Market in grip of junk stocks

The problem with Bangladesh's stock market is not the dearth of stocks; rather it is non-availability of good stocks. In recent times, we have been observing that IPOs are coming to the market, but after a while these sink in value when their trading get started in the secondary market. The main reason for sinking in value is these are fundamentally poor stocks.
Another noticeable aspect of IPO market is that most of these are coming from the low technology-based textile sector. Again, in most cases, these IPOs are coming to the market with premiums. With premiums or no premiums, the IPOs are traded at a much higher value in the secondary market in the first few weeks on their debut but then these start sinking in value. Most of the investors who, out of enthusiasm, purchased the newly-traded IPOs from the secondary market in the recent months lost money. But does it teach them the lesson that they should not buy the IPOs in the secondary market at the overvalued prices? Hardly so. Perhaps not learning anything or not repeating the mistakes of the past is not there in the psychology of the investors.
The regulator BSEC took a relaxed view in permitting the IPOs. Taking the advantage of the regulator's liberal attitude towards permitting IPOs, most of these with poor fundamentals are finding ways to market with premium values. Even, it is heard that some IPOs could have come with premiums though their factories remained closed for months. Such an IPO from the steel sector is now being traded in the market much below the issued value. Meanwhile, the company also issued bonus stocks for the investors and the bonus stocks received by the sponsors of the company had already been sold in the market. Thus, whether a company's factory remains shut or not, it can issue bonus stocks and those bonus stocks can be sold in the market. Thus sponsors can become rich by using the route. This is possible only in Bangladesh; in other markets, bonus issues are conditional and sponsors are not free to sell the bonus stocks as soon as they receive them.
It is to be mentioned here that in Bangladesh, no prior permission is needed to issue bonus stocks, nor is it needed to sell the sponsor's portion of bonus stocks. This freedom is being used very cunningly by the clever sponsors of the IPO-selling companies. We suggest, the regulator should make bonus stock issues conditional and the bonus stocks received by the sponsors be put under a lock-in period. There are some associations named merchant bankers' association, asset management companies' association and brokers' associations which claim to be the main stakeholders in the Bangladesh stock market, but unfortunately they hardly raise the issues which bite the investors most. They have their own interest which sometimes goes against the common interest of the ordinary investors.
Ordinary investors are treated as slaughtered animals. Who are selling the IPOs with the premium, and who are buying those overvalued IPOs in the secondary market and then losing the money by a big margin within a few months? They are the ordinary investors who are target groups for being squeezed. The fact is that, even now the remaining retail investors are being forced out of the market by different tricks.
The associations should raise a non-partisan voice against misdeeds that are still taking in the market and the tricks that are still being played on. The problem in the market is not how many IPOs are coming annually or at regular intervals, but is whether these are really quality IPOs in which the investors can take stakes with investment for a longer period. How many investors believe, or should believe the financial statements of the listed companies being put before the investing public? A stock market can be termed good even with a fewer number of fundamentally strong companies, but a market is a bad market if it is supplied with too many junk stocks. Bangladesh's market has already been made an overburdened one with too many junk stocks. The investors do not find that many good stocks to invest in. The main task of the BSEC should be: to bring good stocks to the market. Investors are prepared to pay premium price for good stocks.
Why have prices of some multinational companies' stocks already touched the sky-high level? Simply because, the investors trust their financial statements. The erosion of trust in the local companies' stocks is one of the main reasons why the stock market has remained dull for months. The newly proposed Financial and Reporting Act, if passed quickly by parliament, may help the investors in a big way. Market needs transparency and accurate reporting to restore the confidence of the investors again. The problem with the market is not absence of adequate liquidity. If the market is supplied with good stocks, more liquidity will be available again in the market. Budgetary proposals, especially tax proposals, matters in case of giving a policy support to the market. All concerned should see how effectively extra incentives can be given to the market through the upcoming budget proposals.
The writer is Professor of Economics University of Dhaka,  abuahmedecon@yahoo.com