Probe body on stock mkt debacle recommends SEC reform
Mohammad Mufazzal | Friday, 8 April 2011
Mohammad Mufazzal
The probe body on recent stock market scam has strongly recommended to the government to reform the securities regulator, identifying its "complete failure" to remove irregularities as one of the prime factors leading to the largest ever fall of the prices of the listed issues in the capital market. It also suggested that the government should disallow forthwith any "distribution of placement shares" as many key persons have "become corrupt" through both allotment and transfer of such shares. Khondkar Ibrahim Khaled, the chief of probe body said this on Thursday immediately after the submission of a 300-page report on stock market scam to Finance Minister AMA Muhith. "The government should appoint the persons of integrity at the office of the Securities and Exchange Commission (SEC), the capital market watchdog, so that they cannot be influenced by the vested quarters," Mr. Khaled told the reporters at his office of Bangladesh Krishi Bank (BKB) at Dilkhusa in the city. "The system of distribution of private placement shares has polluted the society," he said. "The private placement has become a very alarming issue in the country as a large number of people were used in the process of allotment of placement shares for the interest of the vested quarters," Khaled said. He said many important persons, including the key officials of government, securities' regulator, Investment Corporation of Bangladesh (ICB) and both the bourses were favoured with placement shares to serve the interests of such vested quarters. "It's a serious corruption about the way the placement shares were distributed and changed hands. Even some army officers, key persons of different important offices, stock brokers and dealers of both the bourses were allotted placement shares," he noted while mentioning the findings of the probe body. He said: "Even the government officials were given 'private place ment shares' as bribe." In one example, he said the probe body found that the placement shares of Tk 190 million were transferred to two individual addresses. Even some journalists who cover stock market were involved in the business of placement shares, he further noted. According to the probe body's chief, the committee in its recommendation largely blamed the securities regulator for recent stock market scam as it completely failed to ensure 'due-diligence' about issues in the primary market. Khaled said the irresponsibility and dilly-dally on the part of the SEC paved the way for corruption and irregularities that occurred in the stock market. Issuer companies, issue managers, stock brokers, stock dealers and chartered accountants indulged in corruption through the approvals of issues that went public without 'due-diligence'. "The members of the DSE board of directors are also involved in the manipulation of primary market," he said. He said the probe body suggested to the government for the demutualisation of the DSE. "Our neighbouring countries have already demutualised their stock exchanges," he said. He said the regulator failed to guard against the irregularities, despite its main responsibility being the exercise 'due-diligence' with regard to stock-related issues. The probe body could not recommend punishment to other important individuals, stakeholders and key officials of different offices who were involved in market scam, as they made hefty profits through regulatory approvals. That is why the probe body suggested to the government to reform the regulatory body as a whole, the sources said. Khaled said they found immense wrongdoings in the primary market, much more than those in the secondary market. "Our findings about the secondary market are very insignificant," he said. He said the probe body is unable to recommend to the government to take necessary measures against the vested quarters as they reaped hefty profits through regulatory permission. According to the chief of the probe body, the committee recommended to the government to reform the book-building method, widely practised in many other countries. "The book-building system cannot be blamed. Many people made the best use of the existing loopholes under this method," Khaled said. He said RAK Ceramics, is the best example of offloading shares under the book building method. "The issuers did nothing controversial in offloading the shares of this company," he said. The probe body's investigation also said two companies -- GEM Global Yield Fund Limited and BD Thai -- transferred a considerable amount of money outside the country. He said the probe body identified the insider trading of a company and the investors were much influenced by the uppish trend of its market price. "The same incidents also took place about the market prices of shares of some other companies," Khaled said. A member of the probe body said, they identified the involvement of two executive directors (EDs) of the SEC in the secondary market. "An ED of the SEC traded shares amounting to Tk 150 million through the account of his wife," the member told the FE. He said the probe body found the signature of this ED in the form of his wife's account, despite a circular, that barred the SEC officials from getting involved in transactions in both primary and secondary markets, and which was signed by the same SEC official and issued earlier by the regulator. He also said the probe body also suspected that a deputy general manager (DGM) of state-owned investment bank dealt with the account of a top SEC official. "The probe body spent 15 days to find out accounts of the SEC's ED and the DGM of that investment bank," he said. However, the probe body member said it would take more time to find out the involvement of the afore-mentioned DGM in share trading of the SEC official. According to probe body's member, the investigation committee suggested to the government to stop involvement of any SEC official in share transaction in the secondary market. The other members of the probe body are: Professor Dr Toufic Ahmad Choudhury, director general of Bangladesh Institute of Bank Management (BIBM), Mohammad Abdul Bari FCA, former president of Institute of Chartered Accountants of Bangladesh (ICAB) and legal expert Nihat Kabir. Asked, stock market expert Professor Salauddin Ahmed Khan, former chief executive officer (CEO) of Dhaka Stock Exchange (DSE), said some people who sit at the centre of power also became the beneficiaries through the allotment of placement shares. "It's highly unexpected and also harmful for the country if the policy-makers become influenced by placement shares. It, of course, bears a negative sign for us," Mr. Khan told the FE. "The government should think in different ways and stop the system of distribution of private placement shares by all means," he added. bdnews24.com adds: The chairman of the Probe Committee, Khondker Ibrahim Khaled handed over the report to Finance Minister AMA Muhith at the minister's Minto Road official residence in the morning hours of Thursday. While highlighting the need for a drastic overhaul of the SEC, the committee in its report blamed the regulator for the share market crash that led to angry street demonstrations by retail investors. Khaled, a career banker, dismissed any perception of political involvement in the December-January bubble trouble. He, however, said the slide in stock prices as well as the siphoning off, of the money could have well been avoided, had the SEC handled the issue professionally. "I would say the unusual rise-and-fall in the market was an accident." Many are to blame for the mess, he said. "Share issuers, issue managers (merchant banks, mutual funds), brokers and dealers and businessmen are among them." "Retailers also scrambled for a slice whenever they got the opportunity." The unusual price-rise and the free-fall should not have happened, he observed. Drawn into main opposition BNP's claim that an amount of Tk 840 billion (84,000 crore) was siphoned off out of the market, the chief investigator said: "This is an absolute trash." "An amount of Tk 40 billion-50 billion (4000-5000 crore) might have been laundered out of the country," he said. Khaled, before the formation of the probe body, had told the media that 10-15 politician-cum-businessmen, belonging to both the ruling Awami League (AL) and the main opposition, Bangladesh Nationalist Party (BNP) looted some Tk 150 billion from the stock market and was on record as having said that they would never reinvest the money. However, on being appointed as the chief of the probe body, he had told the news agency that his comments came in the light of earlier reports appearing in a section of the media. "I'll forget such comments during the investigation." About media reports quoting him that the probe committee had recommended action against some 300 people responsible for the debacle, he said, "We have no headache about any person." "We have made recommendations on how to improve the [capital] market and make the situation there stable," said Ibrahim Khaled. Journalists rushed to the ministry of finance immediately on receipt of information that the report would be submitted there, but the committee went straight to Muhith's residence. Police used batons and fired tear gas to break up violent protests by hundreds of stock investors on several occasions in mid-January when stock prices collapsed. Trading on Dhaka and Chittagong stock exchanges was halted on four days, including two consecutive days in January following the turmoil. The benchmark Dhaka index DGEN lost more than 29 per cent since December 05 last, when it hit a record high of 8,918.51 points. On Jan 10, trading on the Dhaka Stock Exchange index was shut, after it fell by 660 points, or 9.25 per cent, in less than an hour -- the biggest one-day fall in its 55-year history. Stock prices nearly doubled in 2010, attracting a great number of new retail investors to the market. The number of retail investors has increased from around 500,000 in 2007 to around 3.5 million today. The index recorded an 80 per cent-plus rise in 2010 and witnessed an increase by about 400 per cent for the Dhaka Stock Exchange General Index (DGEN) since the beginning of 2007. Over three million people -- mostly small-scale individual investors -- are estimated to have lost money because of the plummeting share prices. Observers say the trouble started when investors began selling up their stock holdings, amid rumours that large institutional investors had pulled their money out, after making large profits. Regulators then took measures to limit the proportion of deposits that banks can invest in the stock market, amid concerns over shares being over-valued and financial institutions getting over-exposed to the volatility in the capital market. Subsequently, big institutional investors had to reduce their exposure to the capital market, causing panic among individual investors. The watchdog then relaxed some of the conditions with the hope that these would help boost the supply of funds and stabilise the market. Stocks became an attractive investment option for many ordinary people because of large capital gains from such investments when compared to lower level of earnings by putting in their surplus funds in the form of bank deposits with unattractive rates of interest, more so in an inflationary situation. UNB adds: The probe body was given eleven specific tasks which, among others, included finding out whether any individual or groups had influenced the market or taken any undue advantage out of it. Under its terms of reference (TOR), the committee was to find the reasons behind the overpricing of shares over the last two years. It was also assigned to identify the people and the institutions involved in making withdrawal of any unusually high amount of money, after taking advantage of the overpriced market through direct listing, book building and fixed price methods for raising capital for the listed issues.
The probe body on recent stock market scam has strongly recommended to the government to reform the securities regulator, identifying its "complete failure" to remove irregularities as one of the prime factors leading to the largest ever fall of the prices of the listed issues in the capital market. It also suggested that the government should disallow forthwith any "distribution of placement shares" as many key persons have "become corrupt" through both allotment and transfer of such shares. Khondkar Ibrahim Khaled, the chief of probe body said this on Thursday immediately after the submission of a 300-page report on stock market scam to Finance Minister AMA Muhith. "The government should appoint the persons of integrity at the office of the Securities and Exchange Commission (SEC), the capital market watchdog, so that they cannot be influenced by the vested quarters," Mr. Khaled told the reporters at his office of Bangladesh Krishi Bank (BKB) at Dilkhusa in the city. "The system of distribution of private placement shares has polluted the society," he said. "The private placement has become a very alarming issue in the country as a large number of people were used in the process of allotment of placement shares for the interest of the vested quarters," Khaled said. He said many important persons, including the key officials of government, securities' regulator, Investment Corporation of Bangladesh (ICB) and both the bourses were favoured with placement shares to serve the interests of such vested quarters. "It's a serious corruption about the way the placement shares were distributed and changed hands. Even some army officers, key persons of different important offices, stock brokers and dealers of both the bourses were allotted placement shares," he noted while mentioning the findings of the probe body. He said: "Even the government officials were given 'private place ment shares' as bribe." In one example, he said the probe body found that the placement shares of Tk 190 million were transferred to two individual addresses. Even some journalists who cover stock market were involved in the business of placement shares, he further noted. According to the probe body's chief, the committee in its recommendation largely blamed the securities regulator for recent stock market scam as it completely failed to ensure 'due-diligence' about issues in the primary market. Khaled said the irresponsibility and dilly-dally on the part of the SEC paved the way for corruption and irregularities that occurred in the stock market. Issuer companies, issue managers, stock brokers, stock dealers and chartered accountants indulged in corruption through the approvals of issues that went public without 'due-diligence'. "The members of the DSE board of directors are also involved in the manipulation of primary market," he said. He said the probe body suggested to the government for the demutualisation of the DSE. "Our neighbouring countries have already demutualised their stock exchanges," he said. He said the regulator failed to guard against the irregularities, despite its main responsibility being the exercise 'due-diligence' with regard to stock-related issues. The probe body could not recommend punishment to other important individuals, stakeholders and key officials of different offices who were involved in market scam, as they made hefty profits through regulatory approvals. That is why the probe body suggested to the government to reform the regulatory body as a whole, the sources said. Khaled said they found immense wrongdoings in the primary market, much more than those in the secondary market. "Our findings about the secondary market are very insignificant," he said. He said the probe body is unable to recommend to the government to take necessary measures against the vested quarters as they reaped hefty profits through regulatory permission. According to the chief of the probe body, the committee recommended to the government to reform the book-building method, widely practised in many other countries. "The book-building system cannot be blamed. Many people made the best use of the existing loopholes under this method," Khaled said. He said RAK Ceramics, is the best example of offloading shares under the book building method. "The issuers did nothing controversial in offloading the shares of this company," he said. The probe body's investigation also said two companies -- GEM Global Yield Fund Limited and BD Thai -- transferred a considerable amount of money outside the country. He said the probe body identified the insider trading of a company and the investors were much influenced by the uppish trend of its market price. "The same incidents also took place about the market prices of shares of some other companies," Khaled said. A member of the probe body said, they identified the involvement of two executive directors (EDs) of the SEC in the secondary market. "An ED of the SEC traded shares amounting to Tk 150 million through the account of his wife," the member told the FE. He said the probe body found the signature of this ED in the form of his wife's account, despite a circular, that barred the SEC officials from getting involved in transactions in both primary and secondary markets, and which was signed by the same SEC official and issued earlier by the regulator. He also said the probe body also suspected that a deputy general manager (DGM) of state-owned investment bank dealt with the account of a top SEC official. "The probe body spent 15 days to find out accounts of the SEC's ED and the DGM of that investment bank," he said. However, the probe body member said it would take more time to find out the involvement of the afore-mentioned DGM in share trading of the SEC official. According to probe body's member, the investigation committee suggested to the government to stop involvement of any SEC official in share transaction in the secondary market. The other members of the probe body are: Professor Dr Toufic Ahmad Choudhury, director general of Bangladesh Institute of Bank Management (BIBM), Mohammad Abdul Bari FCA, former president of Institute of Chartered Accountants of Bangladesh (ICAB) and legal expert Nihat Kabir. Asked, stock market expert Professor Salauddin Ahmed Khan, former chief executive officer (CEO) of Dhaka Stock Exchange (DSE), said some people who sit at the centre of power also became the beneficiaries through the allotment of placement shares. "It's highly unexpected and also harmful for the country if the policy-makers become influenced by placement shares. It, of course, bears a negative sign for us," Mr. Khan told the FE. "The government should think in different ways and stop the system of distribution of private placement shares by all means," he added. bdnews24.com adds: The chairman of the Probe Committee, Khondker Ibrahim Khaled handed over the report to Finance Minister AMA Muhith at the minister's Minto Road official residence in the morning hours of Thursday. While highlighting the need for a drastic overhaul of the SEC, the committee in its report blamed the regulator for the share market crash that led to angry street demonstrations by retail investors. Khaled, a career banker, dismissed any perception of political involvement in the December-January bubble trouble. He, however, said the slide in stock prices as well as the siphoning off, of the money could have well been avoided, had the SEC handled the issue professionally. "I would say the unusual rise-and-fall in the market was an accident." Many are to blame for the mess, he said. "Share issuers, issue managers (merchant banks, mutual funds), brokers and dealers and businessmen are among them." "Retailers also scrambled for a slice whenever they got the opportunity." The unusual price-rise and the free-fall should not have happened, he observed. Drawn into main opposition BNP's claim that an amount of Tk 840 billion (84,000 crore) was siphoned off out of the market, the chief investigator said: "This is an absolute trash." "An amount of Tk 40 billion-50 billion (4000-5000 crore) might have been laundered out of the country," he said. Khaled, before the formation of the probe body, had told the media that 10-15 politician-cum-businessmen, belonging to both the ruling Awami League (AL) and the main opposition, Bangladesh Nationalist Party (BNP) looted some Tk 150 billion from the stock market and was on record as having said that they would never reinvest the money. However, on being appointed as the chief of the probe body, he had told the news agency that his comments came in the light of earlier reports appearing in a section of the media. "I'll forget such comments during the investigation." About media reports quoting him that the probe committee had recommended action against some 300 people responsible for the debacle, he said, "We have no headache about any person." "We have made recommendations on how to improve the [capital] market and make the situation there stable," said Ibrahim Khaled. Journalists rushed to the ministry of finance immediately on receipt of information that the report would be submitted there, but the committee went straight to Muhith's residence. Police used batons and fired tear gas to break up violent protests by hundreds of stock investors on several occasions in mid-January when stock prices collapsed. Trading on Dhaka and Chittagong stock exchanges was halted on four days, including two consecutive days in January following the turmoil. The benchmark Dhaka index DGEN lost more than 29 per cent since December 05 last, when it hit a record high of 8,918.51 points. On Jan 10, trading on the Dhaka Stock Exchange index was shut, after it fell by 660 points, or 9.25 per cent, in less than an hour -- the biggest one-day fall in its 55-year history. Stock prices nearly doubled in 2010, attracting a great number of new retail investors to the market. The number of retail investors has increased from around 500,000 in 2007 to around 3.5 million today. The index recorded an 80 per cent-plus rise in 2010 and witnessed an increase by about 400 per cent for the Dhaka Stock Exchange General Index (DGEN) since the beginning of 2007. Over three million people -- mostly small-scale individual investors -- are estimated to have lost money because of the plummeting share prices. Observers say the trouble started when investors began selling up their stock holdings, amid rumours that large institutional investors had pulled their money out, after making large profits. Regulators then took measures to limit the proportion of deposits that banks can invest in the stock market, amid concerns over shares being over-valued and financial institutions getting over-exposed to the volatility in the capital market. Subsequently, big institutional investors had to reduce their exposure to the capital market, causing panic among individual investors. The watchdog then relaxed some of the conditions with the hope that these would help boost the supply of funds and stabilise the market. Stocks became an attractive investment option for many ordinary people because of large capital gains from such investments when compared to lower level of earnings by putting in their surplus funds in the form of bank deposits with unattractive rates of interest, more so in an inflationary situation. UNB adds: The probe body was given eleven specific tasks which, among others, included finding out whether any individual or groups had influenced the market or taken any undue advantage out of it. Under its terms of reference (TOR), the committee was to find the reasons behind the overpricing of shares over the last two years. It was also assigned to identify the people and the institutions involved in making withdrawal of any unusually high amount of money, after taking advantage of the overpriced market through direct listing, book building and fixed price methods for raising capital for the listed issues.