Removing supply-demand mismatch in stock market

The stock market in Bangladesh has shown a better performance in recent times, compared to the trends seen a few months back. The indices-DSEX, DSES and DS30-rallied with restoration of normalcy in the political arena.  
The stock market has been playing an important role for the last few decades in industrialisation of the country and also creating an equity pool for both institutional and individual investors. But the supply side must not be ignored considering the recent hike in demand. It must be ensured that the supply side is commensurate with the demand. It can be done by floating shares of fundamentally strong companies which are yet to be listed with our bourses. There has been an effort for many years to enlist some multi-national companies with the stock exchanges in Bangladesh, but we do not see any tangible progress in it. Apart from this, the existing big companies must offload more of their shares in the stock market. For example, only 1.22 per cent shares of Berger Paints, 3.7 per cent shares of Glaxo, 5.04 per cent shares of Grameenphone and 10.92 per cent shares of British American Tobacco are publicly traded in the stock market. The volume of shares of such companies must be enhanced in the stock market to attract more investors.
The stock market, which remained a small club before the 1990s, suddenly became a big name to all segments of small and big investors during the mid-1990s. This is because  investors had easy opportunities to make money through investing in some listed companies only. There were hardly long-time investors in the market though ideally the stock market does not offer any sustainable and enduring return for short-term investors.
 Our stock market like any other market of the world has always been affected by certain malpractices and misdeeds, overlooked or neglected by the concerned regulators. For example, the nagging failure of DVP (delivery versus payment) settlement caused the debacle in late 1996 and the excessive margin loans created the same bubble in late 2010. In both the cases, the regulators failed to handle the situation properly that brought the investors' confidence to the lowest level.
As the demand-supply mismatch was one of the major causes of both the crashes in 1996 and 2010, the regulator and the bourses cannot ignore the issue.
Here are also some other proposals which can help develop the stock market. These are as follows:
MARGIN LOAN: Though the Bangladesh Securities and Exchange Commission (BSEC) reduced the ratio for new loans, the existing loans also saw an unusual high ratio due to erosion in market value. This is happening as the clients are allowed 100 per cent financial netting (buy 100 per cent with the proceeds from sales). It is, therefore, proposed to set the maximum allowable netting ratio at 85 per cent for positive equity clients having an equity-debt ratio below 50. This will help gradual adjustment of a loan and relieve the customers of the burden of interest, which is unbearable for a client with less than 20 per cent equity-debt ratio. In this regard, if the DSE-CSE money netting is allowed, it will ensure price discovery and liquidity.
INFORMATION DISSEMINATION: The quarterly accounts of the listed companies should be published on websites of the bourses and the BSEC should ensure better assessment of the companies' performance. Currently only the bottom-line numbers are known from the websites, which is very inadequate to the investors as far as any investment decision is concerned.
Currently the DSE monthly review of price-earning (PE) ratio is based on the audited financials of the last accounting year, which is being used as a reference. Since this is based on a year-old audited data, our market stakeholders cannot know the current price. Globally the trailing PE is used, which is computed based on last 12 months' earnings. Thus, the trailing 12-month PE of the indices can be launched, in addition to the current one.
IPO QUOTA: A quota for institutional and high net worth investors (HNI) should be introduced to reduce the possibility of under-subscription. Even more than 24 IPOs are floated a year. It is also the basic right of institutions and HNI segments to be part of the IPO process, a global practice, indeed. While institutions and HNIs may invest for longer term, the IPO hunters just dump the shares at a profit on debut days and most likely do not invest in the secondary market. They continuously drain out money from the secondary market while institutions and HNIs have to build the portfolio at their exit price. Market analysts also suggest that banks should allow the Bangladesh Electronic Fund Transfer Network (BEFTN) for refunding the IPO money to the investors as currently a consolidated cheque takes a few days for clearing in the traditional way.
BOOK-BUILDING METHOD: Currently, there is no compulsion for an institution to provide 'indicative price'. So it is proposed that without providing an indicative price, an institution cannot be allowed to participate in bidding paving the way for getting as many as 20 quotes.
There should be a 10 per cent quota for HNIs to participate in price bidding which will help the IPO price remain competitive.
Another proposal is to introduce the qualified institutional placement (QIP) for listed companies. It should be considered seriously. Such systems exist in India and other developed markets across the world. This will allow a listed company to issue equity shares, fully and partly convertible debentures or any securities other than warrants, which are convertible to equity shares, to an eligible institutional investor. This will facilitate companies to raise funds quickly, choose strategic investors without depriving the company, as it will get a better value for the company. For QIP, it may be required to ensure lock-in, board representation and pre-qualification of the issuer company. Such an institutional placement can be done at a price not less than the average of the closing prices of the related shares quoted on the stock exchanges during six months preceding the relevant date.
The writer is chairman of Nepal-Bangladesh Bank Ltd. and former chairman  of IFIC Bank Ltd.                      [email protected]