Restoring the battered confidence of investors

Restoring the severely battered confidence of the investors, particularly the small retail ones, should be the main focus in overcoming the ongoing turmoil in the country's capital market. Restoring the confidence of investors is a long-term process and it will take time. Retail investors will not regain their confidence unless they feel convinced that they will not be cheated again by the manipulators in the future. And that can only be done through a much stronger regulatory environment in which the rule of law is upheld and action is taken against those who were involved in insider-trading and other forms of market manipulation. In order to restore investors' confidence, among others, the following important measures need to be taken: stabilisation of the stock market within the shortest possible time; bringing the alleged manipulators of the most recent artificially created bubble-and-bust cycle to book in order to set an example; substantial enhancement of the capacity and capability of the market watchdog for a stronger and transparent regulatory environment; and ensuring improved coordination among all the market-relevant institutions. Since the crash in December last year, the stock market has been highly unstable and generally in a slump, taking the retail investors on a disastrous rollercoaster ride. Prior to that, an artificial, unsustainable bubble was created over a period of about two years, allegedly by some "big money" players working as part of syndicates. It was a classic case of a "South Sea Bubble", in which the stock market was "heavily manipulated" and the benchmark Dhaka Stock Exchange (DSE) general index, known as DGEN, reached its historic peak at 8918.51 points on December 5, 2010. It was an over-heated and over-valued market. The banks and other financial institutions were also involved in the stock market frenzy in a big way. So much so that a surprisingly large portion of the profits of many of these institutions were derived directly from their stock market activities in 2010 (calendar year). As the bull-run continued, the central bank and the Securities and Exchange Commission (SEC) independently took some steps to cool down the over-heated market. The Bangladesh Bank increased the cash reserve ratio of banks and financial institutions to put commercial banks' liquidity on the leash in order to control inflation and also asked them to adjust their exposure to the stock market as recommended by the IMF. At around the same time, the SEC also introduced some ad hoc measures to cool the market down. These apparently uncoordinated measures soon led to the fall and subsequent crash of the stock market in December 2010 and January this year, leaving thousands of small investors in ruins. The government later formed a probe body to investigate the stock market scam on January 24, headed by the former deputy governor of Bangladesh Bank Ibrahim Khaled. Although the four-member committee submitted its probe report on April 7, the government was initially reluctant to make it public but later relented following a court order in this regard. Even the published version was edited to leave out some key details and names of people involved in the scam. This act of the government to be transparent with the findings of the investigation report was not really a confidence-builder. Some half-hearted measures were taken to stabilise the market including creation of a Tk 50 billion market stabilisation fund. Some other efforts, including one by an advisor to the ruling party chief, fizzled out. Increased flow of liquidity will greatly help stabilise the stock market. However, the financial sector itself is presently facing a liquidity crisis due to the unprecedented growth in government borrowing from the banking sector. The current proposal to ease the cash reserve ratio and market exposure of banks by the central bank along with the National Board of Revenue's renewed assurance regarding the investment of 'black money', will perhaps reduce the shortage of liquidity in the stock market. At the same time, care should be taken not to exacerbate the existing liquidity crisis in the country's financial sector. Although the top brass of the SEC were replaced as per the recommendations of the probe body, very little has been done to strengthen the market watchdog. In addition to shortage of manpower, the SEC still does not have a strong research and analysis unit to monitor the market adequately. It will not be able to attract qualified market analysts and forensic analysts unless a market-driven higher compensation package is offered. One of the most important steps to restore confidence of the investors would be to take actions against the alleged culprits behind the stock market scam. The probe committee in its report highlighted that the market was "heavily manipulated" and identified 60 individuals behind it. Except for filing of cases against just five people, which did not include any of the 'big' names, no other action has been taken by the authorities yet. Immediate action against the perpetrators of such a heinous white-collar crime should be taken after further investigation. Only then the investors will begin to regain full confidence in the market. Very little has been done in the above mentioned areas so far. Now that the prime minister herself has taken a personal interest in stabilising the stock market, there is some hope of restoring the lost confidence of the investors, particularly the small retail investors. The measures that are currently being discussed to revive the stock market could have been taken much earlier and that could have avoided the lingering hardship of the small investors. Anyway, better late than never! yaminbakht58@gmail.com