SEC exposes tip of the iceberg
Wednesday, 27 June 2007
Shamsul Huq Zahid
The Securities and Exchange (SEC), the capital market regulator, has hit the tip of the iceberg.
It has unearthed, for the first time in its history, a case of insider trading by some sponsor shareholders of the Jamuna Bank, a third generation private commercial bank.
The commission has imposed fines ranging from Tk. 0.1 million (100,000) to Tk. 0.5 million on the persons involved in the scam and locked-in 0.7 million shares that they had purchased on the basis of inside information about dividends for a period of two years.
According to a news agency report, the board of directors of Jamuna Bank at a meeting on April 27 last year decided to announce 1.5 per cent cash dividend and 25 per cent stock dividend. The sponsor shareholders in question had heavily purchased the shares before the decision was made. However, one of the wrongdoers instead of waiting for stock dividend sold all his shares (32000)-purchased from the market-- at higher prices following the declaration of the dividend.
One may find the punitive measures taken by the SEC against the sponsor shareholders of the bank too soft to discourage others from indulging in similar white collar crimes. Nevertheless, it deserves kudos for its action under the given circumstances.
There are allegations that a section of sponsor shareholders of some other banks and financial institutions have been involved in similar insider trading in the absence regulatory body's regular as well as hawkish monitoring of the transactions in the country's bourses. The allegations may not have real basis. Yet there should be no reason for rejecting the same outright. The case unearthed by the SEC itself gives credence to such allegations, to be precise.
There are some plausible reasons to cast doubt about effective market monitoring by the SEC that seems to be more complacent with the daily turnover of the bourses that has been continuously breaking the previous day's 'all-time high' record.
The SEC of today is somewhat different from that of the late nineties since its monitoring job has become easier then before because of automation of the bourses and introduction of central depository system (CDS). But things still need to be further improved.
A few ongoing developments could be pointers to such observations which the SEC might find unpalatable.
Has the SEC ever tried to dig out the reasons behind the unabated rise in the prices of the two recently corporatised power entities-the Dhaka Electric Supply Company (DESCO) and the Power Grid Company of Bangladesh (PGCB)?
The DESCO and the PGCB had declared dividends at the rate of 20 and 10 per cent respectively after their going public. The DESCO and PGCB shares having a face value of Tk. 100 each are being sold at Tk. 1000 and Tk. 600 respectively.
For instance, the PGCB hit the market through direct listing offering its shares at Tk. 250 each. Within a week, its share prices declined to around Tk. 150 and at that price, according to sources, nearly 7.0 million shares changed hands. The holders of those shares in bulk are, allegedly, manipulating the current market price of the issue. The development in case of DESCO is suspected to be similar to that of PGCB.
One would notice yet another interesting feature in the hike in the share prices of two largely state-owned power entities. The DESCO share which is now being quoted at a price nearly Taka 1000 has a net asset value of Tk. 138.44 while the PGCB share having higher net asset value (Tk. 223) is priced at around Tk. 600. In both the cases, however, the net asset value does not justify their current market value.
Another case in point is the price of shares of a leading private commercial bank. Its shares are the most expensive ones in the market in spite of the fact that the bank in question offered not-so-attractive cash dividend in the years 2005 and 2006. Scarcity, it seems, has led to the hike in the prices of the bank concerned since 90 per cent of the bank's stocks are owned by its sponsors. Moreover, there has been an attempt, allegedly, on the part of certain quarters including the sponsors to buy back the shares held by the general investors.
This is, possibly, being done by the sponsors or other interested quarters with a motive of getting long-term benefit. The bank concerned will have to increase its paid-up capital to Tk. 1.0 billion soon. There is every possibility that the bank would raise the paid up capital by issuing stock dividend since the bank is basking in a comfortable retained earnings. In such a situation, the sponsors, in addition to their shares in stock dividends, would also get benefits out of the shares that they have bought from the market. But the moot question is: why should a listed entity plough back all the shares held by the general investors just to deprive the latter of the due benefit?
The Securities and Exchange (SEC), the capital market regulator, has hit the tip of the iceberg.
It has unearthed, for the first time in its history, a case of insider trading by some sponsor shareholders of the Jamuna Bank, a third generation private commercial bank.
The commission has imposed fines ranging from Tk. 0.1 million (100,000) to Tk. 0.5 million on the persons involved in the scam and locked-in 0.7 million shares that they had purchased on the basis of inside information about dividends for a period of two years.
According to a news agency report, the board of directors of Jamuna Bank at a meeting on April 27 last year decided to announce 1.5 per cent cash dividend and 25 per cent stock dividend. The sponsor shareholders in question had heavily purchased the shares before the decision was made. However, one of the wrongdoers instead of waiting for stock dividend sold all his shares (32000)-purchased from the market-- at higher prices following the declaration of the dividend.
One may find the punitive measures taken by the SEC against the sponsor shareholders of the bank too soft to discourage others from indulging in similar white collar crimes. Nevertheless, it deserves kudos for its action under the given circumstances.
There are allegations that a section of sponsor shareholders of some other banks and financial institutions have been involved in similar insider trading in the absence regulatory body's regular as well as hawkish monitoring of the transactions in the country's bourses. The allegations may not have real basis. Yet there should be no reason for rejecting the same outright. The case unearthed by the SEC itself gives credence to such allegations, to be precise.
There are some plausible reasons to cast doubt about effective market monitoring by the SEC that seems to be more complacent with the daily turnover of the bourses that has been continuously breaking the previous day's 'all-time high' record.
The SEC of today is somewhat different from that of the late nineties since its monitoring job has become easier then before because of automation of the bourses and introduction of central depository system (CDS). But things still need to be further improved.
A few ongoing developments could be pointers to such observations which the SEC might find unpalatable.
Has the SEC ever tried to dig out the reasons behind the unabated rise in the prices of the two recently corporatised power entities-the Dhaka Electric Supply Company (DESCO) and the Power Grid Company of Bangladesh (PGCB)?
The DESCO and the PGCB had declared dividends at the rate of 20 and 10 per cent respectively after their going public. The DESCO and PGCB shares having a face value of Tk. 100 each are being sold at Tk. 1000 and Tk. 600 respectively.
For instance, the PGCB hit the market through direct listing offering its shares at Tk. 250 each. Within a week, its share prices declined to around Tk. 150 and at that price, according to sources, nearly 7.0 million shares changed hands. The holders of those shares in bulk are, allegedly, manipulating the current market price of the issue. The development in case of DESCO is suspected to be similar to that of PGCB.
One would notice yet another interesting feature in the hike in the share prices of two largely state-owned power entities. The DESCO share which is now being quoted at a price nearly Taka 1000 has a net asset value of Tk. 138.44 while the PGCB share having higher net asset value (Tk. 223) is priced at around Tk. 600. In both the cases, however, the net asset value does not justify their current market value.
Another case in point is the price of shares of a leading private commercial bank. Its shares are the most expensive ones in the market in spite of the fact that the bank in question offered not-so-attractive cash dividend in the years 2005 and 2006. Scarcity, it seems, has led to the hike in the prices of the bank concerned since 90 per cent of the bank's stocks are owned by its sponsors. Moreover, there has been an attempt, allegedly, on the part of certain quarters including the sponsors to buy back the shares held by the general investors.
This is, possibly, being done by the sponsors or other interested quarters with a motive of getting long-term benefit. The bank concerned will have to increase its paid-up capital to Tk. 1.0 billion soon. There is every possibility that the bank would raise the paid up capital by issuing stock dividend since the bank is basking in a comfortable retained earnings. In such a situation, the sponsors, in addition to their shares in stock dividends, would also get benefits out of the shares that they have bought from the market. But the moot question is: why should a listed entity plough back all the shares held by the general investors just to deprive the latter of the due benefit?