Share market bubble: Who is not responsible?
Saturday, 14 May 2011
M S Siddiqui
The recent debacle in the stock market is an issue of debate. All the stakeholders and particularly the small investors want to know the true story behind the incident. Government also wants to know the reason and wants to address the issue to avoid further debacle in future. There is a major difference between two debacles of share market in 2006 and 2011. The former happened in secondary market but this time the manipulation happened during valuation and fixation of offered price of share and in side trading by different stake holders. It happened behind the screen. Even Investment Corporation of Bangladesh (ICB) also played in the game. They have purchased share of Tk 8.0 billion through 15 Omnibus accounts in October and November, 2010. They of course played the game for some influential officials in the government. The problem was created for a simple reason that there is a gap between demand and supply of stocks in the market. The primary reason is that the regulator could not stop manipulation rather the officials of SEC were involved in trading and other unfair practices. The other agencies and institutions having stakes in the share market possibly failed to perform the need of oversight functions. The share market experienced bullish trend in most part of the last year because of the overexposure of some commercial banks and other financial institutions. They had invested beyond the limit of 10 per cent of their deposit. This is also unethical to invest depositor's money risking the investment and even without their benefit. Commercial banks have been involved heavily in the stock market business during the last few years. Bangladesh Bank has found involvement of eleven banks over investment in the share market. One of the commercial banks made profit of Tk 10.40 billion last year. Of this amount of profit, Tk 4.40 billion came during the last month by investing in share market. Bangladesh Bank has set capital market exposure limit of 10 percent of the deposit for the commercial banks after their involvement in the market with deposit of clients. The country's common people and hundreds of thousands of unemployed youths have entered into the overheated market as a record 1.57 million Beneficiary Owners (BO) accounts, more than half of the total investors, entered into the market in 2010. The relatively heavy investment has an impact in massive surge in share prices besides other reasons. They were advised to conduct merchant banking or brokerage house business without formation of subsidiary companies for the purpose. Allegations have been found that bank officials provided false loan to fake clients for investment in the share markets. The Bangladesh Bank also investigated allocation of Tk 24 billion industrial loans by a bank to its clients last year. Bangladesh Bank was not much aware about banks' exposure to the stock market. Because, surprisingly, banks profit from share business seemed to be negligible according to their income statement or balance sheet although there is a wide perception that banks are making handsome profits from investing in shares and debentures. Proper data on their exposure to the capital market remained unknown, which is a failure from the part of the central bank as a supervisory agency. The internal and external auditors help out the manipulation. Moreover, almost all policies to minimise the exposure of banks were taken in the second-half of 2010, when the stock index had reached an alarming level. For example, the situation worsened when it was made mandatory for all banks to maintain their investment in the stock market equivalent to 10 percent of their total deposit and to comply by December, 2010, when in reality, the ratio was much higher than this level. Bangladesh Bank had a policy to contain inflation and channel credit to other real sector and may be to safeguard the interest of invest of depositors. Bangladesh Bank has taken some steps to reduce inflation and also reduce risk of financial institutions. The steps included statutory cash ration reserve of schedule banks from 5 per cent to 6 per cent. This also has a small impact on cash flow in the capital market. The central bank decided to deal with only the banks, not subsidiary companies as per the new provisions and SEC will look into the functions of the subsidiary banking companies. This transition of authority over the merchant banks overburdened the SEC while they were unable to perform some other responsibilities. Allowing business by some merchant banks has exaggerated the situation. They became the key player in the stock market. In the recent stock plunge some merchant banks deliberately sold off shares of the investors at a throw-away price without even taking consent of the affected clients. The omnibus account with haze background players is a matter of investigation to know the source of money and impact of this money in the stock market and economy. SEC has taken some decisions regarding these merchant banks and also changed those within very short time. They allowed loan against stock use to be fixed by SEC and they have changed the margin ratio on many occasions. They issued rule of loan margin of 1:1 and cancelled the order. Again they withdrew the embargo within 6 weeks. The management of listed companies was busy to make easy money. The listed companies have withdrawn about Tk 170 billion from the market through private placement, issue of preference share and direct listing at the initial stage of listing with stock market. The private placement could reason unfair transaction. Companies sold their share to civil, military bureaucrats and also to other influential persons. Directors of Companies also benefited from direct listing. Another manner of manipulation was revaluation of assets and issue of bonus share which has a link to manipulation of market. It happened in many cases in Z category companies who either do not pay dividend to shareholder, or, do not meet at Annual General Meeting, or are unable to comply with other rules of SEC. Those Z category companies issued right share to the members and again sold those shares in the peak market. SEC did not give attention to Z category companies for preventing increase of price of share and find out the reason, stopping them to issue right share to the members. No proper vigilance and enforcement function was visible. It is found that the directors of some listed companies sold their share amounting Tk 60 billion. Most of those companies are banks, insurance companies and some manufacturers. These Directors are awarded bonus shares through revaluation, and also there was no ground to selling out the controlling share of own companies and banks. The auditors and issue managers, and valuation companies also manipulate the information and SEC approved the reports in opaque manner. In 2010 SEC issued 81 orders but could not regulate the market. Its officials were also involved in corruption and manipulation. This may be a surprise action of a regulator to act in such a manner in a period of one year. There activities were very opaque and some time in collaboration with manipulators. There was a huge in flow of capital and the shares were not sufficient and government could not enlist 26 state companies to float shares as committed. Most of the stocks listed for the last few years offered initial public offerings IPO at unbelievable high price and the SEC approved premium price without any valid ground. There was a serious malpractice during change of face value of share from Tk 100 to Tk 10. There was no dissemination of information and rather artificial maneuver to manipulate the fixation of new price of share. This malpractice accelerated through two prices of shares of different companies in the market. There is haze area in transaction of omnibus accounts. The name of persons behind the account shall be known to authority. Thirty six merchant banks maintain omnibus account. One Omnibus account may include 3,000 to 12,000 account holders. This is a channel for investment of black money in the market for profit and safe investment. The management of 2 stock markets should be separated from ownership to stop inside trading and manipulation. All the stakeholders must be transparent in future to avoid such debacle in future. The writer is a part time teacher of Leading University, and pursuing PhD in Open University, Malaysia. He can be reached at E-mail: shah@banglachemical.com
The recent debacle in the stock market is an issue of debate. All the stakeholders and particularly the small investors want to know the true story behind the incident. Government also wants to know the reason and wants to address the issue to avoid further debacle in future. There is a major difference between two debacles of share market in 2006 and 2011. The former happened in secondary market but this time the manipulation happened during valuation and fixation of offered price of share and in side trading by different stake holders. It happened behind the screen. Even Investment Corporation of Bangladesh (ICB) also played in the game. They have purchased share of Tk 8.0 billion through 15 Omnibus accounts in October and November, 2010. They of course played the game for some influential officials in the government. The problem was created for a simple reason that there is a gap between demand and supply of stocks in the market. The primary reason is that the regulator could not stop manipulation rather the officials of SEC were involved in trading and other unfair practices. The other agencies and institutions having stakes in the share market possibly failed to perform the need of oversight functions. The share market experienced bullish trend in most part of the last year because of the overexposure of some commercial banks and other financial institutions. They had invested beyond the limit of 10 per cent of their deposit. This is also unethical to invest depositor's money risking the investment and even without their benefit. Commercial banks have been involved heavily in the stock market business during the last few years. Bangladesh Bank has found involvement of eleven banks over investment in the share market. One of the commercial banks made profit of Tk 10.40 billion last year. Of this amount of profit, Tk 4.40 billion came during the last month by investing in share market. Bangladesh Bank has set capital market exposure limit of 10 percent of the deposit for the commercial banks after their involvement in the market with deposit of clients. The country's common people and hundreds of thousands of unemployed youths have entered into the overheated market as a record 1.57 million Beneficiary Owners (BO) accounts, more than half of the total investors, entered into the market in 2010. The relatively heavy investment has an impact in massive surge in share prices besides other reasons. They were advised to conduct merchant banking or brokerage house business without formation of subsidiary companies for the purpose. Allegations have been found that bank officials provided false loan to fake clients for investment in the share markets. The Bangladesh Bank also investigated allocation of Tk 24 billion industrial loans by a bank to its clients last year. Bangladesh Bank was not much aware about banks' exposure to the stock market. Because, surprisingly, banks profit from share business seemed to be negligible according to their income statement or balance sheet although there is a wide perception that banks are making handsome profits from investing in shares and debentures. Proper data on their exposure to the capital market remained unknown, which is a failure from the part of the central bank as a supervisory agency. The internal and external auditors help out the manipulation. Moreover, almost all policies to minimise the exposure of banks were taken in the second-half of 2010, when the stock index had reached an alarming level. For example, the situation worsened when it was made mandatory for all banks to maintain their investment in the stock market equivalent to 10 percent of their total deposit and to comply by December, 2010, when in reality, the ratio was much higher than this level. Bangladesh Bank had a policy to contain inflation and channel credit to other real sector and may be to safeguard the interest of invest of depositors. Bangladesh Bank has taken some steps to reduce inflation and also reduce risk of financial institutions. The steps included statutory cash ration reserve of schedule banks from 5 per cent to 6 per cent. This also has a small impact on cash flow in the capital market. The central bank decided to deal with only the banks, not subsidiary companies as per the new provisions and SEC will look into the functions of the subsidiary banking companies. This transition of authority over the merchant banks overburdened the SEC while they were unable to perform some other responsibilities. Allowing business by some merchant banks has exaggerated the situation. They became the key player in the stock market. In the recent stock plunge some merchant banks deliberately sold off shares of the investors at a throw-away price without even taking consent of the affected clients. The omnibus account with haze background players is a matter of investigation to know the source of money and impact of this money in the stock market and economy. SEC has taken some decisions regarding these merchant banks and also changed those within very short time. They allowed loan against stock use to be fixed by SEC and they have changed the margin ratio on many occasions. They issued rule of loan margin of 1:1 and cancelled the order. Again they withdrew the embargo within 6 weeks. The management of listed companies was busy to make easy money. The listed companies have withdrawn about Tk 170 billion from the market through private placement, issue of preference share and direct listing at the initial stage of listing with stock market. The private placement could reason unfair transaction. Companies sold their share to civil, military bureaucrats and also to other influential persons. Directors of Companies also benefited from direct listing. Another manner of manipulation was revaluation of assets and issue of bonus share which has a link to manipulation of market. It happened in many cases in Z category companies who either do not pay dividend to shareholder, or, do not meet at Annual General Meeting, or are unable to comply with other rules of SEC. Those Z category companies issued right share to the members and again sold those shares in the peak market. SEC did not give attention to Z category companies for preventing increase of price of share and find out the reason, stopping them to issue right share to the members. No proper vigilance and enforcement function was visible. It is found that the directors of some listed companies sold their share amounting Tk 60 billion. Most of those companies are banks, insurance companies and some manufacturers. These Directors are awarded bonus shares through revaluation, and also there was no ground to selling out the controlling share of own companies and banks. The auditors and issue managers, and valuation companies also manipulate the information and SEC approved the reports in opaque manner. In 2010 SEC issued 81 orders but could not regulate the market. Its officials were also involved in corruption and manipulation. This may be a surprise action of a regulator to act in such a manner in a period of one year. There activities were very opaque and some time in collaboration with manipulators. There was a huge in flow of capital and the shares were not sufficient and government could not enlist 26 state companies to float shares as committed. Most of the stocks listed for the last few years offered initial public offerings IPO at unbelievable high price and the SEC approved premium price without any valid ground. There was a serious malpractice during change of face value of share from Tk 100 to Tk 10. There was no dissemination of information and rather artificial maneuver to manipulate the fixation of new price of share. This malpractice accelerated through two prices of shares of different companies in the market. There is haze area in transaction of omnibus accounts. The name of persons behind the account shall be known to authority. Thirty six merchant banks maintain omnibus account. One Omnibus account may include 3,000 to 12,000 account holders. This is a channel for investment of black money in the market for profit and safe investment. The management of 2 stock markets should be separated from ownership to stop inside trading and manipulation. All the stakeholders must be transparent in future to avoid such debacle in future. The writer is a part time teacher of Leading University, and pursuing PhD in Open University, Malaysia. He can be reached at E-mail: shah@banglachemical.com