Share market: Transparency needed
Friday, 13 May 2011
M S Siddiqui
A share market is a market place for trading of company shares under certain conditions. These are shares of listed companies. It is also named capital market which is a market for long term debt and equity securities, where business enterprises and governments can raise funds for long term investment. It is normally divided into two broad categories - the stock market and the bond market. The buyers are generally individual investors but the market has some artificial persons or legal entities e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions. Bangladesh share market started in 1976 with the formation of the Dhaka Stock Exchange (DSE). Later on Security Exchange Commission (CSE) was established in 1993 as regulator of stock market. By this time it underwent changes during the last few years. The Chittagong stock Exchange (CSE) started its journey in 1995. Both the markets have 230 members each. Both the markets have trade on Equity Shares, Debentures and Mutual Funds. The listed companies of DSE are 243, and CSE has 201 by December 2010. The market was concentrated in two cities -Dhaka and Chittagong. There is a recent dramatic change in the market. Brokerage houses (members of stock exchanges) numbering 238 have opened 590 branches in 32 districts. Individual investors opened 3.0 million Beneficiary Owner Accounts (BO) throughout the country through these brokerage houses. According to a study there are many sources of these BO from range of broad money, remittance from expatriates, black money, diverted industrial and commercial loans etc. The trend was reportedly visible during the past caretaker government due to the interference of civil and military bureaucrats. SEC was established by an act in 1993 for regulating the stock markets. All companies that sell stock must be registered with the SEC in order to do business with the public. They disclose all relevant information for evaluation and assessment. The purpose for registration is to make certain information related to the company available to the public for evaluation whether or not a company is worth for invests. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information. The listed companies must disclose all price sensitive information to all concerned, and also SEC must ensure disseminate the information through their own channel preferably through web site to the members of the public. In stock markets, transparency is very important. It is a key feature of market design as well as a key aspect of market performance as this information could be divided into pre- and post-trade information. The market has buyers and sellers and the demand and supply matter like any other market. On the other hand, the demand should be backed by liquidity available in the money market. Money market consists of all the institutions which are engaged in the borrowing and lending of short term funds. The members of money market are (1) central bank at the top, (2) commercial banks, (3) co-operative banks, (4) saving banks, (5) specialised financial institutions, (6) discount houses and (7) other sources. Money market may other way be distinguished from capital market. Capital market is a collection of specialised institutions engaged in the employment of medium and long term funds primarily for the raising of new capital. In a developed country, the money market is highly organised and diversified, whereas in a developing country there are a few organised institutions which trade in the borrowing and lending of short term debts. In a developing country, the commercial banks, cooperative banks, saving banks and other financial institutions do exist but they are relatively few and are usually concentrated in big city areas. Stock markets react promptly and uncharacteristically to rumours of instability in politics, business and environment, change in regulatory business environment and interest rate variation etc. The share prices on the stock market are affected either positively or negatively by a number of factors occurring within and without the economic system. Interest rates play a major role in determining stock market trends since small investors decide to put their money in bank or invent in stock. There are instances of investment in share market out of bank loan for different other purposes. The investors in relatively new market like Bangladesh are inexperienced and sensitive to fluctuation of prices. Dividend is an issue for investment in share. Companies doing well in their business activities and offering dividend are likely to attract more investors, thereby resulting in high demand of their shares. Unfortunately the profit of companies do not reflect in the Bangladesh stock market since investors are looking at short term investment due to rapid upward change in share index for re-sell in the market again in short period of time. Monetary policy of Central Bank affects the capital market, in particular the stock price change. Therefore, the central bank in formulating monetary policy, in the performance of the economy and monetary demand of the entity making the correct analysis, judgment, is also concerned about the financial markets. There are some issues related to operation and management of market which has impact on the capital market. The management of the Security Exchange commission, management of stock exchange, officials of regulatory body of government employees who learned of such information because of their employment by the government, can take advantage of information placed to these organisations for personal gain. On the other hand the directors and management of listed companies as well as lawyers, accountants, and similar fiduciaries - routinely possess information that is unavailable to the general public. As because some of the information will affect the prices of the registered securities when it becomes public; insiders can profit by buying or selling in advance. Trades made by these types of insiders in the company's own stock, based on non-public information, are considered to be fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders. These insiders have undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the company. When the insiders buy or sell based upon company owned information, he is violating his obligation to the shareholders. Even friends, business associates, family members of such officers, directors, and employees, employees of lawyer, banking, brokerage firms who were given such information to provide services are obliged to maintain professional ethics not to deal in stock trade. USA Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10 per cent of a firm's shares. In the UK, the relevant laws are the Criminal Justice Act 1993 and the Financial Services and Markets Act 2000, which defines an offence of market abuse. The common investors in USA receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities under Securities Act of 1933 which is often referred to as the 'truth in securities' law. The SEC must govern the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote. The SEC act has such mandatory provision in USA. Their Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. The land mark Sarbanes-Oxley Act of 2002 is the most far reaching reforms of American business practices through enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud. It created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. 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
A share market is a market place for trading of company shares under certain conditions. These are shares of listed companies. It is also named capital market which is a market for long term debt and equity securities, where business enterprises and governments can raise funds for long term investment. It is normally divided into two broad categories - the stock market and the bond market. The buyers are generally individual investors but the market has some artificial persons or legal entities e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions. Bangladesh share market started in 1976 with the formation of the Dhaka Stock Exchange (DSE). Later on Security Exchange Commission (CSE) was established in 1993 as regulator of stock market. By this time it underwent changes during the last few years. The Chittagong stock Exchange (CSE) started its journey in 1995. Both the markets have 230 members each. Both the markets have trade on Equity Shares, Debentures and Mutual Funds. The listed companies of DSE are 243, and CSE has 201 by December 2010. The market was concentrated in two cities -Dhaka and Chittagong. There is a recent dramatic change in the market. Brokerage houses (members of stock exchanges) numbering 238 have opened 590 branches in 32 districts. Individual investors opened 3.0 million Beneficiary Owner Accounts (BO) throughout the country through these brokerage houses. According to a study there are many sources of these BO from range of broad money, remittance from expatriates, black money, diverted industrial and commercial loans etc. The trend was reportedly visible during the past caretaker government due to the interference of civil and military bureaucrats. SEC was established by an act in 1993 for regulating the stock markets. All companies that sell stock must be registered with the SEC in order to do business with the public. They disclose all relevant information for evaluation and assessment. The purpose for registration is to make certain information related to the company available to the public for evaluation whether or not a company is worth for invests. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information. The listed companies must disclose all price sensitive information to all concerned, and also SEC must ensure disseminate the information through their own channel preferably through web site to the members of the public. In stock markets, transparency is very important. It is a key feature of market design as well as a key aspect of market performance as this information could be divided into pre- and post-trade information. The market has buyers and sellers and the demand and supply matter like any other market. On the other hand, the demand should be backed by liquidity available in the money market. Money market consists of all the institutions which are engaged in the borrowing and lending of short term funds. The members of money market are (1) central bank at the top, (2) commercial banks, (3) co-operative banks, (4) saving banks, (5) specialised financial institutions, (6) discount houses and (7) other sources. Money market may other way be distinguished from capital market. Capital market is a collection of specialised institutions engaged in the employment of medium and long term funds primarily for the raising of new capital. In a developed country, the money market is highly organised and diversified, whereas in a developing country there are a few organised institutions which trade in the borrowing and lending of short term debts. In a developing country, the commercial banks, cooperative banks, saving banks and other financial institutions do exist but they are relatively few and are usually concentrated in big city areas. Stock markets react promptly and uncharacteristically to rumours of instability in politics, business and environment, change in regulatory business environment and interest rate variation etc. The share prices on the stock market are affected either positively or negatively by a number of factors occurring within and without the economic system. Interest rates play a major role in determining stock market trends since small investors decide to put their money in bank or invent in stock. There are instances of investment in share market out of bank loan for different other purposes. The investors in relatively new market like Bangladesh are inexperienced and sensitive to fluctuation of prices. Dividend is an issue for investment in share. Companies doing well in their business activities and offering dividend are likely to attract more investors, thereby resulting in high demand of their shares. Unfortunately the profit of companies do not reflect in the Bangladesh stock market since investors are looking at short term investment due to rapid upward change in share index for re-sell in the market again in short period of time. Monetary policy of Central Bank affects the capital market, in particular the stock price change. Therefore, the central bank in formulating monetary policy, in the performance of the economy and monetary demand of the entity making the correct analysis, judgment, is also concerned about the financial markets. There are some issues related to operation and management of market which has impact on the capital market. The management of the Security Exchange commission, management of stock exchange, officials of regulatory body of government employees who learned of such information because of their employment by the government, can take advantage of information placed to these organisations for personal gain. On the other hand the directors and management of listed companies as well as lawyers, accountants, and similar fiduciaries - routinely possess information that is unavailable to the general public. As because some of the information will affect the prices of the registered securities when it becomes public; insiders can profit by buying or selling in advance. Trades made by these types of insiders in the company's own stock, based on non-public information, are considered to be fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders. These insiders have undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the company. When the insiders buy or sell based upon company owned information, he is violating his obligation to the shareholders. Even friends, business associates, family members of such officers, directors, and employees, employees of lawyer, banking, brokerage firms who were given such information to provide services are obliged to maintain professional ethics not to deal in stock trade. USA Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10 per cent of a firm's shares. In the UK, the relevant laws are the Criminal Justice Act 1993 and the Financial Services and Markets Act 2000, which defines an offence of market abuse. The common investors in USA receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities under Securities Act of 1933 which is often referred to as the 'truth in securities' law. The SEC must govern the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote. The SEC act has such mandatory provision in USA. Their Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. The land mark Sarbanes-Oxley Act of 2002 is the most far reaching reforms of American business practices through enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud. It created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. 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