Stock market package and small investors confidence
Tuesday, 3 January 2012
The ongoing sogginess of spirit in the stock market is the result of a number of factors. Such factors include, among others, the lack of hope of investors in the regulatory body and other institutional authorities relevant to the stock market, and the slower than expected liquidity flow even after the promises made by banks to increase their level of investments in the capital market.
Moreover, there is a fear factor influencing the minds of investors about the stock market falling a victim too often to the rumours of a loop of destructive manipulators. It is something as it may be is their most pressing concern when they have to decide about making any further investment.
The one major objective of incentive package that has already been announced by the authorities concerned is to help ensure long-term stable conditions in the Bangladesh stock market. This is intrinsically a striving to deliver over-the-surface changes in the stock market but it is not, in essence, aimed at rejuvenating it. It is not utilitarian in its intents to help rebuild stability with any impression being firmly given about bettering the conditions of the small investors through it only.
One should also note whether it has drawn any effective attention of those, whom we may call, clinical investors. The package does not contain any fruitful step to help lift the psyche or mood of such 'clinical' investors.
The provision about the tax privilege on the profits of offshore investors is noteworthy. But the market will fail to attract offshore investors unless it becomes stable first. The primary aim of the government should be to refurbish the stock market at all costs. At the same time, the announcement about to facilitating increased investment by banks and financial institutions are praiseworthy. Yet nothing can be forecast about how much sufficient such investment will be in the foreseeable future. The country's economy is now susceptible to various strains and stresses and it will be a misplaced priority to plan for the revival and upgradation of the country's stock market if the issues of concern about the state of the economy are not effectively addressed at the same time.
The incentive package has likewise concentrated on an 'anatomical' shift. But positive signals are still missing. It would be too much to expect that it will revitalize the Bangladesh capital market at the soonest as the announced package does hardly include any step of consequence to make that happen.
The stock market in Bangladesh is yet a far way off the situation in the developed and even the emerging markets. Not only its capitalization is extremely low, but also it remains exposed to high price volatility.
Capital market is a sub-set of wider financial markets. It provides a linkage between the users and suppliers of the funds for long-term investment. The capital market mainly consists of stock (equity) and bonds markets. For macroeconomic management and development planning, an efficient stock market can play, at least, three pivotal roles.
It can reflect the levels of the overall as well as sectoral developments, by means of the market indices and valuation ratios. It can help mobilize the funds from domestic and external sources to the priority sectors of the economy. Furthermore, it can provide the indications, guidelines and information to the investors for their investment decision-making.
An efficient stock market develops a path for smooth, simple and transparent opportunities for investment without undue risks and gambling factors. Market efficiency is a matter of important concern for the stock exchanges.
There are different versions of the market efficiency hypothesis, according to the available set of information. This is supposed to be reflected in market prices.
In its weak form of efficiency, the current market prices reflect all information relating to the past situation. Under conditions of semi-strong form efficiency, current market prices reflect all publicly available information. And a strong form of efficiency means that current market prices reflect both public and private information.
A stock market is efficient if it does fully and correctly reflect all relevant information in determining the prices of the listed securities. This implies that it is impossible to make economic profits on the basis of such a set of information.
In practice, investors are highly concerned over getting fair prices and achieving high returns. Furthermore, market efficiency implies an optimal allocation of resources in the economy.
Three types of market efficiency can be noted here.
Operational efficiency: A financial market is operationally efficient if it works smoothly, with limited delays (orders can be transmitted from all parts of the world to a market very quickly, and are quickly executed and confirmed). Markets should carry out their operations at the lowest possible cost. Competition among markets is an ingredient in increasing operational efficiency. Technology is also an important factor in achieving operational efficiency. A market may, however, be operationally efficient, without being efficient, in terms of flow of all relevant information.
Allocational efficiency: Economic resources are scarce and it is important to allocate such resources in a way to help achieve optimum productivity. An efficient market should help channel the fund to promote the growth of different industries.
Pricing efficiency (informational efficiency): In a price efficient market, the investor can expect to earn risk-adjusted returns as prices move instantaneously and in an unbiased manner to any updated news or relevant information. An efficient market, in terms of information, is the one in which market prices adjust quickly in response to new information.
A number of additional steps at this stage do merit attention of the authorities concerned to help revamp or recognize the institutional structure of the country's capital market.
Establishment of OTC Market at DSE: To facilitate transactions of shares in companies that are delisted by stock exchanges, an active over-the-counter (OTC) market needs to be introduced.
Bangladesh Institute of Capital Market: To educate the investors and market intermediaries and to help train the companies in corporate governance in the listed companies, Bangladesh Institute of Capital Market has been established. The Securities & Exchange Commission (SEC), in association with the Dhaka and Chittagong Stock Exchanges, should arrange appropriate investors' training programmes for the relevant state-holders at regular intervals.
Capital Market Governance Project: To reform the market, improve the institutional capacity, upgrade the quality of human resources and enhance the market surveillance system, the SEC was earlier reported to have undertaken a project named 'Improvement of Capital Market Governance Program', with assistance of the government and Asian Development Bank (ADB). Its operations should be properly activated without making any further delay.
Demutualization of Stock Exchanges: The most important step that needs to be taken by the SEC relates to 'demutualization of the country's two stock exchanges. It is to be noted that more than 85 per cent of world's leading stock exchanges have already been demutualized.
Under this system, the stock exchanges will be converted into profit-making organizations and the members of the stock exchanges will be receiving dividend from their incomes. In this case, the members will, however, lose their right to do brokerage business. The brokers will be different from the membership of the stock exchange.
Implementation of this system will ensure transparency and independence of the exchanges. At present, members of the stock exchanges do brokerage business. This increases the scope for to clash of interests and the stock exchanges, themselves being rule-making and execution bodies, cannot, as a result, work as independent and transparent institutions.
Institutional Development: Institutional investors play an important role in development of corporate culture and growth of the financial markets. They help to enhance the supply of liquidity to capital market by allowing more players to enter the capital market. Institutional investment covers the pension, provident and mutual funds and insurance companies. They can minimize the risks of investment by way of diversification of portfolio holding and ensure the better returns.
The institutional investment will create a better scope for making the companies behave in more responsible ways, improve their governance and accountability and practice professionalism. In the process, the savings in the economy can be better utilized along efficient lines. It is a common observation that in all the industrialised countries and the Far Eastern economies, institutional investors contribute a major part to the equities of the listed companies. An enhanced share of institutional holding will not only improve the corporate governance and earnings but also promote the culture of savings in the economy.
Building a world class market: A world class market is one that helps to foster investors' confidence, has breadth in terms of product offerings and depth in the sense of liquidity. World class capital markets are the conduits for mobilization of funds for business expansion and new opportunities, providing also the governments with long-term capital for financing infrastructure and other important projects that can help transform the economies.
The world class capital markets are enablers of socio-economic development because they foster meritocracy, good corporate governance, innovation and entrepreneurship. All these, in turn, create job opportunities, harnessing the skills and entrepreneurial zeal of the many hard-working people. Such markets facilitate the diversification of an economy, enable economic agents to pool price-and exchange-risks, encourage savings and create wealth.
A market that is characterized by orderly trading, transparency and market efficiency is essentially founded on market integrity and is also reinforced through a regime of strong disclosure and accountability requirements. In a world class market, the regulator's involvement transcends the creation of rules and regulations and enforcing the same. The regulators then also help drive the process of entrenching the required corporate governance framework to elicit the desired market outcome.
Lessons from the financial crisis : In the wake of the global financial crisis, many economies have been thrown into a recession, and shrinkage of market capitalization. Capital flight has been turning out to be the norm as a result of loss of investors, confidence in the market. The aftermath has been a plethora of investigations and litigations with the recurring issue of discussions, bordering on governance and regulation. Ultimately, the world is now more aware than before of the parameters that are relevant to assessing truly world class capital markets. Regulators must evaluate, and account for, systemic risks, in addition to the traditional function of rule making.
What makes regulation effective?
Clarity of rules: Market rules are meant to shape behaviour, set standards and create a level playing field for participants. They are also meant to promote orderly trading, transparency and market efficiency.
Strong enforcement and effective regulatory oversight: It is different to conceive of a strong market that does not enjoy wider investors' confidence and public trust. Our enforcement mechanism has to be strengthened for this purpose. Our strength will have to be developed with regarce in our ability to properly enforce actions without fear or favour. The SEC must have zero tolerance for direct or indirect market manipulators and, indeed, any act which can undermine the integrity of the market.
Greater emphasis on capacity building and investor education: A well-informed investing public will be better placed to protect themselves, forming the first layer in investor protection. For instance, an investor who understands his right is most likely to assert his position and seek redress when such rights are violated. Similarly, an investor who understands the workings of the market is less likely to become a victim to any foul-game by unscrupulous market participants than the one who has a low level of knowledge about the market.
When investors are knowledgeable and well informed about the workings of the capital markets, they are also most likely to be better able to assess the risks and rewards of making investments in the market. In this respect, the SEC has to move ahead steadily with its various investor education initiatives, including supply of educational materials for various types of investors, sponsoring of seminars and quiz competitions, and encouraging the pursuit of studies on capital market at the level of universities. It also needs to conduct regularly capacity building programmes for financial journalists and all other relevant personnel.
Good corporate governance: Good corporate governance is the mainstay of a stable capital market. The corporate failures which have accompanied the global financial crisis, have also brought to the fore the issues about the fragile governance system that are at play in most global institutions. The corporate failures have no doubt drawn the attention of all concerned across the globe in recent years to the fact that good corporate governance is extremely important to corporate performance and survival.
Indeed good corporate governance has become one important index for institutional investors' participation in business enterprises and financial markets. Institutions which are poorly governed pose a risk to themselves and also to others in the markets.
Finally, as the SEC is reportedly working on strengthening its own surveillance system, it will be befitting for it at this stage to put in place such surveillance operational mechanism in order to safeguard, with due diligence, the task of reviewing the settlement and all other related practices in the market. It is a welcome sign that the intervention by the Prime Minister has injected a hope into the stock market in Bangladesh.
But all concerned do at the same time need to bear in mind that the stock market is not a "casino" of playful or foolish gamblers. It is primarily, the vehicle of fluid exchanges that should allow the efficient functioning of a competitive market-oriented economy.
(The writer can be reached at
e-mail:toufique2010@gmail.com)
Moreover, there is a fear factor influencing the minds of investors about the stock market falling a victim too often to the rumours of a loop of destructive manipulators. It is something as it may be is their most pressing concern when they have to decide about making any further investment.
The one major objective of incentive package that has already been announced by the authorities concerned is to help ensure long-term stable conditions in the Bangladesh stock market. This is intrinsically a striving to deliver over-the-surface changes in the stock market but it is not, in essence, aimed at rejuvenating it. It is not utilitarian in its intents to help rebuild stability with any impression being firmly given about bettering the conditions of the small investors through it only.
One should also note whether it has drawn any effective attention of those, whom we may call, clinical investors. The package does not contain any fruitful step to help lift the psyche or mood of such 'clinical' investors.
The provision about the tax privilege on the profits of offshore investors is noteworthy. But the market will fail to attract offshore investors unless it becomes stable first. The primary aim of the government should be to refurbish the stock market at all costs. At the same time, the announcement about to facilitating increased investment by banks and financial institutions are praiseworthy. Yet nothing can be forecast about how much sufficient such investment will be in the foreseeable future. The country's economy is now susceptible to various strains and stresses and it will be a misplaced priority to plan for the revival and upgradation of the country's stock market if the issues of concern about the state of the economy are not effectively addressed at the same time.
The incentive package has likewise concentrated on an 'anatomical' shift. But positive signals are still missing. It would be too much to expect that it will revitalize the Bangladesh capital market at the soonest as the announced package does hardly include any step of consequence to make that happen.
The stock market in Bangladesh is yet a far way off the situation in the developed and even the emerging markets. Not only its capitalization is extremely low, but also it remains exposed to high price volatility.
Capital market is a sub-set of wider financial markets. It provides a linkage between the users and suppliers of the funds for long-term investment. The capital market mainly consists of stock (equity) and bonds markets. For macroeconomic management and development planning, an efficient stock market can play, at least, three pivotal roles.
It can reflect the levels of the overall as well as sectoral developments, by means of the market indices and valuation ratios. It can help mobilize the funds from domestic and external sources to the priority sectors of the economy. Furthermore, it can provide the indications, guidelines and information to the investors for their investment decision-making.
An efficient stock market develops a path for smooth, simple and transparent opportunities for investment without undue risks and gambling factors. Market efficiency is a matter of important concern for the stock exchanges.
There are different versions of the market efficiency hypothesis, according to the available set of information. This is supposed to be reflected in market prices.
In its weak form of efficiency, the current market prices reflect all information relating to the past situation. Under conditions of semi-strong form efficiency, current market prices reflect all publicly available information. And a strong form of efficiency means that current market prices reflect both public and private information.
A stock market is efficient if it does fully and correctly reflect all relevant information in determining the prices of the listed securities. This implies that it is impossible to make economic profits on the basis of such a set of information.
In practice, investors are highly concerned over getting fair prices and achieving high returns. Furthermore, market efficiency implies an optimal allocation of resources in the economy.
Three types of market efficiency can be noted here.
Operational efficiency: A financial market is operationally efficient if it works smoothly, with limited delays (orders can be transmitted from all parts of the world to a market very quickly, and are quickly executed and confirmed). Markets should carry out their operations at the lowest possible cost. Competition among markets is an ingredient in increasing operational efficiency. Technology is also an important factor in achieving operational efficiency. A market may, however, be operationally efficient, without being efficient, in terms of flow of all relevant information.
Allocational efficiency: Economic resources are scarce and it is important to allocate such resources in a way to help achieve optimum productivity. An efficient market should help channel the fund to promote the growth of different industries.
Pricing efficiency (informational efficiency): In a price efficient market, the investor can expect to earn risk-adjusted returns as prices move instantaneously and in an unbiased manner to any updated news or relevant information. An efficient market, in terms of information, is the one in which market prices adjust quickly in response to new information.
A number of additional steps at this stage do merit attention of the authorities concerned to help revamp or recognize the institutional structure of the country's capital market.
Establishment of OTC Market at DSE: To facilitate transactions of shares in companies that are delisted by stock exchanges, an active over-the-counter (OTC) market needs to be introduced.
Bangladesh Institute of Capital Market: To educate the investors and market intermediaries and to help train the companies in corporate governance in the listed companies, Bangladesh Institute of Capital Market has been established. The Securities & Exchange Commission (SEC), in association with the Dhaka and Chittagong Stock Exchanges, should arrange appropriate investors' training programmes for the relevant state-holders at regular intervals.
Capital Market Governance Project: To reform the market, improve the institutional capacity, upgrade the quality of human resources and enhance the market surveillance system, the SEC was earlier reported to have undertaken a project named 'Improvement of Capital Market Governance Program', with assistance of the government and Asian Development Bank (ADB). Its operations should be properly activated without making any further delay.
Demutualization of Stock Exchanges: The most important step that needs to be taken by the SEC relates to 'demutualization of the country's two stock exchanges. It is to be noted that more than 85 per cent of world's leading stock exchanges have already been demutualized.
Under this system, the stock exchanges will be converted into profit-making organizations and the members of the stock exchanges will be receiving dividend from their incomes. In this case, the members will, however, lose their right to do brokerage business. The brokers will be different from the membership of the stock exchange.
Implementation of this system will ensure transparency and independence of the exchanges. At present, members of the stock exchanges do brokerage business. This increases the scope for to clash of interests and the stock exchanges, themselves being rule-making and execution bodies, cannot, as a result, work as independent and transparent institutions.
Institutional Development: Institutional investors play an important role in development of corporate culture and growth of the financial markets. They help to enhance the supply of liquidity to capital market by allowing more players to enter the capital market. Institutional investment covers the pension, provident and mutual funds and insurance companies. They can minimize the risks of investment by way of diversification of portfolio holding and ensure the better returns.
The institutional investment will create a better scope for making the companies behave in more responsible ways, improve their governance and accountability and practice professionalism. In the process, the savings in the economy can be better utilized along efficient lines. It is a common observation that in all the industrialised countries and the Far Eastern economies, institutional investors contribute a major part to the equities of the listed companies. An enhanced share of institutional holding will not only improve the corporate governance and earnings but also promote the culture of savings in the economy.
Building a world class market: A world class market is one that helps to foster investors' confidence, has breadth in terms of product offerings and depth in the sense of liquidity. World class capital markets are the conduits for mobilization of funds for business expansion and new opportunities, providing also the governments with long-term capital for financing infrastructure and other important projects that can help transform the economies.
The world class capital markets are enablers of socio-economic development because they foster meritocracy, good corporate governance, innovation and entrepreneurship. All these, in turn, create job opportunities, harnessing the skills and entrepreneurial zeal of the many hard-working people. Such markets facilitate the diversification of an economy, enable economic agents to pool price-and exchange-risks, encourage savings and create wealth.
A market that is characterized by orderly trading, transparency and market efficiency is essentially founded on market integrity and is also reinforced through a regime of strong disclosure and accountability requirements. In a world class market, the regulator's involvement transcends the creation of rules and regulations and enforcing the same. The regulators then also help drive the process of entrenching the required corporate governance framework to elicit the desired market outcome.
Lessons from the financial crisis : In the wake of the global financial crisis, many economies have been thrown into a recession, and shrinkage of market capitalization. Capital flight has been turning out to be the norm as a result of loss of investors, confidence in the market. The aftermath has been a plethora of investigations and litigations with the recurring issue of discussions, bordering on governance and regulation. Ultimately, the world is now more aware than before of the parameters that are relevant to assessing truly world class capital markets. Regulators must evaluate, and account for, systemic risks, in addition to the traditional function of rule making.
What makes regulation effective?
Clarity of rules: Market rules are meant to shape behaviour, set standards and create a level playing field for participants. They are also meant to promote orderly trading, transparency and market efficiency.
Strong enforcement and effective regulatory oversight: It is different to conceive of a strong market that does not enjoy wider investors' confidence and public trust. Our enforcement mechanism has to be strengthened for this purpose. Our strength will have to be developed with regarce in our ability to properly enforce actions without fear or favour. The SEC must have zero tolerance for direct or indirect market manipulators and, indeed, any act which can undermine the integrity of the market.
Greater emphasis on capacity building and investor education: A well-informed investing public will be better placed to protect themselves, forming the first layer in investor protection. For instance, an investor who understands his right is most likely to assert his position and seek redress when such rights are violated. Similarly, an investor who understands the workings of the market is less likely to become a victim to any foul-game by unscrupulous market participants than the one who has a low level of knowledge about the market.
When investors are knowledgeable and well informed about the workings of the capital markets, they are also most likely to be better able to assess the risks and rewards of making investments in the market. In this respect, the SEC has to move ahead steadily with its various investor education initiatives, including supply of educational materials for various types of investors, sponsoring of seminars and quiz competitions, and encouraging the pursuit of studies on capital market at the level of universities. It also needs to conduct regularly capacity building programmes for financial journalists and all other relevant personnel.
Good corporate governance: Good corporate governance is the mainstay of a stable capital market. The corporate failures which have accompanied the global financial crisis, have also brought to the fore the issues about the fragile governance system that are at play in most global institutions. The corporate failures have no doubt drawn the attention of all concerned across the globe in recent years to the fact that good corporate governance is extremely important to corporate performance and survival.
Indeed good corporate governance has become one important index for institutional investors' participation in business enterprises and financial markets. Institutions which are poorly governed pose a risk to themselves and also to others in the markets.
Finally, as the SEC is reportedly working on strengthening its own surveillance system, it will be befitting for it at this stage to put in place such surveillance operational mechanism in order to safeguard, with due diligence, the task of reviewing the settlement and all other related practices in the market. It is a welcome sign that the intervention by the Prime Minister has injected a hope into the stock market in Bangladesh.
But all concerned do at the same time need to bear in mind that the stock market is not a "casino" of playful or foolish gamblers. It is primarily, the vehicle of fluid exchanges that should allow the efficient functioning of a competitive market-oriented economy.
(The writer can be reached at
e-mail:toufique2010@gmail.com)