Strict financial reporting act to help broaden the depth of stock market

The stock market regulators should go for positive reinforcement in terms of further tax advantage and tax holiday and minimize the chance of earning manipulation by introducing strict financial reporting act that will cover both non-listed and listed companies.
"I would like to thank our regulators in this occasion for their sincere effort to pass the Financial Reporting Act (FRA). However, our regulators can also create a strong platform for floating debt instruments with tax advantage for both investors and the issuers. This step may attract new investors with an appetite of fixed income and work as a new financing option for companies," Rashed Hasan, Senior Vice President of LR Global Bangladesh told The FE in an interview.
Regarding attracting more companies to be listed in the stock market, he said : If we do a cost-benefit analysis from the perspective of a non-listed company, we can see that the company has to go through a cumbersome procedure to get listed. What it gains is the access to capital and a 10 per cent tax advantage. But on the other hand, the company has to dilute its equity and face stringent guidelines to ensure better corporate governance. Certainly, the current perks of being listed are not sufficient to encourage the companies to comply with the added cost of being listed.
Replying to another question, he said to diversify Bangladesh's equity-based market, the regulators need to focus on developing a strong secondary bond market. As a first step, the cumbersome procedure to purchase treasury securities needs to be simplified.
"An active platform should be established to facilitate trading of debt securities. For the development of corporate bond market, as I mentioned earlier, tax incentive for both the issuer and the investor purchasing the instrument will create a win-win situation for all the parties".
However, there is no foolproof formula to diversify the market and these are only baby steps that regulators can take to give a 'push'. Overall system needs to undergo a massive transformation to facilitate sufficient liquidity of such instruments. Educating the retail investors about the new products, creating a user-friendly trading platform and shortening the settlement period of sale of assets will be necessary to attract investors to such products. Furthermore, to attain and retain investors' confidence, the corporate debt instruments must be rated by well reputed rating agencies on a periodic basis.  
On developing mutual fund segment, he said educating the retail investors to improve their overall financial literacy is of utmost importance. Mutual Fund should be traded close to its NAV. How come such an instrument used to trade at 600 per cent premiums once and now at 60 per cent discount?
"Our investors must realize that a Mutual Fund has a diversified underlying portfolio and its price should be determined based on the performance of that portfolio.   Regulators can step in here to direct the Asset Management Companies to invest for building investor awareness."
Mr Rashed Hasan said the regulatory bodies should provide the fund managers with more flexibility to diversify funds across varied class of assets. To attract investors to Mutual Fund, it is important that the fund managers ensure a minimum fixed rate of return which is quite challenging considering the current volatility of the Equity Market of Bangladesh.
"A credible rating system needs to be established to rank the assert managers based on their performance and this rating needs to be published on a periodic basis. Categorizing mutual funds based on the level of risk associated with them will further help towards reaching the right target group."
And finally, providing tax exemption on dividend income earned from a Mutual Fund can be an attractive incentive to the investors.
Identifying the reasons behind the sorry state of mutual fund industry, he said one of the misperceptions about the Mutual Funds is that it is a safe investment. How can we call it safe when by regulation, the fund managers must invest majority of their funds in the Equity instruments? Yes the money is certainly safer in the hands of professional fund managers but fund managers are not magicians and their performance will always be somewhat correlated to the overall market performance.
The investors only know the NAV of the mutual funds but they don't have any idea about the underlying portfolio. Unless they know in which instruments the Fund Managers are investing the money, the investors cannot restore their faith. Since 2010, this industry has been attacked with misleading publicity that further eroded investors' confidence. All these factors are responsible for the current situation of the industry.
"To improve the situation, I believe the fund managers need to be much more transparent in terms of disclosing their portfolio. Given the mutual funds disclose their portfolio pinpointing the value of each stock they own, investors will be able to know where their hard-earned money is invested. Additionally, liquidating close-end funds upon maturity and providing cash dividend will further help restore the investors' trust in the industry. Finally, our regulators, for the overall welfare of the industry, need to assess the exposure limit to equity instruments so that fund managers get more flexibility to protect the capital of the unit-holders."
According to the New York-based investment company's senior executive, all the big players of manufacturing sector of Bangladesh are not listed. RMG & textiles companies have only 3.0 per cent of total stock market share. And the same can be said for other important sectors such as - FMCG, consumer goods, real estate etc.
Commenting on the 2010 crash and subsequent recovery till now, he said : We need to go back to 2010 to understand why the crash took place in the first place. The crash was inevitable - market was so severely overheated that most of the companies were trading at 35+ PE, resulting from a four year long rally. Back at that time, the entire ecosystem of stock market was not equipped with skilled professionals to manage the risks, especially the ones associated with margin lending and discretionary portfolio management. Eventually, the bubble crashed leaving many investors losing their entire capital.
"We have already played enough blame-game to point out who was at fault during the crash. The harsh truth is - any mispriced asset will eventually come down to its fair value. And that is exactly what happened in 2010. We have heard so many times that it was the negligence from our regulators that caused us the price correction. But what every investor needs to understand is that regulators are just facilitators of the entire system. Of course, they have a role to scrutinize companies. But it is not their job to keep the index up or to try creating a buy pressure during the downfall. I view this crash as a valuable lesson to all the stakeholders that made them aware of the need for prudent risk-management."
"I do believe that the market has bottomed out from the crash, mostly driven by earnings growth of few large cap blue chip companies. Especially the companies associated with FMCG and pharmaceuticals business have grown at double digit CAGR. I think, as Bangladesh has a consumer base of 160 million people, these companies will have sustainable cash-flows that will have a positive impact on the market."
On regaining the investors' confidence, he said although the market has bottomed out, investors are still maintaining a cautious stance. Since the peak of 2010, the market has undergone 30 per cent correction. Except for a few blue-chip companies, corporate earnings mostly remained flat in the past five years. Unless the listed companies perform well in terms of earnings, investors' confidence will not be restored.
"Moreover, our listed firms have a tendency not to share their profits with the minority stakeholders. The overall cash dividend yield of the listed firms is close to 1.0 per cent. The companies' tendency to dilute the ownership by issuing bonus dividend is detrimental to investors' confidence," he added.
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