Taking steam out of a super bull
Wednesday, 29 September 2010
Shamsul Huq Zahid
The capital market regulator, the Securities and Exchange Commission (SEC), received a plenty of suggestions from the parliamentary standing committee on the Ministry of Finance late last week to cool down an overheated market.
Some of the suggestions concern the SEC and some do not. The SEC hierarchy may not feel comfortable with some of the recommendations of the parliamentary body but it surely would not speak out its mind in public.
Moreover, the SEC has learnt to live with suggestions from so-called market pundits and other stakeholders. So, a few more are unlikely to hurt its peace of mind.
However, the parliamentary committee meeting and issues discussed there should be enough to raise a few pertinent questions.
The first question is about the independence of the SEC.
In the original act, the Commission was independent but through an amendment to the act later it was made subservient to the Ministry of Finance.
However, when an institution carries out its mandated duties and responsibilities efficiently, in compliance with laws and rules, the authorities concerned, generally, do not interfere. And the vested interests do prefer to keep themselves away from the management of such an institution. But when the management is weak and the government gives indulgence to any vested quarters, no public institution, regulatory or otherwise, can exercise independence and earn public respect.
It remains debatable whether suggestions made by the parliamentary standing committee on the Ministry of Finance fall within its jurisdiction or not. One would like to be certain about it.
The rule 248 of the Rules of Procedure of the Jatiya Sangsad (national parliament) does otherwise empower a parliamentary committee on a ministry, among others, 'to examine any Bill or other matter referred to it by Parliament, to review the works relating to a Ministry which falls within its jurisdiction, to inquire into any activity or irregularity and serious complaint in respect of the Ministry and to examine, if it deems fit, any such other matter as may fall within its jurisdiction and to make recommendations.'
The last week's meeting does, however, highlight one fact that the parliamentary committee on finance is very much alive to a problem that has all the potentials of going off anytime, leaving an ugly scar on the economy and hurting thousands of individual investors who have been showing a herd-like instinct.
The second question is about the supply of stocks. The greater flow of new stocks nowadays is viewed as only answer to control the soaring stock market indices. The head of the parliamentary committee also made strong suggestions to increased supply of stocks. But how much of new stocks is enough to satiate the unending appetite of investors? There is no magic formula that can be used to beef up supply of stocks overnight. The number of companies going public during last one year has not been that insignificant. But it could not make any recognizable impact on the market.
However, the suggestions relating to the relaxation of the compulsory lock-in periods for placement and sponsors' shares and netting period with a view to beefing up supply of stocks deserve to be taken with a grain of salt.
If the suggestion on relaxation of lock-in period is implemented, the holders of placement shares and sponsors of listed companies would be making windfall gains in a market that is devouring almost everything. Similarly, a relaxed netting facility has the potential of making the market volatile further.
In fact, the securities regulator is now in a catch-22 situation; it can hardly take appropriate actions for fear of collapse of the market nor it can allow the bubble to become bigger and bigger and burst eventually.
While most listed companies, on enquiries, have been regularly informing the SEC that they do not have any undisclosed information supporting the unusual rise in the prices of their stocks, the general index at the Dhaka Stock Exchange (DGEN) has increased by more than 4000 points over a period of one year.
The situation over last one year or more does otherwise indicate to some foul play somewhere by some people who have both power and clout, political or otherwise. The market is rife with rumours that some known faces have already made money worth billions employing various mechanisms, including the floatation of preference shares. They might be cooking up a few more plans to rip the investors off.
Many institutional investors, too, have made their fortunes out of a market where money is flowing from all directions. A good number of financial institutions, including insurance companies, earned the lion's shares of their profit from stock trading.
The authorities preferred to be complacent when the market started rising since it suited them best. But things have, by all measures, advanced too far. However, there is still time for reining in the market through well thought-out actions. It might be hard to avoid some damage to investors' confidence. But any further delay in taking such actions might even prove costlier.
The capital market regulator, the Securities and Exchange Commission (SEC), received a plenty of suggestions from the parliamentary standing committee on the Ministry of Finance late last week to cool down an overheated market.
Some of the suggestions concern the SEC and some do not. The SEC hierarchy may not feel comfortable with some of the recommendations of the parliamentary body but it surely would not speak out its mind in public.
Moreover, the SEC has learnt to live with suggestions from so-called market pundits and other stakeholders. So, a few more are unlikely to hurt its peace of mind.
However, the parliamentary committee meeting and issues discussed there should be enough to raise a few pertinent questions.
The first question is about the independence of the SEC.
In the original act, the Commission was independent but through an amendment to the act later it was made subservient to the Ministry of Finance.
However, when an institution carries out its mandated duties and responsibilities efficiently, in compliance with laws and rules, the authorities concerned, generally, do not interfere. And the vested interests do prefer to keep themselves away from the management of such an institution. But when the management is weak and the government gives indulgence to any vested quarters, no public institution, regulatory or otherwise, can exercise independence and earn public respect.
It remains debatable whether suggestions made by the parliamentary standing committee on the Ministry of Finance fall within its jurisdiction or not. One would like to be certain about it.
The rule 248 of the Rules of Procedure of the Jatiya Sangsad (national parliament) does otherwise empower a parliamentary committee on a ministry, among others, 'to examine any Bill or other matter referred to it by Parliament, to review the works relating to a Ministry which falls within its jurisdiction, to inquire into any activity or irregularity and serious complaint in respect of the Ministry and to examine, if it deems fit, any such other matter as may fall within its jurisdiction and to make recommendations.'
The last week's meeting does, however, highlight one fact that the parliamentary committee on finance is very much alive to a problem that has all the potentials of going off anytime, leaving an ugly scar on the economy and hurting thousands of individual investors who have been showing a herd-like instinct.
The second question is about the supply of stocks. The greater flow of new stocks nowadays is viewed as only answer to control the soaring stock market indices. The head of the parliamentary committee also made strong suggestions to increased supply of stocks. But how much of new stocks is enough to satiate the unending appetite of investors? There is no magic formula that can be used to beef up supply of stocks overnight. The number of companies going public during last one year has not been that insignificant. But it could not make any recognizable impact on the market.
However, the suggestions relating to the relaxation of the compulsory lock-in periods for placement and sponsors' shares and netting period with a view to beefing up supply of stocks deserve to be taken with a grain of salt.
If the suggestion on relaxation of lock-in period is implemented, the holders of placement shares and sponsors of listed companies would be making windfall gains in a market that is devouring almost everything. Similarly, a relaxed netting facility has the potential of making the market volatile further.
In fact, the securities regulator is now in a catch-22 situation; it can hardly take appropriate actions for fear of collapse of the market nor it can allow the bubble to become bigger and bigger and burst eventually.
While most listed companies, on enquiries, have been regularly informing the SEC that they do not have any undisclosed information supporting the unusual rise in the prices of their stocks, the general index at the Dhaka Stock Exchange (DGEN) has increased by more than 4000 points over a period of one year.
The situation over last one year or more does otherwise indicate to some foul play somewhere by some people who have both power and clout, political or otherwise. The market is rife with rumours that some known faces have already made money worth billions employing various mechanisms, including the floatation of preference shares. They might be cooking up a few more plans to rip the investors off.
Many institutional investors, too, have made their fortunes out of a market where money is flowing from all directions. A good number of financial institutions, including insurance companies, earned the lion's shares of their profit from stock trading.
The authorities preferred to be complacent when the market started rising since it suited them best. But things have, by all measures, advanced too far. However, there is still time for reining in the market through well thought-out actions. It might be hard to avoid some damage to investors' confidence. But any further delay in taking such actions might even prove costlier.