Taming the aberrant investors
Wednesday, 24 November 2010
Syed Mahbubur Rashid
Quite a number of listed companies have shown an unusual price-hike of their shares in the stock market. Some such companies are, in reality, dead ones.
With the approval from the Securities and Exchange Commission (SEC) a few years ago, both the stock exchanges of the country opened a new category for shares of some of such companies, putting them in the Z group – for operational or trading purposes. Defaulting companies who do not hold Annual General Meeting (AGM) regularly and do not pay a reasonable or no amount of dividend are dumped in this group. Of late some such companies in this group — are now being traded through a Dhaka Stock Exchange (DSE) window — a modicum of over-the-counter-exchange (OTCE).
The unusual phenomenon of a robust rise in share-prices of ‘Z’ category companies cannot happen without the presence of some past masters at bamboozling the investors in the share market. At present the traders-cum-investors far outnumber the traditional investors. Even the traditional investors have developed a psyche for reinvestment with a view to maximizing the profit. This is due to the phenomenal growth of the market, both horizontal and vertical. But in no case one can support the sudden price-hike of ‘dormant’ stocks.
Fearing bust of the stock market, the SEC has been issuing warning to the investors in various ways. Investors have always been advised to check the fundamentals of a company before they buy its shares. But the ground reality is that still there have been abnormal price-hikes of some moribund companies.
A very pertinent question here also arises about why the issues can stay in the fray with such poor performances. The probable answer is that the SEC needs a long runway, before it takes off for action. Of course, in one case the SEC has always been prompt. This is to pull the string of the margin money in case of volatility of the market. At one stage, some investors took shelter in the court of law asking for the SEC’s restraint. After several bouts of judicial process, the SEC has been the gainer and now it is to free to act in the manner it thinks it wise.
In the present situation, the merchant banks should offer margin loan facilities at a minimal level. Of course, Arthur Levitt, one of the longest serving chairman of the US SEC feels that an individual investor should always shun margin money. He said: “Margin borrowing is very risky and for an individual investor like you should be avoided at all costs.” Arthur Levitt has always laid emphasis upon an individual investor’s own sense of judgment. His advice to the investors is: “Trust your own instincts. No expert, stock market guru, financial columnist knows what you should invest in, better than you”.
It is, however, not known for how long and to what extent this kind of ‘adage will work. Investors from all walks of life are rushing to the stock exchange. A step-motherly attitude towards the various savings schemes by the ministry of finance has otherwise discouraged the common investors from moving towards that buying savings certificates. Over and above this, both print and electronic media are everyday coming out with the apparent success stories of the share market. So we are expected to see more and more growth of the share market. It will not be an exaggeration to say that the investors are intoxicated; in this situation, the proposition that the buyer is responsible for checking the quality of goods before purchasing them, will then hardly work.
We should remember that there is silver lining behind every dark cloud and vice versa. But what is less frequent is a matter of luck. The present gargantuan growth of share market has caused germination of certain issues which may not have yet been fully exposed. Since no trading can be held outside the floor of the stock exchange, it has automatically become the monopoly business of the members of the stock exchange. With the introduction of online trading, the conventional floor trading has been abolished. So it can be argued that transparency has been ensured and a broker has nothing to hide. There is an element of truth in it but not the whole one. Every member of the DSE, apart from his head office, may maintain a number of branches known as work stations. A member’s authorized assistant is in charge of a station. He does not have any separate legal entity. However, the appointment of an authorised assistant and the opening of a branch are to be approved by the DSE Board. Since a member will have to be responsible and bear all liabilities for the activities of an authorised person on his behalf, so it is natural that he will have full control over the operations of such branches. In such a case, there is no chance of any flexibility in running the affairs of any authorised trader but to strictly follow the instructions of the head office.
Meanwhile, because of the tremendous increase of income of a broker the cost of “buying” or “acquiring” membership has become extremely high. At present, the change of ownership has come to a dead shop, so the price is incalculable. Now the membership of the DSE has become a hereditary peer, transferable only in ease of death. Most of the membership is proprietary; of course, corporate favour has been given to it, by adding the word – “& Co”. Certain genuine corporate members are there but such membership is on account of banks and financial institutions. A question has now arisen whether the shares of a member company can be floated after converting it into a public limited company or not. Some argue that since the stock exchange has the lien over the membership, how can they offer shares? But that kind of argument is not tenable. The DSE will hold lien over the company as a whole; what does it matter as to who are the share holders?
It is likely that the rising market will attract the people not merely as investors-cum-traders; they may be also interested in obtaining a seat in the house. Infusion of new blood will invigorate the exchange not only with money but also with talent. The neophytes may come with new ideas. But most important of all is that no institution can survive long in a dormant situation. It is bound to be attacked with incurable diseases. Demutualization of the stock exchange, as many countries across the globe have gone for, provide one answer to the need for deep-seated reforms of the capital market. It will certainly help remove fears, on real or perceived grounds, about “manipulation by the insiders”.
The present impasse can also be overcome by establishing a national stock exchange, having a wide base and covering banks, financial institutions, business houses etc. There is no legal bar to setting up more than one stock exchange in a city. As such, the rejection of any such proposal by the concerned government authorities will be considered authoritarian and not based on law. The sooner the government sees the reason, the better will be for all.
.......................................................
The writer is a former secretary of Dhaka Stock Exchange
Quite a number of listed companies have shown an unusual price-hike of their shares in the stock market. Some such companies are, in reality, dead ones.
With the approval from the Securities and Exchange Commission (SEC) a few years ago, both the stock exchanges of the country opened a new category for shares of some of such companies, putting them in the Z group – for operational or trading purposes. Defaulting companies who do not hold Annual General Meeting (AGM) regularly and do not pay a reasonable or no amount of dividend are dumped in this group. Of late some such companies in this group — are now being traded through a Dhaka Stock Exchange (DSE) window — a modicum of over-the-counter-exchange (OTCE).
The unusual phenomenon of a robust rise in share-prices of ‘Z’ category companies cannot happen without the presence of some past masters at bamboozling the investors in the share market. At present the traders-cum-investors far outnumber the traditional investors. Even the traditional investors have developed a psyche for reinvestment with a view to maximizing the profit. This is due to the phenomenal growth of the market, both horizontal and vertical. But in no case one can support the sudden price-hike of ‘dormant’ stocks.
Fearing bust of the stock market, the SEC has been issuing warning to the investors in various ways. Investors have always been advised to check the fundamentals of a company before they buy its shares. But the ground reality is that still there have been abnormal price-hikes of some moribund companies.
A very pertinent question here also arises about why the issues can stay in the fray with such poor performances. The probable answer is that the SEC needs a long runway, before it takes off for action. Of course, in one case the SEC has always been prompt. This is to pull the string of the margin money in case of volatility of the market. At one stage, some investors took shelter in the court of law asking for the SEC’s restraint. After several bouts of judicial process, the SEC has been the gainer and now it is to free to act in the manner it thinks it wise.
In the present situation, the merchant banks should offer margin loan facilities at a minimal level. Of course, Arthur Levitt, one of the longest serving chairman of the US SEC feels that an individual investor should always shun margin money. He said: “Margin borrowing is very risky and for an individual investor like you should be avoided at all costs.” Arthur Levitt has always laid emphasis upon an individual investor’s own sense of judgment. His advice to the investors is: “Trust your own instincts. No expert, stock market guru, financial columnist knows what you should invest in, better than you”.
It is, however, not known for how long and to what extent this kind of ‘adage will work. Investors from all walks of life are rushing to the stock exchange. A step-motherly attitude towards the various savings schemes by the ministry of finance has otherwise discouraged the common investors from moving towards that buying savings certificates. Over and above this, both print and electronic media are everyday coming out with the apparent success stories of the share market. So we are expected to see more and more growth of the share market. It will not be an exaggeration to say that the investors are intoxicated; in this situation, the proposition that the buyer is responsible for checking the quality of goods before purchasing them, will then hardly work.
We should remember that there is silver lining behind every dark cloud and vice versa. But what is less frequent is a matter of luck. The present gargantuan growth of share market has caused germination of certain issues which may not have yet been fully exposed. Since no trading can be held outside the floor of the stock exchange, it has automatically become the monopoly business of the members of the stock exchange. With the introduction of online trading, the conventional floor trading has been abolished. So it can be argued that transparency has been ensured and a broker has nothing to hide. There is an element of truth in it but not the whole one. Every member of the DSE, apart from his head office, may maintain a number of branches known as work stations. A member’s authorized assistant is in charge of a station. He does not have any separate legal entity. However, the appointment of an authorised assistant and the opening of a branch are to be approved by the DSE Board. Since a member will have to be responsible and bear all liabilities for the activities of an authorised person on his behalf, so it is natural that he will have full control over the operations of such branches. In such a case, there is no chance of any flexibility in running the affairs of any authorised trader but to strictly follow the instructions of the head office.
Meanwhile, because of the tremendous increase of income of a broker the cost of “buying” or “acquiring” membership has become extremely high. At present, the change of ownership has come to a dead shop, so the price is incalculable. Now the membership of the DSE has become a hereditary peer, transferable only in ease of death. Most of the membership is proprietary; of course, corporate favour has been given to it, by adding the word – “& Co”. Certain genuine corporate members are there but such membership is on account of banks and financial institutions. A question has now arisen whether the shares of a member company can be floated after converting it into a public limited company or not. Some argue that since the stock exchange has the lien over the membership, how can they offer shares? But that kind of argument is not tenable. The DSE will hold lien over the company as a whole; what does it matter as to who are the share holders?
It is likely that the rising market will attract the people not merely as investors-cum-traders; they may be also interested in obtaining a seat in the house. Infusion of new blood will invigorate the exchange not only with money but also with talent. The neophytes may come with new ideas. But most important of all is that no institution can survive long in a dormant situation. It is bound to be attacked with incurable diseases. Demutualization of the stock exchange, as many countries across the globe have gone for, provide one answer to the need for deep-seated reforms of the capital market. It will certainly help remove fears, on real or perceived grounds, about “manipulation by the insiders”.
The present impasse can also be overcome by establishing a national stock exchange, having a wide base and covering banks, financial institutions, business houses etc. There is no legal bar to setting up more than one stock exchange in a city. As such, the rejection of any such proposal by the concerned government authorities will be considered authoritarian and not based on law. The sooner the government sees the reason, the better will be for all.
.......................................................
The writer is a former secretary of Dhaka Stock Exchange