When hope for capital expansion lures investors into small-cap stocks

Libra Infusions was the number one gainer last week with an appreciation of 27.53 per cent on the Dhaka Stock Exchange (DSE).
Apart from this company, many small-cap companies having weak fundamentals have exhibited abnormal price hikes in the mostly stagnant market. Libra Infusion jumped 101 per cent between July 11 and October 18 though it has been incurring losses since 2020.
Market insiders and analysts have repeatedly pointed to artificial price hikes that such entities have been subjected to, but a written statement regarding some big investors' participation in trading in Legacy Footwear and BD Auto cars reveals another motive that helps boost stock prices.

The FE has collected a copy of the statement.
In an inquiry conducted by the securities regulator in 2019, some groups and individuals were found involved in manipulation of the stock prices.
Of them, Padma Glass, Rahmat Metal Industries, and Padma CANS & CLOSURES made a series of transactions to exert a combined effect on the share prices.
Rahmat Metal Industries was summoned to a hearing by the enforcement department of the securities regulator.
It said regarding its participation in Legacy Footwear that the company's small paid-up (Tk 113.78 million) and authorised capital were the reasons behind its position in the company.
"There was information in the market that the company would recommend a large amount of stock dividend to expand its paid-up capital."
The regulator asked 64 companies, including multinational ones, to raise their paid-up capital to Tk 300 million by December last year. As per the 2015 exchange regulations, listed companies' paid-up capital must be at least Tk 300 million.
Some companies issued stock dividends, while some others placement shares to meet the requirement. For example, Sonali Aansh disbursed 100 per cent stock dividend, while Legacy Footwear issued placement shares.
Though the deadline was not extended, the regulator welcomes moves to meet the criterion on a case-by-case basis.
Legacy Footwear went up 124 per cent between May and July 2018.
The company again experienced an abnormal price hike of 223 per cent to Tk 136.5 between March and August this year.
Of other small-cap companies, the share price of Sonali Aansh Industries jumped 40 per cent to Tk 710.3 in the last 14 sessions.
Previously, the company's share price jumped 111 per cent between July and October last year.
The share price of Shyampur Sugar Mills, which has been incurring substantial losses for years and out of operations, escalated 145 per cent between February 28 and October 5 this year.
Monno Agro & General Machinery saw a rise of 118 per cent between November 2022 and June this year.
Of other small-cap companies, BD Autocars exhibited abnormal price hikes in March-June, 2023, Northern Jute manufacturing Company in May-June, Gemini Sea Food in February-March of this year.
The managing director of Midway Securities, Md. Ashequr Rahman, said it was very easy to move the share price of a small-cap company, with a fund of Tk 500 million or less for example.
"But it's not possible to do so in the case of a large-cap company, such as Grameenphone.
"After the imposition of floor prices, the liquidity crisis largely stopped the trading in large-cap companies. That's why a group of investors shifted focus to small-cap companies."
Mr. Rahman added that the withdrawal of the floor price would stem the abnormal price movements of small-cap companies along with increasing investors' participation in large-cap companies.
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