Here is why SME stocks plunged as quickly as it had shot up

SME stocks have been through the pain of price erosions between 14 per cent and 65 per cent in the past seven months since they peaked.

The only exception is Yousuf Flour Mills that surged abnormally on the SME board. Himadri Ltd, which runs six potato cold storages in the northern part of Bangladesh, has been stuck at Tk 35.30 since June 29 last year.

The huge price corrections of 13 stocks dragged down the SME Index by 53 per cent, or 1,195 points, to 1,050 on Wednesday. The index had peaked at 2,244 on August 11 last year.

The major obvious reason behind the index decline is that floor price does not apply to SME stocks unlike the companies on the main board.

Besides, according to market experts, frequent policy changes by the securities regulator for the SME board and the bearish main market have taken a heavy toll on the SME stocks.

The main stock market has long been on a downward trend since the economic outlook dented investors' confidence, said Sajedul Islam, senior vice president of the DSE Brokers Association of Bangladesh.

"SME board is not an exception. So the stocks slumped," he added.

This perception is, however, rejected by the argument that the SME stocks plunged as fast as it had shot up due to manipulation.

Signs of manipulation

Before the index started to drop, it jumped 1,550 points or by 223 per cent in just six months between March 16 and August 16 last year.

Most of the SME stocks appreciated in the FY22 despite plunges in their profits.

That is because a group of dishonest traders were targeting the SME board to manipulate stocks, said Abu Ahmed, a former professor of the economics department at the University of Dhaka.

"The price surge was artificial as their [SME stocks'] financial performance does not match the price hikes."

When people started investing in them, manipulators dumped their holdings, causing the stocks to plummet. "Pumps and dumps theory does not last long, so the SMEs' shares came down to their real prices," Mr Ahmed added.

Despite the fall in profits, listed SMEs had declared 5-15 per cent dividends in cash for the FY22. The disclosures largely failed to bring any positive outcome for the stocks.

Mysterious case of Yousuf Flour Mills

The little-known Yousuf Flour Mills that stands out in the crowd soared 78 times since August 11 last year. Its shares shot up 22 times on November 13 alone after the dividend declaration when the 10 per cent upper circuit breaker was lifted for the stock.

The stock closed at Tk 1,873.50 on Wednesday.

"The surge of Yusuf Flour to the level of multinational companies shows what's actually going on in the stock market," said Mr Ahmed.

The returns that investors had received on investments in the company in previous years did not justify the stock's rally, he added.

Representatives of Yusuf Flour Mills could not be reached for comments as it neither gives any contact number nor any email address on the DSE website.

An official of the Bangladesh Securities and Exchange Commission (BSEC) admitted that the stock price of Yusuf Flour is overvalued and that it was possible to deploy gambling tactics to influence the price due to the company's low number of shares. He spoke on condition of anonymity.

Yusuf Flour has 0.60 million shares, of which 53.88 per cent is held by sponsors and the rest by the public, the DSE data shows.

Though the company reopened its factory after its transfer from the OTC (over-the-counter) market last year, its earnings did not match the stock price increase.

The BSEC official said the surveillance team of the regulator was keeping an eye on trading on the SME board and taking action as per the rules.

"We are working to make the SMEs raise their paid-up capital. But it takes time," he said.

Changing policies

The SME board was introduced to facilitate the growth of small companies that face hurdles while trying to get bank loans.

Ten SME firms raised Tk 1.14 billion from the market while five firms came from the OTC market, according to data from the DSE.

Trading on the SME board started on September 30, 2021. The free-float base index was 1000 points.

Initially, the BSEC did not allow general investors to trade on the SME platform without prior permission, considering the high 'risk' posed by such firms.

An investment of at least Tk 5 million was needed at the time to be a qualified investor (QI) to trade on the SME platform.

Due to low response from investors, stocks sank pushing the index down below 600 points within five months from early February 2022.

A complex registration process and the high minimum investment requirement kept investors away.

To remove the roadblock, the securities regulator on February 17, 2022 cut down the investment requirement to Tk 2 million in listed securities on the SME board. The BSEC also removed the mandatory registration requirement, saying registration would be complete automatically if an investor met the criterion.

All these developments triggered a turnaround of the index to 2,244 points on August 11 last year.

However, the regulator did not stick to its stance for criticisms by market analysts that easy access had led to the overpricing of SME stocks.

In September last year, the BSEC revised the minimum investment to Tk 3 million from Tk 2 million. The High Court stayed the order on November 16 last year and kept the matter hanging.

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