Restoring confidence in the stock market

The stock market in Bangladesh is currently grappling with a pressing issue of growing volatility, a situation that demands immediate attention. This volatility, which has intensified following the recent change in government, has its roots in past corruption and irregularities. The leadership of Dr. Muhammad Yunus, a Nobel-winning economist, in the interim government initially sparked hope among investors, leading to a significant rise in the stock index by nearly 800 points.

Unfortunately, confidence quickly waned due to appointment issues involving the Bangladesh Securities and Exchange Commission (BSEC), the regulatory body for the stock market, the Investment Corporation of Bangladesh (ICB), a state-owned investment management company, and the Dhaka Stock Exchange (DSE), the country's premier stock exchange. Investors questioned the selection process, feeling that industry insiders were overlooked. Market experts believe these appointments failed to address the needs of a sensitive market, dependent on skilled management to sustain investor trust. As a result, the index has plunged back to earlier levels, and the market struggles to regain momentum.

This article tries to explore the key challenges facing the stock market and proposes reforms, drawing lessons from developed markets to stabilise financial sectors in crisis.

ADDRESSING MARGIN LOAN ISSUES: One of the long-standing problems plaguing Bangladesh's stock market is the misuse of margin loans. Margin loans are funds borrowed from a brokerage firm to purchase securities. Approximately Tk 120 billion is trapped in these distressed loans, significantly hampering liquidity. Both brokerage houses and merchant banks suffer from accumulated non-performing loans, which were initially issued at high interest rates but failed to generate returns.

The government and BSEC should consolidate all margin loans and interest into a blocked account for 5-10 years to prevent further interest accumulation. Interest may be partially or fully waived through government tax incentives or adjustments. Brokerage firms and merchant banks can offset the foregone interest through tax adjustments over the next 5-10 years.

A slightly higher special tax rate may also apply to trades receiving the benefit, allowing the government to recover revenue. Stock force sales should be suspended to encourage gradual market re-entry, boosting trading activity and tax revenues for the government, banks, and brokers.

MANAGING SUPPLY AND DEMAND IMBALANCES: The unchecked introduction of low-quality ("junk") stocks into the secondary market has diluted liquidity and trapped investor funds. In many cases, IPOs have drained market funds without yielding returns, further eroding investor trust.

BSEC may halt IPO approvals until the index stabilises at least 8,000 points to preserve liquidity. In developed markets, regulators restrict the introduction of new securities during turbulent times to prevent market fragmentation, a strategy Bangladesh must adopt.

CASH SUPPORT AND POLICY INTERVENTION: While the government has provided financial aid to the banking and other sectors, the stock market has been overlooked. In comparison, countries like the US and the UK introduced bailout packages during financial crises to stabilise their stock markets.

Bangladesh Bank can offer low-interest loans backed by securities to distressed investors and brokerage houses. BSEC may also introduce long-term stabilisation packages with possible funding from international organisations like the World Bank, ADB, or Chinese stakeholders in DSE.

Direct financial intervention through soft loans can prevent market collapse and boost investor sentiment.

ENHANCING GOVERNANCE AND APPOINTING EXPERTS: The BSEC's leadership plays a pivotal role in market stability. More than academic expertise is required to address the complexities of stock markets; practical experience is essential. Developed markets often appoint industry veterans to regulatory bodies for effective oversight.

In this connection, stakeholder representation in the BSEC is essential. To ensure experienced market professionals are included, one commissioner should be nominated by the Listed Companies Association, one by the DSE, and one by the BO Account Owners Association.

REDUCING THE TAX BURDEN: Double taxation on listed companies and investors discourages market participation. In developed markets, capital gains and dividends are often taxed at reduced rates or exempted to promote investments.

The government should eliminate double taxation on listed companies and investors' capital gains and dividends. Taxes on securities trading should be treated as final settlements to provide certainty and relief for investors.

Strengthening Market Surveillance and Regulation: Regulators must act proactively to prevent market manipulation and irregularities rather than reacting after the damage is done. In developed markets, advanced surveillance systems detect anomalies in trading patterns.

So, BSEC should implement real-time monitoring systems to block manipulative trading activities and foster a fair trading environment that attracts foreign investors.

CREATING INCENTIVES FOR FOREIGN AND EXPATRIATE INVESTMENT: A robust stock market is a crucial indicator of economic health, attracting foreign investment. However, the volatility of Bangladesh's market has discouraged expatriate and foreign investors.

Against the backdrop, BSEC should introduce tax-free investment windows for expatriates and foreign investors for a limited time. The government may also explore offering long-term bonds linked to the stock market to attract foreign inflows.

Strategic Government Intervention and Investment Packages: Bangladesh's stock market needs immediate support to regain stability. The government may allocate Tk 200 billion in soft loans for market stabilisation, sourced from the central bank or international development partners.

The fund can support margin loans and fresh investments to stabilise the market. Merchant banks and brokerage houses should manage the loans, ensuring equitable distribution among affected investors. This will stimulate market growth, increase trading cycles, and enhance government revenue through commissions and taxes.

CONCLUSION: By drawing on lessons from developed economies, Bangladesh has the potential to transform its stock market. With a focus on policy support, financial intervention, tax reforms, and effective governance, the stock market can regain stability, rebuild investor trust, and become a pillar of sustainable economic growth. The time for action is now. Strategic decisions are not just important, they are essential to make the stock market a pillar of Bangladesh's economy, attracting local and international investment.

The writer is Vice chairman of Islamic Finance and Investment Limited and President Of Victoria University of Bangladesh.