tock market rket is one of the most impor important tant financ financiial institutions nstitutions of any economy as well as Bang Bangladesh. desh. I t opens door door for for companies companies to raise raise huge huge amount amount of capita capitall from from a lot of indi indiv vidual dual inv inves estors inside & outside of a country. country. Ha H afer and and Hein H ein (2007) pointed pointed that that growth owth of of new businesses businesses or our economy would ould not not be possi possible ble without availabil ailabiliity of stocks and and develo developme pment nt of fi financi nancial markets. H ere inves investors tors parti participate cipate volunta oluntary to buy owne ownershi rship p of a compa company in the public public market. In I n these days days for for mil millions of middl middle e class educat educated ed peop peoplle in Ba Bangladesh desh investing in stocks is is more popul popula ar than investing ting in any other inve i nvestme stment nt sector sectors. s. For For an investor, tor, stocks are more lliiquid quid than any any other inve investment sources sources as it gives abil bility to sell and buy buy ownership ownership anytime time without thout any hassle. Th T he consecutive outstanding ing performance of Bangladesh stock market in recent years before the crash crash lured lured mi millions of inv inves estors tors to the stock ma market rket to to inve invest thei their li little ttle saving vings. Befor Before e the stock market cras crash the the ma market had become a route oute of easy money for too many new new indiv ndividual dual inve nvestors. tors. Tha T hatt is is why mi millions of fres fresh h inve investor stors s invest invest their small saving in the market during during this this period. period. For these fres fresh inve investors inve investing in this this ma market rket provide provided a way to av avoid oid working working a job. Even some BO account ccount holders holders worked orked as intermedi ntermedia aries of fri friends, ends, relatives relativesto inve invest their moneyin the stock mar market. Finally, nally, the stock mar market crashed crashed and taught these investors that inve investing money money in the stock market invol involve ves risk risk too. too. But the les lesson that inve investors tors are taught wreaked ha havoc on the live lives of mill millions of innocent inv investors. T he cras crash h wip wipe ed out bill billiions of taka taka from from the market market where fres fresh, illiterate terate inv investor estors s were the main main victim. victim. It I t has been more more than a year si since the crash crash occ occur urrred. But But the market market is still still struggling to reg regain its its loss. Stock market crash of of 2010-11 2010-11 hasbecome anati national, onal, pol politica ticall and social ocial is issue of the country
STOCK MARKE MARKET T AND CRASH What at is a stock market? Fellowe ellowes (2008, p.29) described cribed that stock stock market has same features tures like a norma normal market with buyer buyers, sell sellers ers and agree eed d pri price. ce. H e also added tha that there will be a middl middleman who guides uides investor to deal deal offer offers s of buying buying and selling shares shares in the stock stock market. W e usually find find stock exchang exchange, regulat ulator ory y org organizations, anizations, inve investors, li listed compani companies es with securiti curities es, broker broker houses houses, merchant merchant banks, and other interme intermedi diary ary org organizations anizations in a stock mar market with co-operatio co-operation n of central central bank and gover overnment of the country.
Stock Ex Exchange A stock stock exchange is is a body that provides provides services to stock stock brokers brokers and traders to tra trade stocks, bonds, and and other other securiti curities es. Stock exchanges also provid provide e facil facilities ties for for iss issuance uance and redemptio edemption n of sec secur uriities ties and other financial financial instrume instruments, capital capital events includi ncluding ng the payment ment of income and div di vidends. Securiti Securities es traded on a stock exchange incl include ude shares issued issued by compa companies, nies, Mutua M utual funds, unit unit trust trusts, s, deriv derivativ tives and bonds. bonds. The T he ini initial tial
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public public offering offering (IP (I PO) of securi ecurities ties (stocks (stocks and bonds) bonds) is is done in thepr thepriimary market market and subsequent equent tra trading ding of it is is done in in the secondary market. A stock exchang exchange is often often the most importa important nt component of a stock stock mar market.
The major functions functionsof Stock Exchangesare: 1. Li L isting of Compa Companies nies (As (As per Li Listing tingRegula ulations). tions). 2. Pr Providi oviding the scree screen n based automated utomated tr trading ding of listed Securi Securiti ties es. 3. Settlem Settlemen entt of trading (As (As per Settl Settlement ent of T ransaction Regula ulations tions). ). 4. Gi Gifting fting of share / granting approva pproval to the transaction/trans ction/transfer of share outside the trading trading system of the excha exchange (As (As per Li L isting Regulat ulatiions 42). 5. Market Administration & Control. 6. Market Surveillance. 7. Publication of Monthly Review. 8. Moni M onitori toring ngthe activitie ctivities of li listed compa compani nie es (As per Li L isti stingRegula ulations). tions). 9. I nve nvestor’s tor’s griev rieva ance Cell (Di (Disposal posal of complai complaint by laws 1997 1997). ). 10. Inv I nves estors Pro Prote tection ction Fund Fund (As (As per inv inve estor stor protec protection tion fund Re Regula ulations tions 199 1999) 9) 11. Announce Announcement of Price ri ce sens sensiitiv tive or other infor inform mation tion about about li liste sted companie nies through online
What is is astock marke ketcra rash? W hen there is more than 10 per cent loss loss within thin a few days in the market, it it is is call called ed stock market market crash “Stock market cras crash h is is a sharp and unexpected decli decline of stock market pri prices ces for a very short short period period of of time time,, usual usually accompanied nied with the decl decline of many other assets’ sets’ prices pri ces” menti mentioned oned by stockmarketcrashes.net. .net. It I t causes causes signifi nifica cant nt capital losses osses to inve investors and speculat ulator ors. s. The T he market particip participant ants s become become panicked panicked which hich lea leads to more loss losses es.. BANGLADES BANGLADESH STOCK MARKET MARKET History tory of Bang Bangladesh stock market
Th T he jou journe rney of Bangladesh st stock ma marke rket starte rted on on Apr April 28 28, 19 1954 as Eas East Pa Pakistan Stock Exc Exchan hang ge As Associ sociation tion Ltd. L td. At that that time time Bangladesh used used to be ruled ruled by Pakista Pakistan and the name of the the cou countr ntry y was East Paki Pakistan. But tradi trading ng on this this market rket started in 1956 1956 with a total paid up capital capital of T aka 4 bil billion and 196 secur ecuriities ties were li listed on on this this market. T he excha exchange nge was renamed on on June J une 23, 1962 1962 as Dha Dhaka ka Stock Stock Exc E xchan hang ge (DSE (DSE)) Li L imited ted
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Dhaka Stock Excha Exchange (DSE (DSE)) Dhaka Stock Excha E xchange nge is the fir first & big biggest est stock exchang exchange of the country. country. The T he operation operation of of Dhaka D haka Stock Excha E xchange started on May M ay 14, 1964 after after renaming East Pakist kista an Stock Excha Exchange Li Limited ted
I n the beginning nning DSE was a phy physical stock exchange and used to tra trade in in the open open outcry cry system. tem. Dhaka Stock Excha Exchange (DSE (DSE)) is is registe stered as a Public ublic Li Limited Company Company and its activiti ctivities es are regula ulated by its Articles ticles of Ass Associa ociation tion rul rule es & regula ulations tions and byelaws along with the Securiti Securities esand Excha Exchang nge Ord Ordiinance nance - 1969, Compa Compani nies es Act - 1994 & Securi Securities ties & Exc Excha hang nge Comm Commission Act Act – 1993 1993 DSE uses uses automated utomated tradi trading ng system. T he sys system was insta installed on 10th Aug August, 1998 and was upgraded time time to time time.. T he late latest upgr upgrading ading was done on 21st 21st Dece December, mber, 2008. Ta T able 1: T he number of lis listed companies ies of DSE DSE according ingto FY FY 1990-91 2001-02 2005-08 2009-10 2011-12
The number of listed companies niesof DSE 149 248 300 273 268.
Th T he workin rking g days of DSE DSE are 5 days in a week with ithout Saturday. Th T he trading ing time ime is from rom 10:30 am to 14:30 pm (loc local time ime). Inv Investment option ions for an inves nvestor in in this this marke rket are are ordi ordinary share, Debe Debenture, Bond Bond & Mutua M utuall funds. Chitt hittagongStock ongStock Exchange (CSE (CSE)) Chitta hittagong Stock Exchange is the 2nd stock exchang exchange of Bangladesh. adesh. It I t is is said that CSE is the pionee pioneer of the modern modern capital capital market rket of the country a as s it introduces introduces modern modern technology & sophisticated logistic support I t wa was incorpor incorpora ated ted as a self reg regulated ulated non-prof non-profiit org organiza nization tion on 1st 1st Apri Aprill, 1995 and and for formally opene opened on Novem N ovember 4, 1995. It I t sta starrted ted its its trading trading through through cry-out sys system. tem. Th T hen Chit Chitttagong Stock Exc Exchange starte rted firs irst automated trading ing bourse of the country. CSE started started its automa automated trading trading on 2nd June, J une, 1998 and internet internet trading trading service on 30th Ma May, 2004 2004 Central Depository Bangladesh Limite Limited (CD (CDBL) Th T he es establis lishment of CDBL added value lue to to the st stock marke rket of Ban Bangladesh and attracte attracted mor more e investors especi speciall ally y for foreigners. eigners. Befor Before e the establ tabliishment shment of CD CDBL proces process s of tra transferri nsferring and deliv delivering ering ownershi ownership p was too leng lengthy and risky. risky. After After implem mplementing automa automate ted d tra trading ding system in DSE D SE & CSE CSE and introduci introducing ng central central depositor depository y system, the stock mark market et of Bangladesh adesh became more effec effecti tive ve and credibl credible e to the investors. (Bepari & Mollik, n.d.)
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CDBL was incorporate incorporated d as as a publi public limited limited compa company on 20th 20th Aug August, ust, 2000. 2000. The T he owners ners of CDBL are DSE DSE,, CSE CSE,, banks, banks, Inv I nves estme tment Corporat Corporatiion of Banglades ladesh and and some other other fina financ ncial ial ins i nstitution. titution. T he parti participan cipants ts of CD CDBL are ca called lled Depositor Depository y Participa rticipant nt (DP (DP). CD C DBL charges rges fees fees from from its partic rticipa ipants for differen differentt se services rvices provide provided d by CDBL CDBL . Thefunctionsof CD CDBL are given below:
O perate perate and maintain the Central entral De D epository pository Sy System stem(CD (CDS) of Electronic ctronic Book Book Recor ecordi ding ng and maintaining aintaining securiti curitie es accounts accounts and reg registering transfer of of securities Changing the ow ownership nership without any physical movem movement or endors endorsement of certificates Supervisi Supervision on of Depos Deposiitory tory participan participantt activities ctivities Providing different investor services including providing a platform for the secondary condary market rket tradi trading ng of T reasury Bi Bills and and Gov Government ernment Bonds Bonds iss issued by the Bang Bangladesh desh Bank. Bank. (Source: www.cdbl.com www.cdbl.com)) Bangladesh Security curity& Exchang Exchange Comm Commissions(BSE (BSEC C) Th T he aims ims of forming ing Securit rity Exc Exchange Com Commission ion are to pro prottect inv investor’s int interest, improve mprovement of securiti curities es markets, and appropr appropriiate ate issuance of securi securiti ties es and proper proper guidi uiding ng of secur securiities ties laws. The T he most most importa mportant nt organiza nizati tions ons and interme intermedi dia aries ri es under supervision upervision of SEC SEC are DSE DSE,, CSE CSE,, CD CDBL , stock stock brokers brokers,, mercha merchant nt banks and as asset management ement companies companies. Khal K haled ed (2011)
Th T he Gov Governm rnment of Bangladesh fo founded Se Security ity and Exc Exchange Com Commiss ission ion (S (SEC) on 8th June J une,, 1993 under under the Securiti curitie es and Excha Exchange Com Commission Act A ct,, 1993. The T he commi commission is is consists consists of a chair chairma man and four member mbers. T he Cha Chairman & members of security curity exchang xchange commiss commissiion are are appoi ppointed by the the gover overnment nment of Banglades adesh. SEC SEC is directly directly connected wi with the mi ministry nistry of Fi F inance nance and has rig rights to to supervise all of securiti curities es laws & regula ulations. tions. Accord Accordiing to Secur Securiities ties and Exchange O rdinance dinance, 1969 SEC SEC has been empowe empowered to control control even self self regula ulatory tory institutions nstitutions for instance Stock Exchanges. The main functionsof SEC SEC are foll following:
Registering and regulating the business operation of DSE, CSE, stock brokers, merchant chant banks, underwri underwrite terrs, share transfer agents, ents, portfo portfollio managers and other intermediaries. Developing investor’s education, providing training for intermediaries, executing market res research and publ publiishing hingthose. Control ontrollingevery author authoriized zed self regulatory org organiza nizations tions too I nspec nspecting ting and control controlling fra fraudule udulent and and unfair trading in securi security ty ma marke rkets Auditi uditing ngand inve investiga stigating ting of anyintermedi ntermediari aries es or stock stock exchang exchanges Coll ollecti ective investment schemeregistering tering& control controllling
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(Source: www.secbd.org) Sometrendsof Capital market rket An analysis of capita pitall market depends on the observed trends trends in market capi capita talization, tion, inves nvestmen tmentt capi capita tallizati zation on ra ratio, tio, turnov turnover, er, vola olatil tility of share index index,, the number of listed sted compani companies es and moneta monetarry poli policy. Market Capita pitalization Ratio
Market rket ca capita pitalizatio zation n ra ratio tio equals the sum that derive derived from from the curr current ent stock stock pri price per per shar share time times the the total number of shares outstanding nding. Al Although the market capita pitallizati zation on of a company company is an indi indica cation tion of of the value of the company, company, it it is is only only a tempor temporary ary metric tric based on the current current stock stock market. Market rket capita pitallization tion ratio equals the value of li listed ted shares div divided by GDP. Thi T his s ratio are often often using usingas a measure of stock market size.
Figure 1: Ma Market capita pitaliza lization ra ratio in percent percent
I n FY FY 2009-1 2009-10 0 the rate rate of mark market et ca capita pitalization tion re reached ched at 32.79 32.79 percent percent and fi final nally in FY 2010-11 2010-11 beca became 29.55 29.55 percent. MarketCa Capita pitalization andInv I nvestmentR Ra atio I nvestment ratio has staye tayed betwee een n 10 to 35 percent. Fol Folllowi owing that that fisc fiscal year the scena scenario has has been been chang changed si signifi nifica cantl ntly y and the ra ratio tio of of mar market capita pitallizati zation on and investm nvestment ent has incr increa eased sed wi with a maximum ximum grow rowth, indicating ndicating the huge huge accumula ccumulated concentration in capita pitall market rket than those of other other forms forms of inve investme stment nt
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I n FY FY 2009-10 2009-10 and and FY FY 2010-11, 2010-11, the market capitaliza apitali zati tion on and invest investme ment nt ratio were 134.29 and 119.46 percent respectiv tively. ely. T hese indica indi cate that in in these years the ma market capita pitallization tion exce exceede eded d the total investme stment nt of the economy. Figure 2: Market Market capita pitalization tion and inv investmentratio
TURNOVER Tu T urno rnover equals the value lue of total shares traded divide ided by marke rket capita italiz lization ion. High High turnover turnover is often often used as an indi indica cator of hig high lev level of of li liquidi quidity ty.. T urnov urnover measures sures trading trading relative to the size of the stock market. T herefore herefore a small, all, li liquid quid market rket may have a hig high turnov turnover ra ratio tio but with a small total value tr traded and and GD GDP ratio. ratio. Fig Figure 3: The T he percentage change of turnover of DSE during duringF FY 1995-96 to FY 2010-11
Th T he extent of ups and downs in turno rnover of capita ital market mainly inly de depends on econo economic mic envi environment and some others factor factors s such as as short hort ter term increa increase in pr profi ofit in in capita pitall market than those those of other other econo economic mic acti activ vities ties. I n cal calendar endar year 1996, the sudden increa increas se iin n gene general ral index made made the temptation ptation to the people people a and nd it also has induced people people to to inv inves est more in capital capital marke rket. Therefore T herefore in in FY FY 1996-97, 1996-97, the turnover
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increased ncreased by 697.81 perce percent nt than the prev previous fisc fisca al year. But ‘g ‘game planner’ has achiev hieved the goal and reduce reduced the the turnove turnover by 80.71 percent than that that of the prev previous fis fiscal year. T he turno turnov ver increa increased dra dramatical tically from from FY 2008-09 2008-09 to to FY FY 2009-1 2009-10; 0; in in this period period the turnov turnover incr increa eased sed about 186.81 186.81 percent than that of prev previous fisc fiscal al year year and beca became T k. 25635 256353.55 3.55 crore crore. T he turnover turnover as well as li liquidi quidity ty of capi capita tal marke rket started to fall in FY FY 2010-1 2010-11. 1. The T he present economic adve adverse condi conditio tion n together ether wi with the contrac contracti tionary onary monetary poli policy may cause anegativ tive impact on turnove turnoverr and li liquidi quidity ty of capita pitall market may go dow down in in near near future. CAPITAL MARKET VOLATILITY Volat olatiility is a measure of the the degree of pri price ce movem movements of a stock. tock. It I t shows shows how acti active ve a stock pri price typica pically is over over a ce certain period period of time. time. I n general, the volati volatility of stock stock return is determined by the fluctuations in stock index. Fluctuation in the stock index also depends on the the demand and supply supply of securiti securities es traded in in the stock exchang exchange. The T he market estima estimate of vola volatil tility can can be used as the barometer barometer of the vul vulnerabil nerabiliity of the stock market rket CAPITAL MARKET SIZE
One of the im importa portant nt indi indicators of the ca capita pital marke rket is is the numbe numberr of listed sted compani companies es. T he rationa rationale of incl i ncludi uding ng this this mea measure is that that as the number of li listed company company increa increase ses, s, available ble sec secur uriities ties and trading trading volume olume also increas increases. T he properti propertie es of the compa companie nies, the compani ompanie es are div divided into fiv five groups roups;; A, A , B, B, G, G, N and Z. T he properti properties es of thes these companies companies are show hown in in the table ble below. Table ble 2: C Capital apital Ma Market rketCompanyCategory oryand Chara Characterist cteristics
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Stock market cra rash of Ba Bangladesh in in 1996 Background Th T he scenario of stock marke rket crash in 1996 and crash in 2010-11 are totally lly diff ifferen rent. Th T he number of BO account holde lders was only 300,000 and most of them were verynew in the ma marke rket. Duri D uring ng the cras crash h of 1996 1996 paper paper shares shares use used to be sold sold in in front front of DSE and it was not easy for for investors to identif identify y fake fake and ori original nal shares. es. T he market market was enough developed oped to gain confi confidence of investors. nvestors. T here was no automated trading trading system, surv surveil eillance was not enough str strong ong and no circui circuitt brea breaker kers s as well ell as international nternational prote protectio ctions ns.. (Hoss (H ossain, 2011) 2011) Th T here was a huge surge in the stock marke rket in 1996 evide idenced by an enormous inc increase in the market rket capita pitallization. tion. In I n DSE DSE general eneral index index increased from from 775.6 775.65 5 in in Ja January nuary 1996 1996 to 3064 in in Nove November, 1996. 1996. After After an incre increase in the general eneral index i ndex of DSE for a short period, period, the index sta started to fa fall down down dra dramatically tically and in in Dec Decem ember ber 1996, 1996, the index fell fell down to 2300.15. 2300.15. T he short hort time time ‘ga ‘game plan’ plan’ made the investors investors to inve invest more in in the capi capita tall market but when when this this ‘game pla plan’ achiev chieved its its goal;
Figure ure 4: stock stock market rket crash crash in 1996 (Source: Dhaka Stock Exchange) the confi confidence of the the inv investors was was signifi significa cantly ntly damaged because of excessive speculatio speculations, ns, al allegedly edly aggravated by widesprea despread ir irregular ular acti activ vities ties. Th T his fall do down of general ind index of DS DSE co continu inued over th the calen lendar year of of 19 1997. In Apri pril 1997, 1997, the general index of DSE was 957.48 957.48 whil hile in Dec Decem ember 1997 1997 it fell fell down to 756.78. Finally nally abnorma bnormal rise of share prices prices started tarted to fall fall and Bang Bangladesh desh stock market experi experience enced its its fir first crash crash of the the history history in 1996.
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Reasons Effect of Poli PolicyReformson Market Efficiency fficiency: Evidence from from Dhaka Dhaka Stock Excha Exchang nge, Alam and others others (n.d.) (n.d.) menti mentioned oned that that some some forei foreig gn portfol portfoliio managers, few brok brokers ers and sponsors ponsors of few few listed compani companies es were behi behind nd the stock pri price manipul nipula ation tion in in October 1996. 1996. As As a resul result al all share pri price index ndex of DSE DSE dra dramatica tically sky rocketed rocketed to 3600 point point from from 1000 point point in in si six months time. time. Few Few for foreign eign & local local inve investors stors that that had had inside nside infor informa mation tion made huge profi profit and a lot of general eneral inve investors pai paid heavily vily lators rsmentioned Th T he cause of stock marke rket crash in 1996 was the failu ilure of market regula by Afr Afroz oz (2006). (2006). Stock Stock exchanges did did not not take any any action ction against the dramat dramatiic pri price increase of listed se securiti curitie es during during J une to Nove November 1996. 1996. Bubble B ubble forme formed due to abnormal abnormal demand demand of securiti ecurities es by new investors stors where the numbers of listed securi securiti ties es were very very few few. T he reason reason of hug huge infl influx of inves nvestors wa was poli politica tical stabi tabillity in the country and and bri bringingconfidence confidence in inv inves estor’s tor’s mind. The deli delivery versuspayment (DV (DVP) systemof tradin trading gused used to allow allow buyer-seller to settle ttle their transactions ctions betw betwee een n them without stock exchang exchange particip participat atiion. Many brok brokers/d ers/dea ealers used it it as as a tool to show fake fake trading trading to to incr increa ease demand of share from from the general eneral investor’s stor’s side. Accordi ccording to Bang B angladesh Bank Bank analysis that there wa was an unauthori unauthorized kerb market consi consisting sting of over over 25,000 25,000 investors outside outside the stock exchang exchange where securi securiti ties es were traded at a very hig high pri price. ce. Mor M oreov eover, er, SEC SE C could could not handl handle e the crisis crisis for its defect defectiive infr infra astru structu cture. re. W eak regula ulations tions and and survei surveillances nces could not monitor market manipulators and market intermediaries. Even information ineff neffiiciency, ciency, artifi rtificial cial fina financial ncial sta stateme tements certi certifi fied ed by chartered accounta accountants, nts, false infor nformation tion and rumor rumor were other im importa portant factors that ov overhea erheated ted the ma market rket and burst the bubble. (Afroz, 2006)
Stepstaken Finally nally on 26th Dece December mber, 1996 BSE BSEC C forme formed a probe probe comm commiittee ttee to investig tigate and find find out out manipula nipulators behind the stock marke rket debacle. T he committe committee e publi published a report eport on Ma M arch 27, 1997 stat statiing a number number of companies nies, inve investors tors and broker brokers s who were in the market manip manipul ulat atiion. BSEC SEC obtained wa warrant rrants s of arres arrest ag against 32 people people in 7 broker brokera age fir firms, 8 li listed compani companies es and fil filed 15 share-scam ca cases ses in the cour court. t. (Afr (A froz, oz, 2006) I t took too long long for the govern overnme ment and market regulat ulator ors s to restore the market conditi conditions. ons. The T he stock ma market crash crash of 1996 destroye troyed confidence confidence of inve investors. As As an initi nitiat atiive gover overnment of Ba Bangl ngladesh desh adop adopte ted d Capita Capital Market M arket Dev Development elopment Progr ogram (CM (CMDP) to stabil stabiliize the the capita pitall market rket,, and att attrac ractt more loca local and for foreig eign inv inves estors tors on 20th Novem November, ber, 1997. Aft After er that adopti dopting ng automated automated trading trading system and esta establi blishment shment of CD CDBL increa ncreas se the the credi edibility bility of capita pital market to the the inves investors. (Be (Bepari pari & Moll Molliik, n.d.)
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ST OCK MARKET MARKET CR CRAS ASH OF BANGLADES BANGLADESH H IN 2010-11 SEC ECT TOR WIS WI SE PERFORMANCE PERFORMANCE I n FY FY 2010-11, 2010-11, there was an upward trend trend in in terms of sector sector wise perfor performa mance; nce; all all sectors ctors experienced xperi enced an upward trend trend with a few excepti exception on Fig Figure 5: Sector Wi Wise Performa rformance in FY FY 1995-96
Source: Source: Dhaka Dhaka Stock Stock Excha E xchange, 2011
I n FY FY 1995-96 1995-96 the the ma major jor contri contribution of mark market et ca capita pitallization tion were were engineering ri ng (22%), pha pharmace rmaceuti utica cals (13%), food food and alli allied products products (11%), (11%), banks (11%) and insurance insurance (7%). I n this this period riod the major market rket contri contribution bution of mark marke et capita pitallizatio zation n was mainly nly depended on those sectors whi which ch have direct direct infl influence on the real sector of the the economy. I n FY FY 2001-02, 2001-02, the major jor sector ector wise contribution contribution of mark market et capita pitallizatio zation n has signif signifiicantly ntly differed differed from from the previ previous time trend. trend. In I n this this fisc fisca al year the major market rket contri contribution bution in in ter terms of market market capita pitallization tion was was banki banking ng sector ector.. About About 30 percent percent market rket ca capita pitalization tion ha has contribute contributed d by only only single banking nking sector. All the other other sectors ectors like engineer neering, foo food d and allied products products,, pharmaceuticals and fuel fuel and power power have less contri contribution bution in market rket capita pitalization. tion. T he se sectors which hich can directly directly infl influence uence the real sector sector have contr contriibuted les less than than that of prev previous time and and the growth owth of financ financiial sector of market capita pitallizati zation on proces process has increa increas sed si signifi nifica cantl ntly. y.
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Fig Figure 6: Sector Wi Wise Performa rformance in FY FY 2001-02
Th T he fina inancial marke rket contrib ribution ion in capita ital marke rket in terms of marke rket capita italiz lization ion has increased sed signi signifi fica cantly ntly in FY F Y 2010-11. 2010-11. In I n this this year the banks, ins insur ura ance includi including ngmutua mutuall funds funds have have jointl ointly y contributed contributed 53 percent of market capita pitallizati zation on wherea whereas s pha pharmace rmaceuti utica cals and chem chemiical cals, textil xtile industries ndustries, food food and alli allied products products and engineering ring have jointl jointly y contr contriibuted buted 21 percent percent of total marke rket capi capita tallizatio zation. n. T he shor shortt term larger pr profi ofit of fi financial sector sector has induced the investors tors to make a larger inves nvestmen tmentt in in finan financial cial sector than those those of rea real sectors. sectors. Therefor T herefore e in short short run the prof profiit has been been maximized ximized but in in the long long run it it can can make a disturbi disturbing ng effect on the economy which hich has already been been observed throug through capital pital mar market downwa downward trend trend and zero rec recove overry in the capi capita tal market in in this this year. Fig Figure 7: Sector Wi Wise Performa rformance in FY FY 2011-12
Source: Source: Dhaka Dhaka Stock Excha E xchange, 2011
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Root of bubble ble Due to poli politica ticall unres unrest of Bangl ngladesh desh state of emer emergency wasdecla declared and mili military took pow power of the the country ountry in 2007. Dur Duriing mili militar tary-backed regime investm nvestment in re real sectors sectors as well as FD FDI decrea decrease sed but the infl inflow ow of forei foreig gn remittance remittance increase increased. I nvestor stors s tri tried ed to find find alternative investme investment sector sector to inve invest their savings and and found found stock stock market rket as an an attractive attractive alter ternati native. (Khaled, (K haled, 2011) Nature of Inv I nvestors: At the end end of 2010, tota totall number number Bene Beneficiary ficiary Ow Owner (BO (BO) Account stood at at 3.3 Million (DSE (DSE Data) ta) though the number number was 1.25 mill million in in December 2009. Most M ost of these new investors tors don’t don’t have enough enough knowl knowledg edge about the stock mark market et but inve invest their most most or all savings vings in the market.
I nforma nformati tion on of BO accounts of la last 3 yea years are given below: Ta T able 3: Cha Change in total Num Number of BO Acc Accounts in two Yea Years Date 01.01.2009 30.06.2009 30.06.2009 31.12.2009 30.06.2010 31.01.2011
T able No. of BO/AC /A C 14,68,500 14,19,019 14,19,019 19,20,602 25,70,654 33,79,719
Chang hange (+/-) --(49481) 5,01,583 6,50,052 8,09,065
From the tabl table e we find find that most most of the BO BO accounts accounts were opened during during June ’2009 to Jan January’2011 that ind indica icated that more than half of the inv investors could be treated as new investors. 238 brokerag brokerage houses houses opened opened 590 branches at 32 distri districts. cts. As As CPD (2011) found, found, internet-base nternet-based trading trading operation, operation, openi opening ng branches of brok brokerag erage houses houses across cross the country country, easy acce access ss to to the mar market info inforrmation, tion, arranging a countr country ywide 'share mela (fair (fair)' )' are the factor factors s for increasin ncreasing g investors that see seems to be succes successful as the BO BO accoun accountho thollders ders was doubl doubled ed in in las last two years that might be trea treated as a potenti potential al for for market developme elopment. nt. But But due to scarcity of new securi securiti ties es market pri price increased substanti tantia ally. Thi T his s demand-suppl and-supply y mismatch along alongwith inade inadequa quate te investor’s tor’s know knowledge made the stock pri prices ces in a newheight and finall finally y turn turned ed into a big bigdepres depression sion that is stil till going oing on. on. Banks & other fi financial nancial instituti nstitutions ons of Ba B angladesh had a lot of exces cess liqui liquidi dity ty due to less busines business opportuniti opportunities es in the rece recession period period of 2009-1 2009-10. 0. To T o minim minimize the the cost cost of bearing ring excess liquidi quidity ty and as a great opportuni opportunity ty, theses theses financ financiial instituti institutions ons & its off officials cials as well as other peopl people e took loan and inve invest in the shar share market rket.. Thi T his s made a huge influx of liquidity in the share market.
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I t was seen that the dai daily transaction ction in in the share market rket was on an average from from Ta T aka 20,000 to 30,000 30,000 million in in 2010 and the fig figure was double double compa comparring to 2009. (Ra (Raisa, 2011) To T o grow Ban Bangladesh’s economy by 7-8% per year Bangladesh Bank adopted accommodati commodativ ve monetary poli policy duri during the hig high infl infla ation tion periods periods to support upport investment. Bang Bangladesh desh Ba Bank has pegged Taka T aka against doll dollar to support support expo exports. rts. As As Ta T aka has been undervalue lued it has made excess growth in money supply. Las Last couple of year’s broad broad money made exces excess li liquidi quidity ty and the main motive motive behind behind it it wa was Bangladesh Bank’s ex-chan ex-chang ge rate poli policy. A big big portio portion n of this excess liquidi quidity ty had gone gone to the the stock stock market rket but there were were very few few shares in the market. T he poli policy that was adopted by BB BB to grow economy economy by increa increase sed exports exports & inve investment tment eventual ntually misguided uided and and ended up blowing blowing the the mother mother of of all all bubbles bubbles. Then T hen government nment ag again fuell fuelled the bubble bubble after permitting permitting white hiteni ning ng of blac black k money throug through tax breaks and schemes. (Rahma (Rahman, 2011) Moreov oreover er Security Security & Exchang xchange Comm Commissions was not capable ble to monitor onitor the ma market conditio conditions ns properly. properly. Due Due to to the poor monitori onitoring ng & market rket survei urveillance share price prices of Z Ca Category ory Companies and sma small companies companies increa increased sed dram drama atica ticallly. Mor Moreov eover, er, some initi nitiat atiives taken by SEC SEC were not effec effecti tive ve and changed dir directi ective ves freque frequentl ntly y such as; it it changed directi directiv ves of margin loan ratio 19 times. (R (Raisa, 2011)
Timeof his historica orical fall Tim T imelin line of his histtoric rical fall of of th the crash ha has been div divide ided int into tw two se section ions which ich are are December 2010 and Ja J anuary 2011. December 2010 I t has been stat stated ed by Bhui Bhuiy yan (2011) (2011) that 5th Dec Decem ember, 2010 as the last glori orious day of the year for the investor stors s of Ba Bangladesh stock market rket.. On O n this this day DSE General neral I ndex (DGEN) gained its all-time highest 8, 918.51 point & broke all old records of DSE turnove turnover by T aka 32.50 32.50 bill billion.
Figure 8: DSE daily DGEN index of December, 2010
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Figure igure 9: 9: CSE CSE da daily CASPI CA SPI index of Dec D ece ember, ber, 2010
19th Dec Decem ember was a histori historical day of the financ financiial yea year 2010-11 2010-11 in in Ba B angladesh desh stock market. On O n this this day DSE witnessed its its bi biggest one day fall fall in 55 years history history until the date with losi losing ng 551.76 points points or 6.71 6.71 per percent. cent. T he losing losing index index was ev even hig higher than 284.78 284.78 points points or 3.32 percen percentt of 12th 12th Dec D ecem ember. Pri P rice ces s sta started rted to nosediv dive in an hour hour after after the trading trading started and about 200 200 points points were wiped off. off. In I n the mi middle ddle of the session it it re recovered li little bit bit and and ended up the session at 7654 7654 point point Bangladesh desh Bank Bank got got a compla complaint that Ba Banks nks ar are inve investing sting money money in in the stock mar market from from their reserve. O On n the 1st 1st day of December mber BB B B sent 50 teams in dif different banks banks of Dhaka & Chi Chitta ttag gong ong to inve inves stig tigate ate and found found some banks in such irr irregulari ulariti ties es.. (Ra (Raisa, 2011) On 15th De December, BB increased CRR CRR and SLR SL R by 0.5 percent and and increa increased sed to 19 & 6 percent. Another Another importan importantt directiv directive e initiate initiated d by BB was withdrawal of illegally invested industri industria al loans by Dece December mber 31, 2010. As As a lot of the reserved reserved money money was invested in capital market, banks star tarted sellingsharesand wi withdra thdrawing that that money from from the market. market. By By the time investors tors became pani panicked. cked. T o handle handle the disa disastr strous & ass assure ure the panicked nicked investors tors BB extende extended d its its deadli dline for for submitting submitting and adjusting loans. For For the mer merchant chant banks the deadli deadline ne was J anuary 15, 2011 and for for the commercia ercial bank bank February 15, 15, 2011. January2011 Th T he down slop lope of ind index is notice iceable from rom Jan January2nd to 10th On 9th 9th Ja January DSE Genera eneral (DGE (DGEN N) Inde I ndex x dec declined by 600 600 points and all all indice indices declined declined nearl nearly y 7.75 percent. On On 10th Jan January uary Dhaka Stock Excha Exchange nge General eneral (DG (DGEN) Index I ndex lost by 660 points points or 9 percent percent & Chi Chitta ttagong Stock Exc Excha hang nge Selecti ectiv ve (CSE (CSE)) Index I ndex decl declined by 914 914 points points or 6.8 percent percent within thin 50 minutes nutes of trading. trading. CSE CSE All Share Share Pri Price I ndex ndex (CASP (CA SPII ) stood stood at 192 19212 12.34 .34 losingby 1,396 1,396.21 .21poi point, nt, which is is 6.77 6.77 percent. percent. CSE CSE Sel Selecti ective Categ Categories ories I ndex (CSC (CSCX X) lost lost 914 914 points or 6.87 percent percent and CSE -30 Index Index also lost lost 149 1490.83 0.83 or 8.28 perce percent. nt.
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Figure igure 10: daily daily DGE DGEN index of Ja J anuary, 2011
Figure igure 11 11: CSE CSE daily daily CASPI CA SPI index of Jan January, uary, 2011
January2012
Figure igure 12: Tren T rend d of DSE DSE Ge General ral (DGE (DGEN N) index index
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Figure gives the hig highly hly vola olatil tile and sharpl sharply y falling index trend of DSE general I ndex that that started ted to increa increas se from from 2600 points points in Ja J anuary nuary 2009 and cross crossed its its zenith pr price of 8600 8600 in in Dec Dece ember 2010. 2010. After A fter cli climbing the hig highest hest point point it it started to fall sharply rply and came down below below 4000 4000 in in Ja J anuary 2012 les less than half half of the hig highest poi point. I t had broken broken all previ previous recor records ds of dec decreasing reasing index. After A fter that that Securi Security ty & Exc Excha hang nge Commi ommissions called for for an emergency meeting with BB BB and stop stop tradi trading ng at both Dhaka Dhaka & Chi Chitta ttag gong Stock Excha Exchanges. es. I nvestors came came out in in the street street wi with proces processions and demonstrate demonstrated d against free free fall fall of Share index index in both bour bourse ses s as well as suspe suspensio nsion n of trading. trading. I nvestors fro from m different different parts parts of the country country such as, as, Chi Chitta ttagong, ong, Comil Comillla, Narsingdi, singdi, Na N arayanganj and Jes Jessore broug brought ht out proces processions sions and clas clashed with la law enfor enforces in some pla places as well. ell. Foll ollowi owing two days days consecutive histori historica call fall fall of share prices prices the govern overnme ment, Central Central Bank & SEC SEC took insta nstant action actions s to to stabili bilize the the ma market rket and bri bring the confi confidenc dence e among mill million of small invest nvestor ors. s. The T he government overnment create created d pres pressure sure on Bang Bangladesh Bank & SEC to improve the market condition. As a result, recovery was initiated with I nstitutional nstitutional buyer for for instance merchant merchant banks, banks, state owned banks banks & non-fi non-financi nancial insti nstitutions. tutions. On O n 11th Ja J anuary nuary market rket recove recovered 15.6 15.6 percent percent of General neral index by the end of the session and ma made a record in Ba Bangladesh adesh stock market history history of gain
Factors rscont ntrib ibuted to thecra rash According ccording to the Inve I nvesti stigation tion report report (2011) of the probe comm committee, re reasons for the stock market rket crash are foll following: owing:
Role ole of market rket regula ulators and their employee ployees: Th T he role role of BSEC BSEC to to control rol & monitor onitor capi capita tall market rket,, working working in fa favor of manipulators, nipulators, approving unet unethi hica cal prop proposa osall and iss issuing uing wrong direc directi tive ves which hich lea lead to unexpected unexpected market Conditio onditions ns deteri deterior ora ated ted the imag image of SEC SE C. I nvesti stigation report report ment mentiioned some some names of corrup corruptt empl employe oyees es of the market rket regula ulators tors who were directl directly y or indirect ndirectlly responsibl responsible e in the marke rket ma manipul nipula ation. tion. T here is a job overlapping DSE & SEC SEC both org organiza nizati tions ons have betwee een n SE SEC and exchanges. Such as, DSE surve surveillance department for for the sam same job job but there there is is no no co-ordi co-ordina nati tion. on. Li L isting comm committee of DSE DSE & CSE CSE examines listi stingappli pplication tion of company but SEC SEC doesn’t do it it prope properly rly and approveit.
Placeme cement of M utual fund & I PO at a pri price lower than than the ma marke rket va value has become a newmethod of bri bribery for powerf powerful ul employe employees of regulat ulator ors s. T here here is another accusatio accusation n that these senior enior level evel employee employees s recei eceived place placement ment by using using other’s name which hich is very diffi difficult to identif identify y. T he report admits admits tha thatt BSE BSEC C doesn’t have have enough empl employe oyees es for for example; qua quallified fied accountant, accountant, fina financi ncial al analyst and res researcher to control control and monitor monitor the market.
Demutualization of of Exchanges: T here are are both elected elected & nominate nominated d membe members in DSE DSE and CSE CSE.. Ba B asical sically, elec electe ted d members run the adminis dministration due to les less
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interest nterest & relat relatiion of of nominated nominated members. embers. As As a result, ult, the play players of the capita pitall market rket act as as controll controllers. ers. Meanwhi nwhille, controll control lers are inac inactiv tive during during unethi unethica cal acti ctivitie ties due to confli conflict of inte interrest. I n the inv inve esti stigation report report it it wa was said that diff different erent stake holders holders of capita pitall market and civil civil society support upport & demand for for demutuali demutualiza zation tion of excha exchang nges es. T he mea meaning ning of Dem D emutual utualizati zation on is is separating parating controlling functions from controller’s functions, empowering controller and taking taking decisio decisions ns without thout being being motiva motivated by the mark arket et play players.
Investment of ba bank in the capital market rket: I n 2009 & 10 banks banks and and fi financial nancial institutions nstitutions invested invested huge amount of deposit money in the stock stock mar market. As As a resul resultt share pri prices ces sk sky rocketed rocketed until until Decembe cember 2010. 2010. W hen Ba Bangladesh Ba Bank restricte tri cted more more than 10 percent inv investment of deposited money, increase ncreased CR CRR and SLR SL R ratio, created ted li liquidi quidity ty crisis crisis and and marke rket crashed hed
Pre-IPO -IPO & IPO IPO process: I nvestigation tion commi committee considered considered that that due to PrePreIPO & I PO manipul nipula ation tion share share pri prices ces sky sky rockete rocketed and that is the main re reason for the share market rket cras crash. h. Man M aniipula pulators il illegally & unethi unethica cally creat create ed a Kerb K erb market rket in Pre-I Pre-IP PO sta stage. Wi W ithout recomme recommendatio ndation n by the the list listiing committe committee e appli pplication tion for for I PO was acc acce epted. pted. SEC SEC did did not examine abnormal bnormal asset revaluatio luation n and and indica indicati tiv ve price price.. As a result in Pre-I Pre-IP PO or I PO stage place placement proces process s and plac placement tr trade K erb market overval rvalued share share pri prices. ces. Thi T his s eventually generated enerated liqui liquidi dity ty crisis crisis in the capita pital market. rket.
Changesin Fa Face Value (Stock Spli Split) of Securities curities: A most importa important nt reason reason for abnorm bnormal climbing cli mbing of index was indi indica cated ted to . Spli Splitting tting share does not change revenue revenue uni for m face face va value of share at at T aka 10 or asset of a company company and should should not affec affectt the share pri price. ce. But But Small investors showed their their utmost utmost interes interestt to buy spli plit share share with their their small investme stment and consequentl consequently y pushed the pri price up. Up U p to 62 list listed ed companies companies spli split thei their shares in 2009 & 2010. 2010. So, it it abnorma bnormally increase ncreased li liquidi quidity ty of the market market and broug brought ht notable change in market capitali capitaliza zati tion. on. I nvestig tigation tion repor reportt shows shows that MC increase ncreased d 655% of companies nies those adopted dopted share unifo uniforrm and MC M C increase ncreased only only 46% of those that did did not adopt. Fro From m Jul July y 2009 2009 to Dec D ecem ember 2010 the role ole of total total MC were 81.5% of companies companies which hich adopted share unifo uniforrm and only1 only18.5% 8.5% those those that did did not not adopt. adopt.
Place Placement trade / Kerb market: rket: Before fore issuin issuing g I PO, Iss I ssue manag nager or Iss I ssuer uer Company ompany sell shares to their nominat nominated ed per person and that is called Pri Priva vate pla placement or pre pre-IP -I PO pla placement. Pri Priv vate placement is is risky risky because use it doesn’t doesn’t have accounting counting disc disclloser. oser. In the developed eloped countri countries there are are some fixe fixed d rul rules but in Ba B angladesh SEC SEC didn’t didn’t have proper rules rules for it. As As a resul resultt some some manipul nipula ators used used it it as as a tool of pri price manipul nipula ation. tion. I nves nvestiga tigation tion committe committee e found found tha that in in most of the cases plac placement was offer offered ed at at les less than the IP I PO pri price. ce. Th T hough aim of pu public lic offerin ring is partic rticip ipa ation ion of of pu public but placement doesn’t make sure it. it.
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Eight compani companies es issued converti convertibl ble e preference share share in 2009 & 10 in whi which ch average 69% 69% went for for pl placeme cement. So, particip participa ation tion of the publi public was hindered hindered and that cr created ted plac placement tra trade or K erb mark market et.. Ta T able 4: T op Com Companies offered preference Shares
Companyname
Value of preference share Pr riivatepla lacement (Tk. Million)
Bexi eximco mco Pharma Sumit Power ower Aftab Automobi utomobille Peoples eoples L easing sing BD T hai hai Aluminum num
4100 3000 1800 1800 1200 750 750
63% 69% 82% 58% 77% 77%
I n case case of preference preference share, most most of them are distributed distributed throug through pri private plac placement where there was no tra transpar nsparency ency of allocation allocation.. Another A nother interesting ting thing thing is that, stock pri price of most most of the companies companies mention mentioned ed abov bove increas increased substa substantiall ntially y just after the off offering erings that increa increase sed the gree eed d of inves investors tors to make prof profiit throug through h buying right/pr ht/preference eference shares of thes these companies nies.
Insider Tra T rading: I nsider trading trading also might be a cause of econo economic mic bubble, bubble, esp., p., in the capita pitall market. Insid I nsiders ers can use the hidden hidden infor informa mation tion to take take advanta dvantag ge of the undisc undiscllosed osed news news from from the market and can make make the stock pri price higher higher than than its its intrins ntrinsiic va value (Ronald R et. et. al. 1993) 1993)
Omnibus account: Omnibus Omnibus accounts accounts of I CB and merchant banks as another major reason behind behind the stock mar market debacle. It I t was was found found that many speculati speculative ve deals were made throug through h Omnibus O mnibus accounts accounts of Merchant Ba Banks. Report eport showed that that eac each Omnibus O mnibus account account consists of 3000-10000 3000-10000 indi individual accounts and and big big market rket pla players/ma ers/manipul nipula ators tors used Omnibu O mnibus s Accounts Accounts to to make make speculate culate stock pri prices. Eve Even hig high SEC SEC and Gove Government rnment Off Offiicials used used the hel help of Omnibus account ccount to buy and and sell share though though its its prohibi prohibite ted d for for them them to invol nvolv ve inves investt in the stock ma marke rket.(Ibr t.(I bra ahim him K hal halid Com Committe mittee e Report). port).
I n this this ca case Merchant Ba Bank di did not compl comply y with SEC SEC and Ba Bangladesh Ba Bank rules rules. As A s per per central Ba Bank la law, shares of Ba B anks cannot be bought in in unide unidentifi ntified accounts but Me Merchant banks did did so in in many cases. But But SEC SEC never ra raised any question question about such accoun accounts ts and never never made any any inve investiga stigation tions s to dig dig out out irregularities that indicate poor regulations. As investig nvestigat atiion repor reports ts shows shows that thi this s kind kind of account made a lot of of il illegal transactions. It I t publishe publishes na name of 30 big big play players including ncluding I CB for a lot of suspicio picious us transac transacti tions ons and says most manipul anipulator ators s traded from from the omnibus accounts. ccounts. It I t was also reporte reported d at least T aka 2.5 bil billion ha has bee been traded from from hidden or omnibus accounts.
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Asset revaluation tion & Rumor: Rumor: By taking king chance of weak asset asset revaluation uation method companies nies have overva overvalued their their asset. In I n this this proce process ss dishones dishonest audi auditor tors s generate nerated d artifi artificial cial audit udit re reports ports.. So, calculati culating of NAV on ov overval rvalued ued ass asset indica ndicates wrong ongsig signal
Book building buildingm method: I t’s a proce procedure of dete determining rmining price price of I PO at which hich it is offered. offered. T he fai fair pri price is determine rmined d by the dema demand of a securi ecurity ty from price. T he main aim insti nstitutional tutional inv i nves estors and and their indicativeprice aim of introduci ntroducingthis method in Ba Bangladesh adesh stock stock market was to attr attrac actt mor more e firms firms for enlisting enlisting in the the stock exchang exchanges throug through h fair fair share pricing. pricing. Howe H owever, it was found as an instrument nstrument of manipul nipulat atiing market price prices. s. Inves Investig tigation tion report report rev reveals that duri during the pri price disc discove overy/biddi y/bidding ng stage inv investors tors manipul nipulat ated ed share share price prices s for pla placement with too hig high pri price. H igh pri price was maintained ned only only for the lock-in lock-i n period period and then then inv inve estor stors s offloade offloaded d their shares. As a resul resultt they pull pulled out a lot lot of pro profi fitt within a short hort peri period od and and after after that the share price price did did not increa increase. In In this this process process corrupted corrupted Iss I ssuer and iss issue ma manager mani manipul pulat ated ed the price price
Suspici picious ous transaction ction of top pla players: I nvestiga stigation tion repor report rev reveals some names of individual ndividual and instituti institutional onal inve investor stors s as top buyers buyers and and sellers during during abnormal increase and decrease of index in di diffe fferent time time periods. periods. T he transa transactions of these these inve investor stors s were suspicio picious us and affecte affected the the market market heavil heavily y and li liable ble for abnormal rise and fall.
Dire irect lis listing: W ith the appro approv val of SEC SEC few compa compani nie es hav have been been direct directlly list listed ed in the stock excha exchang nge. e. Thes T hese e companies nies come to the market rket with infl inflate ated share price prices s. I nves nvestig tiga ation tion report report mentio mentioned ned that that indi indica cative price prices s of these these compa companie nies were determined even even 58 timesmore than EP EPS and and 9 time times of NA N AV.
Th T hough share pr price ices of of these ty types of dire directly lis listed companies ies ha have be been artifi artificial ciallly deter determined, but SEC SEC or or exchanges did did not inve investigate the the reason of abnormal price. Bangladesh Securiti Securities es exchange commission (B (BSEC SEC) has taken some ini initiatives tiatives to pro rotect in investors rs from om any potential loss. Som omeof the steps are mention oned below ow: Query to the Compa Company: SEC SEC many query to the company for several time times to expl expla ain the reason reason behi behind nd the pri price boom boom of the the company stock. In I n each time, the company answered that there there is is no undisc undiscllosed osed pri price sensiti sensitive ve infor nforma mation tion of of the Company Company for recent recent unusua unusuall price price hike. hike. Investig tigation of of factory and accounts: SEC/DSE sent their investigation team to the factory factory and and look looked ed into physical and and fi financial nancial res resources to to dis discover cover the reason of pri price boom and disc discllosed osed the found found matter tters to inve investors throug through h stock exchanges.
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Investors rs awaren eness messages: SEC SEC disclo disclose sed d many mess messa ages to made inve investors stors aware from from not to to buy the securi security ty of the the company company to protect protect them them from from any potential potential loss. loss. SEC SEC says “Hono “H onorrable ble I nvestors plea please make your your investment decision decision based based on company fundam fundamentals, techni technica cal analysis, pri price level, disc discllosed osed info inforrmation; tion; and avoid oid rumor base based speculations.” peculations.” Repeatof company Fundamentals to DSE DSE Scree Screen: SEC repeatedly disclosed the company fundame fundamentals ntals to the the screen to make inv investor estors s aw aware about bout the company. Legal actions against company Directors rectors: SEC SEC sued against five five director directors s for for recent ecent price price hike hike of the company stock and the case still still running unning with the court court
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RECO ECOMM MMENDAT ENDATIIONS AND CONCLUS CONCLUSIION Strengthenin ingt gtheMarketSurveil illance Systems To T o strengthen the SEC’s EC’s operation ions and governa rnance, (i) (i) A real-time real-timemarket sur surv veill eillance ance system should should be instal installed, and (ii) Capacity building will be provided to improve monitoring, supervision, and enforcem enforcement ca capacity of the the SEC SEC Ensuring uringIIntegrity rityand Effi Effici ciency encyof SEC SEC Membersand Staffs ffs Staff of SEC, CSE, and DSE will be trained in modern market surveillance and enforcem enforcement techniques hniques to enabl enable e them to be more more effective at at det detec ecti ting ng trading trading irreg rregula ulariti ritie es and and mark marke et abuse abuses. T he training training will include examinati mination of of evidence dence and and analysis sis of trading trading accounts ccounts of brok brokerag erage fir firms Co-ordi o-ordina nation tion between SEC SEC and Stock Exchang Exchanges From rom the anal nalysis and and Inve I nvestig tigation tion re report port we we found la l ack of coordina coordinatio tion n and inconsistencies be betw twee een n the functions functions of SEC SEC and Stock Excha E xchanges. es. Esp. Esp. in in case of Company listi sting and survei urveillance, Coor Coordi dina natio tion n is highly important. important. To T o comba combatt future debacle debacle both SEC SEC and and stock exchang exchangesshould should wor work k close closelly. Bank Fina Financein Capital Market Commercial Banks relies heavily on capital market by investing directly and indirectly (Ma (M argi rgin Loans L oans) that cr creates tes hig high ri risk on depositor’s depositor’s money. So Reg Regula ulators tors shoul should d impose mpose restriction triction on inve investme stment on Ca Capita pitall marke rket by Banks. In I n Indi I ndia a, Ba Banks can inves nvest a certain portio portion n of thei their owne owner’ r’s s equi equity ty//capita pitall (not deposit) to capi capita tall marke rket but in Ba Bangladesh Ba Banks can inve invest 10%of thei their total liabili bility that that is is not rational at all. all. Such hug huge inve investment by banks pushes only only the demand side side and creates bubble bubble to the the market as as suppl supply y side response is very low low in Ba Bangladesh. desh. SO, SO, regulat ulator ors s shoul hould d set new limit on the basis of Sharehol Shareholders ders equi equity ty and should monitor onitor this very stri strictly. ctly.
Supply Supply of adequate securities ecurities Supply Supply si side res response duri during last two two years was very very poor poor relative to sky rocki rocking ngdema demand of securiti curities es that helped helped to infl inflat ate e the the price price of almost every share share traded traded in in Dhaka Dhaka and Chittag hittagong stock exchanges exchanges. Government Government shoul should take measures to bring bring good ood companies companies (both loca local and MN M NCs) by allowing easy acce access ss and good good I PO price price to to promote promote the ma market rket.. Other reg regulators li like (Ba (Bangladesh Bank, B ank, Ba Bangladesh T elecom ecom Regula ulatory tory Authority uthority,, Reg Registrar strar of J oint oint Stock Stock compa compani nies es and Mi M inis nistrie tries) can al also take measures to enli enlist new new companies companies to the the mark arket et to enhance the depth of it.
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Transparency in lis listingproce tingprocedure As list listiing methods ethods (Book (Book Buil uilding ding methods ethods and direct direct listing ting) play played a vicious rule rule to dama damage the sta stabi billity of the market; maj major change sho shoul uld d be broug brought to make it it acceptable ptable and and transparent. parent. In I n this this reg regard, SEC SEC should hould promote promote only only Fixed xed Pri Price ce method as it la lack le less opportunity opportunity to manipul nipula ate the the offe offer pri price. ce. SEC SE C can also use due dil diligence to fix fix the offer offer price price under under this method. For Book Book Buil Building ding M ethod, thod, price price bidder bidder El Eligibl igible e I nstitut nstitutiona ionall I nves nvestors (EI (EI I s) should should deposit deposit at lea least 10% of the value of the securi securiti ties es that that they are interes interested ted to buy. buy. Such deposit deposit will make them more car careful and help help them to make better analysis to quote any price price.. Lock-i L ock-in n period period should should be fixe fixed to at le least 180 180 day days at shor shortt lock-i lock-in n (21 days) help help them to specul speculat ate e them them mor more e to get hig higher returns. returns. Institutes I nstitutes and persons persons behind hind the book buil building ding scam scam should should be under trial trial and steps should houl d be taken to the confisc confi sca ate their ill-gotten wealth. Peopl Peoples es of Reg Regulat ulator ory y bodies bodies who allow allowed ed such offences also should be brought under proper trial. Direct listing method should not be allow allowed ed as as it is very to manipul nipula ate under this this method. Consistency in Regulat ulation From rom the the anal nalysis ma made in this this report, report, I found found va various rious inconsistencies inconsistencies in the SE SEC regula ulations. tions. SEC SEC notifi notifica cation tion came only only when the ma marke rket ris ri ses continuously ontinuously for many days that do not not reflec reflectt good regulat ulatiion. T he Bang Bangladeshi adeshi stock market needs needs to move move towards a ma market rket based system of regul regulat atiion for capita pitall market acti activiti vities es and SEC SEC should should act proac proactiv tively inste instead ad of its its reacti reactiv ve response. response. SE SEC does not measure the costs and benefits fits of its rapidly rapidly changing guideli uidelines nes/regulations ulations.. SEC SEC and GO GOB should have have long term vi visions reg regarding ding market and and shoul should d make cost-benefi cost-benefitt analysis befo beforre makin making g any rule/l rule/la aw as it affect inve investor’ stor’s s return. Regulat ulator ory y parity and cons consistency betw betwee een all institutions nstitutions and particip participant ants s conducting conducting related elated capi capita tall market market acti activiti vities es has to be ensur ensured ed at at al all time times s Seria rial Tra T rading dinga and Manipulation As there ar are many evidence evidences s that some inv investors tors and institutions nstitutions were were involved involved in in the the seria ri al trading and ins insiider tra trading ding to manipul nipula ate the pri price of indi individua viduall stocks stocks under under regula ulatory tory supports upports.. Ma M anipul nipula ative trading trading under Omni mnibus accounts ccounts shoul should d be full fully investigated and and peopl peoples and instituti institutions ons under the hidd hidden en accounts ccounts should should be identified dentified and al also should hould bring bringunder under tri trial if i f any any irre rregula ularity rity is found found
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Stepsalr lready taken by the Go Governm nment: Government already took some some steps to stabil bilize the the market. Securiti Securities es and Excha Exchange nge Commi ommission is is restructured tructured and all the all management peopl people e are replac replaced ed by new peoples peoples. Uni U nifo forrm per value of shares are started ted from from Dece December 2011 that that ensured the unifor uniformity mity in in terms of par par value value in in the market. Gove Goverrnment sued ag against some some manipul manipula ators tors and the court court is is runni running the cases. Government has also introduced some big funds to provide liquidity supports to the market rket and and also also pla planning nning to compensa compensate sma small investors who who lost everythi ything ng due to use of margin loan loan by redeem redeemingthe interes interest of the loan. loan. Role ole of government to preventthis kind kind of cras crash in in future Recommendations endations that that government sho shoul uld d adapt to avoid oid and tackle the sam same kind kind of of crash crash in in future future are given foll following: owing:
Actions ctions should should be taken taken against those who wer were involve involved in in this this recent stock market cra crash
I mprov mprovingsecurity curity laws and penalty for brea breaking kingthose
Balancing ncing of demand demand and supply supply of shar shares
Foll ollow-up ow-up the market and protect protect against any kind kind of mani manipul pulation ation
Bangladesh unveil eils 21-poi -point nt stock market stabil bilization package Dhaka, Ba Bangladesh (BB (BBN) - Bang Bangladesh has announced announced a 21-poi 21-point stock mar market stabil bilizatio tion package that pri primaril rily focus focuses es on gr greater partici participatio pation n of banks and and other other financial institutions in stock market in the short-term T he SE SE C chair man said the measures measures inc in cl uded in the th e pac pack age age wer wer e i n short, mediu medium m and long-te long-terr m in natur e. "The "T he impl ementation mentation of the shor short-te t-terr m meas measur ur es wil l start tar t i mmediately mmediately,, the medium- term ones in three months and the long-term ones in six months," the SEC SE C chief noted.
Th T he package inc includ ludes a plan to formulate a 'special scheme' aimed at helping ingthe small investors recoup their losses.
Theten short rt-term measuresinclu lude: 1) The T he loan loans s provided by banks to thei their capita pitall marke rket subsidia diaries ries, will will not be ta taken into account account whil while estima estimati ting ngtheir 'exposure posure to stock stock market'; 2) T he long long-term -term equi equity ty investment made made by abank in in any company company will not be
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considered considered as 'capital 'capital market exposure'; 3) T he repatri repatria ation of commiss commission money, which hich has has to be paid paid to foreign foreign brokera brokerag ge firms firms in in cas case of for foreig eign n inve investment, will be ma made speedier, peedier, subjec subjectt to submission of relev elevant documents; 4) T he 10 per per cent cent tax imposed imposed on the profi profits ts earned by investments by for foreign eign institutional and non-resident Bangladeshis will be withdrawn; 5) The T he central bank wi will consi consider the banks' exposure xposure li limit to the stock stock marke rket on a 'net-of 'net-offf' basis, inste instead of 'marki 'marking ngto mar market', basi basis; 6) T he dea deadli dline for adjusting single-borrow e-borrower exposure li limit of banks banks has has been been extended extended by another two years, up to December 31, 2013; 7) The T he commerci commercial al banks banks haveagreed to make make more inves investment tment in in the stock stock market in in line with with the advice dvice given by by Finance inance Ministe nister AMA Muhith; 8) Insu I nsuranc rance e compa compani nies es (li (life and and non-l non-liife) have agreed reed to inject inject thei their surpl surplus us funds in the stock market; 9) The T he sponsor sponsor-di -dirrectors of listed compani companies es will have to own own at least 30 30 per cent cent stakes of their respective compani companies es; and 10) The T he merchant banks banks and other subsidiari subsidiaries eshave so so far far coll collecte ected d 99 to 100 per per cent of their their funds funds from from their parent compa compani nies es, whi which ch are banks, non-banking non-banking financi nancial instituti nstitutions ons (NB (N BFI s) and insu insuranc rance e companie nies. From now on, the merchant banks and other subsidiary firms will be allowed to mobil mobilize 49 per per cent of their their funds funds from from source ources beyond their their parent compani companies es.
The mid-term measuresare: 1) The T he sec securi urities regulator will take take ini initiative tiatives s to to la launch the 'Inve 'Investment tment Adv Advisory ory Service' to make the market an an info inforrmed one. For For this, this, brokerag brokerage fir firms will have to to employ employ profess professiional and expert inves investment tment managers; 2) T he sec securi urities regulator will make available ble 'Equity 'Equity Research Publi P ublica cation' tion' to ensure ensure access to inf infor orma mation tion by inv investor estors, s, academi demicians and and pol poliicy maker kers; s; 3) A corpor corpora ate govern overna ance guidel uideliine will be formulate formulated d to ensure transparency and accountability of the listed companies; and 4) The T he sec secur uriities ties regulat ulator or will immediat diately ely take take measures to increa increase sethe capita pitall of merchant merchant banks and other other subsi subsidia diary firms. firms.
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Thelo long-termmeasuresare: 1) Financial Reporting Act (FRA) will be formulated in a bid to increase the quality accounting counting and auditi uditing ngdisc discllosure by li listed companies; 2) T he present present 'insi nsider tra trading ding' rules rules will be upgraded and and stri stricte cter. 3) The T he regula ulator will will make the 'Sma 'Small I nve nvestor stor Prote rotect ctiion' la law more ore titime- befitting fitting;; 4) The T he propo propos sed demutual utualization tion of of the two stock exchang exchanges will be compl complete eted ver very soon to ensure ure thei their corpor corpora ate govern overna ance; 5) Nece N ecessary measures will be taken taken to strengthen the mutual funds funds and make those more attracti attractiv ve to investors; tors; and 6) T he sec securi urities regulator will furthe furtherr streng strengthen then the moni monitori toring ngactivitie ctivities in in the stock stock market by esta establi blishing shing improve improved survei surveillance ance system stem
Conclusion: Th T he study shows that the major jor re reasons behind ind th the stock ma marke rket crash are irra irration ional market behavior, or, inconsistency inconsistency in regulat ulatiions, exces excess s liquidi quidity ty in the market, stock stock spli split by companies ompanies, faulty faulty li listing sting system, iss issuance of right shar shares and preference preference shares by compani companies es at hig high pri price, stock stock mani manipul pula ations tions by insider tra trading ding, ser serial tra trading ding etc etc and and excessive greed of inves investors. tors. In I n most cases, inve investor’ stor’s behavi havior was natural natural and consistent to the sta standard behavior. or. But But the study did did not find find reg regulat ulator ory y fail failure ure as the root-ca root-cause use of the vol vola atili tility and dis disagree with the Ibrahi Ibrahim m Kha Khallid Comm Committee report and suggest for for fur further ther study to impl impleme ement the recommendations ndations of the the committee. Due to many con cons straints traints (dataavailabil bility and acces access, time time etc.), etc.), I have failed failed to conduct more more compr comprehensive ehensive study on the the crash but I hope hope my study might give some guidel uideliine for resea researchers who want to conduct further study on it. it. Fur Furthe therr study in this field field is is required equired asmany of the issues issues are not cover covered in in my report. report. http:///www.busi http: business nessnews-bd. s-bd.com/ com/iindex.ph ndex.php? p?opti option= on=com_ com_content&task= content&task=view&i view&id= d=4695