EVERYONE has observed that both the Dhaka and the Chittagong Stock nges have gone through major upheavals over the last six months and are still showing signs of volatility and listlessness. Taking into account the price behaviour of the last few months, one finds that by the end of July, 1996, the Dhaka Stock Exchange's (DSE) All Share Price Index (ASPI) stood at 1156 which showed a rapidly rising trend in the subsequent months registering its highest point of 3627 on November 16th which went down to 2241 on December 22nd. 1996. Since then, although it was gyrating somewhat it was showing a downward trend, reaching a still lower point of 1839 on January 13th. 1997 From the peak to the bottom of this price cycle, the Index fell by 49.3 per cent. This is an historically unmatched event and admirably qualify to be called a crash. Without going to 1929 crash, even compared with October 1987 crash of New York Stock Exchange wheti the Dow Jones Index fell by only 26 per cent, the fall of the DSE's All Share Price Index was almost double.

One may. of course, try to argue that while the October 1987 crash took place in a matter of only two days the DSE price decline took place over three months. One should understand that had there been no imposition of Circuit-Breaker by the Securities and Exchange Commission (SEC), the crash would have taken place much quicker devastating effects on the market psychology. Circuit-breaker, therefore, had only slowed down the rate of decline but it would have come anyway. The underlying market fundamentals were ready for a major downward price adjustment which no one could escape. However, since January 13th, the market has been showing a slowly rising trend again reaching a point of 1962 on last Thursday. January 30th.

Loss of Confidence and Vibrancy

Whatever one may argue.

there is no doubt that the market has lost its confidence and vibrancy that one saw during the months of July to MidNovember. 1996. The expectation that was created, rightly or wrongly, by a variety of forces seems to have gone. Many ugly incidents ending in violence have taken place in front and around the DSE building leaving a bitter taste of share market bonanza among the new investors specially the smaller ones. But the bigger and clever ones have made their fortunes leaving the smaller ones to shed tears on the streets. The question that comes to mind is whether the good tidings for the general investors are likely to come back again in the near future. To answer this question, there is a need for taking a hard look at the circumstances that led to such a stormy event in the market.

The "Visible Hand" of the Market

Many writers have attributed the following factors to the phenomenal rise of share prices during the July-November period of 1996 preceding the crash: popularity of the new government and its conversion to the free market economy, scarcity of supply relative to the demand (including people's craze for holding on to any share) in the market. SEC inability to regulate the market and the Insiders' price manipulations.

There is no doubt that the new government changed its position (certainly for the better) from its historical commitment to socialism to the free market economy. While the first Awami League government closed down the Dhaka Stock Exchange in 1972 which was reopened in 1976. the new Awami League government has re-oriented its ideological position and supported the devel-

opment of capital market in the country. There is some truth in the assertion that this support has contributed to the reinforcement of public confidence in the stock market. But there are other factors that explain better the rapid rise of share prices before the crash. The two most important factors are the supply-demand imbalance and the insiders' price manipula tions. It is worth dealing with these two important factors briefly.

There is no doubt that investors. particularly the medium and the smaller ones, were looking for profitable outlets for their Investible funds.

of about 98 per cent. Two points should be noted here. First of all. the sharp rise in the rates of Trowth of these Indices began in 994 and was somewhat accel-

erated in 1996. Secondly, the average annual rate of growth of demand for shares over the period 1994-96 indicated by the value of trade was 98 per cent.

What about the supply side of shares in the DSE? Tne number of securities in circulation increased over the same period from 214.4 million in 1994 to 325.5 million in 1995 and to 375.3 million In 1996 registering a 37.5 per cent average annual rate of growth of shares in the market. One can now see

This is indicated by over-sub-scriptions of the Initial Portfolio Offers (IPOs) of private companies and corporations in recent years. While such oversubscriptions were only about 15 per cent in 1992 and 7 per cent in 1993. they reached 484 per cent in 1994. 454 per cent in 1995 and 505 per cent in 1996.

If one looks at the secondary market in the DSE one finds that it was showing a strong upward trend in terms of both volume and value. Without going into great details, the total turn-over in the DSE went up from 11.6 million in 1994, to 25.9 million in 1995 and to 71.6 million in 1996 registering a 258.6 per cent average annual growth rate. The corresponding value of trade in billions of taka in those years were 2.4, 4.7 and 7.1 respectively registering an average annual growth rate

quite clearly that the rate of growth in demand for shares was 2.6 times faster than that of the shares in circulation. These calculations Indeed show that a boom-like situation in the stock market was going to come about in the near future. One must note here that what is discussed here is the dynamics of supply and demand behaviour and not the short-term static gap between the supply and demand. The latter determines a higher equilibrium price level while the former determines the rate of change of price level In the market. However. If the rate of Increase of supply was not going to Increase pro rata with that of the demand, there could be an explosive situation over the years. The roots of the trouble were inherent in the dynamics of the supply and demand of shares forthcoming in the market irrespective of the

government's political commitment.

The role of the insiders' price manipulations has been analysed in an article by this writer in these pages on January 5th under "Loopholes in the Stock Market". Some data released by the DSE on weekly share transactions published in The Ft nancial Express show that there .were about six major players in the DSE who bought and sold large blocks of shares among themselves at high Srices which set the trend for igh price escalation. Some of these are members of the elected Council and at the same time active brokers. This is unethical. However, what followed from this was the craze for buying and selling of shares outside the official bourse and make a quick buck. This aspect of the market transaction was illegal because, according to the SEC regulations, all transactions have to be gone through the floor trading, recording and official settlement process. The final exchange of shares and cheques have to be settled within 6 days after the date of transactions. Further, the SEC regulations require that the buyer of a share must register with the stock Issuing company within 4 days of settlement of account with the seller of the shares. None of these regulations was fulfilled by the buyers and sellers in the kerb market. The result of all these were scandal and chaos in the stock market.

To compound the situation, as it were, there came the reports of involvement of some members of the SEC in these scandals whose contracts have been terminated and who have been replaced by newly appointed members. It is ironical to see that people who are supposed .to be regulating the affairs of the stock exchanges remaining clean and above board are themselves accused of corruption. Hopefully, the legal

process will ultimately settle the truth of these charges.

It is clear that the "Invisible Hand7 of the free market which was supposed to bring the market to equilibrium to the benefit of all parties seems to be very much "visible" in this case.

How to Avoid these

Mistakes?

The government has set up a Commission to investigate the charges brought against the persons involved in the scandal. Hopefully, the Commission will be able to unearth the real reasons for the crash and bring to light the extent of price manipulations done by whoever they are. Unless the stock exchange is placed on a clear slate, confidence will not return and the capital market will not be able to play its constructive role in raising capital for industrial development of the country. Similarly, all the legal loopholes and gaps should be plugged so that no one can ma-nipulate the market process to his personal advantage ever.

Finally, it is good to see that the government is going to establish a National Stock Exchange (NSE) in the near future. It may take about two years before it can be made functional with all the modern infrastructure and trained manpower. In the meantime, the government would do well to make the existing stock exchanges efficient and corruption free by taking whatever steps necessary. Similarly. the government should try to run the NSE with professional managers vested with some degree of autonomy and accountability rather than with government bureaucrats. Otherwise. it will eventually be turned into another State Owned Industry (SOE) with all its present characteristics. The government should also understand that the country's capital base is too shallow to have more than one or at most two stock exchanges. It will be a waste of time, energy and resources to have a few more private stock exchanges in the country.