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Some reflections on Bangladesh capital market

Dr. Mirza Azizul Islam
THE capital market of Bangladesh owes its origin to East Pakistan Stock Exchange Association Limited set up In 1954. The association was later converted into Dhaka Stock Exchange in which formal trading was started in 1956. The exchange was renamed as East Pakistan Exchange in 1962andunder-Tftflhinothcr name change in 1964 when it was renamed again as Dhaka Stock Exchange (DSE). Trading on the stock exchange was suspended during die liberation war. There was no trading in the immediate post liberation years as the economic policies of the country during those years had a strong orientation towards central planning, '(hiding was resumed in J976 with the shift of development strategy in favour of a greater role of the private sector. DSE has remained in continuous operation since then. Chittagong Stock Exchange (CSE) was set up in 1995.
Both Dhaka and Chittagong stock exchanges experienced a meteoric rise between July and November 1996. Average daily turnover increased by over 1000 per cent. The share price index of DSE jumped from 957 on 2 July 1996 to a record high of 3649 on 5 November in 1996. InCSEalsothe index rose dramatically from 411 on 2 July 1996 to 1417 on 2 November 1996. Then, started a process of catastrophic crash, particularly In DSE. with the index falling to 3065 In DSE by 30 November 1996. The index continued a downhitt'ntureh thereafter with the lowest level recorded at463on3Mny 1999.
Since then the capital market In Bangladesh had been in a state of dotdrum. However, the market has been showing unmistakable
signs of resurgence* from early 2004.
A bird's eye view of the recent past and the present
As already noted, the potential contribution of capital market in financing development is yet to be realized in Bangladesh, this is evidenced by the fact that market capitalization as a proportion of gross domestic product (GDP) is of the order of six per cent of GDP In contrast, the relevant orders of magnitude in India, Pakistan and Sri Lanka are respectively 47 per cent, 20 per cent and 15 per cent. Given the size of population of Bangladesh and steady growth of its GDP exceeding five per cent over the past one decade, considerable unrealized opportunities exist for utilizing the capital market as a vehicle for raising long term investment finance. The recent developments clearly suggest strongly positive developments in this regard.
Relevant data in support of positive developments arc presented in table 1. Data for DSE only are used in this paper because it is a march larger exchange than CSE and the developments in the latter closely parallel those in the former, it will, be noted that the number of listed companies declined as of June 2005 relative to the previous year because a number of non performing companies were delisted. Since then, the Securities and Exchange Commission (SEC) has given consent to initial public offering (IPO) for nine companies. A few more are in the pipe line. By June 2006, the number of companies listed on the stock exchanges will definitely exceed that of the pervious year. The general Index and market capitalization have both Increased substantially over the past two years. Perhaps, even more remarkable is the rise in turnover which indicates resurgence of vitality of the capital market Bangladesh has outperformed most other stock markets of the region in terms of change in index as of 17 August 05 relative to SI 'December 04 (table 2). Furthermore, this notable gain has been achieved while maintaining a significant degree of stability. To illustrate this point, it can be noted that during the past six months, day to variation in the DSE's
genera! share price index was less than one per cent on overwhelming number of trading days
There are also strong signs of confidence in the primary market. Al! IPO issues for which subscription closed between November 2003 and August 2005 numbering 18 were substantially oversubscribed. These positive developments have been induced by a number of measures taken by SEC in concert with other market actors to revive investors' confidence in the capital market and to 'ensure orderly and transparent trading on the exchanges. Some of these are presented below:
(1) The process of dialogue and communication between SEC and the exchanges has been institutionalized by constituting a consultative committee of which a senior SEC official is the convener and the Chief Executive Officer of the two exchanges are members. The committee invites representatives of other market actors, as needed to review market developments and recommend regulatory changes or administrative orders for appropriate action by SEC and / or the exchanges.
(ii) A regular system of inspection of brokerage houses by
SEC and the exchanges has been put in place.
(iii) Automated trading system has been introduced by both exchanges. CSE has opened internet tradingfacility.
(iv) The central depository system (CDS) for electronic trading was operationalized in January 2005. All new primary shares can be issued only in electronic form. The existing paper securities are being gradually dematerialized. As of now, shares of companies accounting for well over 70 per cent of market capitalization have been demated.
(v) The settlement cycle has been reduced with effect from 01 March 2005.
(vi) There have been considerable improvements in the regulatory framework since 1996. These relate to, inter alia, disclosure requirements for IPOs; right issues; qualifications of auditors, their retention by listed companies and standards of audit; insider trading; and eligibility criteria and codes of conduct of merchant bankers, stock dealers / brokers and their authorized representatives as well sponsors, trustees, asset managers and custodians of mutual funds.
(vii) SEC has strengthened its monitoring and enforcement role with the result that there has been a considerable decline in the number complaints against market intermediaries as well as issuers. A particularly heartening fact is the fall in the incidence of issuers' default with respect to holding annual general meetings and submission of half yearly / annual financial statements.
(viii) SEC is undertaking a more rigorous screening of the proposals for initial public offering. In consequence, the secondary market is pricing then well. The shares of nine companies for which public subscriptions closed between 15 November 2003 and 18 May 2005 are now being traded in the secondary market. The market price of all of them is well above the initial offer price excepting in two cases. In one case, the market price as of 31 July 2005 was Tk 99.75 and in the other case, it was Tk 90.75 against the initial offer price of Taka 100 In both cases. In contrast, out of 10 immediately prior issues, the shares of as many as four companies fetched market price well below the initial offer price (ranging from under 10 per cent to 60 per cent of the offer
price).
Some ruminations about the future
SEC, in collaboration with other relevant agencies, is in the process of initiating several steps with a view to enhancing the confidence of the investors, increasing the quantity and variety of instruments, and improving the functioning of the market. Some of the forthcoming measures to accomplish these objectives are briefly mentioned below.
(i) As of now, enforcement powers of SEC are, after due enquiry and giving an opportunity to the violators to be heard, limited to cancellation or suspension of registration of market intermediaries, and imposition of penal measures which may Involve levying of fines on or filing of cases in competent courts against issuers/ market Intermediaries. These Is no legal provision for SEC to award compensation to shareholders or to file cases on behalf of shareholders. SEC is in the process of drafting amendments to the relevant laws so as to be able to better protect the interests of the shareholders.
(ii ) The need for strength-
cning compliance by all market intermediaries Is greatly felt As present, the regulatory requirement for appointment of a compliance offer extends only to stock broker / dealer. SEC intends to extend the requirement to other market intermediaries laying down Ute qualifications of the concerned officials and specifying the Issues to be addressed in implementing internal compliance procedures.
(iii) A sound capital market requires dep th wi th a wide range of products and Instruments to cater to varying risk return liquidity preferences of investors and also to ensure that the adverse effects arising from disturbance in some part do not assume systemic proportions. In this regard, SEC. in collaboration with Bangladesh Bank had made long term government bonds tradable on stock exchanges. But. not much of trading has been actually taking place. SEC and Bangladesh Bank have formed a joint committee to suggest measures to activate trading in government bonds. Recently introduced asset backed securities which arc now being issued only on private placement basis need to be brought into the mainstream secondary market.
(iv) At the initial stages of capital market development, privatization of state owned enterprises can make a signification contribution. In Malaysia, for example, the Privatization Master Plan resulted in many government linked firms being listed with Kuala Lumpur stock exchange. Seven largest firms listed with the exchange belong to this category. Government linked firms account for 34 per cent of total market capitalization. In Bangladesh also efforts are being made to progressively offload government shares through the stock exchanges. Hon'ble Finance Minister recently chaired an inter Ministerial meeting at the request of SEC. The meeting took a number of decisions regarding off loading of government shares and issuance of bonds by government agencies titrough the capital market. The implementation of these decisions will make a notable contribution to the depth of the capital market.
(v) A healthy capital market requires engagement of competent professionals by a wide range
of market actors. Among the positions which require the services of people with adequate knowledge of the principles of corporate governance as well as security laws and regulations are the members of company boards, company secretaries, officials of the share departments of companies, authorized representatives of brokers, compliance officers of market intermediaries etc. Academic institutions or the professional bodies in the country do not produce enough people to fill up such positions. SEC has constituted a Steering Committee for preparing suggestions to set up a capital market training institute to bridge the gap. Asian Development Bank Is expected to assist in this endeavour. SEC's investors' education programme has been intensified to enable investors to make informed decisions concerning their portfolio.
(vi) SEC is revisiting IPO and rights issue rules and drafting direct listing rules. The objectives arc to reduce issue cost, simplify procedural requirements and shorten the time gap between submission of an application to and consent by SEC.
Concluding observations Capital market in Bangladesh Is yet to play its potential role as a vehicle for financing long term Investment However, the hangover of an unpalatable historical past witlch saw a dramatic upsurge in the second half of 1996 only io be followed by a drastic and prolonged downswing has been successfully overcome. Discernible signs of renewed vitality have emerged. A number of actions arc in Ute offing to add depth to the market, increase the variety of instruments that can meet diverse investors' preferences, further promote orderly trading, enhance professional competence of market intermediaries and facilitate expeditious Issuance of securities at reduced cost. In sum, Bangladesh capital market is now prepared to be harnessed in the service of the country's economic development. It is hoped that polity makers, issuers of securities, market intermediaries and investors will ail join hands, in fuller realization of its potentiaL
IM suitor n ire Chairman of IM SaomOei ml Exchange Commisuon of Banjfadorh.Tno Ofa'nions arpresMd in Ites artido an not nocMUrty MM ot tM Convnlulon.