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The Bangladesh capital market

Mamun Rashid
TODAY, with a S71 billion economy and per capita income of roughly $500-' plus and growth rate averaging 6% during past 3 years, the Bangladesh economy has accelerated to an impressive level. However, the capital market in Bangladesh is still underdeveloped and its development is imperative for full realisation of the country's development potential.
The market has seen a lot of developments since the inception of Securities and Exchange Commission in 1993. After the bubble and burst of 1996, the capital market has attracted a lot more attention, importance and awareness that have led to whatever infrastructure we have in the market today. We have come across a long way (DSE market capitalisation is approximately $12 billion with 250-plus listed companies and daily turnover averaging around $30 million) and also need to go a long way.
Reasons behind the underdevelopment
Information asymmetry. A handful of Institutional investors may
enjoy certain benefits, since they have an investment/research unit manned with qualified officers; nothing exists for retail investors. In the absence of independent research houses and filtering of information among different types of investors, retail investors remain more vulnerable to manipulation.
Supply side constraints: The market does not have adequate number of fundamentally sound scrips. Focus should be on the privatisation of state-owned enterprises through public offerings in the bourses. Also, valuation of equity component in a project is not always done appropriately leading to overvaluation of sponsors equity base and therefore higher leverage from practical point of view.
Lack of professional portfolio management: The government has reduced the interest rates on savings instruments, however this particular market is still limited to the commercial banks, and individual investors do not have access to these instruments. An estimate suggests that the ratio of institutional-to-retail investors is still low in Bangladesh, even relative to other emerging markets. The presence of institutional investors is
expected to ensure better valuation levels due to their specialised analytical skills.
Weak corporate governance: Multi-national corporations and institutions often adhere to very high international standard compliance regime, but the local market has to adhere to and effectively enforce a standard corporate governance system to ensure levelplaying ground for all.
Valuation disparity: An important aspect for capital market is reflection of fair value of scrips. This is not adequately present in the current scenario, resulting into lack of attention of an important segment of investors, both foreign and local.
1996and today
The bull run that took place in 1996 left a number of positives for the market. The SEC has implemented a lot ofinvestment-friendly regulatory reforms. These fundamental developments, which were well overdue, followed the 1996 bull run. In the secondary market, surveillance is more active and particular than before.
In the present automated trad ing environment, bid/offers, depth and required broker particulars arc
all recorded and can be retrieved for future reference. The Central Depository Bangladesh Limited allows operating and maintaining the Central Depository System of Electronic Book Entry and for the convenience of various other activities.
The stock market surveillance mechanics in place at present has no resemblance to that of 1996. There are strict rules and guidelines, trading circuit breakers, and international standard surveillance to protect investor rights and ensure fair play.
The disclosure requirements and its timing for both listed scrips and IPOs as devised by the SEC are now more reflective of international best practices. SEC is also adopting new valuation methods that are expected to result in fair pricing of new issues.
Opportunities
The capital markets in Asia are getting more and more focus with the growing corporatisation of the Asian economies. Comparing the local market scenario with that of the rest of the region, Bangladesh is in a pretty good shape as we have most of the infrastructure in place.
At present, the government is heavily focusing on developing a debt capital market. The market is yet to support short-term capital requirements of corporations. Commercial paper has not yet been tried primarily due to interest rate volatility and illiquid risk-free instruments.
Debut trading of state-owned oil companies has spurred a lot of encouragement among investors. Government needs to privatise
more SOEs through the stock exchange. SEC is contemplating the introduction of the bookbuilding method in the valuation of IPOs in order to ensure a fair price within this year. This will encourage companies with sound financial health to come into the market.
Recommendations
• The market needs more good scrips. The process would be easier if we could draw attention of good issuers by improving the market governance system and eliminate scope for manipulation. The regulators need to play an active role in removing the bureaucratic bottlenecks and promote rules that provide incentives to the family-owned conglomerates to list.
• A dedicated financial market cell at the Ministry of Finance could be formed to co-ordinate with various regulators as well as other ministries. This would enable the government machineries to approach the development of die capital market in co ■ ordination with the broader monetary and exchange rate policies.
• Flotation of mutual funds will ensure sound investments and reduce the dependency from local individual investors to institutions to an extent. This could work as an immediate solution to contain the unpredictable volatility caused by retail investor spree.
• The private equity industry in Bangladesh Is at a very nascent stage, witnessing initiatives from some local entrepreneurs who have undertaken to raise capital
from global institutional investors for the purposes of private equity investment in the country. Government initiatives in this sector would be very useful in the form of a one-stop service solution to approve and register private equity transactions at origin.
• Incentive for private sector entrepreneurs to access the capital market should be more noticeable. Infrastructure projects should access capital market to raise financing through bonds and corporations should raise short-term financing through commercial papers.
• Equity research is not yet very popular in Bangladesh. The quality of brokerage houses should be assessed by the quality of research produced by their independent research departments. Quality analysis needs to address valuation issue in a more pro-active manner. The independent analysts should determine the intrinsic value of a traded security for the investors; this would indicate whether particular scrips arc overvalued or undervalued in the
• secondarymarket.
As mentioned earlier, the Bangladesh capital market still has a long way to go. The measures taken by the transitional government have already begun to positively impact the market. If more investor-friendly policy reforms were to be Implemented, the capital market will undoubtedly play a critical role in leading Bangladesh towards being the next ?\sian tiger.
Tho writer is a banker and economic analyst
**This piece is from the series of summaries of papers presented at the "Bangladesh in the 21st Century" conference held at Harvard University (June 13-14) and organised by Bangladesh Development Initiative (US), Democracy and Development in Bangladesh Forum (US), and The Ash Institute of Democratic Governance & Innovation at the Kennedy School of Government, Harvard University. The views expressed in the articles are expressly those of the authors.**