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Magic art of turning Tk 43 into Tk 1,200

Stocks in hot money spin again

Sarwar A Chowdhury with rejaul Karim Byron
The company had been incurring losses for four consecutive years till 2007, producing aluminium panels.
Last year its share price dropped as low as Tk 43 while the face value of the share is TklOO
Then came in a foreign investment fund, offering to pump in a huge amount into the company with a hopeless record.
A deal was cut between the aluminium panel producer and the foreign investment fund under which the foreign firm snapped up a huge chunk of shares at a huge premium.
The market went crazy with the news. The company's shares worth Tk 43 soon started trading at a breakneck speed at astronomical prices, reaching as high as Tk 1.199 a share.
Within a month and a half, the foreign firm dumped all its shares on the bourses, and made even more astronomical profits. It repatriated $2 million from Bangladesh against its investment of $500,000. A super deal by any standard, >for a month and a half.
The local company is BD Thai and the foreign firm. GEM Global Yield Fund.
That is what happened with Dhaka Stock Exchange between April and May this year, and market operators arc now questioning how wise it was for the Securities and Exchange Commission (SEC) to allow foreign funds to engage on such terms in the market without any lock-in, a measure by which such investment companies are barred from selling before a certain time the shares they possess.
Questions are surfacing over SEC's withdrawal of the lock-in system for the foreign fund. In the past, the lock-in system had been in place for all companies -- both foreign and local -- to avert short-term speculative trading, and flight of capital from the market.
Usually, there should be a lock-in for a minimum of one year on share sales, and SEC applied the safety measure for GEM Global as well, at the commission's first meeting.
But the lock-in was withdrawn by SEC later after lobbying from an influential group, according to sources. The group argued if the lock-in remained, the for-
eign company would not invest.
Contacted by The Daily Star. SEC Chairman Ziaul Haque Khondker declined to comment on the issue of GEM Global.
Now an increasing number of companies such as Beximco Pharmaceuticals, and Aftab Automobiles arc interested to strike such deals with the same foreign investment firm.
Not only that, those two local companies are now seeking to hand over their shares to GEM as loan', just like BD Thai sought.
If the share loans' are approved that could lead to even more interesting dealings, market players say.
GEM could first sell the shares that it buys for high prices, and then also sell the shares it gets as 'loans'. Then it could repatriate the whole amount. Later, as the market cools down, GEM could again buy the same shares at a lower price and repay its'share loans'.
And why give shares as loans to a foreign fund? Because, as market players say, if a foreign company deals in its shares, general investors will find it much more valuable' than if a local company sells. In another word, such an arrangement would help boost share prices much more easily.
The Bangladesh Bank however acted wisely when it disallowed such deals, as that would lead to market manipulation and capital flight. The central bank rightly put a condition that in such cases of curious loans', GEM must arrange a guarantee in foreign currency by a foreign bank, so even if GEM sells the 'loaned' shares, the money remains in the country. If such conditions are not put in place, then a floodgate will open for such deals, draining the country of its foreign currency.
Market players also point out another curious thing that nobody knows who nave contributed towards building the GEM fund. In many countries, disclosures about investors in a fund is a must, to avoid terrorist financing. But not in Bangladesh.
BD THAI DEAL AND CRAZY INDEX
DSE launched an investigation following an unusual price hike of BD Thai shares. The investigation found that GEM Global sold 2.72 lakh BD Thai Aluminium shares at Tk 909.51 each, totalling in more thanTk 24.73 crore.
DSE Chief Executive Officer AFM Shariful Islam, who led the investigation of BD Thai, also refused to comment yesterday.
The market witnessed a
record-breaking trend in single-day turnovers over the last couple of months. Records were broken in single-day turnovers for at least four times within a month with the highest ever turnover of Tk 1,149 crore in DSE last Thursday.
The key index also went up by over 400 points since June 1 this year, according to DSE statistics.
CAYMAN CONNEC TION According to websites, GEM Global is an investment firm of GEM Global Emerging Markets, having offices in New York, London, Paris, Hong Kong and Beijing.
GEM Global is incorporated in the Cayman Islands, a British overseas territory in the Caribbean. It is billed as a centre for tax evasion. It has a tax rate of zero for corporation tax, income tax. and capital gains, drawing some of the world's biggest banks and hedge funds to i ts shores.
’I he Uny Layman Islands are the world's fifth biggest financial centre, where hundreds of billions of dollars flow through the economy.
The global economic downturn has brought the Cayman Islands and other offshore financial hubs into the spotlight.
Leaders from 20 of the world's most powerful countries, who gathered in London for a summit in April, put regulating offshore tax havens on the agenda. The Cayman Islands has been criticised for lax financial regulations.
LOCK-IN SAFETY
Market analysts suggest imposition of an immediate lock-in on all shares acquired by nonresidentcompanies.
"I'm in favour of a lock-in system against issued warrants," Rakibur Rahman, president of DSE, told The Daily Star yesterday
"There should be a lock-in system for three years, for the greater interest of the market, so no one may sell shares just after receiving or converting the warrants Into ordinary shares," he added.
BEXIMCO'SBID
In January this year. Beximco Pharmaceuticals, a company of Beximco Group, announced that it had entered into a subscription agreement with GEM Global to raise Tk 460 crore by issuing its shares or warrants.
SEC had put a lock-in system in the initial stage, but withdrew the system following Beximco's lobbying with the commission. '
"This is not correct. SEC gave a consent order based on shareholders' approval, without any lock-in as in similar cases," Bexmico said in a statement yesterday.
"Mr Salman F Rahman did not lobby with SEC regarding this matter," the statement added.
There were also allegations against Rahman of lobbying with the Bangladesh Bank for permission to transfer shares as 'loans' to GEM Global, and for making the shares saleable at any time.
In yesterday's statement, Beximco denied that allegation too saying, "This is not correct. Loan shares may be given against bank guarantee or Escrow Fund. Mr Salman F Rahman did not lobby with Bangladesh Bank regarding this matter."
1996 SCAM RECALLED
The episode is reminiscent of the 1996 scam when Awami League was in power.
"The incident calls to mind the 1996 incident. Unless the culprits are punished, there will be a repeat of the 1996 episode," Salahuddin Ahmed Khan, former CEO of DSE, told The Daily Star.
Khan said SEC should not approve such subscription to foreign funds without strict verification.
BD THAI VERSION
When contacted, BD Thai Chairman and Managing Director Zahid Maleque MP toTjI T^it* ■£)QiIy"Star that'‘the deal was struck according to the rules and regulations, and all regulators such as SEC, the central bank, and DSE approved it.
Asked about the share sales by GEM Global, he said, "Selling of shares is a matter of GEM. We did everything within the framework of law."
"The lock-in system is not necessary for foreign investors," he said.
"I was able to turn my company around, thanks to the deal,” he added.