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BSEC measures to prop up stocks backfiring
According to market analysts
AHSAN HABIB
The main index of the stock market in Bangladesh has been hovering around 6,300 for the past year, with many shares remaining unsold amid scant investor participation, according to market analysts.
Besides, only junk stocks are performing well thanks to the prevalence of rumour-based trading, which is not a good sign for any market as it erodes investor confidence in the long-run.
But this is a common scenario for the country’s share market due to the growing confidence crisis that has been exacerbated by some decisions of the Bangladesh Securities and Exchange Commission (BSEC).
Of these decisions, the move to stop market intermediaries from executing forced selling following the crash in 2010 and setting floor prices for all stocks in 2020 were the most impactful, they said.
And in 2018, the BSEC allowed fund managers to extend the tenure of closed-end mutual funds by 10 years, denting the confidence of foreign and institutional investors as many were awaiting returns.
Also, the market regulator’s lack of restraint in giving licences to firms for operating as stock brokerages, merchant banks and asset management companies is not healthy for the market, they added.
Faruq Ahmad Siddiqi, a former chairman of the BSEC, said there is no doubt that these decisions have hurt investor confidence as people invest for mainly two reasons.
The first reason is that the stock market provides the scope to potentially turn a profit while the second is that it is a place where parked funds can be easily liquidated.
“However, launching floor prices has led to investors’ funds becoming stuck even in blue-chip or other well-performing stocks,” he said, adding that foreign investors will not be interested in such a market.
The DSEX introduced floor prices in 2020 to halt the freefall of market indices amid economic uncertainty brought on by the Covid-19 pandemic.
The floor price mechanism was gradually lifted in 2021 following criticism from most analysts and investors, but it was ultimately reinstated in mid-2022 after the Russia-Ukraine war began.
Another misstep was to bar market intermediaries from executing forced selling as investors would have otherwise at least gotten some money back and the intermediaries themselves would be left unscathed.
“Many intermediaries have become paralysed as they could not execute forced selling. So, their funds have become negative and they are still inactive in the market,” Siddiqi said.
Forced selling occurs when an investor or business is compelled by their broker or financial advisor to sell assets or securities to create liquidity for repaying debts or meeting margin calls.
In 2011, the regulator verbally ordered all stockbrokers and merchant banks not to execute the forced sale of shares that were bought against margin loans in a bid to boost confidence in the market.
Take the case that an investor bought shares worth Tk 200 by taking a margin loan of Tk 100 from a stockbroker or merchant bank.
If the share price drops to Tk 150, then the market intermediary can order the investor to repay Tk 50.
And if the investor fails to repay the sum and the share price drops further, then the broker or merchant bank is allowed to sell his or her shares without consent in what is called forced selling.