For nearly a year, our collective endeavour has been to rejuvenate the nation. Our focus: ridding the landscape of the fraudulent trifecta of bribery, corruption, and treason, previously perceived as the very keystones of a complex societal jigsaw. Despite marked improvements in numerous spheres, one area still being largely ignored is our national capital market. Just last week, the discontent bubbled over into protests, with investors and regular citizens alike calling for the resignation of the incumbent BSEC commissioner, blamed for loss of investor capital.
A common misconception is that a regulator’s duty is to monitor and control prices. In reality, their mission is to oversee operations and guard against illegal trading practices. Stocks are a symbol of business ownership, but they are not necessarily a direct reflection of company performance. The value of stocks is determined by market dynamics, often driven by broader economic trends and investor sentiment. Therefore, when capital floods the market, either domestically or via Foreign Portfolio Investments (FPI), the market invariably experiences an uplift, and vice versa.
Naively, many continue to believe that the mere introduction of government incentives or new securities could stimulate the capital market. This will not hold water unless market capitalisation reaches levels akin to developed markets like the US or the UK, or unless corporate governance pitfalls surrounding company operations and listing are addressed decisively. The 2010 stock market crash still casts a long shadow over the Dhaka Stock Exchange (DSE), which shockingly, has yet to recover to its pre-crash baseline.
As of May 24, the DSE index sat at 4746.42, far below what one would expect considering the number of IPOs issued over the last 15 years. If reflective of the 2010 DSE, the market index should flirt with the 12000-15000 range, considering the volume of new IPOs, rights shares, and bonus shares issued since the crash. Bafflingly, the Karachi Stock Exchange (KSE) witnessing a growth from 9411.75 to 116673 in the same timeframe, as reported by investing.com.
These disparities beg a number of questions. Given the persistent India-Pakistan conflicts and subsequent economic instability, why did the KSE only shed 3.03%, while the DSE plummeted by 3.01% (149.31 points)? If Bangladesh has indeed become one of Southeast Asia’s stalwart economies, why are its FPI and FDI inflows trending downwards? Furthermore, what factors are bringing other economies to an intersection of quandaries and how does Bangladesh compare?
The primary money-making vehicle in the DSE since its inception has been IPOs. Quite controversially, some companies choose to list with no forward-looking growth projections, aiming to milk the last drops of funding by siphoning off the resources of investment banks and retail investors. Their modus operandi: list their shares, sell them at inflated prices, then avail of tax breaks and rights share issue privileges once their initial funding dries up.
More than once, a company has listed at face value, only to see its share price soar to over Tk100 within a matter of days, before crashing down to Tk3-5 levels in the following years. Allegations frequently circulate that these roller coaster price fluctuations are orchestrated by the very sponsors of these companies, who cash out at peak prices and use the proceeds to fund new ventures, perpetuating an unending cycle of boom and bust.
This raises a critical point. If an investment strategy allowing profits even with declining share prices were to be introduced to the market, perhaps market manipulators would be less inclined to cause sudden price declines. One such strategy is short selling, where investors borrow shares of a stock from a broker, sell them at the current market price, then repurchase the shares once the price dips to a predetermined level.
In addition to short selling, the introduction of derivatives could be another strategy. Previously, short selling was prohibited, but recent amendments have permitted it. Unfortunately, in reality, the settlement system continues to impede its execution. Apart from market surveillance (implemented in 2012), all other regulatory functions within BSEC are still paper-based. Thus, it becomes imperative to adopt an advanced regulatory information system to oversee numerous functions such as accounting, company records, procurement, and payroll.
There is a pressing need for independent entities to oversee domains like mutual funds, Special Purpose Vehicles (SPV), and Asset-Backed Securities (ABS), given these are specialised fields requiring intensive due diligence and technical knowledge. In enabling a daily settlement cycle and discarding the T+1, T+2, and T+3 systems, we can pave the way for short selling and intra-day trading, practices widely employed in major exchanges globally.
The present inability of the BSEC’s registration department to assess and regulate the Central Counterparty (CCP) and its infrastructure is a substantial risk. The department lacks the expertise to evaluate CCP rules, operating procedures, and IT systems. Further, there is no definite framework in place for ongoing regulation of the CCP. The management of such regulation is likely to fall under the under-resourced Supervision and Regulation of Intermediaries Department (SRI), which unfortunately lacks the necessary knowledge and capacity.
With adequate instruments and reforms in place, Risk-Based Capital Adequacy (RBCA) rules can be integrated to ensure continual review of regulatory decisions and compliance enforcement across all sectors. However, it’s important to bear in mind that the items listed above hardly scratch the surface of the immeasurable promise that the Bangladeshi capital market currently offers while grappling with its existing challenges.
Inarguably, we cannot win the confidence of Foreign Portfolio Investors with dazzling roadshows if irrational policies like floor prices imposition persist, and are executed suddenly and sustained for unduly long periods. Is it our fate to continue suffering like Sisyphus in Tartarus or shall we be graced with mercy in the form of implemented critical market reforms in Bangladesh 2.0? This question persistently gnaws at the minds of the 32 lakh retail and institutional investors in Bangladesh, a quandary that remains unresolved.
The post Bangladesh Capital Market in Dire Need of Reform appeared first on Real News Now.
About Author
