In a notable shift, the capital-market regulator in Bangladesh has ceased its past practice of proactively encouraging stakeholders to either invest in specific stocks or abstain from selling them. This significant transition, according to market participants, is the most perceptible positive change since Sheikh Hasina’s administration came to an end on August 5th of the prior year.
Those active in the spheres of merchant banking, brokering, and asset management have reported that the past year has witnessed additional favorable alterations. These include strides towards instating infrastructural modifications, which are designed to reduce the previously commonplace occurrences of corruption and undue influence on the market.
Furthermore, the initiative by the government to divest its shares from public sector enterprises and multinational corporations has been met with applause. Yet, one obstacle continues to obstruct the market’s prosperity – a dearth of valuable stocks that investors can confidently bank on.
According to numerous stakeholders, the Bangladesh Securities and Exchange Commission (BSEC) has been less than swift in its efforts to amend three crucial regulations pertaining to initial public offerings, margin loans, and mutual funds. These prospective changes are considered essential for attracting newcomers to the market.
The chief executive of a prominent asset-management firm estimates that there are a scanty ten or fewer stocks that would be sound investment options. In the past year, no companies have introduced an IPO, and market insiders do not predict any in the foreseeable future, at least for another six-month stretch. This, they assert, is due to the regulatory agency dissecting its listing regulations, a process which can be quite time-consuming.
The capital market in Bangladesh, unfortunately, does not mirror its real economy. Holding a market capitalization that is a mere 12-13% of the country’s GDP, it lags significantly behind its counterparts; India boasts over 100% market cap of its GDP, while developed markets exhibit a staggering 150-200%.
Notwithstanding the improvements in governance and the fortification of the crackdown on market manipulation, the scarcity of quality stocks and legal hurdles remain deterrents for institutional investors. Bangladesh’s economy, today valued at over $450 billion, is expected to cross the half a trillion dollar mark in the next two years.
However, the valuation of the Dhaka Stock Exchange, in a stark contrast, does not reflect this growth story. It stands at a mere $58.66 billion, which is approximately 12–13% of the country’s GDP. This ratio is incredibly low when compared to India’s 131% for companies listed domestically and Pakistan’s figure of around 20%.
A noteworthy point is that enterprises are leaning towards banking finance at higher costs, instead of raising funds via the capital market. They attribute this choice to stringent regulations and unfavorable stock pricing formulas that make the capital markets less attractive to them.
In contrast to developed nations where institutional investors have the liberty and are actively encouraged to make capital market investments, the legislation in Bangladesh works against such initiatives. Globally, pension funds and insurance companies are motivated to invest in the capital market. Sadly, in Bangladesh, the law discourages them, categorizing such investments as high risk.
Over the span of 2021 and 2022, the regulating commission has slapped fines surpassing Tk1,000 crore on almost two dozen companies found guilty of manipulating shares. The actual recovery of these fines was minimal by April, but market insiders still view this strict enforcement as a positive stride towards reinforcing market discipline and ensuring a fair playground for all.
This stringent response from the commission sends a potent message that the market will not tolerate manipulative practices, indicating that action will be taken against offenders. The repercussions of the hefty fines were palpable in the market, with particular groups known for their manipulative tendencies now lying dormant.
The economic stagnation and spike in the yields of treasury bonds, a repercussion of the disciplinary measures, resulted in a subsequent fund shortage in the capital market. An incessant sell-off pressure on stocks led to significant dips in the benchmark index and overall market capitalization. Despite these setbacks, the market has demonstrated signs of a recovery in the last month.
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