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Current stock market events and some suggestions

Abdul Hashem Khan
The stock market has perhaps been the most talked-about issue in recent months. Due mainly to some obvious reasons, different sections of people have been participating in the discussion on the subject and in most of the cases they are passing remarks without bothering about whether their comments are relevant or not. And our over-enthusiastic media merrily publicised those.
But by and large, we people, those who are somehow or other involved in the capital market have become the worst sufferers because of their irresponsible comments. The stock market in general and the investors of the Bangladesh share market in particular are not only sensitive but have become super-sensitive because of the recent unprecedented 'share market scam', mishandling of the situation by almost all concerned, and the knowledge gap especially of the small investors. Certain groups took advantage of these factors which led to the 'bleeding' in the stock market and the subsequent sufferings of the stock market investors.
There is no denial of the fact that among the stake holders, the investors are the worst sufferer of the "share market scam" and its after effects, which in fact is still going on.
Most of the recent pre-budget discussions prominently featured the "sky- rocketing" share market, its unusual fall, the probe report on the stock market scam, implementation of its recommendations and other related issues. This is also natural. But it is not understood how a civil society think tank like the Centre for Policy Dialogue (CPD) can suggest, among others, for requiring mandatory TIN for BO accounts, imposing capital gain tax and restricting investment of undisclosed money in the share market as measures to restrict speculative trading and avoiding further volatility in the capital market. I am sure they are so busy that they could not update themselves and were compelled to depend on last year's statistics. That is why the CPD is perhaps still suggesting to impose "disincentive(s) to avoid further volatility". Had they been aware of the havoc that occurred in the capital market, the DGEN Index having declined by more than 40 per cent and continuing to decline further, leading to further panic in the investors community compelling them to take the suicidal decision of selling shares at about half of the purchase price, probably the CPD and such other "opinion leaders" could hardly place such suggestions.
The suggestion for installing closed-circuit TV cameras in the DSE premises and introduction of identity cards for the investors obviously is a positive suggestion and will help to bring about market discipline. But the way it was declared and dramatised by the media has created further panic among the general investors. As the investors have burnt their fingers and have become super-sensitive, many of them are seriously looking for a scope to get out of the market. Any small issue that is apprehended to affect the market negatively, creates further panic and causes the investors to sell their shares to minimise their losses. We know that the correlation between news (information on share market, whether fact or rumour) and the market volatility is very high. The impacts of rumours are perhaps more. As an example, we can have a glimpse of the market scenario of a few days of the current month:
On May 12, Bangladesh Bank in a meeting with Association of Bankers mentioned among others that there is no liquidity crisis. The DGEN Index increased by 129.64 points. On May 13, there was news about the widely expected appointment of the new Chairman of the Securities and Exchange Commission and concern of the prime minister about share market. The DGEN Index again went up by 140.58 points. On May 16, the SEC Chairman joined. The market remained positive and the DGEN Index gained 3.0 points. On May 17, the DSE president addressed a press conference, but he failed to give any positive guidance towards regaining investors' confidence. The market started to decline. Again on May 22, news on introduction of compulsory ID cards for the investors, installation of CCTV, making TIN compulsory for BO accounts, were published in the newspapers which made the investors shakier and the index lost 205 points in one day. On May 23, the DSE and CSE leaders met the finance minister and gave their pre-budget suggestions without receiving any positive feedback specially about TIN, gain tax, etc. which made the investors further nervous. The market continued to bleed. And on May 24, the finance minister in parliament categorically said that no decision has been made to require the submission of TIN for BO account holders. He also stated that certain vested quarters are spreading rumours to destabilise the market. Subsequently, the National Board of Revenue (NBR) in the name of "bringing dynamism in the market" circulated a statement through the DSE and CSE that "the NBR has never taken any steps in the past or will not take any steps at present that goes against the interest of the investors…" The obvious effect was a rise of the index by 68 points.
I am not arguing that the reasons stated above are the only reasons for the present market conditions. Obviously, there might be many other variables affecting the index and the share market. But these are also remarkable and deserves due treatment for stabilization of the market. It is high time. Already we have lost time, energy and lots of money. If we look back, we can observe that during January 2010 the DGEN Index was 5367.11 points which rose to 6153.68 points in June 2010. The figure rose to above 8900 points in December 2010. Thereafter, it started losing ground and on May 23, 2011, it stood at 5376.30 points, i.e. a loss of 3524 points which is about 40 per cent and almost the same as it was in the month of January 2010.
The market capitalisation at the end of January 2010 was Tk 1813.48 billion which increased to Tk 2276.40 billion in June 2010 and to Tk 3065.19 billion at the end of December 2010. The figure came down to Tk 2002.02 billion on May 23, 2011 i.e. only Tk 188.54 billion above the figure of January 2010 and Tk 1063.17 billion below that of December 2010, whereas during that time a good number of new IPOs, and lots of right shares and bonus shares were added to the market, increasing the capitalisation. Are these (loss of index by 3524 points and shrinkage of market capitalization by Tk 1063.17 billion) not enough testimony of facts that the investors, especially the small investors, are the sufferer of these losses.
Blaming the stock market debacle, media reports have pointed fingers towards: inefficient SEC, powerful and motivated members-run stock exchanges; merchant banks and their omnibus accounts; syndicates; high-profile large investors; the liquidity crisis created because of the untimely tightening of the financial institutions and so on. Enough discussions, talk shows, reports, articles, seminars, symposiums, etc. have already taken place and finally by the good intention of the government authorities a full probe report covering many things, if not all, have been completed. Drawbacks, flaws and reasons of the debacle have since been identified. There are conclusive decisions on restructuring of the SEC, redesigning of the book-building method and many such issues. All concerned are also of the opinion that for the sake of revitalising the capital market and at the same time for salvaging the poor investors all stakeholders should join together and give their best concerted efforts to do the needful. Short medium and long term plans have been chalked out. A fund has been arranged and placed under the ICB.
But nothing is turning out to be fruitful. So what to do? The most important factor will be to regain the investors' confidence. The finance minister's statement in parliament followed by the NBR's clarification proved that the recent news published in the media about gain tax, TIN, etc. are rumours spread by vested quarters. But these rumours have caused a lot of damage.
Therefore, the concerned authorities can take immediate measures to restrain the media from publishing any share market related news without having due authentication and based only on speculation, violation of which should be punishable.
The government has already initiated necessary steps for restructuring the SEC. The plans and programmes in this regard should be well-circulated which will help restore the investors' confidence.
Many people are talking about the 'demutualization' of the stock exchanges. As if it is the omnipotent. Let us wait for it. But for the time being, would it not be possible to initiate some immediate actions like placing an administrator (as was once thought), separating the supervision and compliance part? Surely, it will have a good and immediate positive impact on the investors' confidence.
Omnibus accounts of the merchant banks are a serious concern and should be looked into. But at this crucial juncture, should it not be wise to equip them with necessary regulation to avoid 'force sale' which is there only as a statement from different corners. But it is related to financial matter and has legal as well as pecuniary interest. So without any legal backing for the merchant banks, it would not be possible for them to restrain from 'force sale', if it is necessary.
Syndicates are not at all desirable. But it is known to everybody that without the 'big investors' market will not be so vibrant. So long the actual wrongdoers have not been identified clearly all will remain shaky.
As far as the liquidity crisis is concerned, although the Bangladesh Bank is repeatedly assuring that there is no such crisis, but increasing rate of interest, withdrawal of upper cap on interest, credit squeeze, failure of some banks to bring their advance deposit ratio to the prescribed rate, etc. indicates otherwise. Given the present situation, the stringent policy of keeping investment at 10 per cent of liabilities may be reviewed. Section 26(2) of the Banking Company Act is a very old one when Bank's capital was very small (Tk100 million without public issue and Tk.200 million with public issue). But by this time, the capital base of the banks has increased considerably. Besides, at one stage the authorities were thinking to reset this with capital. In India, banks are allowed to invest 40 per cent of their capital. Nevertheless, it is the demand of the time to reset the ratio and for the sake of time it could be done by SRO.
Finally, the potentiality of the small investors needs to be counted. They are not only the investors but also the 'small savers'. Had it been possible to keep them properly motivated and help them investing in both the primary and secondary markets, if necessary by creating new rules, like proposed IPO investment without BO account, sacrificing BO maintenance fee, creating enough scope to invest in IPO by bringing more than 100 prospective companies awaiting for public floatation, etc., these 3.4 million investors (which may increase if favourable atmosphere is created) can help reduce the liquidity shortage at least to a certain extent.
The writer is Managing Director of Hallmark Securities Ltd. The opinions expressed in the article are his own. He can be reached at email : ahk15@hotmail.com

Source: Financial Express (29 May 2011).