Capital Market of Bangladesh

Capital Market of Bangladesh

Definition: Capital market is a mechanism to flow fund from the hands of small savers (individuals and institutions) at low costs to those entrepreneurs who do need fund to start business or to business. In the other words, capital market mechanism gives a part ownership of big companies/corporations to small savers like you and me. In simple term, it is a globally accepted scheme to share ownership of economic development with general public. History of capital market: Capital market started in USA at Wall Street in 1653. 1t came to Mumbai, the commercial capital ofIndia around 1890. However, investment in shares boomed in late 1970s. It took many years to come to the land, now comprising Bangladesh. The origin of stock market in Bangladesh goes back to April 28, 1954 when a stock exchange was formed under the name East Pakistan Stock Exchange Association at Narayanganj. Trading started in 1956. It was renamed East Pakistan Stock Exchange Ltd. Transferred to Dhaka in 1958 and again renamed Dhaka Stock Exchange Ltd in 1964. Trading remained suspended during the Liberation War in 1971. The Dhaka Stock Exchange resumed operation in 1976 with nine listed companies as against 452 today. Capital market in Bangladesh got momentum with the establishment of Securities and Exchange Commission in 1994. A big wing was added to the capital market with the incorporation of Chittagong Stock Exchange on April 1, 1995. Operation of CSE started on October 10, 1995. However, there was a market crash in November 1996. Thousands of investors lost their capital and ran away from the capital market. At that time there was trading floor at both the stock exchanges. It consists of CDBL (Central depository Bangladesh limited), the only central depository of Bangladesh that provides facilities for the settlement of transaction of dematerialized securities in CSE & DSE.

Asset Management Companies (AMC) are authorized to act as issue and portfolio manager of the mutual funds which are issued under SEC (Mutual Fund) Rules 2001. There are 15 AMCs in Bangladesh at present. Credit Rating Companies (CRCs) in Bangladesh are licensed under Credit Rating Companies Rules, 1996 and now, 5 CRCs have been accredited by SEC. Investment Corporation of Bangladesh (ICB) is a specialized capital market intermediary which was established in 1976 through the ordainment of The Investment Corporation of Bangladesh Ordinance 1976. This ordinance has empowered ICB to perform all types of capital market intermediation that fall under jurisdiction of SEC. ICB has three subsidiaries: 1. ICB Capital Management Ltd., 2. ICB Asset Management Company Ltd., 3. ICB Securities Trading Company Ltd
Trades were conducted through cry-out system. A high powered enquiry committee was constituted to investigate the cause of the market crash, to suggest remedial actions to avoid such crash in future. Cryout system of trading was replaced by automated trading system under LAN. Virtually capital market facilities are now expandable to all big cities. The CSE has offered internet trading facility to get excess even from outside the country. The DSE will operate the service soon. The Asian Development Bank granted aid to strength the SEC capacity to become a pro-active regulator and facilitator. Now, we are institutionally better equipped to become a vibrant capital market.

Vision: a) Regulating the market structure through proper rules and strict compliances by members. b) Expansion of CSE network to cover 504 thanas. c) Introducing derivative market .d) Continues promotion of stock investment throughout the country. e) Introducing book building system in Bangladesh capital market. f) Create opportunity to cross border trading with safe country. g)Introduce global depository receipt (GDR). Product of capital market: a) Shares, b) Debentures, c) Mutual funds, d) Bonds, e) Derivatives, f) Future and options.

Players of capital market: a) Investors, b) PLCs, c) Stock exchanges, d) Brokers and Dealers, e) Merchant banks, f) Securities and Exchange Commission, g) CDBL. Operation of capital market: Each and every step of capital market operation is regulated. Regulations may come from SEC, Stock Exchanges and CDBL under Securities Act. Parameters used to measure size of capital market: a) Number of listed companies, b) Number of securities, C) Size of market capitalization, d) Index, e) Daily trade volume, f) GSP ratio to market capitalization,

Efficiency indicators of capital market: a)PE multiple, b) Dividend yield, c) Liquidity, d) Visible presence of regulators, e) Exit route regulation for sick PLC. Automation, On-line trading, Safe, Securities Institute, International Seminar, Investors training etc. Future action plan for vibrant capital market in Bangladesh: a) Strengthen SEC, b) Capital Market Education: at school, college and university levels, c) Training of Directors of PLC, Regulator and Broker house officials etc, d) Certification system for certain level of officials, e) Introduction of new Products, f) Incentives for listing with Stock Exchange, g) New pricing mechanism for IPO, h) Appropriate fiscal measures, i) Fully automated settlement system, j) Separate bench at High Court. The Economist Intelligence Unit: The Economist Intelligence Unit is the world's foremost provider of country, industry and management analysis. Founded in 1946 the Economist Intelligence Unit of The Economist magazine is now a leading research and advisory firm with more than 40 offices worldwide. For nearly 60 years, the Economist Intelligence Unit has delivered vital business intelligence to influential decision-makers around the world. The Economist's international reach and unfettered independence make it the most trusted and valuable resource for international companies, financial institutions, universities and government agencies. Its mission is to provide executives with authoritative analysis and forecasts to make informed global decisions. Institutional investor: Institutional Investor is a leading international business-to-business publisher, focused primarily on international finance. It publishes magazines, newsletters and journals as well as research, directories, books and maps. It also runs conferences, seminars and training courses and, is a provider of electronic business information through its capital market databases and emerging markets information service. Conclusion: In today's world, if you rely on fundamental analysis, brokers advise, share price information, newspaper articles or business channels for your investing or trading decisions, you are asking for a

painful experience in the markets. Whether you are a first time investor, a seasoned pro, an "in and out" day trader or a long term investor the Dhaka Stock Exchange Ltd, Chittagong Stock Exchange Ltd, StockBangladesh.com and Securities and Exchange Commission will provide you with the necessary information you need for maximum profits and success in today's dynamic markets. The methods used to analyses securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better investor.

Capital market: structural problems & solution

The recent debacle on the stockmarket has outraged small investors and fuelled street agitation :
The recent performance of the capital markets in Bangladesh, notably from December 2010 till February of 2012, has been very poor compared with its performance over the last five years. The index fell from a high of around 8,900 points to 3,700 points, a drop of almost 40 percent in just one & three months. Bangladesh capital markets have been in the top three best performing markets in the world over the last 2008,2009,2010 years. However, its recent performance has

cast a big doubt about its future performance. It is a case of too much money chasing too few stocks. This correction in the market has been long overdue because there was too much money in the stock market in too few stocks. This inflationary pressure was finally controlled by the central bank by raising its cash reserve ratio (CRR) and statutory liquidity ratio (SLR) thus resulting in limiting the liquidity flow into the capital market. The interbank call money rate (DIBOR Dhaka Interbank Offer Rate) went up by 189 percent. One of the main reasons for this was that the domestic banks had too much of their money invested in the stock market, for quick and easy profit taking and as a result caused the stock market to rise even higher. So, to control the excess money in the capital market the central bank took these drastic measures, as it is within their right to do so, to control inflation. The problems of the capital markets in Bangladesh are structural, and, actually quite far-reaching than what meets the eye. As we all know, the capital markets here, notably the Dhaka Stock Exchange (DSE), is way overvalued due to, firstly, the DSE index calculations being incorrect. Secondly, there are big syndicates acting together to artificially influence the prices resulting in huge profits for them at the expense of the average investors who put in their hard earned lifetime savings. And last, but definitely not least, is the Securities and Exchange Commission (SEC) whose total policy and regulations favors the syndicates which primarily consists of high net worth people and the stock exchange members resulting in an artificial demand driven market. Until and unless these fundamental issues are addressed the capital markets here will fail to see the light of the day. So, if we look at the issues individually like the DSE Index, the syndicates, comprising of stock exchange members and the SEC we can find the common link, which is the stock exchanges and the SEC. So the question arises, what do we do about them? The answer is that rests with the question, which is to solve the problems at the two exchanges and the SEC and you will get a vibrant, dynamic and progressive capital market whereby all players involved starting from the stock exchange members and employees, firms wanting to raise capital. The SEC and most importantly the investors will enjoy the economic benefits because the markets will multiply enormously resulting in big profits for all trickling down to higher salaries, higher returns, dividends and more employment and capital market growth which in turn will attract more capital for our markets which in turn creates a virtuous cycle of wealth creation! The solution is actually twofold. Firstly, there needs to be structural changes in the capital markets and secondly, there needs to be more supply of good companies getting listed. Let's look at the structural changes first. What I mean by structural changes is, in essence, changes required at the DSE, CSE and the SEC. Let's look at the structural changes at the stock exchanges first which can be brought about through demutualization. Demutualization is the process of transformation from members associations into for-profit corporations. Stock exchanges across the globe have rethought their business strategy and model due to the simultaneous convergence of a number of powerful developments in order to find ways of how best to survive. And, in the process the exchanges have evolved towards new corporate, legal and business models to strengthen governance and face competition through the process of demutualization. Currently, the DSE and the CSE operate under a metalized structure. Under demutualization the mutual ownership structure will change to a share ownership structure. The process entails first converting memberships into shares, which may or may not be followed by a public issue. Ownership and trading privileges are effectively separated. Stockbrokers are no

longer owners but customers of the exchange. Directors are elected by shareholders and answerable to them. The reasons for demutualization are many but here are a few. First and most importantly, in the case of Bangladesh, it is of rationalized governance. The corporate model of the exchange under demutualised structure will enable management to take actions that are in the best interests of customers and the exchange itself. With the separation of ownership and trading privileges, an exchange will achieve greater independence from its members with respect to its regulatory functions. There will be the requisite degree of transparency. Demutualised exchanges will be forced to account to their shareholders regarding the bottom line as well as corporate governance. Secondly, there will be more investor participation. The new corporation will be more profit orientated due to shareholder accountability. Unlike a mutual structure where often only brokerdealers maybe members, a demutualised exchange afford both institutional and retail investors the opportunity to become shareholders. A demutualised exchange will have greater flexibility to accommodate the needs of institutional investors as customers, and potentially, as owners. Thirdly, it is the resources for capital investment. A competitive stock exchange must be able to respond quickly to global competitive forces and technological advances. With the capital raised from initial public offerings or private investment and a heightened awareness of accountability to stakeholders, a stock exchange should have both the incentive and the resources to invest in the competitiveness of its information systems. So to be competitive, products and services must not only be timely and cost effective, but also reliable. The second part of the structural changes needs to be at the SEC of Bangladesh. The fundamental issue here is: what is the regulator doing to help minimize risk for the investors? The absolute minimum the SEC can ensure is to have risk minimizing tools. As a first step they can introduce scrip netting facility, like financial netting currently allowed, which could be in the form of settlement of trades being T+0: T is for time and currently trades have a settlement period of T+3 which means that investors buying any stock will have to wait three days before he can sell out his position. Next, they can introduce short selling whereby the investors has the facility to short sell if he thinks the price of stocks would fall and then buyback. By introducing these facilities it will allow investors to minimize risk as and increase liquidity as well. The SEC should also have a good surveillance system in place to ensure fair play. The introduction of equity derivatives should also most definitely be taken into serious consideration to minimize risk, as there are no instruments to do so. Finally, the government of Bangladesh, who oversees the SEC, needs to ensure that the SEC as an organization is run by more professional and credible people who has sound knowledge of the capital markets and its mechanisms. If that means hiring professionals from local or abroad and paying them attractive salaries then be it. The second part of the solution is to have more companies being listed. This also applies to the government taking a dynamic approach in their privatization manifesto and deregulating the economy so more of the state owned enterprises can be brought to the market which in turn would benefit the exchequer from more revenues. Investors would then have a wider selection of stocks to choose from thus making the former state-owned enterprises accountable to shareholder pressure and making them perform better. Henceforth, we can see that, until and unless there are structural changes brought about in the capital market it will not grow. Artificially creating demand by pumping in more money in the capital market will only inflate the market temporarily before falling again. This will never solve

the underlying fundamental problems. Whereas, when you open up the capital market by addressing its structural problems and bring in new products and regulations the market will grow, become more dynamic as capital flow will increase thereby increasing profitability for all. Good examples of demutualised and highly profitable exchanges can be seen all over the world like the LSE, NASDAQ, NYSE, EURONEXT to name just a few. These exchanges have evolved to such an extent that now the exchange business and the financial markets are in trillions of dollars! So Bangladesh needs to wake up, as the benefits are enormous! Guide to invest in capital market:

According to group discussion, some investors and media topics that investors would prevails who are already in the Share Market as investors and those who want to invest in the share market. People from all strata are entering into the share/securities market irrespective of whether they are investors or new issuers. New Issuer Company and corresponding investors are the precondition for healthy growth of the share market. The numbers of new investors [Beneficiary Owner (BO) accounts] in Bangladesh are increasing day by day. Central Depository Bangladesh Limited (CDBL), Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) are relentlessly working to increase their capacity to meet the growing demand of the investors and the issuer companies. DSE and CSE members are opening their branches in different areas to cater for this growing demand. But their exists some miss matches of demand and supply, which concern every one related to this market. Especially the new comers, who are investing both in the secondary market as well as in the IPO (Initial public offer) through members' branches, located in Dhaka and also outside Dhaka. These new comers are subject to mistakes due to lack of proper knowledge, high expectations caused by rumors etc. The move to expand the market base was taken by DSE in early 2006 to bring its trading facilities to all districts of the country. In its first phase, Chittagong, Sylhet, Rajshshi and Barisal

were included as divisional priority and Bogra and Comilla as district level first target areas. Internet service provider's (ISP) limitation halted the expansion program to some extent otherwise this could grow much more. The Road Show to create awareness among the local and foreign investors in the capital market of Bangladesh should be continued. If the program could be conducted outside the country, it would attract more foreign and Bangladeshis working abroad. Hope that marginal new investors in the capital market will exceed 3-4 million in the lower middle class and raise the market-cap to 60% of the GDP. It will help government to raise fund from the capital market reducing borrowings from the banks. It will enable the banks to fund more to the business and also attract Non Resident Bangladeshis' (NRB's) remittances to the Share Market that could help reduce excessive pressure on the consumer market. This will create a well-balanced investment friendly environment by minimizing financial expenses for the entrepreneurs/ borrowers and reducing cost of fund to the bankers/lenders. This win -- win situation can only be possible from capital market. If this can be made possible, our future will be bright; we will be able to be a middle earning country soon. Our competitiveness in the world market will increase; we will be able to stand with pride. We have to believe that the capital market is the best vehicle to speed up growth of the country as in other nations. We need immediate action from the bourses to undertake regular awareness program to educate the new investors about the risk management, investment planning, portfolio management and other basic knowledge about shares and securities, company fundamentals etc. The way the share market is growing, we feel the good entrepreneurs are now having the best time to raise fund from the Securities market. Securities market provides both Equity and Debt. Equity is raised in the form of shares. Debt is raised in the form of Debenture, Preference share, Convertible Bond (convertible from bond to share) etc. Equity is raised against ownership i.e. profit and loss sharing basis and Debt is interest bearing which is always cheaper than bank borrowing rates. This money can be used as working capital. So if the fund can be used efficiently the financial cost can be reduced. Government can also raise fund for its nationalized factories by listing those in the bourses secondary market, trading of its shares or debentures. By using this instrument government can raise huge capital by giving attractive incentives to the general investors.

Supply of Securities is a real constraint in our economy. Both the bourses are trying relentlessly to encourage new issuers. It is actually the task of the Merchant Banks to work for bringing in new issues. SEC may liberalize its stringent regulations to bring more issues the market. The way banking, Insurance, Leasing, Telecom, Power etc. sectors are growing with the help of capital market others will gradually follow their path. We need not to run after rumor. We should now try to learn the commonly used terms in "share business": * P/E: Price Earnings Ratio-Closing price/ Earnings per share. * Book Closure/ Record Date: Name of registered shareholders on a particular day. * AGM: Annual General Meeting. * EGM: Extra Ordinary General Meeting. * Companies' Categories like as: - A = Regular AGM and minimum 10% dividend. - B = Regular AGM but dividend is less then 10%. - N = newly listed Companies. - Z = No regular AGM, no dividend. * Share holders' equity: Share capital+ Share money deposit+ Share premium + Reserve & * Surplus. * NAV/ Share (Net Asset Value): Share holders' equity/ No. of shares. * Cash dividend Yield (%): Cash dividend per share/Market value per share. * EPS (Earning per share): Net Profit After Tax/ Number of shares. * Market Capitalization: Closing price* Number of shares. * Reporting periods: a) Q1 = 1st Quarter, b) Hy = Half Yearly, c) Q3 = 3rd Quarter. We should also learn the reasons of Bullish and Bearish market? What means bubble, what risk is involved if it happens etc? What is the way to minimize your risk is also a very important thing to learn? Selection, of portfolios, collection of information and proper timing to buy and sell are the most important things to make gains in the capital market.

Share Traders should have proper education and training on the following among others: Classes of shares: The training should explain the various types and classes of shares, including the rights and privileges of a shareholder.
Viewpoint: investment, income & jobs

Monetary policy, capital market and inclusive growth of Bangladesh: Monetary policy can be both expansionary and contructionary. When the total supply of money is increase, its expansionary. And its aontructionary when cumulative money supply is decreased. An expansionary policy is usually adopted in a situation where there is unemployment during recession by lowering interest rates. Conversely, a contractionary policy is espoused to stabilized inflationary pressure through increased interest rates. Lately, we have been hearing about accommodative monetary policy in Bangladesh, focusing more on a balance between taming price spiral and supporting growth imperatives. Under such a policy, we see relatively quick shifts expansionary to contractionary measures and vice-versa, to fine-tune growth in an economy prone to inflationary pressures. The latest monetary policy statement (MPS) by Bangladesh bank (BB) for the period of January-June 2011, speaks that in the same time. Since its inception, monetary policy in Bangladesh was conducted with full direct control on interest rates and exchange rates, as also on the volumes and directions of credit flows.However, as of today, directed lending has been abolished and gradual liberalization of interest rates has taken place. Thus, interest rates have become market driven. Exchange rates have become floting with Bangladesh bank buying or selling currencies to keep liquidity at the desired level through we keep on hearing about manage float or moral-suasion and at frequent intervals. Bangladesh Bank's MPS for the second half of FY11 is focusing on continuous watch towards locating and neutralizing likely inflationary pressures from the growth-supportive monetary and credit policies, to the extent feasible, targeted to selected priority productive sectors. Deepening of financial inclusion of agriculture, small and medium enterprises (SMEs), renewable energy and ecological footprint are mentioned to remain as the priority sectors while BB continues to discourage expansion in lending for wasteful consumption and unproductive speculative investment. Monetary policy in a transition economy like Bangladesh should be able to draw a balance between inflationary pressure and investment growth, thereby creating jobs in a labor surplus economy. It is said, if we err, it is better to err with growth than inflation. An evolving economy needs growth acceleration, adequate inputs and wealth to support that growth. Bangladesh's major challenge is to invest more than its current rates, i.e. 24% of gross domestic product (GDP). The country saves nearly 35% of its GDP. With the incremental capital output ratio (ICOR) value of 4.0 to 4.5, Bangladesh has enough savings to generate 8.0 to 8.5% growth. An optimal level of foreign exchange reserve is necessary, which is roughly $5.5 billion if one considers the three month import payments as the yardstick. Bangladesh Bank seems to be panicked with inflationary pressure and huge credit growth in the unproductive sectors, while money is mostly being diverted to real estate and capital market. Credit growth has risen to 27% vis--vis against below 20% about a year ago with inflation inching up beyond 8.00%. Therefore, though Bangladesh Bank is talking about an accommodative monetary policy, in reality through mopping up the surplus by increasing the

CRR (Cash Reserve Ratio), it was rather following a contractionary policy. However, lately they are trying to sooth the market by releasing more money through repurchase agreement or REPO. They are having a tough time in differentiating between unproductive sector credit growth and normal credit growth. Though they are committed to protect the banking sector from the effects of any possible stock market crash, the overall susceptibility to the pressure from a popularly elected regime is not allowing them to be focused on execution. There is a big question, whether Bangladesh Bank has performed its due role while the capital market needed their help. Analysts say, despite a huge increase in money supply, inflationary pressure on food and non-food items, was not high, since most of the surplus money went into capital market. However, when they started to mop up the surplus, the market felt the pinch big time, liquidity dried out and market index came down from 8900 to 6300, pushing many retail investors to the street and the government policy planners bewildered. We were privy to a big debate -- whether Bangladesh Bank is responsible for ensuring real sector growth through monetary policy response or they should be much concerned about a temporary asset bubble or sudden burst in the capital market. Yes, there are 40 million plus bank account holders, numbers increasing with the opening of more farmers' accounts with the state owned banks to channel subsidy. Should the monetary watchdog then be too concerned to protect the interest of about 3.2 million beneficiary owners account (BO) holders in the stock brokerage houses, which is already heated up, warranting massive correction based on fundamentals? To keep the answer short and crispy- Bangladesh Bank is more responsible for real sector growth and at the same time, it needs to protect and help nourish country's banking sector. However, its actions so far warrant a 'soul searching'. While they came to know (though pretty late) that banks' exposure to the capital market went beyond the roof, they could have come up with a coordinated effort to gradually reduce the exposure to the optimum level. Instead, selling pressure by the large banks to adjust their position created a panic in the market, shaking the confidence. Bangladesh Bank somehow lent deaf ears to the Securities and Exchange Commission (SEC), on the latter's appeal for creating liquidity in the stock market. The right arm was not obviously talking to the left arm. The level of retail investors' engagement in the stock market -- too many people chasing too less stocks, unlike to the situation in any other similar countries -- may cause serious threat to the political or social security. Therefore any regulator, wanting to protect the regime, must lend helping hand in this regard. At least, do a 'deep dive' analysis and action in togetherness. However, an USD 50 billion capital market with 445 listed securities and that too being quite shallow, not depicting the real fundamentals, can't do much to create an inclusive society in Bangladesh and make growth more equitably distributed. It is rather contributing further to create an asset bubble in the economy and, at the same time accelerating the process of income inequality and regional disparity to a significant extent. In a labor surplus economy, we need more employment at home and also at abroad with an increasing rise in investments, both domestic and foreign. Only real sector investment makes this worth. We need to revamp labor regulations, improve agricultural technology and infrastructure, help lagging divisions beyond the metropolis Dhaka and regions to catch up and empower the poor through proactive policies that help them to participate in the market on fair and equitable terms.

We need coordinated efforts with clear visibility about the destination. Poverty can't be distributed. Therefore, we need wealth creation in the right streams of the economy