1.

1 Introduction

The development of capital market has been receiving heightened attenti on from the
policy-makers in recent years. One explanation lies in the fundamental shift of
development strategy reflected in the nearly universal embrace of the private sector as an
engine of economic growth. The governments in both developed and developi ng
countries, the international financial institutions which exert tremendous influence on the
policy-making apparatus of developing countries and, to a great extent, the intelligentsia
have all joined together as ardent advocates of private entrepreneurship. Capital market
can play an important role in accelerating economic development through efficient
intermediation of savings into productive investments and in fostering the growth of
private entrepreneurship.

IDLC Finance Ltd, a leading financial institution of the country achieved significant
growth in all areas of business in the year ended, 2008. IDLC began its operation in 1985
as the first leasing company in Bangladesh. In 1995, I DLC was licensed as a Financial
Institution by the country's central bank and during the last two decades, the company has
grown in tandem with the country's growing economy

The company's wide array of products and services range from retail products, such as
home and car loans, corporate and SME products including lease and term loans,
structured finance services ranging from syndications to capital restructuring and capital
market services.

The company also strengthened its presence in the country's growi ng stock market with
launching a subsidiary-IDLC Securities Limited-which is offering full-fledged brokerage
service for retail and institutional clients,

IDLC Securities Limited bagged the 9th position in January, 2007and 6th position in
December, 2007 among the most active members of Dhaka Stock Exchange (DSE).

1
1.2 Origin of the Report
Since practical orientation is an integral part of the BBA degree requirement, I was
deputed by the Department of Finance, University of Dhaka to IDLC Securities
Limited to take real life exposure of the activities of the organization as a financial
institution.

I was assigned in the Documentation Division of IDLC Securities Limited. As IDLC

Securities Limited is a well known Brokerage House, I have decided to work in the field of
Brokerage house operations.

This report has been originated as the course requirement of the BBA program. I hope the
report will give a clear idea about the activities and role of IDLC Securities Limited and
the present condition, prospect & future of the capital market.

1.3 Objectives of the Report

The main objective of the study is to get a definite idea about how brokerage houses
operates and what function it does i.e. opening BO account, trading, settlement,
accounting procedure etc. Also its presence and contribution in the capital market,
prospect of the capital market etc are some other objectives. Further more, the
orientation is very useful to detect whether the theoretical knowledge matches with real
life scenario or not. Though the title Present & Prospect of Capital Market and the role of
"

Brokerage House: A study on IDLC Securities Limited very lengthy area, the specific
"

objectives are as follows:

1. To know the overall activities of the Brokerage house.

2. To know how BO account is maintained.

3. To learn about the whole Trading process of IDLC Securities Limited.

4. To know the decision making process of the organization.
5. To know the present situation & growth of the capital market
6. To know about the probable benefits of derivatives, future & forwa rd market.

2
1.4 Scope of the Report
I am very fortunate that I could work in various departments of the organization thereby I
gathered knowledge about the overall activities of the company. I have had an
opportunity to gather experience by working in the different desks of the branch. The
area of concentration of this report is confined in investigating different aspects of the
capital market transactions, problems, prospects. The report also covers the functions
performed by the brokerage house, rules and regulations related to it, procedure,
monitoring, various analysis related to this particular arena etc.

1.5 Methodology of th e study

Analysis has been made on the basis of the objectives mentioned before in the context
of “Present & Prospect of Capital Market and the role of Brokerage House: A study
on IDLC Securities Limited”

The paper will be written on the basis of informat ion collected from primary and
secondary sources.

( i) Pr i ma r y Da t a ; Discussion with the respective organization's officials.

( i i) For the completion of the present study, secondary data has been collected. The
main sources of secondary data are:

 Annual Report of IDLC Finance Limited.

 Website of IDLC Finance Limited.
 Securities & Exchange Commission website.

 Rules and regulations provided by SEC.

 Data from published reports of SEC, DSE
 Different Books, Journals, Periodicals, News Papers etc.

3
1.6 Limitations of the study
To make a report various aspects and experience are needed. But I have faced some
barriers for making a complete and perfect report. These barriers or limitations, which
hinder my work, are as follows:

 Difficulty in accessing data of its internal operations.

 Non-Availability of some preceding and latest data.

 Some information was withheld to retain the confidentiality of the

organization.
 I was placed for only 3 months of time & working like a regular employee
hindered the opportunity to put the effort for the study. The time span was not
sufficient enough to learn all the activities of the organization properly.
Therefore, it was very difficult to carry out the whole analysis.

4
The Company

5
2.1 IDLC Finance Limited

IDLC Finance Ltd commenced its journey, in 1985, as the first leasing company of the
country with multinational collaboration and the lead sponsorship of the International
Finance Corporation (IFC) of The World Bank Group. Technical assis tance was provided
by Korea Development Leasing Corporation (KDLC), the largest leasing company of the
Republic of South Korea.

IDLC, which has now emerged as Bangladesh’s leading multi -product financial
institution, has amongst its external share-holders, international development agencies
such as the Aga Khan Fund for Economic Development (AKFED) and German
Investment and Development Company (DEG) besides the IFC. The other foreign
sponsors include Kookmin Bank of the Republic of Korea in addition to KDLC and, all
these institutions together hold 45% of the Company's shares.

Three Bangladeshi financial institutions - IPDC of Bangladesh Limited, The City Bank
Limited, Sadharan Bima Corporation and the general public hold the remaining
55% of the shareholding in this public limited company listed with the Dhaka
Stock Exchange. IDLC is on the list of the twenty largest capitalized companies in the
country.

The unique institutional shareholding structure comprising mostly of financial

institutions helps the company to constantly develop through sharing of experience and
professional approach at the highest policy making level.

IDLC offers a diverse array of financial services and solutions to institutional and
individual clients to meet their diverse and unique requirements. The product offerings
include Lease Finance, Term Finance, Real Estate Finance, Short Term Finance,
Corporate Finance, Merchant Banking, Term Deposit Schemes, Debentures and
Corporate Advisory Services.

IDLC Finance Limited’s vision is to be Bangladesh’s best financial institution. In

achieving this vision and goal, we realize the importance of taking due care of all of
our constituents, particularly the share-holders, customers and workforce. The corporate

6
philosophy is to perform with proper accountability and achieve highest ethical standards
in all our activities.

IDLC’s unique institutional shareholding structure, compromising mostly of financial

institutions, helps the company to constantly develop through sharing of experience and
professional approach at the highest policy making level. The company has authorized
capital of Taka 1,000,000,000 (10,000,000 shares of Taka 100 each) and paid up capital
of Taka 150,000,000 (1,500,000 ordinary shares of Taka 100 each). IDLC has also
established two wholly owned subsidiaries, IDLC Securities Limited and I, Cons Limited
to provide customers with security brokerage solutions and IT solutions, respectively.

2.2 The Sponsors

7
2.3 Shareholding Structure
IDLC was incorporated in the year 1985 as a joint venture public limited company among
five foreign and three local financial institutions. Now the foreign sponsors hold 30%
of its share and domestic sponsors and general public hold the rest. A list of shareholders
is provided here.

Table: Shareholding structure of IDLC as of the year end 2008

8
2.4 Company Chronicle

9
2.5 Guiding Principles
IDLC is a multi-product financial institution offering an array of diverse financial
services and solutions to institutional and individual clients to meet their diverse and
unique requirements. Following are the guiding principles that shape the organizational
practice of IDLC

Customer first: IDLC has grown with its customers, who are believed to be the center
of all actions. As the crux of IDLC’s corporate philosophy, custom er service gets the
highest priority.

Innovation: IDLC has continuously introduced new financial products for meeting the
needs of the entrepreneurs in a complex & challenging business environment. The
concept of innovation is in-built into the working culture.

Professional Knowledge: IDLC is staffed with qualified professionals and innovative

minds in the country. Years of operational experience, large industrial database and
competent workforce have gives them unparalleled advantages.

Professional ethics: The professional at IDLC maintain the highest degree of financial
and business ethics in all transactions with the clients. Over the last two decades, IDLC
have put in bets efforts to meet the expectations of the clients and investors.

One stop solution: Work at IDLC begins with the idea generation, then goes on into the
feasibility study followed by arrangement of financing to implement the project. IDLC
advises the clients, finance them and even arrange financing for them via different
financing modes, namely: lease financing, term loan, bridge loan, syndication, bridge
loan, syndication, ordinary shares, preferred shares and debentures.

Vision:

Become the best performing and most innovative financial solutions provider in
the country.

Mission:

Create maximum possible values for all the stakeholders by adhering to the highest
ethical standards -

10
For the Shareholders: Maximize shareholders’ wealth through a sustained return on
the investment.

For the employees: Provide job satisfaction by making IDLC a center of excellence with
opportunity of career development.

For the society: Contribute to the well-being of the society, in general, by acting as a
responsible corporate citizen.

Goal:

Long term maximization of Stakeholders’ value

Corporate Philosophy:

Discharge the functions with proper accountability for all actions and results and bind
to the highest ethical standards

2.6 Organogram

11
2.7 Products and Services

Name of Product Line Product Name

Structured Financing Syndication

Advisory Services
Merger and Acquisition
Securitization
Local Enterprise Investment Center

Real Estate Financing Real Estate Finance

Home Loan

Lease Financing

Short Term Financing Factoring of Accounts Receivable

Work Order Finance
Deposit Schemes Cumulative Term Deposit
Annual Profit Term Deposit
Monthly Earner Deposit
Double Money Deposit
Inter Corporate Deposit

Merchant Banking Services Issue Management

Underwriting
Private Placement
Portfolio Management
Trusteeship Management
Bridge Loan Financing
Personal Loan
Car Loan
Personal Loan
SME Loan

Securities Services

12
IDLC Securities Limited
A Subsidiary of IDLC Finance limited

13
3.1 Company & Its Activities

3.1.1 Legal status

IDLC Securities was incorporated as a private limited company in Bangladesh under The
Companies Act 1994 on April 19, 2006 vides registration No. C -61319 (3328)/06. The
company started its operation from September 18, 2006.

3.1.2 Nature of business activities

The Company is a securities company and a member of Dhaka Stock Exchange Limited
(Membership No. 58) and Chittagong Stock Exchange (Membership No. 119) and in
engaged in brokerage in the capital market.

3.1.3 Operation of business

The head office of IDLC Securities Limited is situated in Dilkusha C/A, Dhaka. On
December 3, 2007 it inaugurates Its Chittagong Branch in Agrabad C/A, on December 18
IDLC Securities Limited opened another branch in Mohakhali DOHS.

3.2 Services

3.2.1 Brokerage Services

 Trade Execution (Dhaka and Chittagong Stock Exchange Limited).

 Pre-IPO Private Placement opportunities through IDLC Finance Limited (Merchant

Banking Division).
 Opportunities for trading of client’s portfolio account maintained with IDLC
Merchant Banking division.

 Appointment of dedicated and skilled sales representative exclusively for client

dealings.

 Asset allocation advice.

 Opportunities for trading in different financial instruments.

14
3.2.2 Research Services

 Free access to company research reports through the web -site.

 Customized research recommendation.

 Sectors and Company research reports.

 Half yearly political and economic update.

3.2.3 Safe keeping of securities

 IDLCSL has an exclusive arrangement for clients to keep their shares in

the vault. The brand new vault is well protected.

 The Company is capable to verify and register client’s securities in

his name or in the name of client’s portfolio account at a mini mum of
cost.

3.2.4 CDBL Services as full service Depository Participant (DP)

 BO (Beneficial Owner) accounts opening and maintenance.

 Dematerialization (The process of conversion of physical Script to

Script less to the CDBL part of the Company register.)
 Re-materialization

 Freeze (freeze request and release request) and suspensions

 Transfers and multiple accounts movement

 Pledging, Un-pledging and confiscation

 Lending and borrowing

 Corporate events announcement Inquiry (Cash and Non Cash)
 BO ISIN balances and master maintenance inquiry

15
3.3 Significant Accounting policies

3.3.1 Basis of accounting

The accounts are prepared & maintained under the historical cost convention on a going
concern basis and in accordance with Companies Act, 1994 and Bangladesh Accounting
Standards (BAS)

3.3.2 Revenue recognition

Revenue is recognized based on share transactions amount which comprises of brokerage
commissions, service charges, transaction fees and custody fees and capital gain. In case
of interest on bank accounts and fixed deposit, revenue is recognized as the interest
accrues unless collectibles is in doubt.

3.3.3 Taxation
Under the Income Tax Ordinance1984, IDLC Securities Ltd. is subject to tax on income
derived from share transaction amount of its trading activities. Provision for income tax
has been calculated on the other income of the country. The company’s trading in come is
subject to deduction of tax at source on brokerage commission as final settlement.

3.3.4 Depreciation & Amortization

Depreciation is charged on fixed as set on a straight line method at the rates varying from
12.50% to 33.33% in order to write them off over their useful economic life. Intangible
assets are amortized over a period of three years.

16
3.4 Brokerage manual

3.4.1 Beneficiary Account (BO) Opening

IDLC Securities Limited allows clients to register accounts in a variety of ways:

 Trading and BO Account – (Individual) The account is registered to one person

who is the sole owner of the assets in the account.
 Trading and BO Account – (Joint) Two or more individuals own the
account equally. If one registrant expires, his or her share of the assets in the
account is owned by the decedent’s estate.
 NRB Trading and BO Account The account is registered to the
Bangladeshi citizen who resides outside of Bangladesh.
 Institutional Trading and BO Account – (Corporate) This account is
registered under the name of an institution and all assets are owned by this
institution as well. .
 Institutional Trading and BO Account – (Partnership) The account is
registered in the name of a partnership company/institution.
 Institutional Trading and BO Account – (Trust) A trust is registered in the
name of an established legal trust, either an individual trust or a corporate
profit sharing trust with a third party.

3.4.1.1Procedures
An investor should submit the following documents duly signed and filled:

1. Trading Account Form.

2. Beneficiary Owner (BO) Account Form.
3. Trading and BO Account Nominee Form, (if any).
4. Terms and Condition for opening a Trading Account.
5. Terms and Condition for BO Account – Bye Laws 7.3.3(c).

An investor may appoint an authorized person for operating his/her trading account and
also may provide Power of Attorney to an eligible individual for Beneficiary Owner (BO)
account operation.

17
3.4.1.2Documents required opening Trading/BO Account.

Individual

For Individual/Joint

1. Two copies of passport size photograph of the account holder(s). Signature of the
applicants must be furnished at the back side of the photograph.
2. Passport size photograph of the Nominee(s) - (if any)
3. Passport size photograph of authorized person/ power of attorney.
4. Name, client code & signature of the introducer.
5. Photocopy of Passport/ Voter ID / Driving license / Nationality certificate /
TIN No./ Employers certificate of the account holder.
6. Bank certificate containing name of the applicant, father & mother name,
bank account number.
For Non Resident Bangladeshis

1. Two copies of passport size photograph of the account holder(s). Signature of the
applicants must be furnished at the back side of the photograph.
2. Passport size photograph of authorized person/ power of attorney.
3. Name, client code & signature of the introducer.
4. Photocopy of Passport of account holder (valid)
5. Service agreement with the employer/Work permit/ Residence Permit/Trade
License/valid work visa.
6. Foreign Currencies Bank Account Statement containing name of the
applicant, father & mother name, bank account number.
7. Salary statement/Tax pay slip

Bangladeshi NRB
Individual/Joint Individual/Joint
Non Refundable 500/- 500/-
Advance BO Renewal Fee 300/- 300/-
Total 800/- 800/-

18
Institution

For Local Institution/Partnership/Trust

1. Board Resolution regarding opening brokerage and BO account.

2. Memorandum and Articles of Association

3. Trade License (valid)

4. Certificate of Incorporation and Commencement of Business/trustee deed
5. TIN Certificate, if any

6. List of authorized signatories to operate the account with photograph(s).

Signature of the applicants must be furnished at the back side of the photograph.
7. Bank certificate containing name of the applicant, bank account number.

For Foreign Institutions

1. Memorandum &Article of association

2. Tax Clearance Certificate
3. Certificate of incorporation
4. Trade license.
5. Foreign Currency bank certificate containing name of the applicant & bank
account no.
6. Custodian bank with beneficiary owner account.
7. Resolution of authorized representative.

Trading and BO account opening charges and fees for both Bangladeshi and foreign
clients:

Bangladeshi Foreign
Institution Institution
Non Refundable 500/- 1000/-
Advance BO Renewal Fee 300/- 300/-
Total 800/- 1300/-

19
The respective officer must follow these procedures to open a Trading/BO account:

 Obtain completed and duly signed and filled Trading and BO

Application Form from the client(s).

 Inform the Settlement Department Upon the opening of the

account when there is atrade order immediately.
 Write the account number on the top of the application form when
the account is opened.

 An authorized supervisor must sign the application form before formally

opening the account.

3.4.1.3 Related policies

 Both Individual and Institution will be eligible to open Trading/BO account.

 An individual Client will be eligible to open a maximum of two

accounts – one single account and another joint account with other
eligible individual.

 Institution will be eligible to open only one single account.

3.4.2 Trading

3.4.2.1 Buy/sale Order Book & Register

Securities Exchange rules 1987, 4 (1)

1. A buy/sell order form is to be maintained through which all clients shall

place their transactions order. This form is to be signed by the clients. No
order shall be entered in the Brokers workstations without written order
form. [This clause is extremely important as the main risk of a brokerage
house is involved with it and any misunderstanding regarding the order
shall be verified with this document.]

2. All these orders should be chronologically recorded in a register

mentioning the name and address of the client, the name and number of
20
 the securities to be bought or sold, the nature of transaction and the
limitation, if any, as to the price of securities.

3. No sell order to shares shall be entered without holding the shares by the
Broker or having the shares in the Broker clearing account (in case of
CDBL traded issues). CDBL regulations require the shares intended to be
sold out be transferred from the BO account of the client to the clearing
account of the Broker.

4. No buy order shall be entered with out having positive balance (Credit
balance) with the broker excepting a margin Agreement for credit facility.
[In case the accumulated purchase amount exceeds the credit balance of a
particular client, excess amount should be deposited with the broker
on t he same day]

3.4.2.2 Telephonic / E-mail / Fax Order

Securities Exchange rules 1987, 4 (1)

1. A telephonic order of buy or sell given by a customer may also be

accepted if:
a. The customer has an established account with the member.

b. The order is properly recorded and signed by the member or his

Authorized representative.

c. Written order of confirmation is obtained by the member within 24

hours

2. A buy or sell order by fax or E-mail may also be acceptable. These

orders shall be numbered and time-stamped at the time of receipt thereof
and entered in chronological order in a register, which states the name
and address of the persons who placed the order, the name and number
of the securities to be bought or sold, the type of order

21
3.4.2.3 Trade Confirmation Report
Securities Exchange rules 1987, 4 (5)

1. A member executing an order of buy or sell of a customer shall within 24

hours of the execution of the order, transmit to the customer a
confirmation note.

2. Such Confirmation Note shall include the following information, namely

 Order execution date.
 Name and number of the securities
 Nature of transaction (spot, ready and bought or sold)
 Share price
 Commission
 Whether the order is executed from the members own account
of from the market
3. Duplicates or counterfoils of confirmation note shall be preserved with
the signature of the customer.

3.4.3 Settlement process

3.4.3.1 Procedures

The settlement date is the day on which either the payment to cover purchases or the
securities to cover sales must be in the company’s account. When the clients
purchase/buys a security, payment must reach IDLC Securities Limited account before
execution of trade. When the client sells a security, the share certificates must be
delivered to IDLC Securities Limited be fore trade execution.

22
3.4.3.2 Clearing & Settlement
1. Shares and money are settled with the clearing & settlement department of the
exchange according to the category of the company. For ‘A’ category shares,
money and shares are to be settled on T+1 (Transaction Date + One Days) and
cleared on T+3 (Transaction date + Three Days). For ‘B’ and ‘G’ same rule
applies.
2. In case of shares in ‘Z’ category shares and money shall be deposited on T+4 and
cleared on T+7.
3. CDBL traded issues are settled on within T+2. only ‘A’ category share are
eligible to become as demat form. (except Shine Pukur)

3.4.4 Payment policies

IDLC Securities Limited prefer that the client makes payment before the execution of a
buy order or delivers share certificates before the execution of a sell order.

3.4.4.1 Payment against purchase

Account payee Cheques for payments on purchase of securities must be made payable to
IDLC Securities Limited.

3.4.4.2 Acceptable Forms of Payment

The following are considered acceptable forms of payment:

 Client’s personal Cheque (A/C Payee)

 Corporate Cheque
 Bank Draft
 Pay order

23
3.4.4.3 Unacceptable Forms of Payment
The following must not be accepted as payment:

 Travelers Cheque
 Money Order

 Cash

 IDLC Securities Ltd Executive’s personal or business cheque

 Cheques drawn on foreign bank

 Cheques once returned by the bank for insufficient funds or any other
reason will not be entertained by IDLC Securities.
 Credit Cards

3.4.4.4Balance payment
Procedures

1. Obtaining written requisition form duly signed by the client(s ).

3. Signature verification
4. Verification of matured balance
5. Cheques signed by authorized signature of IDLC Securities Ltd.
Related policies

1. All payments shall be made through A/CPayee Cheque.

2. No Cash or Cash Cheques shall be provided to the client(s)

3.4.4.5 Expenses, Commission & Fees

Client expenses

There are two types of charges borne by the client:

(i) CDBL

(II) Brokerage Commission

24
A. Commission Schedules

Commissions are incurred with every buy/sell transaction by an IDLC Securities Limited
Brokerage Account.

B. General Securities

The Account Executive should use the following two-step process to calculate brokerage
commissions:

1. Determine the commission based on the schedule.

2. Add procurement charge (if any) to commission.

Basic brokerage:

Amount of trade commission rate

0.40%

CDBL Charges At Actual

Note: Commission might change subject to negotiation with the client.

3.4.5 Others

Share receiving Procedure: All Share has to be received with a duly filled
prescribed received bill.

Share delivery Procedure: All Shares has to be delivered according to the prescribed
procedure by the regulatory. A share Received Bill will be kept by the brokerage company.

25
Physical Share receiving for demats purpose: Client has to duly fill up the
prescribed demat from provided by the DP. After completion of necessary formalities
by the DP, the client will have to physically deposit this share within 3 days of setup.

Account Closing Form: After formally Requesting the DP/Brokerage to close an account,
theclient will have to submit the A/C closing form duly signed & verified.

Pledging/Unpledging Procedure : A written application will be required followed

by duly signed & filled prescribed from both by the client and Institution.

Share Transfer Procedure: A written for warding with the procedure duly filled &
signed CDBL prescribed Form.

Share receiving through Link A/C: After receiving the shares thorough link A/C, the
concerned officer will perform formalities and receive the report generated the
following day. The concerned officer will then import the shares and export it to the
customer A/c.

Sponsor share sell/buy Procedure: Execution will only have done after disclosure
of the information by the client through the stock exchange.

Foreign client sell/buy Procedure:

Customer A/C Operation: Consolidated customer a/c will only be used for
customer’s receivable and payable purposes and DSE/CSE payable and receivable purposes.
Every month end the company can take out the commission income from the Consumer
A/c and transfer it to General A/C for day to day expenses.

26
Compliance authority: Chief Executive Officer shall act as the compliance authority
of I.S.L

Proper control over Trader Limit Facilities: The Authorized traders trading limit will
be bounced by the server setup. However with an approved permission by the concerned
authority, the trader may increase/decrease his/her limit.

Net Capital Balance: The accounts of the company will create a net Capital balance as
per the requirement of D.S.E

Time Limit of Purchased Share for Selling: In case of physical share purchase, the
client will have to withdraw share within four months from purchase date for the purpose
of Name Transfer. And discrepancies found on the certificates, the client have to inform
the brokerage company within 150 days from purchase date. Facility to do so, the brokerage
will not take any liabilities for any losses caused by fake/ claimed and type of error
shares.

27
Key concern regarding
Brokerage Operation

28
4.1 Screen Based Trading System

It is an advanced trading system over the “Cry out Market”. Now Bangladesh has started
this type of trading system. In this system the shares are dematerialized that means we do
not have any paper share certificate. Now every share is reserve in the centr al depository.
Central depository is a system where every share is record as digital and they are also
traded digitally. The way bank record all the transaction of its client depository also
record his client’s every transaction electronically. And the own er ship also transacted
digitally. The depository maintains an account of the share investor which is called the
BO account.

4.2 Settlement Period

The Settlement day means the day on which transactions that were carried out by the
Members on a trading day are settled by them through delivery of securities and/or
Cheque/pay order/demand draft to the clearing house of DSE. If in case, a settlement day
or clearance day falls on any holiday, the next day following the holiday shall be the
settlement or clearance day.

The Trading day means the specific day on which transactions are carried out by the
Members in DSE (i.e. T+0). On the Clearing Day the Clearing house delivers securities
and makes payment by account payee Cheque issued to a member in respect of the
transaction carried out on each trading day on the some day subsequent to the settlement
day.

For A, B and G instruments

Market name Settlement Period

Public T+3
Spot T+1
Block +Odd T+3

29
For Z instruments

Market name Settlement Period

Public T+7
Spot T+1
Block +Odd T+7

4.3 Safeguards a shareholder have for his investment

Apart from the normal risks involved in the ups and downs of the market, a share holder
in a listed company has the protection of a well organized market, the DSE, CSE and the
Securities and Exchange Commission (SEC) a statutory body responsible for ensuring an
orderly market and protecting the interest of investors, among other things.

4.4 CDBL

Central Depository Bangladesh Limited (CDBL), a joint venture company setup by

banks, stock exchange, Asian Development Bank and other institutions operates the
Central Depository System (CDS) in Bangladesh. CDBL, by converting physical
certificates into electronic form, will eliminate the risks of damaged, lost, forged and
duplicate share certificates. The Dhaka Stock Exchange has become a full depository
Participant (DP) of CDBL to facilitate the trading of its non -DP members. CDBL is
regulated by the Securities and Exchange Commission (SEC)

4.4.1 Operation of CDBL

 The investor opens a depository account with a participant or CDBL.

 The issuer updates the register and moves the holding to the depository portion
of the register.
 The investor sells on a stock exchange through a stock broker and another
investor buys.

30
  The stock exchange advises CDBL to update its records. Investors may
rematerialize if they wish
 CDBL debits the sellers account and credits the buyers account.

4.4.2 Organizations participant in CDBL

Stock brokers/dealers (members of the Dhaka and Chittagong Stock Exchanges); Banks;
Financial institutions; Insurance companies; A statutory organization; Merchant bankers;
Asset managers; Custodians; and Other capital market intermediaries registered with the
SEC.

4.4.3 CDBL Eligible Companies

CDBL agree with issuers when their securities are to be made eligible and The Securities
And Exchange Commission (SEC) publishes this information to the market. Once a listed
security has been declared an eligible security by the SEC such then securities that are
traded on an exchange:

 Must be in an account in the depository before they may be sold;

 Will be added to an account in the depository after they have been bought

4.5 TESA

4.5.1 Structural design of TESA

DSE trading function is operating by the help of TESA (The Electronic Securities
Architecture).It is a trading software which is based on HP proprietary O/S & DBMS.
TESA software is built for the global securities markets. It uses fault tolerant computers,
intelligent workstations and client / server design techniques. This provides co -operative
processing, high message integrity, continuous operation and fully automatic recovery.

31
This co-operative mechanism enables very high speed processing which is essential for
today’s electronic markets, especially for DSE. TESA has two parts: MSA (Member’s
Server Application) & TWS (Trader workstation).MSA is the “Gateway” between the
traders and the Stock Exchange, which manages all the transactions and database
operations between the traders and the Trading Engine. TWS is the Front -end
Application closer to investors, where they can submit Buy/Sell orders for their desired
securities

4.5.2 Advantages at TESA

The TESA application suite derives significant advantag es from being implemented on
the HP Nonstop platform. The HP NonStop customers have benefited from these
advantages.

Fault Tolerance: One of the most important automation requirements for any stock
exchange system is continuous system availability. With most systems Fault Tolerance is
created at the application level. Fault Tolerance is a fundamental design feature of the HP
Non Stop architecture.

Data Integrity: Data integrity is an integral feature of HP architecture. TESA employs

standard HP tools to achieve exceptional data integrity.

Scalability: The ability of an exchange to accommodate extraordinary increases in

transaction volumes without loss of its Capital investment in automation is very
important. The HP Nonstop Server is massively scalable due to Parallel processors

32
4.5.3 Principal functions of TESA

 Market Information Supplying all market information is needed to formulate

:

the buy and sell decisions.

 Order Management: Accept, validate and store orders and quotes from
broker workstations and / or systems
 Order Execution: Automatically executes orders when buy and sell prices
match.
 Trade Reporting: Trade execution reports are provided to each trade
participant, to the settlement system and / or the depository and to the market.
 Index calculation: Calculates and publishes market indices (DSE General Index &
Weighted Average Index.
 Market Access: Provide exchange members with efficient affordable GUI -
based tools for accessing the market

4.5.4 Trading

Dhaka stock exchange utilizes the blending trading system where both the pure auction
market and the dealer market work collectively. Actually the pure auction market
dominate the dealer market as public basically prefer and feel comfortable dealing with
the pure auction market in first hand in trading system. However, people go for dealer
market when, trading in dealer market is much more comfortable to utilize the trading
system compared to only exercise pure auction market. Nevertheless, note that, when
pure auction market and dealer market is in same cost to trade, then people definitely go
for the pure auction market as its more comfortable toward public.

33
4.5.5 Trading Sessions
TESA conducts trading in-5-phases:

 Enquiry: In this session Brokers can logon to the system. No order will be
submitted in this session. No trade will be executed. Only previous orders can be
withdrawn in this session.
 Opening: The Opening is a pure, single-price auction. All buy and all sell
orders are compared and calculate the open-adjust price. No trades will be
executed in this session
 Continuous Trading: During this phase, participants enter orders and immediate
execution or for inclusion in the book. Automatic matching and exec ution
takes place based on best price/ first in, first out trading rules.
 Closing: Closing prices are calculated and disseminated to market
participants
 Enquiry: Market will be closed in this session & other facilities like the previous
enquiry session

4.5.6 Types of transactions:

Orders may be grouped or categorized based on the following, namely: -

(a) Price; (b) Volume; and (c) Validity.

Based on price orders may be of the following categories, namely: -

,

(a) Limit order and (b) Market order

Based on volume orders may be of the following categories, namely :-

,

(a) Partial fill which signifies that as much possible of the order quantity shall be
executed as soon as the order is submitted to the trading engine.
(b) Partial fill and kill signifies that as much as possible of the order quantity shall be
executed as soon as the order is submitted and the remaining order quantity shall be
returned to the trader who entered the order.

34
(c) Full fill or kill signifies that either all of the orders quantity shall be executed as soon
as the order is submitted to the trading engine or the entire order shall be rejected and
returned to the trader.

Based on validity orders may be of the following categories, namely:-

,

(a) Good till day - By default, all orders shall be valid till the end of the current trading
day.
(b) Good till date - The trader can specify the date till which the order should remain
active in the market. The order validity date can be a date which is up to a maximum of
thirty days from the current trading day.

4.5.7 Matching of order

All orders with price equal to or better than the opening price will match automatically.
Orders which are at the most favorable price, that is, at the lowest selling or highest
buying price, shall be executed first. If two or more orders are listed in the order book at
the same price, the oldest order shall be executed first.

4.5.8 Queue priority

Orders that cannot immediately be executed shall be queued for future execution in a
specific order of priority mainly based on price and time of entry. In case an order is
executed partly, the remaining part of such order shall not lose its priority. The queue
priority shall be determined by the system through an interactive process and the order of
priority displayed by the system of conclusive.

35
PEST Analysis & SWOT
Analysis

36
5.1 An overview of PEST Analysis

PEST analysis stands for "Political, Economic, Social, and Technological analysis" and
describes a framework of macro environmental factors used in environmental scanning.
It is a part of the external analysis when doing market research and gives a certain
overview of the different macro environmental factors that the company has to
take into consideration. It is a useful strategic tool for understanding market growth or
decline, business position, potential and direction for operations.

The PEST factors combined with external micro environmental factors can be
classified as opportunities and threats in a SWOT analysis. PEST/PESTLE alongside
SWOT and can be used as a basis for the analysis of business and environmental factors.

It is also referred to as the STEP, STEEP, PESTE, PESTEL, PESTLE (or Political,
Economic, Socio-cultural, Technological, Legal, Environmental). Recently it was even
further extended to STEEPLE and STEEPLED, including education and demographics.

5.2 PEST Analysis

Political, Environmental, Social, Technological, Legal, and Economical analysis are very
important before measuring any organization’s performance. To evaluate the position of
IDLC in the industry, it is essential to know where and in what situation this institution is
performing its operations. Following factors are discussed to show their effect on IDLC
and on this industry of Bangladesh as a whole.

5.2.1 Political Factors:

Political factors include areas such as tax policy, employment laws, environmental
regulations, trade restrictions and tariffs and political stability. Political environment was
always unstable and it always affects every aspect of life of this developing country. Due

37
to political turmoil since October 2006 the share market behaves inconsistently. During
this period, DSE general index reached into record maximum point and also fallen to
record minimum point. 26th November, 2007 DSE GEN reached 3071 point increasing
127 in a single day while 3rd December it fallen to 2873 decreasing 93 points single day
lose. This indicates lack of confidence among investors and uncertainty in the capital
market. But after the 1/11 incident the political scenario changed dramatically.

5.2.2 Economic Factors:

Economic factors are economic growth, interest rates, exchange rates and inflation rate.
Economic forces are the factors that affect the consumer buying power and spend ing
patterns. Despite political turmoil Bangladesh saw a record GDP growth rate of 6.7% in
fiscal year 2005-06. At the same time export oriented manufacturing, the industrial sector
rose by 10.47% and the foreign exchange reserves achieved a new high of US $ 3.9
billion at the end of 2006. However due to massive seasonal flood and cyclone SIDR
attack, the projected growth for the fiscal year 2007 -2008 will be tough to achieve.
Beside this high inflationary pressure led by hike in price of essentials, fuel, o il, power
shortage, uncertainty in politics, reduced RMG export will worsen the situation.

5.2.3 Social Factors:

Social factors often look at the cultural aspects and include health consciousness,
population growth rate, age distribution, career attitudes and emphasis on safety. These
are the forces related to society’s basic values, perceptions, preferences and behavior.
People grow up in a particular society that shapes their basic belief and beha vior pattern.
These forces affect the survival and success of every industry of the given society. For
the record of share market points, experts claims the investors’ mindset and lack of
knowledge. Thus brokerage house industry heavily influenced by social factors.

38
5.2.4 Technological Factors:

Technological factors include ecological and environmental aspects and can determine
barriers to entry, minimum efficient production level and influence outsourcing decisions.
Technological factors look at elements such as R&D activity, automation, technology
incentives and the rate of technological change.

It is a common saying that today’s world is a world of technology and only those will
survive who can be up-to-date with the technology. Technological forces are those that
create new advancement, create innovative products and market opportunities. To
operate in the share market every broker house must be connected to TESA (The
Electronic Securities Architecture), the trading software of DSE. The principle function
of TESA includes Market Information, Order Management, Order Execution, Trade
Reporting, Index calculation, and Market Access. It runs 24 hrs in a day & 365 days in a
year.

5.3 An overview of SWOT Analysis

It has always been important for a business to know and understand how it fits in and
interacts with the surrounding environment on both an internal (office/factory/shop
environment) and external view (how the business operates with the out side world).

Researching the environment will benefit the organization and/or management team by
putting in a position to develop a strategy for both the long and short term.

5.3.1 Analyzing the Business

The most influential way of doing this is to perform a SWOT analysis of the company.
It is a common phrase used to abbreviate Strengths, Weaknesses, Opportunities and
Threats.

39
Each term is a heading for a separate analysis of the business but they can be
related.
It is important to know that the SWOT analysis is only based upon information that is
known by the assessors (you), and is seen as perhaps the more basic approach of
analyzing a business’ position: but SWOT is still a powerful tool when looking for
immediate benefits.

5.3.2 Performing SWOT

Recognizing the Strengths and Weaknesses before tackling the Opportunities and Threats
is the best way to approach the analysis: the more Strengths and Opportunities the better
they can both be seen as the bigger influences for the success of your company. One need
to be aware that the most important rule is not to leave anything out no matter how small
the issue may be.

There is no fixed way of doing a SWOT analysis, but it should be done in a way that one
feel most comfortable with, and more importantly that you understand it. The objective is
to be in a position where the company can determine a strategy for the future to improve
company’s overall performance

40
5.4 SWOT Analysis of IDLC Securities Limited Ltd.

5.4.1 Strengths

Strong Corporate Identity

IDLC Finance Limited is the leading provider of financial services in Bangladesh. As
IDLC Securities Limited is a subsidiary of this organization, with its strong corporate
image and identity it can better position in the minds of customers. This image has helped
the company to grab the market share very rapidly. IDLC Securities Limited bagged the
9th position in January (2007) and 6th position in December (2007) among the most
active members of Dhaka Stock Exchange (DSE).

Well-built Employee Bonding

IDLC Securities Limited employees are one of the major assets of the company. The
employees have a strong sense of commitment towards organization and also feel proud
and a sense of belonging towards the company. The strong organizational culture of the
company is the main reason behind this strength

Professional Performance
IDLC Securities Limited provides hassle free customer service to its client base
comparing to the other brokerage houses of Bangladesh. The client service is excellent in
this regard.

Empowered Work compel

The human resource of IDLC Securities Limited is extremely well thought & perfectly
managed. As from the very first the top management believed in empowered employees,
where they refused to put their fingers in every part of the pie. This empowered
environment makes IDLC Securities Limited a better place for employees. The
employees are not suffocated with the authority but they are able to grow as the
organization matures.

41
Strict adherence to compliance standard
The organization abides by all the rules and regulations provided by the regulatory
bodies. It has proven reputation in serving Customers by maintaining strong compliance
practices and presence in the market. This strict adherence to compliance standard is an
excellent strength for the company.

Modern Equipment & Technology

IDLC Securities Limited owns the state of the art information technology in Bangladesh
regarding operating brokerage services. Its ultramodern system starting from terminal
PCs to HUB are based on international Standards. IT infrastructure is well equipped and
managed which is also maintained with high level of professionalism.

5.4.2 Weaknesses

More Innovative services must be offered

In order to be more competitive in the market IDLC Securities Limited should come up
with more new & attractive packages & services

Low paid up capital

The paid up capital of the company is relatively low. For widening the operating network
& services more capital is required. In the long run this might turn out to be negative
issue.

Not offering margin loan to clients

Institutional brokerage houses can extend substantial margin loan to their client with a
minimum cost, for example Dhaka bank, Al Arafah Bank etc. IDLC Securities Limited
due to its low paid up capital can not extend margin loan.

Limited no. of trading machines

The present number of trading machine are limited in a sense that when the market will
grow the company might face problem with this limited no of trading machines to
cooperate.

42
5.4.3 Opportunities

Countrywide network

IDLC Finance Limited has a good network of branches in the country. By utilizing the
parent company’s expanding operation & widening network IDLC Securities Limited
might increase its profitability as well as tapping the market & secure its existence in the
long run.

Huge Market
The capital market in Bangladesh has tremendous potentials. The size of the market is
still small compared to the size of GDP. People as a whole had a misconception about the
capital market. But gradually we are finding signs of maturity. The market capital will go
up rapidly with the entrance of Titas, Grameen Phone etc. This is a great opportunity for
the company to actively participate in the market.

Government & Regulatory Body’s initiative for market growth

Policymakers are gradually taking the securities market as one of the most important
factors for development. Entrepreneurs’ mindset is also changing day by day. Govt.
initiatives in capital market investment in our country made it attractive to the general
people to invest. Such as introducing book-building system to ensure IPO fair price,
tightening listing rules to bring more companies to capital market Here IDLC Securities
limited has a large opportunity to tap the growing market.

Weak marketing message by other organizations

The basic assumption of the trade business is that customer will come to the organization
and ask for service that is why brokerage houses are not that much enthusiastic about
letting know their services features. This is an opportunity for IDLC Securities Limited..

43
5.4.4 Threats

Upcoming Brokerage Houses

The upcoming brokerage houses posses a serious threat to the existing networks of IDLC
Securities Limited. With the new entrance the intensity of competition will rise further
and the company will have to develop strategies to compete against the threat.

Rivalry of Existing Competitors on commission & others

A larger number of brokerage service provider increase rivalry because they are
competing for the same customers and resources. The rivalry intensifies if the companies
have similar market share, leading to a struggle for market leadership. Competition
among the existing service providers in the area of commission, earnings and extending
various facilities are also present.

Similar services are offered by other Banks & Financial Institution

Now day’s different private banks are also offering similar type of services with an
almost similar profit margin. So, if all competitors fight with the same weapon, the
natural result is declining profit.

Industrial downward trend due to recession, inflation & political

instability
Bangladesh is economically unstable country. Due to political instability our economy
faces a huge challenge. This creates a downward pressure in all sectors of business.

44
Performance Analysis of
IDLC Securities Limited

45
6.1 IDLC Securities Limited- BO account opening Information

May 2007 May 2008

Individual 19 36
Institution 848 1842

40 2000
35
30 1500
25
20 1000
15
500
10
50 0
May, May, May, May,
2007 2008 2007 2008

6.2 Financial Statement analysis of IDLC Securities Limited.

Year 2007 2008

Current Assets 351,509,228 511,044,663

Current Liability 282,083,555 307,690,767

Operating Income 68,711,273 199,684,901

Fixed Assets 11,913,662 16,839,938

EBIT 54,738,752 155,531,545
Net Profit after tax
49,321,454 151,294,513

Operating Expense 11,586,570 30,084,849

Gross Profit 54,738,752 169,600,052

Total Assets 363,422,890 546,718,963

Cash & cash equivalents 172,013,393 332,439,525

46
 70
60
50
40
2007
30
2008

20
10
0
OperatingNet profit
Income after tax

400
350
300
250

200 2007
2008
150
100
50
0
Total Asset Current Current
Asset Liability
Various devices are used in the analysis of financial statement data to bring out the
comparative and relative significance of the financial information presented. These
devices include
1. Comparative analysis
2. Percentage (Common size) analysis
3. Ratio analysis

47
6.2.1 Comparative analysis

In Comparative analysis the same information is presented for two or more different
dates or periods so that like items may be compared. In Comparative analysis an
investment analyst can concentrate on a given item and determine whether it appears to
be growing or diminishing year by year and the proportion of such change to related
items.

6.2.2 Percentage (Common size) analysis

Percentage analysis consists of reducing a series of related amounts to a series of

percentages of a given vase. All items in an income statement are frequently expressed
as a percentage of sales or sometimes as a percentage of cost of good sold. This analysis
facilitates comparison and is helpful in evaluating the r4elative size of items or the
relative changes in items. It may facilitate comparison between companies of different
sizes. Analyst can use this analysis to evaluate and compare companies.

6.2.3 Ratio analysis

Ratio analysis involves methods of calculating and interpreting financial ratios to assess
the firm’s performance. Ratio analysis of a firm’s financial statements is of interest to
shareholders, creditors and firm’s own management. Ratio analysis is the starting point
in developing the information desired by the analyst. Ratio analysis provides only a
single snapshot, the analysis being for one given point or period in time. In ratio
analysis it is possible to compare the company ratio with a standard one. Ratio analysis
can be classified as follows:

1. Liquidity ratio
2. Activity ratio
3. Profitability ratio
5. Owner’s Ratio

48
6.2.3.1 Liquidity

A firm's ability to pay its debts can be measured partly through the use of liquidity ratios.
A firm should ensure that it does not suffer from lack of liquidity and also that it is not
too much highly liquid. Short term liquidity involves the relationship between current
assets and current liabilities. If a firm has sufficient net working capital (the excess of
current assets over current liabilities), it is deemed to have sufficient liq uidity. There are
some ratios that are commonly used to measure liquidity directly, they are:

1. Current ratio
2. Cash ratio

Current Ratio

The current ratio is a ratio of the firm's total current assets to its total current liabilities.
The current ratio is computed by dividing current assets by current Liabilities. Current
asset normally includes cash, sundry debtors, inventory, marketable securities, and
current liability consists of Sundry creditors, short -term loans and advance current
liabilities and provision for taxes and other accrued expenses. The ratio is generally an
acceptable measure of short term creditors are covered by assets that are likely to be
converted into cash in a period corresponding to the maturity of the claims.

A low ratio is an indicator that a firm may not be able to pay its future bills on time,
particularly if conditions change, causing a slowdown in cash collections. A high ratio
may indicate an excessive amount of current assets and management's failure to utilize
the firm's resources properly.

49
Current Ratio = Current assets /Current liabilities

1.5

1 Year 2007 2008

Current 1.25 times 1.81 time
0.5
Ratio
0
2008 2007

Analysis
The current ratio of IDLC Securities Ltd has decreased. As the business is in a growing
stage the liability is getting more. Analyzing current asset we see that all of the
components has increased in 2008.

Cash Ratio
The cash ratio is the most traditional assess of analyzing liquidity position. Generally we
meet our current liability with our current asset but the use of either the current or quick
ratio is not good enough to analyze the liquidity position of the firm because it consists of
account receivable and inventory, which takes time to convert with ca sh. That’s why it is
really important to look how much cash the firm has in hand or at Bank to meet its
current liability and the cash ratio gives a better result.

Cash Ratio = Cash / Current Liabilities

1.8
1.6
1.4
1.2
1
0.8 Year 2007 2008
0.6
0.4
0.2
Cash Ratio .609 times 1.75 times
0
2008 2007

50
Analysis
The cash ratio of IDLC Securities Ltd has decreased. As the business is in an emergent
stage the liability is getting more. Analyzing cash and cash equivalents we see that all of
the components have increased in 2008

6.2.3.2 Activity

Activity ratios reflect the firm’s efficiently in utilizing its assets. The funds of creditors
and owners are invested in various kinds of assets to generate sales and profits. The better
the management of assets, the larger the amount of sales. These ratios are also called
Turnover Ratios because they indicate the speed with which assets are being converted or
turned over into sales. A proper balance between assets and sales generally reflects that
the assets are managed well. There are some ratios under these criteria. They are as
follows:
1. Fixed Asset Turnover
2. Total Asset turnover

Fixed asset turnover

A similar measure of usage, but one, which concentrates on the productive capacity, as
measured by fixed assets, indicates how successful the company is in generating sales
from fixed assets. It measures how efficiently the companies are using fixed asset i n
generating sales.
Fixed asset turnover = Operating Income / Net fixed asset

6
Year 2008 2007
5
Fixed Asset 6.18 times 2.11 times
4 turnover

3 2007 2008

51
Analysis
From the analysis we see that the turn over has increased rapidly. By this analysis we can
say that management has able to use fixed asset efficiently.

Total asset turnover

Total assets turnover indicates how well a company has used its fixed and current assets
to generate sales. It is the most asset measure ratio. Such ratio is probably most useful as
an indication of trends over of years. There is no particular value, which is too high or too
low, but a sudden change would prompt the observer to ask questions. In these criteria a
high ratio means the company is achieving more profit.

Total asset turnover = Operating Income/ Total asset

0.18
0.16
0.14
0.12
Year 2008 2007
0.1
0.08
0.06
Total Asset .18 times .057 times
0.04
turnover
0.02
0
2007 2008

Analysis
Total asset turnover also increases sharply. This increase has happened because the
operating income has increased at a higher rate than the rate of increase in total asset.

6.2.3.3 Profitability

There are many measures of profitability, which relate the returns of the firm to its sales,
assets, or equity. As a group, these measures allo w the analyst to evaluate the firm’s
earnings with respect to a given level of sales, a certain level of assets, or the owners’
investment. Without profits, a firm could not attract outside capital. Moreover, present

52
owners and creditors would become concerned about the company’s future and attempt to
recover their funds. Owners, Creditors, and management pay close attention to boosting
profits due to the great importance placed on earnings in the marketplace.

The profitability ratios are:

1. Gross profit margin

2. Net profit margin
3. Return on total asset (ROA)

Gross profit margin

The gross profit margin measures the percentage of each sales amount remaining after the
firm has paid for its goods. It may be used as an indicator of the production operation and
the relation between production cost and selling price. The gross profit ma rgin is
calculated as follows:

Gross Profit Margin = Gross Profit / Operating Income

80
70
60
50 Year 2008 2007
40
30 Gross Profit 79 % 33 %
20
10 Margin
0
2007 2008

Analysis
The gross profit margin has increased in 2008 compare with 2007. There is an inclining
tendency in the gross profit margin as well as the gross profit.

53
Net profit margin
The net profit margin measures the percentage of each sales remaining after all costs and
expenses including interest and taxes deducted. The higher firm’s net profit margins the
better. The net profit margin is calculated as follows:

Net Profit Margin = Net profit after tax / Operating Income

80
70
60
50 Year 2008 2007
40
30 Net Profit 72 % 20 %
20
10 Margin
0
2007 2008

Analysis
As the amount of gross profit has increased in 2008 compare to 2007, the net profit
margin also increases.

Return on total asset (ROA)

Calculating the return on total assets is another variation on measuring how well the
assets of the business are used to generate profit Return on total assets also called return
on investment. It measures the overall effectiveness of management to generate profit
with its assets. It could be measures as follows:
Return on Total Assets = Net profits after taxes / total asset s

14
12
10
8
6 Year 2008 2007
4
2 ROA 13.49 % 1.3 %
0
2007 2008

54
Analysis
Net profit increases from 2007 significantly. As a result it has positive affect in the return
on assets ratio.

6.2.3.4 Ownership ratios

Ownership ratios assist the stockholder in analyzing present and future investment in a
company. Stockholders are interested in the way certain variables affect the value of their
holdings. The ratios compare the value of the inves tment with factors such as debt,
dividends, earnings, and the market price of the stock. By understanding the profitability
and liquidity ratios, the owner gains insights into the soundness of the firm's business
activities. Dividend ratio is used under this norm.

Dividend Ratios
The common stockholder is very concerned about the position taken by firm with respect
to the payment of cash dividends. If the firm is paying insufficient dividends, the stock is
not attractive to investors desiring some current income their investment. If it pays
excessive dividends, it may not be retaining adequate funds to finance future growth. To
pay consistent and adequate dividends, the firm must be liquid and profitable.

Dividend per share = Dividend / No of Outstanding Shares

25

20

15

10 Year 2008 2007

5
DPS 25 Taka -
0
2007 2008

Analysis
The company started to pay dividend in 2008 which is a Cash dividend of 25%

55
Regulatory Body & Markets

56
7.1 Securities and Exchange Commission
The level of development of the capital market is an indicator of the state of development
of an economy. To achieve private sector-led growth objective, it is necessary to make
capital market more efficient. As a capital market watchdog, the Securities an d Exchange
Commission (SEC) of Bangladesh was formed on June 8, 1993 under the 'Securities and
Exchange Commission Act,1993'. The principal responsibilities of the SEC include
ensuring proper issuance of securities, safeguarding the interest of investors i n the stock
exchange, controlling the stock market and development of the capital market. The SEC
has also a mandate to protect the interest of investors in order to speed up the
industrialization process, and to this end, new measures are underway to strengthen the
role and capability of the SEC. Currently, two stock exchanges are operating in
Bangladesh: Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Both
the stock exchanges are autonomous non-profit organizations.

7.2 Dhaka Stock Exchange

Incorporated as East Pakistan Stock Exchange Association Ltd. : 28th April 1954
Start of Formal Trading : 1956
Renamed as East Pakistan Stock Exchange Ltd. : 23rd June 1962
Renamed as Dacca Stock Exchange Ltd. : 13th May 1964
Trading Suspended under new State Policy : 16th December 1971
Trading Resumed in Bangladesh : 16 August 1976
Starting Of All Share price Index calculation : 16th September 1986
Share price Indices calculation on basis of IFC Designed formula : 1 st November 1993
Starting of Automated trading : 10th August 1998
Starting Of DSE-20 Index calculation : January 2001
Starting Of DSE General Index calculation : 27th November 2001
Start of CDS through CDBL : 24th January 2004
DSE All share price Index (DSI) re introduced : 28th March 2005

57
The number of securities (including mutual fund and debentures) listed with the DSE
increased to 325 by June 2007 from 303 of June 2006. By the end of June 2007, the
issued capital of listed securities stood at Tk. 16427.90 crore, which is 91.64 percent
higher than that of June 2006.

Trading Operation in Dhaka Stock Exchange

Calendar No. of Initial Issued Market Turnover Price

year/ listed Public capital capitalisation (in index(b)
monthend securities(a) Offering (in crore (in crore crore Tk.)
Tk.) Tk.)

1996 205 24 2305.24 16810.62 3013.30 2300.15

1997 222 12 2820.78 7130.16 1740.34 756.78
1998 228 6 2862.57 5025.40 3436.84 540.22
1999 232 11 2877.46 4478.12 3896.44 487.77
2000 241 7 3119.20 6292.40 4036.48 642.68
2001 249 11 3345.43 6522.28 3986.83 817.79
2002 260 8 3520.30 7126.20 3498.49 822.34
2003 267 14 4605.50 9758.70 1915.21 967.88
2004 256 2 4953.20 22492.30 5318.11 1971.31
2005 286 22 7031.30 23307.50 6483.48 1275.05
2006 310 12 11843.70 32336.80 6506.93 1321.39
2007 325 - 16427.90 47585.50 3091.01 1764.18
(June)
Source: Dhaka Stock Exchange
(a) Including mutual fund and debenture
(b) All share price index is calculated on weighted average method since November 24, 2001. Since December 9, 2003 all share
price index is calculated on general share price index (excluding 'Z' group) by withdrawing weighted average method. The
index base earlier was 100 for DSE.

7.3 Chittagong Stock Exchange

The number of securities listed with the CSE reached 219 as of June 2007 from 213 as of
June2006. By the end of June 2007, the issued capital of listed securities stood at Tk.
8103.29 crore,which is 29.59 percent higher compared to that at the end of June 2006.
As of June 2007, market capitalisation of securities reached Tk. 39849.90 crore. General
shareprice index of the CSE reached 5194.77 as on June 2007, which was 2879.19 on
June 30, 2006.

58
Trading Operation in Chittagong Stock Exchange

Calendar No. of IPOb capital Market Turnover Price

year/ listed Issued (in crore Capitalisation (in crore index(c)
monthend securities Tk.) (in crore Tk.) Tk.)

1996 117 16 1872.60 14704.30 608.90 1157.90

1997 141 19 2276.14 5283.23 854.51 332.98
1998 150 6 2418.03 4138.25 1403.60 232.80
1999 159 9 2508.09 3654.24 1153.79 197.83
2000 165 3 2726.60 5776.55 1293.38 1412.25
2001 177 9 2965.27 5636.35 1479.62 1836.87
2002 185 9 3107.99 6046.77 1358.61 1841.14
2003 199 10 4196.76 8531.23 668.86 1642.78
2004 195 3 4697.87 21501.08 1755.13 3597.70
2005 210 16 5551.93 21994.28 1404.27 3378.68
2006 213 6 6937.84 27051.07 1589.31 3724.39
2007 219 - 8103.29 39849.90 522.28 5194.77
(June)
Source: Chittagong Stock Exchange
(a) Including mutual fund & debenture
(b) Within the calendar year.
(c) All share price index is calculated on weighted average method since 24 November, 2001. The index base was 1000 for CSE
from the year 2000. The index base earlier was 100 for DSE. Since December 9, 2003 all share price index is calculated on
general share price index (excluding 'Z' group) by withdrawing weighted average method.

59
PresentScenarioofCapital
Market

60
8.1 Present Scenario of Capital Market

Both Dhaka and Chittagong stock exchanges experienced a meteoric rise between July
and November 1996. Average daily turnover increased by over 1000 per cent. The share
price index of DSE jumped from 957 on 2 July 1996 to a record high of 3649 on 5
November in 1996. In CSE also the index rose dramatically from 411 on 2 July 1996 to
1417 on 2 November 1996. Then, started a process of catastrophic crash, particularly in
DSE, with the index falling to 3065 in DSE by 30 Nov ember 1996. The index
continued a downhill march thereafter with the lowest level recorded at 463 on 3 May
1999.
Since then the capital market in Bangladesh had been in a state of doldrums. However,
the market has been showing unmistakable signs of resurgence from early 2004.

8.2 A bird's eye view of the recent past

As already noted, the potential contribution of capital market in financing development is

yet to be realized in Bangladesh. This is evidenced by the fact that market
capitalization as a proportion of gross domestic product (GDP) is of the order of 15 per cent
of GDP. In contrast, the relevant orders of magnitude in India, Pakistan and Sri
Lanka are respectively 166 per cent, 48 per cent and 25 per cent. Given the size of
population of Bangladesh and steady growth of its GDP exceeding 6 per cent over the
past years, considerable unrealized opportunities exist for utilizing the capital market as a
vehicle for raising long term investment finance. The recent developments clearly suggest
strongly positive developments in this regard.

61
Relevant data in support of positive developments are presented in table. Data for DSE
only are used in this paper because it is a much larger exchange than CSE and the
developments in the latter closely parallel those in the former. It will, be noted that the
number of listed companies increase to 350 in 2007. The Securities and Exchange
Commission (SEC) has given consent to initial public offering (IPO) for 14 companies. A
few more are in the pipe line. The general index and market capitalization have both
increased substantially over the past two years. In 2006 the market capital was US $ 4.67
billion, where as in 2007 with an incredible growth of 135% it became US $ 10.82
billion. It is expected that this market capital will be doubled by the end of 2008 as many
SOEs including sugar plantations and textile mills will be denationalized and the entrance
of telecom sector in the market.

Perhaps, even more remarkable is the rise in turnover which indicates resurgence of
vitality of the capital market. Bangladesh has outperformed most other stock markets of
the region in terms of change in index. Furthermore, this notable gain has been achieved
while maintaining a significant degree of stability.

62
Years 2005 2006 2007 2008 2009

Listed Issues

No. of Securities 286 310 350 412 443

% of Annual Growth 11.72 8.39 12.9 17.71 7.52
No. of Securities in mn 1244.14 1546.05 2081.00 2759.00 3136.00
% of Annual Growth 4.68 24.27 21.83 32.58 13.66
Issued Capital & Debentures
-Tk. mn 70,313.00 118437 214472 372156 457944
-US$ mn 1,062.77 1711.52 3127.33 5409.24 6634.95
% of Annual Growth 41.95 68.44 81.09 73.52 23.05

Market Capitalization

-Tk. mn 233,075.12 323367.94 742195.87 1059530 1312773

-US$ mn 3,522.90 4672.95 10822.34 15400 19020.18
% of Annual Growth 3.62 38.74 135.28 42.76 23.90
Conversion Rate 66.16 69.2 68.58 68.80 69.02
Turnover of Listed Securities
Total Turnover
Volume in mn 883.3 797.77 2831.23 4605.38 3480.54
Value (Tk. mn) 64,835.28 65079.11 322867.07 667964.82 565038.22
Value (US$ mn) 979.98 1099.3 4707.89 9708.79 8186.59
% of Annual Growth 21.91 0.38 396.11 106.89 -15.41

63
In the primary market the scenario was not as better as the secondary market. Market
received poor response from the private sector companies on issuing IPOs in 2009 in
which year stock market achieved phenomenal growth in terms of transaction and stock
prices. A total of 14 companies entered the country’s capital market issuing initial pu blic
offerings in 2009.

The companies floated IPOs worth some Tk 492.39 crore in the year. Regulators and
analysts termed the number of IPOs insignificant and expressed discontent over the
reluctance of private companies to enter into the country’s capi tal market. In 2009, a total
of nine companies raised Tk 430 crore floating IPOs and offloading shares on the bourses
through direct listing regulations. To attract more companies SEC is working on
introducing book-building process of IPO pricing

64
8.3 Factors Behind the developments

These positive developments have been induced by a number of measures taken by SEC
in concert with other market actors to revive investors' confidence in the capital market
and to ensure orderly and transparent trading on the exchanges. Some of these are
presented below:

 The process of dialogue and communication between SEC and the

exchanges has been institutionalized by constituting a consultative committee
of which a senior SEC official is the convener and the Chief Executive Officer
of the two exchanges are members. The committee invites representatives
of other market actors, as needed to review market developments and
recommend regulatory changes or administrative orders for appropriate action
by SEC and / or the exchanges.

 A regular system of inspection of brokerage houses by SEC and the exchanges

has been put in place.

 Automated trading system has been introduced by both exchanges. CSE has
opened internet trading facility.

 The central depository system (CDS) for electronic trading was

operationalized in January 2005. All new primary shares can be issued only
in electronic form. The existing paper securities are being gradually
dematerialized. As of now, shares of companies accounting for well over 90
per cent of market capitalization have been demated.

 The settlement cycle has been reduced with effect from 1 March 2005.

65
 There have been considerable improvements in the regulatory
framework since 1996. These relate to, inter alia, disclosure requirements
for IPOs; right issues; qualifications of auditors, their retention by listed
companies and standards of audit; insider trading; and eligibility criteria
and codes of conduct of merchant bankers, stock dealers / brokers and
their authorized representatives as well sponsors, trustees, asset managers
and custodians of mutual funds.

 SEC has strengthened its monitoring and enforcement role with the result
that there has been a considerable decline in the number complaints against
market intermediaries as well as issuers. A particularly heartening fact is
the fall in the incidence of issuers' default with respect to holding
annual general meetings and submission of half yearly / annual financial
statements.

 SEC is undertaking a more rigorous screening of the proposals for initial

public offering. In consequence, the secondary market is pricing then well.

66
8.4Laws that govern Capital Market

There are a host of laws, rules, regulations and administrative orders to enable the SEC to
meet the above requirements in Bangladesh. Broadly speaking, the regulatory framework
designed by SEC is primarily intended to ensure equitable treatment of the investors,
disclosure by all market actors (the issuers, stock brokers and dealers, stock exchanges,
merchant bankers and other intermediaries) and adherence to certain aspects of business
ethics. SEC derives its regulatory authority from three pieces of legislation, namely,

Securities and Exchange Ordinance, 1969.

Securities and Exchange Commission Act, 1993; and
Depository Act, 1999;

as amended from time to time and various rules, regulations and administrative orders
issued under them.

67
8.5 Violation of Law by the listed companies.

It is widely known that Bangladesh is riddled with extensive violations of regulatory

requirements in virtually all areas of governance. Many economic agents are loath to
voluntary compliance. In this overall scenario, SEC has to deal with multiple forms o f
violations.

As regards issuer companies, the violations usually are:

(i) Default in holding annual general meetings in time

(ii) Default in submission of annual audited financial statements and half yearly
audited / unaudited financial statements in time
(iii) Non payment or delayed payment of declared dividend or obligations against
debentures
(iv) Delays in transfer of shares.

As regards brokers, the violations usually involve failure to deliver shares purchased on
behalf of clients and procrastination in making payments to the clients, including for sale
proceeds of shares.

8.6 A long way to go

Among other market intermediaries, particular mention should be made of merchant

bankers and stock exchanges. Most of the merchant banks do not exercise due diligence
in issue management role. This poses a major problem in that the applications for initial
public offering of securities suffer from a large number of deficiencies. Similar
statements also hold with respect to rights share offer documents. In consequence,
decisions are delayed with adverse implications for capital market development.

68
As regards the stock exchanges, one important problem relates to their responsibilities to
exercise supervision over their members, mostly brokers. The inadequacy of stock
exchanges in this respect partly stems from human resource limitations. The conflict of
interest (arising from the fact the exchanges are owned by the very same members whose
activities have to be supervised by the management) may also play a role. The rea l
separation of ownership and management roles remains a far cry in the corporate
universe of Bangladesh the lack of such separation is not unique to stock exchanges.

Occasionally other problems arise. Among these are insider trading, attempts to
manipulate the market through aggressive buying or selling, inappropriate use of funds
raised from the public and attempts by sponsors to grab shares offered for public
subscription by using fictitious names.

Notwithstanding the above enumeration of problems which are, by no means exhaustive,

it should be emphasized that the recent developments bear unmistakable signs of
improvement. Delayed transfer of shares has been virtually eliminated with the
introduction of central depository. The incidence of complaints rela ting to other forms of
violations by issuer companies mentioned earlier has also considerably declined.
Similarly, fewer complaints have been lodged against brokers during the current year.

69
Prospects & Future of
Capital Market

70
9.1 Prospect, possibilities, challenges of capital market

The recent growth of capital market of Bangladesh was behind time. We have witnessed
the money market grow stable in this country over the last decade; our economy was
starving for a matured and stable capital market. The stability came through a variety of
sources namely, educated retail investors, institutional investors and last but not least the
capital market regulators.

 As it is a market that involves both the sponsors and investors, the need for a
healthy and stable market became necessary. Through various forms of
reforms and automation the capital market of Bangladesh won the con fidence of
investors from all walks of life. It is a fact that capital market outperformed money
market by far in the last couple of years but that was only possible due to the
uniform and state of the are technology that has been used as the platform of
our capital market. In addition to that, the government facilitated our capital
market by structuring its monetary and fiscal policies in a pro - capital market
manner.

 The central bank played a thoughtful part in developing our capital market. It
brought transparency to the banking sector, which actually welcomed the
retail investors to join the capital market with high confidence. The
performance and healthy return of the banking sector worked as a crucial
component to bring in institutions and fo reign investors. Power and
pharmaceutical sector also outperformed the expectations of general investors;
resulting fresh fund injection into our capital market.

 Our emerging economy mostly invited the funds from all over the globe.
Market capital has shown amazing growth. Although current market price
earning ratio is higher than that of the neighboring country but that
considering the demand for lack of avenue to invest, the capital market of our
country has a bright and attractive future and untapped sector.

71
Addressing the issue regarding our capital market, 'liquidity' and lack of "instrument"
would top the list of challenges that we have right now. The major reason for the
existence of the stock market is to provide liquidity of shares and diversified instruments
which helps increase market capitalization. It also helps investors to gain more
confidence and positively impact Gross Domestic Product (GDP) of our country.
Neighboring countries such as India and Pakistan have market capitalization of more than
75% of their GDP. Comparatively, the Bangladesh capital market accounts for a far
lesser share of its GDP indicating ample scope for future intensification in this sector.
Hence, we should address the above to issues with utmost seriousness and with a future
vision.

As we know, our economy is an emerging one; there is ample scope of growth of our
•

capital market. Our market cap, accounts for a lower share of our GDP in a comparative
regional perspective. With the help of upcoming issues (IPO) we are very optimistic that
the market capitalization is reach a higher level within a short span of time.
Automation and introduction of Central Depository helped our capital market to
grow considerably. The regulatory body, namely Securities and Exchange
Commission, is continuously facilitating our capital market with its international
standard surveillance and monitoring. The continuous endeavor of the SEC has resulted in
our capital market to be free from fraudulent and manipulative activities. Thus presence
of the SEC has impacted significantly in the development of the market. However,
considering our market size, the SEC should employ more professionals from
private sector. Would bring more dynamism to the market.

The major drawbacks of our capital market are lack of instruments and liquidity. We can
address these two issues by attracting more companies to the market. In order to make the
market more attractive, the corporate tax bracket can be lowered in order to encourage
sponsors to list their companies in the exchanges. We can also introduce Future and
Option Market and help our already existing bond market to be more vibrant leaving th e
investors with more instruments. Although we have some mutual funds (MF)
currently.

72
Trading in the secondary market, yet we believe there is higher demand for such products,
since MF provides the clients the opportunity to reduce investment risk. With the help of
the bourse, we should welcome hedge funds from different parts of world to invest in our
capital market. Cash management can also play a significant role in overcomin g the
drawbacks of our capital market. With the help of efficient and online cash management
our cumbersome settlement procedure could be stream lined. There are other numerous
ways we can reduce the drawbacks of our capital market. Last but not least, int ernational
auditing standard has to be adopted, resulting in more transparency in the financial
activities and reporting. This would draw the attention of general investors and gain then
confidence to invest in every sector. More importantly, in the contex t of online central
depository system, guaranteed clearing agent for settlement is obvious for market
development.

 Absence of capital gain tax is the most attractive reason for foreign investors
(FI) to invest in Bangladesh capital market, which is not v ery common in
emerging economies such as Bangladesh. In addition to high return and
significant dividend yield, FIs should be attracted to our capital market
because of the easy and hassle free repatriation of funds.

 From the present point of time the future seems bright, not only because of
our vibrant capital market but also of our room for new products. With the
introduction of direct listing and possible book building method, our primary
market is improving in line with the secondary market. The marke t cap will
grow significantly within next few years and turnover shall reach an
international level. Moreover, institutional clients, namely banks are entering
the market with their huge liquid fund causing the capital market to grow very
rapidly. Domestic and international banks have started not only to invest in
the capital market but also to operate brokerage and merchant banking wing.
Cross border trading and index trading are ideas we might adopt in future,
which will result in liquidity and new avenues for investment and minimize
our cash market risk.

73
The Bangladeshi and foreign investors are experiencing the scarcity of diversified
products in Bangladesh. The platform of this market is supply and demand. Due to the
absence of diversified products, the liquidity of market is declining.

 Introducing option and future market to our capital market can be a solution to
the above issue. Turnover and market capital of India grew substantially after
introducing the option and future market. However, the investors have to be
educated properly to reduce speculation. Derivatives and option market is
unavailable only due to our lack of professionals and technical weakness and
also there are no specific regulations relating to these products. However, in a
very short span of time capital market intermediaries are bringing in
infrastructure changes such as book building, derivative and option marke t to
our market. Introduction of these products will further broaden investment
horizon and bring enhanced depth and liquidity to our market and attract
global customers.

Although we have a bond market but compared to other countries it is very weak. We
have to attract private and public sector companies to issue more bonds and thus increase
liquidity in our bond market.

 The need for cooperation among the stock exchanges in this region has to be
emphasized her in order reap tremendous benefits. At present , the level of
such cooperations remains at a very low level. The experience we have had in
our respective markets can be valuable to each other and ought to be
exchanged, even though the sizes and specifications of our markets may vary.
Region wise, we are bound by commonalities in culture, environment, and
tradition. The same Socio-political factors affect us rather similarly. Hence,
the knowledge gathered in our respective countries can be valuable to us, who
belong to the same region. Through a friendly dissemination of knowledge
and experience, we can revitalize and energize our economies. Shared
knowledge can fuel the growth of a stronger and more vibrant capital market.

74
Initiative taken by the
authority

75
10.1 A few cogitation about the future

SEC, in collaboration with other relevant agencies, is in the process of initiating several
steps with a view to enhancing the confidence of the investors, increasing the quantity
and variety of instruments, and improving the functioning of the market. Some of the
forthcoming measures to accomplish these objectives are briefly mentioned below.

(i) As of now, enforcement powers of SEC are, after due enquiry and giving an
opportunity to the violators to be heard, limited to cancellation or suspension of
registration of market intermediaries, and imposition of penal measures which may
involve levying of fines on or filing of cases in competent courts against issuers / market
intermediaries. These are no legal provision for SEC to award compensation to
shareholders or to file cases on behalf of shareholders. SEC is in the process of drafting
amendments to the relevant laws so as to be able to better protect the interests of the
shareholders.

(ii) The need for strengthening compliance by all market intermediaries is greatly felt. As
present, the regulatory requirement for appointment of a compliance offer extends only to
stock broker / dealer. SEC intends to extend the requirement to other market
intermediaries laying down the qualifications of the concerned officials and specifying
the issues to be addressed in implementing internal compliance procedures.

(iii) A sound capital market requires depth with a wide range of products and instruments
to cater to varying risk return liquidity preferences of investors and also to ensure that t he
adverse effects arising from disturbance in some part do not assume systemic
proportions. In this regard, SEC, in collaboration with Bangladesh Bank had made long
term government bonds tradable on stock exchanges. But, not much of trading has been
actually taking place. SEC and Bangladesh Bank have formed a joint committee to
suggest measures to activate trading in government bonds. Recently introduced asset
backed securities which are now being issued only on private placement basis need to be
brought into the mainstream secondary market.

76
(iv) At the initial stages of capital market development, privatization of state owned
enterprises can make a signification contribution. In Malaysia, for example, the
Privatization Master Plan resulted in many government linked firms being listed with
Kuala Lumpur stock exchange. Seven largest firms listed with the exchange belong to
this category. Government linked firms account for 34 per cent of total market
capitalization. In Bangladesh also efforts are being made to progressively offload
government shares through the stock exchanges.

(v) A healthy capital market requires engagement of competent professionals by a wide

range of market actors. Among the positions which require the services of people with
adequate knowledge of the principles of corporate governance as well as security laws
and regulations are the members of company boards, company secretaries, officials of the
share departments of companies, authorized representatives of brokers, compliance
officers of market intermediaries etc. Academic institutions or the professional bodies in
the country do not produce enough people to fill up such positions. SEC has co nstituted a
Steering Committee for preparing suggestions to set up a capital market training institute
to bridge the gap. Asian Development Bank is expected to assist in this endeavor. SEC's
investors' education programme has been intensified to enable inv estors to make
informed decisions concerning their portfolio.

(vi) SEC is revisiting IPO and rights issue rules and drafting direct listing rules. The
objectives are to reduce issue cost, simplify procedural requirements and shorten the time
gap between submission of an application to and consent by SEC.

77
10.2 Moreover recently some other initiative ha s been taken, these
are as follows.

10.2.1 Boosting NRBs' confidence in the capital market

The head of the stock market regulatory body, the Securities Exchange Commission
(SEC), has meanwhile assured that the organization will enhance their quota in the initial
public offerings (IPOs) of public limited companies.

The subscription for the largest IPO in the country's capital market, the ICB AMCL
Second Mutual Fund, is scheduled to open from mid May. What should gratify the NRBs'
is that 60 per cent of the issues worth Tk 1.0 billion would be made available for them.
This would certainly open the door for the wage earners as well as big players among the
NRBs to eye their home capital market as a covetable destination for investment.

10.2.2 Introducing book-building system to ensure IPO fair price

The stock market regulatory body is working to introduce book -building method to
ensure fair price in the initial public offerings (IPOs) for the entrepreneurs whose
companies will go public. The book-building system is a modern method of selling
equities when an investment firm seeks bids for a new issue at indicative prices. When
the book is complete, it offers prices and sells the lot in a si ngle day.

Underwriters buy all the shares to be floated by public limited companies through
competitive bidding procedure under the proposed system. Later the underwriters choose
some brokers to put up those shares for selling to retail investors.The issue rs in the book-
building system get their share prices from the underwriters who will be the highest
bidder in the bidding process.
The SEC has already fixed certain initial criteria for the prospective issuers and the
brokers to become eligible for participation in the proposed book-building system.

78
10.2.3 Tightening listing rules to bring more companies to capital
market

The securities regulator tightened the listing rules, making it mandatory for companies
with paid-up capital of at least 500 million taka to go public within a maximum three
years after their operation The share markets will get a big boost because of the latest
changes in the rules. We expect that dozens of top companies will be listed within a few
years after the amendments. But the regulator should have given careful thought before
making such a big amendment. They should examine how it is going to make impact in
the macro-economy. The strong-arm tactics, however, could back-fire as a lot of
entrepreneurs might be discouraged to make fresh investment in the country.

Presently, a handful of the country's top companies are now listed in the Dhaka and
Chittagong stock markets. Majority of them avoid being listed, as they prefer financing
by the banks, instead of making initial public offering (IPO)

10.2.4 Guilty companies to face 45-day trade suspension

The interim cabinet has approved the Securities and Exchange Amendment Ordinance
2008 that prescribes tougher punishment to companies guilty of violating rules and
regulations. According to the new law, any company found guilty will face 45 -day trade
suspension on the capital market and the regulator can extend the punishment by 45 more
days.

10.2.5 Formulate guidelines for brokerage house branches

The Dhaka Stock Exchange and the Chittagong Stock Exchange has worked out a set of
recommendations for the expected guidelines for opening and operating branches of
brokerage houses as the SEC is going to formulate the guidelines soon. SEC has taken the
move as brokerage houses are opening branches in greater number in different parts of
the country with the expansion of the market, but it has remained a matter of concern
about issues relating to their compliance with the securities law.

79
10.3 Source of excessive cash flow

So, there were so many factors that made the market to break its new high everyday. It is
true that excessive fund flow was one of the major reasons getting the index up to this
level. But this fund was brought by different participants in the market. They are:

1) Foreign Investors' fund (They can not avail margin loan),

2) Brokerage Houses and Merchant Bankers' margin loan,
3) Black money (whitened in the capital market),
4) Banks' and Financial Institutions' significant participation,
5) Fresh fund brought by the new investors from different sources like withdrawal
of FDR, CC loan from Bank.

So, it is a very difficult task for the SEC to control the fund flow of the market by
restricting the merchant banks and brokerages houses from extending margin loan only. I t
may only effective in the short run. Large fund has already been injected in the market
and this fund will rotate only. The merchant banks and brokerage houses contribute
only an insignificant amount in the market as we have experienced that the day when
the margin loan was withheld an amount of Tk. 2.38 billion (238 core) was traded in
the market. The small investors in this case will suffer heavy losses, as they have to
realise their losses by adjusting the loan amount with a panic sale.

80
10.4 Measures that SEC can take

So the following measures other than restricting margin loan, can be taken as the long -
term view that will give the market a good balance.

1. The SEC can give consent of Mutual Funds and IPOs of companies' immediately those
have been applied for.

2. The government should offload their holdings of different companies in a very regular
interval.

3. Book building method should enact vastly so that more companies can come up in the
capital market to raise their fund more conveniently. At present many companies have
the intention to come in the capital market but are not convenienced about the existing
valuation method of the SEC. Book building method will give a new dimension in the
market and ultimately will increase the supply in the market.

4. Up to 25 PEs, stocks can be categorized as risky and can have a different category
name other than A, B, N, G and Z. It could be in 'R' category with 7 days settlement.
Once it reaches to 20 PE, it will be remain in this category for at least one month. It
comes at 15 PE level after one month it will again traded in its respective category. This
could be considered as a 'cooling down strategy'.

5. Trade duration can be changed at the time when market becomes overheated.

6. Derivative market may be introduced to balance the capital market to safeguard the
investors. It would also help them to hedge their fund.

7. All the listed companies board resolutions should be intimated to SEC as soon as the
meeting ends and thus through the market (if SEC thinks prudent) so that no
over speculation can be done in the market.

81
8. All the Bangladesh Bank economic data should be provided to the market as and when
they come. It will help to balance the investors' decision with the pace of country's
economy.

9. Major daily political, economical, whether and environmental data update (both
domestic and international) should be disseminated in the market as and when they come
basis from proper sources. 'Reuters' can be tagged with DSE and CSE terminal and also
with their respective website so that investors can take their investment decision with
overall global scenario.

10. Regular TV and Radio programme should be made on developments and other topics
relating to the capital market to make the investors aware and a lso to train them up. It
would help them to learn more about market fundamentals and technicalities.

10.5 How to deal with the Z category companies

The number of Z category shares is about 100 or about 40 per cent of the total shares
listed with the market. These shares are floated mostly by companies of the
manufacturing sector. Although a few of these labor-intensive units have real problems,
the majority of the companies have been consistently showing losses artificially in their
balance sheets. Their conditions are not as bad as they used to claim or show in
calculation. The boards of directors of these companies are doing so only to siphon off
capital from the companies and evade corporate tax to be paid to the government. As a
result, the net asset value of these companies has been decreasing every year, leading to
abnormal fall in the prices of shares. Some of these shares are being traded at less than
one-tenth price of the face value. Consequently, the small investors are losi ng huge
money; the common people are also losing confidence in the stock market.

82
It should be mentioned here that a company needs to be registered first as public limited
company with the Joint Stock Company to become enlisted with the stock exchange.
Then, about 50 per cent of the capital to be invested in the company is accumulated from
the public by selling initial public offering (IPO). Smaller amounts of money coming
from general investors together are transformed into a huge chunk of industrial capital.
Worldwide, the main sources of the industrial capital are these small and institutional
investors. The Securities and Exchange Commission (SEC) usually plays the role of a
watchdog on the stock market to protect the interests of the common investors.

10.5.1 Problem in Management

Everyone knows that investing money in the share market involves certain amount of
risks and small investors particularly have to bear the liabilities for investing money in
the secondary market. The small investors invest money taking such risks.
Understandably, if a company cannot run its business properly in unprecedented
circumstances or it incurs huge losses due to adverse situation at home and abroad, t he
price of shares of that particularly company will naturally fall. And the small investors,
too, will be the losers under the impact of the losses of the company. This is a reason of
loss, which can be acceptable to the investors. But why should they sho ulder the
liabilities or losses as a result of inefficiency and mismanagement of the boards of
directors and irregularities, corrupt practices and siphoning off of money by them? We
have seen in our context during the last one decade that these irregularit ies have
become a dominant practice — a bad practice that has turned into an epidemic today.

This state of malpractice has not been posing any problem to the entrepreneurs or the
boards of directors of companies. They are rather drawing higher benefits fro m the so-
called loss-making companies using luxury cars and traveling foreign countries taking
money from the company fund. Gesture and posture of these individuals do not indicate
that they are the directors of losing concerns. It is also found that many of these people do
not have adequate number of shares to form the board of directors of the company or they
have already sold those shares. Many of these companies do not hold the annual general
meeting (AGM) or in some cases they may hold a nominal AGM, where the small
investors cannot even raise their necessary protest.

83
10.5.2 Losses for public & Government

The amount of corporate tax paid by the companies of the share market is a major source
of revenue earning of the government. But the companies of Z category do not pay any
tax by showing fake accounts that are unrealistic in any analysis. Alongside small
investors, the government is also losing money because of the fabricated balance sheets
shown by the companies.

10.5.3 SEC’s Role:

In view of such a situation and following longstanding demand from the small investors,
the SEC had issued a notification in this regard a few years ago. That was a timely step to
ensure good governance in the share market.

According to that notification, the companies of Z group would be given six months’
time to overcome their problems. In default, the SEC would dissolve the board of
directors and constitute a new board of directo rs by involving the general and
institutional shareholders. The new board would be provided with all necessary support
to run the company.

The share market had undergone sudden positive changes as a result of that
notification. A good number of companies belonging to Z category held AGMs
regularly and announced dividends for the shareholders. But sadly enough, the High
Court had suspended the effectiveness of the notification upon a writ petition filed by
certain vested quarters. The share market had gone back to the previous state and the
small investors have failed to get any relief from the plight. The situation demands urgent
intervention by the SEC to save the small shareholders.

The share market of a country is a major indicator of the national economy and that is
why we need improvement in the capital market. All the parties and authorities concerned
will have to come forward to establish good governance in our common interest.

84
Derivative & Future
market

85
11.1 Derivative market: An enormous potential for Bangladesh

A significant number of new investors are now entering in the market due to this changed
scenario of our capital market. But a common phenomenon of our general investors is to
come in the market at the time when the market index goes very high thinking that they
can make some profit out of it without considering the fundamentals. They invest i n such
a time and situation when the smart investors’ starts taking out their profit and in most of
the instances it is seen that these small investors suffer losses. As a result, they take their
face away from the market and also create a negative impact to those of the fresh investor
who intends to come in the market. This is an impediment why the general participation
of our people is not growing who rather wants to lie up their money in the bank to have
risk free interest of 10% to 12%. Take a test and just ask your friend sitting near to you
and ask him to invest in the stock market, in 80% of the cases he will just turn back and
will show reluctance to invest in stock. He or she will just bring the havoc history of ‘96
crashes as the reason of his reluctance to invest in the stock market. The havoc still
persists in the mind of the potential investors.
But without the mass participation, the market cannot sustain in the long run. In the
United States one of every three persons involves in capital market . In our neighboring
countries like India, Pakistan, and Thailand or even in Srilanka, the number of
investors is much more than Bangladesh. On the other hand the institutional investors
of our country are mostly speculators. They generally do some research on the basis
of the performance of the companies and if they think prudent fundamentally and
technically to invest in any stock, they take their position. This type of investment policy
is nothing but the calculative speculation base on the future profitability of those
companies. They can make profit if their analysis comes right and face loses if the
scenario goes the other way round. However, the foreign investors come into market
due to their arbitraging nature. They try to perceive the relative oppor tunity of the market
that generates more profitability and if they find it effective, they come and invest.
Irrespective to investor’s point of view, if the market falls drastically due to any reason,
all of the aforesaid investors suffer losses and the liquidity of the market goes down. In
this case, we lost our money, confidence and very importantly the investors, which are
not at all desired by us.
86
But we want such a system where investor can earn money even if the market goes down.
That is, the market should have the mechanism to reward the investors who have rightly
predicted the downtrend. We want the capital market system standing despite having
calamities in home and abroad. The one and only system, which can guarantee such
return, is the introduction of derivative market in the country. Derivative market mostly
consists of two basic markets, which are called future market and the option market.
Derivative instruments derive prices from the underlying assets. An underlying asset
can be a stock, commodity, interest rate or anything that has a price.

Future Derivative Market: A future contract is an agreement between two parties to

buy or sell an asset at a certain time in future at a certain price. The future contracts are
standardized and exchange traded.
Call Option Market: A call option gives the holder the right but not the obligation to
buy a particular stock at a defined price and time and
Put Option market: A put option gives the holder the right but not the obligation to
sell a stock at a defined price and time.

But as we have just stocks in Bangladesh capital market, we will discuss on stock futures
and options only. Investors can generate profit in this market even if the market goes
down. It has now become the part and parcel of the capital market system. In developed
countries like USA, UK, Japan, China, Korea and even in India, it has now become an
integrated part of their capital market system.

87
Let us have a look on the following chart, which shows the volume and turnover of the
equity market and the derivative market. It is shown that the turnover of the derivative is
much higher than the cash market (stock market).

(Source: World Federation of Exchanges)

A survey of the World Federation of Exchanges says that Equity products, which are the
most important segment of global derivative markets for the number of traded contracts,
continued to grow.

Two major findings should however be highlighted concerning equity derivatives in

2006:
A confirmation that stock futures meet the need of a growing number of market
participants. This market, which was still a fledgling in 2004, has now gained a
significant share of derivatives trading. Trading volumes in stock futures
represented more than 10% of stock options trading volumes, and newcomers from all
regions, except North America, are expanding the use of these products.

88
Now the question may be asked who will be the participants of this market and how
participating in the derivative market can bring them benefit. There are three types of
investor take part in this market.

1. Hedgers who want to minimize the risk of their investment in the stock market.
2. Speculators who want to speculate base on their research and analysis on particular
stocks and
3. Arbitragers who want to find the better investment opportunity in the marke t. So how
hedgers can minimize his/her risk by using the derivative market product? Let me give an
example of trade in the future market.

11.1.1 Benefits and calculation in Future market:

Think Mr. X takes a position in the stock market and thinks that the market might go
down due to any reason, he can sell the same stock in the future market which will have a
specific tenure and obviously higher price than the stock market. Generally there are one
month, two month or three-month future contacts available in the market. Lets take the
instance this way, Mr. X buys 100 IDLC stock from the cash market (stock market) @
Tk.800. At that time in future market the same stock will be traded lets say with the cost
of carry @ Tk.820 with one month tenure. Cost of carry is simply nothing but the interest
rate of the mentioned tenure. It has some other factors to consider also. If Mr. X thinks
that the price might go down and he wants to lock his profit, he can sell the 100
quantity of IDLC @ Tk. 820 level. At the time of maturity, if the stock price in the cash
market (stock market) goes down at Tk. 750 what will happen? He will earn Tk.
(820- 750)=Tk.70 100=Tk.7000 from future market and will lose
×

Tk.(800- 750)=Tk.50 100=Tk.5000 in the cash market. Ultimately he will earn net
×

income of Tk. (7000-5000) = Tk. 2000 from it. And if the market goes the other way
round, meaning to say if the stock price goes up at Tk.890 at the end of the maturity. The
investor will gain Tk.90/share and his gross gain will be Tk.(890 -800)=Tk. 90 ×

100=Tk.9000 from the cash

89
market (Stock market) and he will loss in the future market Tk.(820-750)=Tk.
70 100=Tk. 7000. Ultimately his net gain will be Tk.9000 – Tk.7000=Tk.2000. This is
x

how he can lock his profit and minimize his risk no matter the market goes up or down.
On the other hand, the speculators base on their analysis ca n maximize their profit
unlimited if their analysis goes right. They can also suffer huge loss as well if their
speculation goes wrong. The arbitragers are the inves tor who always corrects the price
difference of the stock. If they find any stock under priced, they take the opportunity and
take their position. Most interestingly, an investor does not need to invest as much money
as it is required in the cash market (stock market). Here he/she just needs the margin
amount, which is considerably much lower than the cash market (stock market). Thus
how the participants of the future market can contrive.

11.1.2 Benefits and Calculation in Option Market:

In the call option there are two parties like a buyer of a call and the seller. The seller also
called the option writer who just takes the option premium and takes the obligation to
provide the stock when the stock hits the contracted price or over. Thus the risk of the
option buyer is limited by the option premium and his opportunity of profit is unlimited.
Suppose IDLC stock is traded in the cash market (stock market) @800/share and a buyer
Mr. X buys it. Another buyer Mr. Y buys 80 one -month call option contracts in the
market at a strike price of Tk. 810 with a premium of Tk.10/share. For buying the
contracts Mr. Y just needs to pay the premium and with Tk.800 he can buy 80 contracts
of IDLC in the call option market. Both of the investors are bullish about the market and
they think that the market will go further up. Now what happens at the time of maturity
when the IDLC stock price stands at Tk. 900 in the cash market (stock Market)? The cash
market investor Mr. X will gain (Tk.900 -Tk.800)=Tk.100/share which means
100/800=0.125 100 12=150% return in one month. For the call option buyer, he will
x x

exercise the call at the time of maturity and he will get (Tk.900 -Tk.810)=Tk.90-
Tk. 10=Tk.80/share 80 contracts=Tk.6400 in one month. (Tk. 10 is the premium he pays).
x

So, his return will be 6400/800=8 100 12=9600%. We can see Mr. Y’s return is
x x

much
90
more higher than Mr. X. This is only possible in the option derivative market. Now what
could happen if the market goes down and at time of option maturity if the IDLC stock
price goes down at Tk. 700? Mr. X who holds the share in the cash market will lose
(Tk.800-Tk.700)=Tk.100/share. Mr. Y who buys the call, will not exercise the call (he
has the right to buy but not the obligation) and will lose only the premium of Tk.10/share.
No matter at what level the price go down, the call option buyer will just lose the
premium not more than that. So these are the benefits of the future and the option
markets. In the above description I have just tried to give a simple hypothetical example
of the derivative markets by using some simple calculations. There are some other
considerations involves in it which is not possible to describe in short.

Now the question may be come again who else will get benefit with the inception of
derivative market? Most likely the investor will be the first who will get the maximum
benefit of this market. Then the brokerage house operates in the future market, the
bourses, and the central clearing house will also get benefit from this market. More
guaranteed mutual funds would come up in the market as there would be much more
instruments to construct their portfolio. The activities of portfolio mangers will be more
widespread and this will also increase more opportunities for them to manage the client’s
portfolio. More workforces will be needed and more employment will be generated. As
the turnover will go high, the brokerage house, the bourses and the central clearing house
will earn more revenue, which will ultimately contribute to our national GDP.

11.2 Success Story in Derivative Market: India

Now let’s take a look in our neighboring country India. Once a former President a Stock
Exchange in India cited that ‘derivative market is a like Ferrari car and the Indian
roads are not ready for it’s driving. Anytime an accident may occur.’ The national stock
exchange (NSE) started the derivative market in early 2000 with S&P 500 Niffty Index.
The first year average daily trade volume was only Rs. 11 core. After seven years time,
now per day, the average daily trade volume stands at Rs.35, 000 core! They have set
around 50,000 terminals across India and trade is going on such a meticulous pace.

91
Despite several crashes in the market, how strong this market is still remained and how
wrong the quotation of the former stock Exchange was! They have proven that it is not
the problem with the Ferrari car that may caus e an accident; it is the driver whose
reckless driving can occur the accident. If the driver is good, he can drive any car no
matter the car is a Ferrari one or a Tata Sumo. What a splendid performance by the
Indians! Now again the question might come what will happen if the big investor
manipulates the market? Yes, it is possible to manipulate the derivative market for the big
investors as long as our market remains small. But the thing is if our regulator can protect
manipulation of our small stock market with great success, I think they are also capable
to protect the derivative market from manipulation. It is still a controversial issue in the
world and it will continue years after years to go. But the progress of derivative market
cannot be stopped. It will just go on and on.

11.3 Bangladesh’s scenario

Our market capitalization is soaring up and it will boost up more in the days ahead. More
good number of companies are now in the process to come up in the market through IPO,
direct listing and in book building method. It will certainly strengthen the depth of the
market. So time has now already come to consider about the inception of the derivative
market. We know we have so much of limitations. We don’t have adequate professionals,
expertise in our market. Our market turnover is still less than 1% of the total market
capitalization. Our risk free rate is still higher than any other countries in the world. But
despite all these limitations, we have to come forward. At least we can start thinking of
introducing the derivative market in our country in a limited scale. What can we do at
least to start with?

92
11.4 The following measures can be considered:

The security and exchange commission can form a committee about the feasibility of the
derivative market and the committee may consist of some university commerce faculties,
merchant bankers, economists, DSE and CSE professionals including SEC officials
 Necessary legal reformation needs to be done.

 The SEC can recruit a domestic or foreign consultant for introducing of the
derivative market
 The SEC can send professionals to India for training and development of the
derivative market
 Round table discussion can be arranged with different interest groups.

 Both the bourse can take initiates to train their respective members on regular basis
for the derivative market. They have to make their members understand about the
importance and benefits of derivative market.
 In our education system from SSC level, we can incorporate the basic capital
market system including the derivative market, which wil l in turn create quality and
smart investors for the market in the long run.
 Derivative market establishment requires considerable financial support. The govt.
may ask assistance from different international donation agencies in advance.
 An MOU can be signed with National Stock Exchange (NSE) to support establishing
our derivative market.
What we need at the primary level is to comprehend the business of the derivative market
and how it can be effective to the investors and to the brokers. We have adopted the
capitalistic system and derivative market has now been proven as the par t and parcel of
this system. We are lag behind from so many of things apart from the world. But this is
not the issue that we cannot do; this is because of our negligence of thinking. If our two
bourses start working on it and can consistently pursue the g overnment; it is possible to
implement this market within two to three years time.

93
Recommendation

94
12.1 Recommendation for IDLC Securities Limited

IDLC Securities Limited has established its image as one of the best service provider for
its potential customers. From above discussions and basic understandings while working
in the organization following recommendations can be formulated for the organiz ation.

By adopting the principles of good governance at all decision making levels,

IDLCSL must show that corporate governance is a management enhancement
tool. This is one of the factors that can give confidence to business partners and
facilitates co operation with parties in international financial centers, which
already adopts such principles.

IDLCSL should more clearly define respective responsibilities of staffs,

managers, board of directors and shareholders in the attainment of goals and
establish a procedure of sanctions attached to these responsibilities.

It should improve more on management control systems comply religiously with

corporate governance principles and the international financial standards
especially aspects that impact on assessmen t &management of risks,
transparency &viability.

Intensify consultation within the profession in order to become a real source of

idea for the development of brokerage house system within the region.
Demand is shifting continuously, and these shifts have so much to do with today
and the future as with the past.

In order to increase the profitability & reduce the risk, IDLCSL should maintain

a well-balanced portfolio. The more diversified the por tfolio, the lesser the risk
of losses

95
 It is to be keeping with mind that competitors can copy product but cannot copy
the understandings & expertise.

Many consumer segments still demand braches & use them while the other seek
the reassurance of the branch if they do not use them, so branch should be based
on proper demand identification.

IDLCSL should continuously redefine new demand for financial, brokerage

services & ensure that this understanding is unique & actionable.

Establish priorities for capabilities for new product investment as well as better

ways to minimize gaps in strategic management.

12.2 Recommendations for Capital Market

We have talked about promising prospects for the capital market in Bangladesh.
Among factors which should help in sustaining improved per formance are as
follows:

Considerable improvements in the regulatory framework

Strengthened human resources in SEC

Acquisition of greater skill by SEC staff in enforcing regulatory requirements

through on-the job experience as well as foreign training

Somewhat greater consciousness of the investors, helped partly by past

experience and partly by investors' education programmes conducted by SEC

96
Closer collaboration and dialogue between SEC and other regulators and market
actors, particularly the stock exchanges.

Strong policy framework and timely implementation of these policies are

required to lure the profit making local and multinational companies into the
capital market. Moreover, it is the overall socio-economic environment of the
country that can encourage these companies to come to the market.

Foreign portfolio investments is good for the capital market, But SEC needs to be

remains cautious given the very unpredictable nature of such funds.

Initiatives must be taken to introduce derivative market in our country.

Maintaining the confidence level of the general investors high by complying with
strict rules & regulations and amending the existing acts when necessary.

The prospectus or the offer document for issuance of securities must contains
comprehensive information disclosure, including those relating to the financial
health of the company so that investors are not misled in their investment
decisions;

The issuers must comply with regulatory requirements administered by

Securities and Exchange Commission (SEC), including those relating to hol ding
annual general meetings and audit of accounts as well as by other regulatory
authorities such as Bangladesh Bank, Registrar of Joint Stock Companies,
Controller of Insurance in so far as these impinge upon investors' interests;

All capital market intermediaries should comply with regulatory requirements

administered by SEC. The market intermediaries include stock exchanges; stock
brokers and dealers; merchant bankers who perform security issue management,
underwriting and portfolio management functions; central depository system;
depository participants most of whom are stock brokers as well (but there are a
few non broker depository participants also) and mutual funds managers.

97
Conclusion

98
13.1 Conclusion

Capital market has been experiencing a optimistic trend over the last few months In
Bangladesh. The DSE general index crosses 3000 landmark and also the average daily
market turnover crossed over Tk.300 million. The market capitalization has been growing
tremendously up which is now over US$ 13 billion level, ever highest in the history o f
Bangladesh. According to DSE source, the market basically trends to bullish due to
active participation of the institutions, which is, 60% of the total trade; 20% of it comes
from the foreign investors and the rest 20% comes from the retail investors. Th is is
indeed a very good sign for the capital market of Bangladesh and we are also looking to
more general, institutional and the foreign participants to come in this market.

One of the main reasons why the market is growing up can be identified due to sus taining
warm political stability in the country. Political and administrative reformation as well as
the insurgent against the corruption also has brought the good confidence in the market.
Investors are feeling more comfortable in such environment and the y keep continuing
their investment in the market

In addition, the market capital is growing due to a good growth of the financial sector, as
we know 52% of our market capitalization is consisted based on the banking sector.
Among others, floating of some new IPOs in the market has also provided adequate
supply of good shares. Some big telecom companies and some govt. own companies are
also coming in the market within short time, which will eventually enhance the total
market capitalization. We are also expecting some more exchange traded mutual funds
that will also contribute to the market for its good growth and will create much depth
indeed.

Our regulator, Security and Exchange Commission is also more cautious in monitoring
all the discrepancies done by any listed company in compare to their past years activities.
They are now remarkably competent and proficient in performing their activities.
They do not give away anything that has been done erroneously and accordingly they

99
take measures. Our two burses are also very active in performing their duties and
responsibilities, which also helps to build the confidence level of the investors. So, it is
easily to be felt that our capital market is growing and seems to have a very healthy shape
in the coming days to come.

In the final analysis, the Bangladesh capital market still has a long way to go. It is
growing, but the pace needs to be faster. With th e support from government and
multilateral institutions for capacity building this market has every possibility to improve.
We are yet to have in place several missing parts of the vital market infrastructure, and
valuation and appropriate rules are essential segments of this expected infrastructure

100
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102
Appendix
Appendix A: IDLC Finance Limited in Dhaka Stock Exchange

Authorized Capital in BDT (mn) 1000.0

Outstanding Capital in BDT (mn) 250.0
Face Value 100.0
Market Lot 20
Total no. of Securities 2500000
Listing Year 1992
Market Category A

Closing Price Graph (June 2007-May 2008)

Highest Value: 2798.15
Lowest Value: 638

Total Trade Graph (June 2007-May 2008)

Highest Value: 1094
Lowest Value: 0

103
Appendix B: Overview of the global Market
Market
Indices Cap GP
Name of the Indices Indices Listed in Turnover PE Yield GDP
Current
Capital Markets Name ending Issues US$ in US$ mn Ratio % July
mn July
2006 July 2007 2007 July 2007 (2006) (2006) 2007

SAARC Countries:

Colombo Stock Exchange CSE Milanka 2722.36 2442.11 237 7,042 579 14.01 2.01 24.32
Dhaka Stock Exchange DSE GEN 1609.51 2384.18 338 7,915 623 8.44 2.54 15.87

Karachi KSE 100 10040.5 13630.5 651 65,820 66,598 - - 47.85

Bombay Stock Exchange SENSEX 13786.9 15551.0 4853 1117910.0 155650.8 19.02 1.47 166.9

Regional:

Philippines PSE 93,951 17,305

2982.54 3501.2 242 - - 72.92
Composite
Kualalampur KLSE
1096.24 1355.38 1009 302,741 110,365 - - 197.17
Composite
Singapore STI 2985.83 3547.7 732 512,895 212,568 - - 351.28
Stock Exchange of
SET - - 520 196,421 63,879 - - 87.30
Thailand

International:
Hongkong Hang Seng 19964.7 23184.9 1209 2,229,101 921,992 - - 1307.85
Japan TOPIX 1681.07 1706.18 2417 4,674,472 3,800,569 - - 99.65

London FTSE 100 6220.8 6360.1 3301 3,940,829 6,532,036 - - 139.76

United States (Combined) S&P 500 1418.3 1455.27 5972 16,428,558 15,750,529 - - 144.42
Germany DAX 6596.92 7584.14 755 1,902,587 2,515,436 - - 64.59

104
Appendix C: Rules & Regulation for brokerage house
Rules Regarding Preparation of Financial Statement of Brokerage house
Securities Exchange Rules 1987, Rule 5
SEC (Stock Dealer, Stock Broker & A/R) Regulations, 2000
1. All members shall prepare a Trial Balance half yearly basis with the balance of all
ledger accounts. This trial balance agrees in both debit and credit side amount.
2. Every member shall prepare once in every year a Balance Sheet, a Profit and Loss
account, Cash flow statement and changes in equity on the basis of the books and
account and other documents as prescribed by rule 8.
3. Every member shall have his financial statements audited by an auditor who is a
Chattered Accountant and shall submit the same to the stock exchange concerned
and the commission within 4 (four) months the end of the year concerned.
Provided that the commission may extended the said period up to such time, as it
may deem fit on the basis of application made to them by the member.
4. Notwithstanding anything contained in this rule, a member shall also have his
accounts audited by an auditor appointed by the commission, whenever such audit
is required by the commission in the public interest.
Provided that the fee for such audit and all other expenses in the relation thereto
shall be borne by the member concerned.

Rules Regarding Capital requirement of Brokerage House

SEC (Stock Dealer, Broker, A/R) Regulations, 2000 Rule 4(ga)
1. Minimum Capital requirement of a member shall be TK.25 lac fully paid in cash.
In case of dual membership in two stock exchange is shall be Tk.50 lac.
2. At least fifty percent of ot’s paid up capital shall be maintained all time as net
worth. A calculation of net worth is shown bellow.
Net Worth = Value of all assets (excluding preliminary expenses and fictitious
assets) – Value of total Liabilities.
Preliminary Expenses: All expenses, which are relating to company formation.
Fictitious assets: Assets which have no physical existence and which are
required to charged off against P/L as revenue expenses, usually incurred in

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 acquisition or formation of business or issuance of shares or debentures,
preliminary expenses.
3. A member of stock exchange shall at all times maintain a net capital balance in
the capital account of an amount, which is not less than one lac taka [SER 1987,
Rule3(2)].
“Net Capital” means liquid assets minus designated liabilities of a member in
relation to his trading in the stock exchange. [SER 1987, Rule 2(c)].

It is not maintained – The membership of a member shall stand suspended as

soon as the net capital balance falls short of the amount specified in sub -rule (2)
and shall remain suspended until the net capital balance is increased so as not to
fall of that amount.
Reporting Date – Every member shall report to the stock exchange monthly
within three working days of the end of the month that the firm at all times during
the month to which the report relates; maintained a net capital balance of an
amount not less that the specified in sub-rule (2).

4. A member shall at all times maintain a net capital balance as required under sub -
rule (2) of rule 3 for the purpose of his business and the aggregate indebtedness
ratio between his net capital and aggregate liabilities shall, at no time, exist the
ratio of 1:20 [SER 1987, Rule 15(1)].

If the requirement is not maintained - the member shall forthwith cease to

carry on his securities business, otherwise than for the purpose of giving effect to
any agreement of arrangement entered in to before such failure, and inform the
stock exchange and the commission about such failure.
The member who has ceased to carry on his business under sub -rule (2) may
resume his business if he becomes capable to meet the requirement, provided the
stock exchange is satisfied about that and permits him to do so under immediate
intimation to the commission [SER 1987, Rule 15(3)].

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Appendix D: Reform Initiatives in the Capital Market in 2007

The Securities and Exchange Commission (SEC) continues to carry out its regulatory
reform activities in a bid to develop and protect investors’ interest by establishing
transparency in the capital market. A brief description of the major reforms undertaken in
the capital market during FY 2006-07 is given below:

New Investment in the Capital Market

An amount of Tk. 321.71 crore was invested in the capital market during FY 2006 -07
through IPO of ten companies.

Mandatory Opening of Beneficiary Owners’ (BO) Account and Central Depository

System(CDS)
SEC has made it mandatory to open beneficiary owners’ (BO) account before applying
for shares floated through IPO. Central Depository of Bangladesh Ltd has been
operational since December 23, 2005. Up to June 2007, investors opened 13.85 lakh
beneficiary owners (BO) accounts with Central Depository Bangladesh Ltd. and 121
companies were brought under the CDS. After the introduction of CDS, transparency in
securities issuance, trading and settlement have increased significantly and settlement
period of securities transactions has been reduced by a day.

‘N’ Category Company Introduced

A new category named ‘N’ was introduced on the stock exchanges for newly listed
companies that did not hold annual general meeting from the date of listing.

Improvement of Capital Market Governance Programme

The SEC has taken up a project titled ‘Improvement of Capital Market Governance
Programme’to improves the governance scenario of the capital market. The project has
already started functioning.

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Formation of Financial Reporting Council (FRC) and Bangladesh Institute of
Capital Market (BICM)
The government has taken initiatives to set up an oversight body named ‘Financial
Reporting Council’ to ensure on time preparation of financial statements by the issuers
reflecting true state of financial affairs of issuer companies and also to ensure objective
auditing International Standard on Auditing. Besides, to educate investors, intermediary
institutions and to improve the corporate governance in the listed companies, the
Commission, in association with other stakeholders, is going to establish a securities
training institute titled ‘Bangladesh Institute of Capital Market’ which i s now at its final
stage.

Enforcement Action
From FY 2006-07, the SEC took 174 enforcement actions against issuers and other
market intermediaries, who failed to comply with security related rules.

Training Programmes for Members of Authorized Representatives of Stock

Exchanges
The SEC has organized a training programme covering securities laws, rules/regulations
and central depository system for the representatives of Dhaka Stock Exchange and
Chittagong Stock

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Appendix E: Index Calculation Algorithm (according to IOSCO
Method)

Yesterday's Closing Index X Current M.Cap

Current Index = -----------------------------------------------------
Opening M.Cap

Yesterday's Closing Index X Closing M.Cap

Closing Index = -----------------------------------------------------
Opening M.Cap

Current M.Cap =Y_ (LTP X Total no. of indexed shares)

Closing M.Cap = Y_ (CP X Total no. of indexed shares)

There are three indices in the DSE as follows:

Sl.No Index Name Base Index

1 DSI (all shares) 350 (as on 01-11-1993)

2 DGEN
(A, B, G & N) 817.63704 (as on 24-11-2001)

3 DS20 1000 (as on 01-01-2001)

Abbreviations and Acronyms

M.Cap - Market Capitalization
DSE - Dhaka Stock Exchange
IOSCO - International Organization of Securities & Exchange Commission
LTP - Last Traded Price
CP - Closing Price

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