introduction to bangladesh stock market

8/2/2019 Introduction to Bangladesh Stock Market

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Introduction to Bangladesh stock market

The necessity of establishing a stock exchange in the then East Pakistan was first decided by the

government when, early in 1952, it was learnt that the Calcutta Stock Exchange had prohibited the

transactions in Pakistani shares and securities. The provincial industrial advisory council soonthereafter set up an organizing committee for the formation of a stock exchange in East Pakistan. A

decisive step was taken the second meeting of the organizing committee held on the 13th march,

1953. In the cabinet room, Eden building, under the chairmanship of Mr. A. Khaleeli, secretary

government of East Bengal, commerce, labor and industries department at which various aspects of

the issue were discussed in detail. Then the central governments proposal regarding the Karachi

Stock Exchange opening a branch at Dhaka did not find favour with the meeting who felt that East

Pakistan should have an independent stock exchange. It was suggested that Dhaka Narayanganj

Chamber of Commerce & Industry should approach its members for purchase of membership cards

at RS.2000 each for the proposed stock exchange. The location of the exchange it was thought

should be Dhaka, Narayanganj or Chittagong. An organizing committee was appointed consisting

of leading commercial and industrial personalities of the province with Mr. Mehdi Ispahani as the

convener in order to organize the exchange.

The chamber informed its members and members of its affiliated associations of the proceedingsof the above meeting, requesting them to intimate whether they were interested in joining the

proposed stock exchange. This was followed by a meeting, at the chamber of about 100 persons

interested in the formation of the exchange on 07.07.1953. The meeting invited 8 gentlemen to

become promoters of the exchange with Mr. M Mehdi Ispahani as the convener and authorized

them to draw up the memorandum and article of association of the exchange and proceed to obtain

register under the companys act.1913. The other 7 promoters of the exchange were Mr. J M

Addision-Scott, Mr. Mhodammed Hanif, Mr. A C Jain, Mr. A K Khan, Mr. M Shabbir Ahmed and

Mr. Sakhawat Hossin.

It was also decided that membership fee was to be RS.2000 and subscription rate at 15 per month.

The exchange was to consist of not more than 150 members. A meeting of the promoters was held

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at the chamber on 03.09.1953 when it was decided to appoint Orr Dignam & Co., solicitors to

draw up the memorandum and articles of association of the stock exchange based on the rules of

stock exchange existing in other countries and taking into account local conditions.

The 8 promoters incorporated the formation as the East Pakistan Stock Exchange Association Ltd.

on 28.04.1954. As public company, on 23.06.1962 the name was revised to East Pakistan Stock

Exchange Ltd. Again on 14.05.1964 the name of East Pakistan Stock Exchange Limited was

changed to "Dhaka Stock Exchange Ltd."

At the time of incorporation the authorized capital of the exchange was RS. 300000 divided into150 shares. Of Rs. 2000 each and by an extra ordinary general meeting adopted at the extra

ordinary general meeting held on 22.02.1964 the authorised capital of the exchange was increased

to TK. 500000 divided into 250 shares of TK. 2000 each. The paid up capital of the exchange now

stoods at TK.460000 dividend into 230 shares of TK. 2000 each. However 35 shares out of 230

shares were issued at TK. 80,00,000 only per share of TK. 2000 with a premium of TK. 79,98,000.

Although incorporated in 1954, the formal trading was started in 1956 at Narayanganj after

obtaining the certificates of commencement of business. But in 1958 it was shifted to Dhaka and

started functioning at the Narayangonj Chamber Building in Motijheel C/A.

On 1.10.1957 the stock exchange purchase a land measuring 8.75 kattah at 9F Motijheel C/A from

the government and shifted the stock exchange to its own location in 1959.

Anticipation of the crash

The developments on the Dhaka Stock Exchange and the Chittagong Stock Exchange have all the

typical signs of a stock market crash though it can be argued that it is still too early to call it a bear

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phase that could last for years. We have seen a massive decline of stock prices across all

significant sectors of companies listed on the stock market, resulting in a significant loss of paper

wealth. In this case, the selling appears to be driven by panic to comply with new regulations as

well as curbs on flow of fresh money into bourses owing to these very norms. It is still not clear as

to whether underlying economic factors have changed enough to justify a complete erosion of

confidence.

To clarify, stock crashes may be associated with bear markets but are not tied to them. The crash of

1987 for example did not lead to a bear market while the Japanese Nikkei bear market of the 1990s

occurred over several years without any notable crashes.

Shares price crashes often follow speculative stock market bubbles because market players are part

of a socio-economic fabric where external economic drivers combine with crowd behavior and

panic psychology.

This leads to selling by some market participants and this induces more market participants to sell.

In contrast, there appear to be few willing to buy in such a market, though erosion in prices may

make many shares very attractive in terms of valuation.

Reasons for the crash

A correction after a prolonged period of rising stock prices and excessive economic

optimism

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new pricing structure emerging in a market where price-to-earnings P/E ratios had

exceeded averages causing the crash.

Institutions trying to correct injudicious use of margin debt and leverage which violatedexisting or reformed regulations caused the crash.

Panic selling and abrupt, dramatic price declines (unlike bear markets are declining stock

market prices can be measured in months or years).

Introduction of norms that have dried up flow of fresh funds into bourses and forced

existing players to pull out funds hitherto used to fund share purchases. The first knee jerk

reaction is always the trading curb, also called a circuit breaker, which halts trading in

the cash market if share prices rise or fall by a pre-set margin. (If the market has a futures

trading platform, there is a corresponding trading halt in the derivative markets based on

substantial movements across the broader market.) But this is not a solution- curbs work in

case of a few scripts, not when the entire market is in turmoil.

It can be argued that the only rational solution is deliberate intervention, in which a

government or a state-backed enterprise steps in to consciously buy shares and build up

holdings in worthwhile ventures.

A third way is to adopt steps to attract buyers back into the market. Companies could

choose to declare special or bonus dividends, make rights issues at very attractive prices or

even give bonus shares so that investors hold on their shares, or buy them for dividendshopping or bonus shopping.

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Imposition of trading curbs and reforms like a norm that allows short selling only if the last

trade in the stock was positive, to prevent short sellers from driving the price of a stock

down in a crash.

Formation of the probe committee

Some 60 individuals, many associated with Awami League and BNP, have made fortunes through

stock market manipulations, found the probe into the recent share debacle. Many of them can be

tried under the existing laws of the Securities and Exchange Commission, Khondkar Ibrahim

Khaled, who headed the probe, told The Daily Star yesterday. He also said the government can

publish the report including the names mentioned. This view runs counter to that of the finance

minister, who said he would not make the names public until he is convinced about the allegations.

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Arguing for disclosure, Khaled said in many cases suspects' names are published on the basis of

first information report. He, however, stressed the need for detailed investigations to bring them to

trial. The committee has warned the government high-ups against the influence of market players

like pro-AL business tycoon Salman F Rahman and former DSE president Rakibur Rahman. The

government must stay watchful so that Salman, Rakibur and other top market players cannot

influence policymaking or appointments to the SEC through recommendations or lobbying, said

Khaled. During the two-month investigation, the committee had talked to over 500 traders

including all members of Dhaka and Chittagong stock exchanges, and also journalists, professors

and researchers. We got the impression after talking to people, said Khaled, also chairman of

Bangladesh Krishi Bank. The probe body also found involvement of opposition-linked influential businessmen and traders in the stock market debacle. It observed that the SEC will remain

ineffective and exposed to manipulations as long as the market players are able to influence the

regulator. The committee said Salman and Rakibur were named as suspects also in the probe report

on the stock manipulation in 1996. The investigation into the recent bourse debacle found their

roles to be under widespread public suspicion. There have been allegations that the two influenced

the SEC and lobbied for the appointment of Ziaul Haque Khandaker as SEC chairman and

reappointment of Mansur Alam as SEC member. Salman lobbied the Bangladesh Bank governor to

soften the central bank's stance on BD-Thai Aluminium that had been involved in money

laundering, said the report. Besides, he had links with overpricing of shares and overvaluation of

assets of GMG Airlines and Unique Hotel, it said. Salman and Rakibur exerted undue influence on

the SEC and tarnished the government's image in the process, the report said. When contacted,

Salman, now in London, said he would return home soon and go through the probe report.

Whatever I did in the stock market had the approval of the SEC, said the influential

businessman. He could not find any reason why the probe committee has warned the government

about him. I will look into the matter on my return home, he said. Rakibur, a DSE director, hasdenied the allegation of influencing the SEC in any way. I have no power to influence the SEC. Is

there any proof that I influenced it?" he questioned.

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The probe has found instances of fraudulence in omnibus accounts. It traced existence of several

lakh shadow accounts that had been used as tools for trickery. But the committee could not look

into them properly for lack of adequate time. It however sampled some accounts and examined

them. The report said the shadow accounts shown as omnibus accounts with merchant banks did

not reflect deposits and withdrawals properly. Some of the accounts belong to former BNP

lawmaker Mosaddeq Ali Falu, Unique Hotel and Resorts Ltd, former Awami League lawmaker

HBM Iqbal, Muniruddin Ahmad, Roksana Amjad, Golam Mostafa, Ahsan Imam, Yakub Ali

Khandaker, New England Equity Ltd, Md Lutfar Rahman (Badol) and Shoma Alam Rahman.

Khaled said: Trading through beneficiary owner accounts had been transparent in the secondary

market, thanks to Central Depository Bangladesh Ltd. But suspicious trading had been done from

omnibus accounts. These omnibus accounts must be examined after reforming the SEC, said the

former deputy governor of Bangladesh Bank.

The committee finally recommended that the government turn these omnibus accounts into

beneficiary owners (BO) accounts, otherwise the SEC would block them.

Impact on economy

The benchmark index had climbed by 80% in 2010 but has lost more than 27% since early

December. This is the most drastic situation our country has ever seen. This caused a huge impact

on our overall economy which has given below.

Impact when price index is high is given below

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1. The year also witnessed the approval of the largest Initial Public Offering (IPO) in the history of

the premier bourse of the country in terms of money. The amount of turnover in the year was Tk

4,009 billion which is 171.8 per cent higher on the level of the previous year.

2. The amount of total market capitalization also reached to a new high to Tk 3508 billion which is

83 per cent more than that of the previous year. The government collected a total of Tk 3.16 billion

as tax as source from the DSE while the amount was a nominal Tk 624 million in the previous

year.

3. It is estimated that at least 10% of our total population is directly or indirectly related with

capital market. Simply by loosing capital they find themselves less capable of earning, in less than

one hour.

4. To get the desired level of money Bank invested more money than they are authorized which

causes lack of liquidity in their hand when market goes down.

5. Even sister banking is not possible cause no bank has enough money to lend. (Sister banking

means taking loan from another bank.)

6. The price of share has decreased means the listed companies have lost their values as per the

percentage of their stock has fallen. It means industrialist lost their money to invest to productive

sectors, financial institutions has lost their money to give loan even though manufacturer has lost

their value to produce product with the pace of demand which cause a price hike of almost every

consumer product.

7. At the time of price hike there were huge injections of money but when the price falls, the

money did not come out to the investors. Money manipulated by some syndicates and goes to them

it means money goes to a single hand. So, it is clear that some people are getting rich but the

ordinary people getting poorer than they were.

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8. It creates a bad impact of our country throughout the world which may affect on coming foreign

investment.

However, to get the real pace of capital market we have to let it go with it own style. Now the

question is what its own style is. Neither the over pricing period nor the less pricing period is

called the normal position. The normal position is related with price earning, and face value of

share. The valuation of share is concerned here more than the restriction given by the regulators.

Regulators have imposed restriction in a very incentive place where restriction will cause melting

down of capital in capital market. So they should lift the restriction from the way capital market

run. They should impose it where it is needed.

Reference:

1. bdnews24

2. The Daily Star

3. The Independent

4. Dhaka Stock Exchange

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introduction to bangladesh stock market

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