RECENT TRENDS IN CAPITAL MARKET OF BANGLADESH: CRITICAL EVALUATION OF

REGULATION

Syed GolamShahjarul Alam

Examination Committee

Dr. Sundar Venkatesh (Chairperson)Dr. Winai Wongsurawat (Co-chair) Dr. Yousre Badir (Member)

1

AGENDA

� Objective of the study

� Overview of Capital Market of Bangladesh

� Summary of Ibrahim Khalid Committee report(2011)

� Methodology

Empirical examination of three problems identified by � Empirical examination of three problems identified by Ibrahim Khalid committee (2011)� Stock price “Manipulation”

� Stock split

� Asset revaluation

� Conclusions and Recommendations

2

OBJECTIVES

� To analyze and identify the reasons (Esp.,regulatory rules.) for recent stock marketvolatility in Bangladesh.

� To reviewthe existing listing and trading rules inStockExchangesin Bangladesh.StockExchangesin Bangladesh.

� To recommend some guidelines for betterregulations to strengthen the capital market ofBangladesh.

3

Overview of Capital Market of BangladeshOverview of Capital Market of Bangladesh

4

Capital Market Overview

� Capital market of Bangladesh consists Securities ExchangeCommission (SEC) as the Regulator, two stock exchanges(the Dhaka Stock Exchange (DSE) and the ChittagongStock Exchange (CSE)) which deal in the secondarycapital market. DSEwas established as a public LimitedCompanyin April 1954while CSEin April 1995.Companyin April 1954while CSEin April 1995.

� The SEChas issued licenses to 27 institutions to act in thecapital market. Of these, 19 institutions are MerchantBanker & Portfolio Manager while 7 are Issue Managersand 1(one) acts as Issue Manager and Underwriter.

5

Recent trends of DSE General Index

6

Volatility of DSE compared to other stock markets

Name of the Index Index Return

(Dec’10-Jan’12)

Std. Dev of index return

(Dec’10-Jan’12)

DSE (Bangladesh) (50%) 11%

BSE-30 (India) (14%) 7.8%

SET (Thailand) 55.62% 5.84%

FTSE Bursa Index

(Malaysia)

19.34% 4.38%

7

HIGHEST AND LOWEST RECORDS OF DSEIN 2010Lowest Values Highest Values

Total Number of Trades 88288 389310

Total Trade Volume 24432104 242856735

8

Total Trad Value in Taka(mn) 6238.070 32495.756

Total Market Capital in Taka(bn) 1914.046 3680.714

DSI Index 3773.76 7383.93

DSE General Index 4568.40 8918.51

DSE Top 5 beneficiary Owner (BO) Account holders in 2010

Name Total Annual Turnover

(Tk. Billion )

Eqv. USD

(In Billion )

Prime Bank Investment Ltd. 676.73 9.67

IDLC FinanceLtd. 555.58 7.94IDLC FinanceLtd. 555.58 7.94

LankaBanglaSecurities Ltd. 525.33 7.50

Trust Bank Ltd. 523.25 7.48

AB Investments Ltd. 497.33 7.10

9

NEW INVESTORS WITH INADEQUATE KNOWLEDGE

Change in total Number of Beneficiary Owner(BO) Accounts in two Years

Date Total No. of BO A/C Change (+/-)

01.01.2009 1,468,500 --

30.06.2009 1,419,019 (49481)30.06.2009 1,419,019 (49481)

31.12.2009 1,920,602 5,01,583

30.06.2010 2,570,654 6,50,052

31.12.2010 3,379,719 8,09,065

10

NUMBER OF NEW INVESTORS

� Dramatic increase in newinvestors indicates that themarket might be overcrowded with naive anduninformed investors that might lead more speculation inthe market.

11

IBRAHIM KHALID COMMITTEE REPORT (2011)

Ibrahim Khalid share probe Committee Report (2011)identifies following broad factors behind recent capital marketvolatility in Bangladesh:

� Primary Issue related Problems: � Faulty Methods of IPO� High premium for stock listing� Illegal Private placement market� Illegal Private placement market� Asset Revaluation of Companies before listing to charge

higher premium. � Secondary market related problems:

� Circular trading in Secondary market � Stock Split� Stock Price Manipulation through Omnibus Accounts

12

IBRAHIM KHALID COMMITTEE REPORT (2011)

� Regulatory Failure� Inconsistency in regulatory activities � Supporting and legalization of unethical activities of Big

Investors� Irresponsible Behavior/Weakness in many areas� Formulating policies to support market Players � Formulating policies to support market Players

(Manipulators)� Lack of Due Diligence� Lack of Co-ordination between SEC and Stock exchanges� Allowing Financial Institutions to invest in capital market

aggressively� SEC Failed to take measure against manipulation of

Financial statements13

IBRAHIM KHALID COMMITTEE REPORT (2011)

� Stock Exchange Demutualization� Formulating policy for Capital Market financing by FI’s� Ensuring transparency in dealing with Omnibus Accounts� Prohibit share trading by some Government Officials (e.g.,

SEC, DSE, CSE, Bangladesh bank, Commercial bankofficials)officials)

� Asset Revaluation by companies should be reviewed by SEC� Reviewthe Book-Building Method of IPO� Restructuring of SEC� Uniform face-value of all companies� Legal actions against market players/manipulators

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Empirical examination of three problems identified by Ibrahim Khalid committee (2011)

� Stock price “Manipulation”� Stock split� Stock split�Asset revaluation

15

METHODOLOGY

� Data Sources

� Primary (Dhaka Stock Exchange)

� Secondary Sources (Publications and websites)

Analysis Technique/method� Analysis Technique/method

� Qualitative analysis

� Quantitative Analysis

16

TOP 10 GAINERS OF DSE IN 2010

Top 10 Gainers of DSE in 2010Company name-Category Price (TK)

(01/01/10)Price(TK)30/12/10)

Change (%)

Market Adjusted Return (%)

Ctg. Vegetables-Z 119.75 5099.50 4158.46 4076.99

Safco Spinning-Z 84.50 753.75 792.01 710.54

Tallu Spinning-Z 156.00 848.75 444.17 362.7Tallu Spinning-Z 156.00 848.75 444.17 362.7

Rahima Food-B 165.25 693.75 319.82 238.35

BD welding-A 66.80 266.50 298.95 217.48

Prime Insurance-A 444.00 1584.25 256.81 175.34

Monno Staffler-A 987.25 3360.50 244.13 162.66

Sonargoan Textile-A 380.00 1288.00 238.95 157.48

Dhaka Insurance-A 812.25 2646.50 225.82 144.35

City Gen Insurance-A 474.25 1503.75 217.08 135.61

Market Return (2010) 81.47% 17

STOCK PRICE “MANIPULATION” (CHITTAGONG VEGETABLE)

Stock Price of Chittagong Vegetable oil Industries Ltd.Date Price (Tk.) Change in each 6 Month

(%)P/E Ratio

30-Jan-09 41.25 -

30-Jun-09 59.25 43.64 Nil

30-Dec-09 110.75 86.92 Nil

31-Jan-10 214.00 93.23 10.1931-Jan-10 214.00 93.23 10.19

30-Jun-10 1590.00 642.99 75.72

30-Dec-10 5099.50 220.72 242.80

31-Jan-11 4328.75 -15.11 206.10

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Market adjusted return of Chittagong vegetable oil Industries Ltd

Month Monthly price of stock Month end Index stock Return Index Return Monthly excess stock

return, α1

31/1/2009 4.13 2,649.49 32% -5% 37%

1/28/2009 4.20 2,570.96 2% -3% 5%

26/2/2009 3.40 2,446.92 -19% -5% -14%

30/4/2009 3.50 2,554.36 3% 4% -1%

29/5/2009 3.85 2,572.18 10% 1% 9%

6/30/2009 5.93 3,010.26 54% 17% 37%

30/7/2009 5.80 2,914.53 -2% -3% 1%

31/8/2009 8.53 2,941.28 47% 1% 46%

30/9/2009 13.50 3,083.89 58% 5% 54%

29/10/2009 10.75 3,364.26 -20% 9% -29%

26/11/2009 10.53 4,380.95 -2% 30% -32%

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26/11/2009 10.53 4,380.95 -2% 30% -32%

12/30/2009 11.08 4,535.53 5% 4% 2%

31/1/2010 21.40 5,367.11 93% 18% 75%

28/2/2010 29.98 5,560.56 40% 4% 36%

31/3/2010 99.43 5,582.33 232% 0% 231%

29/4/2010 169.00 5,654.88 70% 1% 69%

31/5/2010 153.55 6,107.81 -9% 8% -17%

30/6/2010 159.00 6,153.68 4% 1% 3%

29/7/2010 156.95 6,342.76 -1% 3% -4%

31/8/2010 140.00 6,657.97 -11% 5% -16%

30/9/2010 148.88 7,097.38 6% 7% 0%

31/10/2010 249.03 7,957.12 67% 12% 55%

30/11/2010 353.95 8,602.44 42% 8% 34%

30/12/2010 509.95 8,290.41 44% -4% 48%

HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF

CHITTAGONG VEGETABLES OIL LTD.CHITTAGONG VEGETABLES OIL LTD.CHITTAGONG VEGETABLES OIL LTD.CHITTAGONG VEGETABLES OIL LTD.

Pair Paired Differences

t-Statistic

Degrees of

freedom

p-value(2-tailed)

Mean Std. Deviation

Std. Error Mean

Lower Upper

Stock Return –Stock Return –index Ret urn

.2499 .526 .026 .033 .467 2.373 24 .026

As the t-statistic is 2.73 and the p-value is 0.026 that is below 0.05, the nullhypothesis is rejected and there is excess market return forthe stock.

Conclusion: Statistically Significant

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CAN IT BE FIXED BY REGULATIONS?

Actions taken by the regulator to alert the investors

� Query to the Company

� Investigation of business activities

� Investors awareness messages� Investors awareness messages

� Repeat of company Fundamentals to DSE Screen

� Legal actions against company Directors

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WHY DIDN’T INVESTORS RESPOND?

Possible reasons behind this

� Investors confidence

� Market inefficiency

Irrational market behavior� Irrational market behavior

22

STOCK SPLIT AND STOCK PRICE

� Aduda and Caroline (2010); the most common reasons of stocksplit are to achieve an optimal price range for liquidity, to achievean optimal tick size and to signal the confidence of managements’in the future stock price.

� Various studies on stock split and market behavior shows thattherearestockprice might lead increasein stockprice andtradetherearestockprice might lead increasein stockprice andtradevolume in the short term

� Copeland (1979) ; A stock split changes stock prices to a moreoptimal price, which in turn increased demand for the stock.

� Baker and Powell (1993) ; The main motivation for the executivesto split stock was toward improved liquidity. High-priced stocksfound to be illiquid due to the psychological reasons andtransaction costs.

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List of sample of companies did stock split during 2009-2010

Name of the Company Market Capitalization (as on 02.07.2009)

Market Capitalization (as on 05.12.2010)

Change (%)

Market adjustedreturn (%)

NBL 17093.45 77256.42 351.9651 2.5

Pubali Bank 16979.24 57735.13 240.0337 (30)

UCBL 9544.65 765099.54 7916.004 ---

Eastern Bank 2475.00 39460.16 1494.35 4

Uttara Finance 2475.00 21859.2 783.2 240

Al-Arafah Islami Bank 6687.61 32413.54 384.6805 101

Prime Bank 15747.27 57186.03 263.1489 (30)Prime Bank 15747.27 57186.03 263.1489 (30)

Southeast Bank 10584.51 45708.89 331.847 (77)

NCCBL 7511.61 37404.66 397.958 (54)

MIDAS Finance 1560.80 12483.34 699.8039 228

Shahjalal Islami Bank 7583.21 309117.03 3976.335 45

BD Finance 2039.68 20200.75 890.3882 273

Phoeninx Finance 1059.30 12199.52 1051.659 225

First Security Bank Ltd. 2768.41 12963.72 368.2731 (65)

Aftab Automobile 2768.41 24360.48 779.9448 7024

PRICE CHANGE OF COMPANIES SPLIT STOCKS DURING 2009-2010

Stock Price before One week

Stock price at the date of

announcementstock price after

One week

NBL533.75 626 654.75

Change in stock price (%)

17.28 4.59price (%)SAFCO Spinning 702.00 723.00 753.75

Change in stock price (%)

2.99 4.25

Phoenix Finance 1,827.25 1,987.25 2,079.75

Change in stock price (%)

8.76 4.65

25

CAN IT BE FIXED BY REGULATIONS?

� Market response toward stock split was consistentwith the results found in the prior studies.

� Regulator cannot restrict companies fromstocksplit.

� Market might be overreacted but it does notindicate any regulatory failure.

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ASSET REVALUATION AND STOCK PRICE MOVEMENT

� Chainirun and Narktabtee (2008) argued that firmsrevalue their assets to signal the firms’ growthprospect and liquidity improvement in order todecrease information asymmetry.

� Sharpe and Walker (2007) revealed thatannouncements of asset revaluation were associatedwith substantial upward movement in stock price andthese shift in stock price generally sustains in latermonths.

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ASSET REVALUATION AND STOCK PRICE MOVEMENTName of the Company

NAV per Share(Tk.) NAV Change

(%)

Stock Price Change during

Jan’2009-Dec’2010 (%)

Change in DGEN

Jan’2009-Dec’2010(%)

Market Adjusted

return(%)

Before Asset Revaluation

After Asset Revaluation

Libra Infusions Ltd.

438 15,667 3472 355

212%

143

Sonali Ansh Ltd. 297 2,157 626 767 555

RahimTextile 127 785 518 641 429212%RahimTextile Ltd.

127 785 518 641 429

BD Thai Aluminum Ltd.

142 566 298 185 (27)

Orion Infusions Ltd.

20 101 413 357 145

Ocean Containers 13 50 296 ---- ----(191)Shinepukur

ceramics12 26 120 21

Prime Textile 300 633 110 572 360

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ASSET REVALUATION � Disclosure of asset revaluation surpluses

decreased information asymmetry in the market.

� Leads to increase in stock price that are veryconsistent with other markets.

� Regulators cannot stop asset revaluation and hadvery fewthings to do with this.

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CONCLUSION AND RECOMMENDATIONS

� Market behavior in the Dhaka stock exchangewas consistent with that of other markets.

� various studies supports the rationality of thisbehavior and study does not support anyregulatoryfailure.regulatoryfailure.

� Most of the factors identified as problem(Liquidity, new investors, Banks investment etc.)seems beneficial for the long-termdevelopmentof the market.

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CONCLUSION AND RECOMMENDATIONS

� Coordinated actions to restore Investor’s Confidence

� Capacity building of SEC

� Structural development of the capital market

� Increase supply of stocks

EducatingInvestors� EducatingInvestors� Conclusions of IbrahimKhalid Committee need to be

reviewed in line of other markets before implementation.

� Further research in this field might help us to drawbetter conclusion.

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Thank YouThank You

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Q&A?Q&A?

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