In capitalistic economy stock market is considered the mirror of economic condition of a country as economic boom and recession are reflected through bull and bear condition of the stock market. Stock index plays the role of country's economic barometer although growth is determined from changes in gross domestic product (GDP). The theory holds good in developed economies but not in emerging ones including ours where stock index does not always reflect the country's economic condition.
During the last one decade, Bangladesh's economy has consistently developed maintaining GDP growth rate at around 7.0 per cent and above, whereas stock market remains more or less stagnant. Since the last crash in 2010, the share price index has remained below 5000 points except some sudden unusual rise in 2017 when index soared to 6336. Our stock market experienced some ups and downs, and the secondary capital market has not performed consistently commensurate with the country's economic growth during the last ten years. In spite of the fact that the country's stock market had to withstand two severe crashes in 1996 and 2010, this market should have rebounded and steadily moved forward by now. A review of the overall situation may cast some light on the prevailing situation.
STOCK EXCHANGES' CAPACITY BUILDING: We have noticed that during the last two decades, our capital market has gone through noticeable changes in the form of bourses' capacity building and regulatory reforms. Remarkable improvement has taken place in the stock market and among them, demutualisation and introduction of real-time online surveillance are praiseworthy initiatives. Besides, their association with many international agencies as well as securities-related entities has raised the bourses' reputation and credibility. Finally, Dhaka Stock Exchange (DSE) has established its own building where they will move very soon. DSE will stand on its own premises at a time when the necessity of physical office is almost over as world's capital market has entered into a virtual platform. Nevertheless, DSC's own building symbolises its strong presence in the market.
BSEC'S REFORMS: Bangladesh Securities & Exchange Commission (BSEC), country's capital market watchdog, has also gone through some regulatory reforms. They have introduced innumerable rules and regulations in an attempt to ensure discipline in the market, establish transparency and finally protect investors' interest. BSEC is now quite capable of overseeing the country's capital market employing adequate manpower with professionally sound qualification and long experience in this field. Besides, BSEC is now well connected with many market watchdogs of different countries and is associated with many international agencies as well. So, from regulatory perspective, there should not be any barrier or limitation towards capital market's development.
DSE AND BSEC'S ROLE NOT REFLECTED IN THE MARKET: It is undeniable that country's capital market has developed in terms of its infrastructure, logistics and regulatory perspective. However, some core issues related to the market itself have not been addressed properly and among them inadequate stocks and securities is the most important limitation.
LESS STOCKS MEANS MORE MANIPULATING SCOPE: Although average market capital of DSE is over USD 40 billion, the number of listed securities are only 578 comprising 312 stocks, 35 mutual bonds, 8 (eight) debentures, 221 treasury bills and 2 (two) corporate bills. Technically, 312 equity shares are listed in DES which is very inadequate. This is also inconsistent with the market condition as market cap is very high despite lesser number of securities. Under this situation, each and every stock carries huge market weightage which can easily be manoeuvred by opportunist investors to play around in the market. When the number of securities is less in a big market cap situation, vested quarters can easily target the few stocks in manoeuvring the overall market in their favour -- to gain manipulative benefit by depriving the general investors. When I used to work in SEC about two decades ago, one of my responsibilities was surveillance of trading at stock exchanges. During that time two high market cap script was BATBC (British American Tobacco Company) and Beximco Pharma. We noticed that at the beginning of the day, market trend was set by trading only minimum number of shares of these two securities because price change of these two stocks used to heavily impact the overall market index. So some opportunist investors used to trade those two companies at higher price to push market index up, alluring general investors to buy more. We investigated and identified those opportunist investors but could not charge them for any violation of securities laws.
MORE SECURITIES STRENGTHEN MARKET DEPTH: Two decades ago, listed securities, particularly equity stocks were about 210 which although has increased to 312, are not good enough for a sound and matured secondary market. So, if a large number of securities were listed in the market, manoeuvring scope of opportunist investors would be substantially reduced. For example, if DSE had one thousand five hundred listed equity stocks with fifty billion USD market cap, trading of some selective stocks would carry insignificant impact on the overall market condition. With the presence of higher number of securities, market depth and breadth are so widened that not only market manoeuvring scope is restricted but general investors have the opportunity to play counteractive role by trading other securities.
STOCK EXCHANGE AND BSEC CAN PLAY SUPPORTIVE ROLE TO BRING MORE IPOS: Although extensive measure for bringing more IPOs (initial public offerings) in the market is inevitably required for rejuvenating the country's capital market, yet Stock Exchange and BSEC cannot stimulate the market enough, as the former plays the role of SRO (self-regulatory organisation) while the latter does the job of market watchdog. However, Stock Exchange can undertake some activities in encouraging the business community for mobilising fund from capital market and thus facilitate easy and convenient stock listing. Similarly, BSEC can provide some incentives for mobilising fund from capital market. They may consider providing more fiscal incentives and non-fiscal incentives to the listed public companies than unlisted public companies. In general, any listed public company has to comply with more regulatory requirements than those of unlisted companies and therefore, many companies stay away from listing their companies with stock exchange.
REMOVING FEAR ABOUT CAPITAL MARKET: The reasons of inadequate new issues are required to be identified first and then appropriate measures need to be taken to address them. Relaxing rules and regulations, differential treatment for small, medium and large companies, simplification of approval process and digitalisation of new issue submission as well as approval could be some of the proactive initiatives that DSE and BSEC can initiate jointly. Although DSE has already introduced a separate window for small companies, that needs to be widened further and made convenient for the investors. Most importantly, there is a common perception among entrepreneurs of small and medium-sized companies, which are mostly family-owned businesses, that unnecessary hassles and regulatory binding would arise if the companies go public by enlisting in the bourse. Many companies take the pain of borrowing money from bank at very high rate of interest, yet they do not consider mobilising funds from capital market. The reason is unfounded fear about capital market. So, DSE and BSEC will have to work together to allay fear of potential entrepreneurs.
Nironjan Roy is a banker based in Toronto, Canada.
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