The Financial Express

Rejuvenating stock market: Long-term measures

Nironjan Roy from Toronto, Canada concluding two-part article on stock market | Published: January 21, 2020 20:50:04 | Updated: January 31, 2020 22:27:48

Rejuvenating stock market: Long-term measures

Stock market should be freed from day-traders who always consider this market as a place which makes one rich overnight. This wrong concept should be removed from the retail investors. Awareness programme should be undertaken and some restrictive measures should be applied to change this mindset of the investors. Stock market should be made an alternative investment opportunity where people will invest their additional savings or surplus fund in order to supplement their income. The practice of day trading with an objective of making easy money, which is being followed for decades, cannot be removed within short span of time, so efforts should be there to gradually stop this practice. At the same time, there should be restriction for small investors to invest through wealth/portfolio management, the service of which will be provided by institutional market players which include commercial banks, merchant banks and ICB (Investment Corporation of Bangladesh).  

MINIMISING DEPENDENCE ON LARGE CAPITAL-BASED COMPANIES: Our stock market substantially depends on a handful of large capital-based companies and this is not a good sign because these types of shares allow scope for a wide range of market manoeuvring. Large capital-based companies carry substantial influence on overall market capitalisation which is felt even from small changes in their share price. While working in the surveillance department of SEC (Securities and Exchange Commission) about twenty years back, I witnessed how market was manoeuvred by trading aminimum number of shares of two largest capital-based companies. In addition to market manoeuvring opportunity, the presence of handful of large capital-based companies exposes the entire market on the performance of these few companies. If anything negative occurs to any of these large capital-based companies, the entire market is badly affected. The recent problem of Grameen Phone (GP) arising out of enormous dues to the government is an example of how the stock market is badly affected by any incident of a single large capital-based company. Drastic fall of GP share is one of the major causes that contributed to the continuous fall of stock index. This problem should be resolved by listing more public and private companies in the bourses. 

MUTUAL FUND FOR EXPATRIATE BANGLADESHIS: PM's six-point directive includes enhancing foreign investment, which is, of course, a long-term measure because foreign investment cannot be mobilised overnight. Moreover, excessive foreign fund in the country's secondary market may make it more volatile instead of sustainable as foreign investors are considered opportunists who will buy at their suitable time and dump shares whenever they find it least risky. The fundamentals of our market and its depth are not strong enough to withstand the consequence of abrupt buy-sale decision made by foreign investors. Nowadays, foreign investment hardly comes from individual investors, rather most foreign investment is made by the rich fund managers or hedge-funds who technically manage rich people's wealth. These investors are always considered very risky all over the world. So, extreme care and strict controlling measures should be exercised while encouraging foreign investment in our secondary capital market.

However, as an alternative measure, foreign fund from innumerable expatriate Bangladeshis can be brought in the capital market. This fund will be very sustainable and will not be easily repatriated if steady income can be generated. Most of expatriate Bangladeshis enjoy advantages of mobilising fund at a very cheap rate that can be invested in Bangladesh if appropriate investment opportunity can be provided with some sort of a guarantee. So, any investment opportunity that generates minimum income will attract attention of many expatriate Bangladeshis. Creation of mutual fund along with some steady growth and balanced growth portfolio, exclusively for Bangladeshi living abroad, has the potential to bring more foreign fund in the country's capital market. In order to make this initiative successful, convenient selling option should be created among expatriates and at the same time, transparency as well as accountability of the company handling this type of investment opportunity should be established. Initially, reputed companies with strong track record may be allowed to handle these investment options for Bangladeshis living abroad.    

FORMING GOVERNMENT COMPANY FOR MEGA PROJECT: One of the six-point directive given by PM includes listing of profitable state-owned enterprises in the bourses. This would really a very good initiative but our experience shows that this measure has been discussed for the last two decades and still we are not sure how many state-owned enterprises have so far been listed with country's stock exchanges.  However, the government can form new companies for undertaking long-term projects, one after another, for developing the country's infrastructure. These companies can mobilise fund through issuance of IPO (initial public offering) to be eventually enlisted with stock markets. By doing so, the government will be able to achieve dual objectives -- supply of good shares will increase in the market and at the same time, fund can be mobilised from capital market at cheap rate which will substantially reduce government's funding on debt.

STREAMLINING LISTING COMPANIES: For prolonged bearish market, some issuing companies may be held responsible because their performance is not above question. It is alleged that many companies after mobilising fund from capital market have ostensibly diverted the same to some other areas. Many companies have not been paying dividends years after years that has caused big frustration among investors and this is one of the reasons of bearish capital market. This type of irresponsible behaviour of the Board of Directors of listed companies is not acceptable at all. Exceptionally, one or two companies may not function as per expectation. But their number should not be many and if so, there must be some mysterious reasons and thorough investigation should be undertaken to unearth the actual reason for remedial measures. Similarly, some action plan would need to be undertaken for the companies that will successively incur loss year after year and will not be able to pay dividend. Even, measures of taking over the management and amalgamation or merger of this type of failed companies will not be an unwise option. At the same time, some preferential treatment can be provided to the listed companies which will successfully run their businesses and will pay dividend to the shareholders on time. Such preferential treatment may include lower tax rate, lower interest rate on bank loan, bank finance on favourable terms, particularly with no collateral etc.   

OTHER MEASURES: There are other important measures like popularising mutual fund, development of secondary bond market, bringing more IPO through automation of IPO management process and establishing accountability and transparency, bringing more professionals in this area are very important. At the same time, the government, in addition to usual regulatory role, should always apply some fiscal and non-fiscal tools to keep the market from being too high or too low. 

Nironjan Roy is a banker based in Toronto, Canada.


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