Capital market and greed factor
Mohammad Saquib Hasan
Our capital market experienced a totally new kind of development in the trading week ending on January 13 last. It watched both sides of a coin within two trading days!
On January 10, we saw a huge selling pressure and a record fall, 600 points, in the general index of Dhaka Stock Exchange (DSE) within just 50 minutes of trading. Again next day we find the other side of the coin when almost no seller was found in case of most of the shares. At the end of the day's trading, the DGEN, actually, gained 1012 points, taking into consideration the previous day's loss. The DGEN gained the maximum on any trading day was 701 points when trading of GP hit the market for the first time. Thus we witnessed both record gain and record decline in index on January 10 and January 11 respectively. 'It appeared like a circus show' said a market analyst. This opinion could not be ignored when we saw a transaction of only Tk.9.77billion on the day when the market experienced the highest increase in its general index. We also witnessed rowdy protests from retail investors when the market took a deep plunge. At this situation we must know the background of such developments. First we need to look at the capital market scenario for the last couple of years. Sophisticated and well-developed capital market is considered as the hallmark of the market economy worldwide. Although our country is moving toward a full market based economy, the capital market is still in its infancy. This has been proved again through the recent trends in the capital market.
The fall in share prices is nothing unusual for a market that has been bullish over a long period. Market pundits also expected a correction in the capital market. But several factors made this expected correction into destruction of investors! The DGEN which was 5367.11 points on January 10, 2010, increased 6249.35 on the same date this year. But in a day's gap market index soared to 7512.09. The percentage change in one year stood at 39.9 from 16.40 within two consecutive trading days! We did so many good predictions about our capital market. Many of us started describing our capital market a successful one as its total market capitalization reached about 40% of the Gross Domestic Products (GDP).
But the ongoing volatile situation in our capital market remind us the fact that we are not capable of exploiting the right opportunities. Many of us started blaming the regulators. It is a matter of great regret that the SEC, the central bank and other stakeholders are also blaming each other. This ultimately proves the lack of coordination among them in policy-making and policy implementation. Unfortunately, this problem is not a new one rather it has one of the main problems for a long time in each and every development process that ended in failures. But it seems we don't like learning from the past. We had an experience of a market crash in 1996 and now we have another one in our hand in 2011.
In early December last when general index reached the record 8700 points, many analysts expressed their concern about the overvaluation and syndicated price hike. But that time our general investors were over-inspired by the gain from the market. It was seen that most regulatory decisions failed to slow down the unending market rally. Investing people became more dependent on rumors than fundamentals of the issues traded on the bourses. Insider-traders turned out to be big gainers. Now it is becoming clear to us that there are many other factors that have brought the capital market on the verge of a collapse.
To take the benefit of the tax exemption allowed in case of investment in shares, a huge amount of black money has flowed into the capital market. Investment of black money in shares had become the easiest way to earn hefty profits. After 2008, these flow of funds started increasing very fast. Again banks and financial institutions started misinterpreting the regulator's guidelines and entered into the capital market with substantial amount of funds that were supposed to be used in providing loans to the real sectors of the economy. However, overflow of funds caused excess liquidity in the market and these in turn has created the bubble.
For quick gain, institutional investors like banks and NBFIs started investing in the capital market without considering any limits. In the year 2010, many banks and non-bank financial institutions invested huge amount in the capital that exceeding their exposure limits. Meanwhile, the recent developments in the country's financial sector do also suggest some laxity on the part of the relevant regulator to monitor properly the investment activities of a number of banks and NBFIs that deployed the depositors' funds imprudently in the stock market. Such banks and NBFIs were reported to have unreasonable exposures to the securities market.
In 2010, institutional investors especially some banks and non-bank financial institutions showed their investment characteristics like general investors. Over last two years, the profit of most of the banks and financial institutions became two to three times more than that of the previous years. This profit growth was attributed to profit earned from investment in shares. Thus many banks and financial institutions concentrated in share business instead of investing in their core banking activities.
Non-bank financial institutions are also major players in the capital market. In 2010, some NBFIs invested more than their total paid-up capital. Bangladesh Bank tried to guide these risky investments by issuing several circulars. But the BB circulars ultimately could not stop these institutions from investing in shares.
For instance, an NBFI is not allowed to invest funds in stocks exceeding 25% of its paid-up capital and reserve. But this limit may be 50% under the consent of Bangladesh Bank (According to the DFIM Circular No.09, 22/08/2010 this guideline was supposed to be implemented by December 2010). That means NBFIs got more than four months to implement this guideline. Up to June 2010, there were more than 10 financial institutions that invested funds worth more than 50% of their paid up capital and reserve in stocks. These financial institutions got enough time to reconstruct their investment. But now it is clear that financial institutions were busy at utilizing the deadline effect. In turn, many people are now blaming central bank for this! Lastly we found huge sale pressure in December by these institutional investors and this affected the market.
Again many of us are trying to find a link between market-fall and liquidity crunch. CRR and SLR are considered as one of the most effective tools for controlling money market. BB recently increased CRR and SLR rate to 6% and 19% respectively in order to check inflation. The implementation date of this guideline started from 15th December. So a big amount of money was taken out from the market. Yet there were idle funds in the market.
Book-building system has already been modified to bring in clarity in discovering the offer price. Still current IPO process has made an impact on market liquidity. In IPO of Mobil-Jomuna, MI cement and Salvo Chemicals, Tk.9.69 billion will be raised. For this reason a big chunk of money will be raised from capital market. However, IPO subscription date of Salvo Chemicals has been shifted to next month. But it should have understood earlier. However, to solve this problem a certain percentage i.e. 5% or 10% may be taken with application submitted by the bidders and after the lottery only winners could be asked to pay the rest. This would have helped minimize the liquidity problems as well as complexities in the overall IPO process.
In every situation, implementation of policy becomes the most challenging issue. Last one week's experience has made us to believe that anything can be happen in our capital market. This time circuit breaker for index is also needed to be introduced. Merchant banks and mutual funds must play the vital role in achieving a stable market. Shared knowledge can fuel the growth of a stronger and vibrant capital market. Thus, through a friendly dissemination of knowledge and experience, we can revitalize and energize our capital market and overall condition of the economies.
The author can be reached at
e-mail:
saquib_hasan@hotmail.com
সাবেক চেয়ারম্যান এ বি মির্জ্জা আজিজুল ইসলাম, বিশিষ্ট শিল্পপতি ও তত্ত্বাবধায়ক সরকারের সাবেক উপদেষ্টা সৈয়দ মঞ্জুর এলাহী, এসইসির সাবেক চেয়ারম্যান ফারুক আহমেদ সিদ্দিকী, অর্থনীতিবিদ অধ্যাপক আবু আহমেদ, ঢাকা স্টক এক্সচেঞ্জের (ডিএসই
