The economic growth of a country heavily relies on channeling of funds from the surplus to the deficit sector, which can be done through the intermediation process and it can be bank-based or market-based, depending upon the characteristics of the country.
In the intermediation process the stock market works as an institution to adjust the gap between surplus units and deficit units of an economy. The stock market is one of the most important financial institutions. It opens door to companies to raise funds from a lot of individual investors inside and outside the country. Here investors participate voluntary in buying ownership of a company in the public market.
The journey of Bangladeshs stock market started on April 28, 1954 as the East Pakistan Stock Exchange Association Ltd. But trading on the exchange started in 1956 with 196 securities listed with the exchange. The exchange was renamed on June 23, 1962 as Dhaka Stock Exchange (DSE) Limited. Trading on the Dhaka Stock Exchange remained suspended during 1971 to 1976 because of the Liberation War and the post-Independence weak economy. Then the trading resumed in 1976 with 9 listed securities and a total paid-up capital of Tk 137.52 million. By 1987, the number of listed companies on the DSE increased to 92. The markets growth was the fastest in 1990s compared with any other time since the inception. After several years of normal operation in the decade the market attained a bullish stage in 1996 but collapsed within few months. The Securities and Exchange Commission (SEC) failed to tackle the situation and the consequences were a lot of small investors lost their hard-earned money. But on taking of few pragmatic steps, the market returned to normal.
In late 2010 the market was again in a bullish mood. But share prices started falling on 3rd January, 2011 as investors had the information about a liquidity crisis in financial and non-financial institutions that limited the margin loans. Due to a selling spree from 2nd to 5th January, shares experienced a heavy fall and the market crashed during 6th to 10th January, 2011.
We have seen several stock market crashes over the last two decades. What leads to the stock market crash? Before answering the question, we need to know what the stock market crash is. We call it a crash, when the share prices fall more than 10 per cent within few days. But there is a difference between market crash and price correction. When the market fall is 10 per cent or less, we call it price correction. The stock market crash is a sharp and unexpected decline in prices for a very short time. It causes a significant loss in capital of investors and speculators. The market participants become panicked which leads to further fall.
It is true that the investors learn a lesson from such a market crash. They learn that investments in stocks not only lead to profits but also involve risks, a costly lesson, indeed, for millions of small investors. The last crash wiped billions off the market and such less-informed small investors were the main victims.
The scenario of the stock market crash in 1996 was quite different from that in 2010-11. In 2010 the number of BO (beneficiary owner) account holders was only 300,000 and most of them were new in the market. But during the crash in 1996 paper-based shares used to be sold in front of the DSE and it was not easy for investors to identify fake and original shares and the market was developed enough to earn confidence of the investors.
Though the capital market index is often said to be the central indicator of an economy, it is less representative of our economy. When some vested groups pronounce that the capital market is inevitable, it seems pretty exaggeration. To some extent it is true, but it largely relies on how smartly the macro-economy is performing.
In the share market its a money game of a section of financial elite which makes them richer at the cost of small investors. Initially the small investors could not understand the game, but at one stage they could and expected the governments intervention and the regulators pragmatic steps. But the response belied their expectation. So the small investors are suffering a lack of confidence before making any investment decision anew, because they cant rely on the policy of the government as well as the regulator. This sagging confidence is having a negative impact on the overall capital market in Bangladesh.
It is often said that if one investor keeps his money in the stock market for five years, then it will just double which is higher than the return offered by a conventional commercial bank. So we should expect more investors than speculators in the market.
If we observe carefully the capital market crashes all over the world, we get some common symptoms, though the factors vary from country to country. But the common factor is greed. From small investors to corporate mafia, none is free from the greed in the financial world. And as the consequences, a group of entrepreneurs have been launching their ventures without any commitment to the rest of the society.
Often we see the market regulator is pressurised by a group of corporate mafia who play a pivotal role in financial decision making by the government. Thats why sometimes the governments pragmatic pro-people policy fails.
On the other hand, sometimes we see the common investors behave like a herd. They consider neither any technical analysis nor any fundamental analysis before taking any investment decision. They are often allured by wrong information disseminated by syndicates. But the people have fewer investment alternatives. Common people are less oriented towards getting involved with production-related and agro-based activities. Rather they like to get involved with trading which may yield bigger profits within a short time. So they enter the capital market.
However, the regulator and the government have developed some mechanisms since the last market crash. But they need more and also need to introduce new tools, strategies, directives, rules and regulations to aid the market development and prevent the recurrence of any stock market crash. Identifying faulty accounting practices and methods, recruiting honest officials, imparting education and training to general investors on the stock market and taking punitive action against manipulators can improve the situation and prevent this kind of crash.
To save general investors the DSE, CSE and the SEC should offer courses and training to enhance the investors knowledge base about the stock market. The regulator should introduce new technologies like surveillance software to monitor trading activities. The SEC should appoint more qualified officials for market research and for other necessary work. The SEC officials should perform their duties honestly as per the law. They should not work for market manipulators and their decision should be aimed at protecting the interest of general investors and other stakeholders.
It was found that manipulation started in the stage of IPO (initial public offering) or Pre-IPO through book building, private placement and the kerb market. Due to manipulation in the primary market, shares were traded in the secondary market at much higher prices. In the secondary market serial trading and insider trading also pushed up the prices. The SEC should frame proper rules and monitor both primary and secondary markets.
So what are the main challenges facing the capital markets in Bangladesh? I believe the problems are mainly structural in nature. It is generally agreed that the Dhaka Stock Exchange is overvalued. It may be partially due to the method used for calculating the index. This is a problem that the authorities could easily overcome. It is also true that syndicates colluded with one another to influence the stock prices. This provided them with big profits while the small investors saw their capital wiped off. So the SEC should introduce tools that would minimise the risk for investors. They could include the financial netting facility where investors buying any stock would have to wait for a certain period before selling the shares. In addition, methods like short selling, introduction of equity derivatives, etc. should also be seriously considered by the SEC. More importantly, the SEC needs to have more regulators on the field to keep all stock transactions under surveillance. Pragmatic regulatory measures and less interference of corporate mafia in policy making may help restore the investor confidence in the capital market of Bangladesh.
The writer is a faculty member of the School of Business at the State University of Bangladesh.