A K M Nozmul Haque & Sadia Parvin
In the stock market, there is a saying More Carrots, Less Sticks. In the context of Bangladesh, most of the time the reverse was true. As far as our stock market scenario is concerned, we are more engaged in, rather unwittingly, restricting the supply side
The worst story of sticks is that in the past there were as many as 11 occasions in one year when the margin loan ratio was changed and every now and then surveillance teams were sent to different stock trading houses or they asked questions over phone, which were good enough to shake confidence of the investors.
There are circuit breakers for individual shares but the halt of trading was imposed even where the increase in share prices was below the limit. The perception of stakeholders, which is the main driving force in any market, is most of the time ignored and over and again is disturbed but being helped which is cardinal for a sustainable market-friendly environment.
Confidence once impaired takes a long time to repair. Before the share market scam in 2010, the financial institutions went overboard in matters of operation in the market so much so that the Asian Development Bank, that matters in the stock market because they are funding various reforms in the market, suggested heavily regulating the financial institutions involvement in it. As a result, the regulations came for them not to involve more than 10 per cent of their total liabilitythe financial institutions have now withdrawn to the extent that, according to a very recent newspaper report, their involvement in the market is about 3.16 per cent of their liability, the present market scenario indicates a buyers market though.
The concept that the stock market is the most cost-effective vehicle of raising funds is misplaced in our country. It is unfortunate that even some well-reputed persons of the country in the recent past ridiculed the market and even those who were active in the market.
With a very limited number of shares to play around, when the liquidity increased, the price upswing of stocks shook the regulators, and with a growing bullish market, more and more liquidity flowed in jeopardising the market structure. And, as a result, the regulator tried to do something to stop the price spiral. The quickest and easiest way to do this was to create a liquidity crunch. It was done through imposing restrictions on banks leading to collapse of the market.
Crash in the stock market is a worldwide phenomenon, most of these are market-driven, but in our case it was administration-driven. With all these compounded, the share market later in 2010 crashed. In a volatile situation, the market became a heaven for short term traders, which also turned out to be ultimately a hell for many of them. The waiting time for the long time investors became longer.
Why it was necessary to intervene frequently in the market, if the market would have collapsed after hitting the price level necessitating a crush. Would that be the worst of what was experienced then?
If the liquidity available at a particular point of time could get spread over horizontally across more securities listed, perhaps the average price increase would have not gone to that extent necessitating a forced crush.
In the present small market even we have noticed that the share prices of banks and mutual funds are very stable, because these are more or less stereotyped, and formatted according to the rules and norms and there are large volumes of shares available in the market, so playing around with these is very difficult. These shares are, therefore, fundamentally strong.
Unless efforts are taken to widen the supply side rapidly by enlisting, and/or encouraging more companies, if necessary, by staging road shows, by presenting benefits, by enlisting their stocks in the market, there may a situation again arise in the future forcing to curtail the liquidity flow to the market, which will not be market-friendly for sustained development of the market leading to a crush again.
The present board of Securities and Exchange Commission (SEC) has provoked at least three major decisions - the process of demutualisation of stock exchanges, to put in effect soon state-of-the-art surveillance software to monitor manipulation, insider trading, and special capital market court. But the Influence on the share market from the Bangladesh Banks guidance note soon to cleanse the share market of ill gotten money to succumb to the pressure from the Financial Action Task Force (FATF) and the Asia Pacific Group (APG) should be taken with a grain of salt.
The black money originated somewhere else, and it is a growing concern that the bug of failure of customs and law enforcing authorities is now passed on to banks and stock markets leading to inefficiency in the financial sector in the long run.
Besides, the SEC should get prepared from now on to face the possible extension of regulations in 2013 from the Financial Stability Board (FSB) located in Switzerland, Basel to mitigate the potential systemic risks associated with shadow banking encompassing the murky world of hedge fund, money market funds and the investment vehicles that are often used by major banks to carry out sophisticated financial transactions , as these shadow legal entities do not take customer deposits, they need not take banking licences and are not subject to supervision.
We have tried to show in the following paragraph, under certain assumptions (*) and considering different sizes of the market that smaller is the market, and the more instability comes in the wake - not conducive to the operation of a mature and likeable stock market to deal in:
The table above shows that with the increase in the shares in the market, the change in DGEN gets slowed down
* Price, market capitalisation, DGEN, the number of outstanding shares are variables, *market capitalisation increased by Tk 50,000, * the present day-to-day calculation of DGEN is known to the readers-all information is as of November 20, 2012.
In the market, when fairly widened, offering good shares-more choices-to play around, excepting unexpected swings, in the event of down swings will be moderate and tolerated well.
Against this backdrop, the recent newspaper news - DSE expert panel finds some IPOs detrimental to interest of investors - drew attention of those who take interest in observing the behaviour of the stock market in Bangladesh.
It is very intriguing indeed to see in this list the name of Western Marine Shipyard Ltd, the front runner in establishing the name of Bangladesh in the global map of ship-building nations and that’s a story that came true very recently.
The name of Western Marine Shipyard Ltd drew our attention, because Mr. Haque visited the Western Marine Shipyard and also had an opportunity to visit the Hyundai Shipyard in South Korea, which was then the 11th largest shipyard in the world and the standard maintained here is not at all sub-standard by any comparison.
The first objection of the expert panel: the turnover growth of around 100 over the last year is unusual - from the reputation they have earned in building and delivering ships around the globe, and from the successive orders they have in hand, we tend to observe that such a kind of sweeping remark seems to be not business-friendly.
The 2nd objection: repayment of loans from IPOs - reducing debt burden by use of public fund – is not liked by the experts.
Now the question naturally arises - what is the colour of the borrowed fund - are they not public fund based on public deposits? The conversion of debt to equity funds is far better an option and in other words, most cost-effective! The cost-effective scenario is better for both the company and the investors alike.
The 3rd objection: five consecutive years of negative cash flow is a cause of concern. Since a reasonable level of inventory is required to be maintained to keep the target date for delivery, for, most of the inventories cannot be procured just off the shelf, the company must invest funds with high interest rates in the prevailing debt market environment, to maintain a positive cash flow after the repayment is indeed a challenging task in this industry relying mainly on the debt fund.
For ship building, sponsors take more than 1 year and within 1 and 1/2 years deliver the ship. If the cash flow on the accrual basis is given due importance, the flow would have been okay. Have the accounts been looked at from that angle by the experts’ committee?, perhaps not!.
We feel, the DSE experts examined this not in a very proactive manner. We have a feeling that converting the majority of the present debt fund to equities will turn the cash flow black.
It is really interesting that the credit rating done by experts is doubted by another brand of experts and is really funny. The offer price of ‘Tk. 90’ - not Tk. 90 but Tk 70 appears to be on the higher side - the company would be heavily capitalised after the IPO and would not be able to pay reasonable dividend - opined by the expert committee.
After the IPO, the company will have only Tk. 104/ as paid-up capital with Tk. 400 million (40 crore) from pre-IPO scenario. The expert committee perhaps lost the sight of the nature of a heavy industry which has 100 percent safety margin - employing Tk. 100 as inputs it produces at least Tk 100 worth of goods and thereby the productivity of the company is on the higher side - the experts seem to have ignored the positive intrinsic sides of the company.
Two expert committees are now appointed by the DSE for evaluation of the proposal sent to the SEC for IPO with copies to the DSE and the CSE. Before the share scam in 2010, there was no existence of these committees besides the listing committee. These committees, as we understand, consist of persons from different disciplines with a bias for accountants.
There has been a tendency of job changes across the institutions in the country now. Many of the CEOs happen to change jobs very often for various reasons - say, for better salary, disliking by the management and/or board of directors, change of station, just for the change of the composition of the board, old face is replaced by a new face, no renewal of contract after expiry of the initial contract for various reasons, like dissatisfaction with the performance during the initial contract period etc.
The capital of Dhaka is so small a place where most of the persons are known to each other, everybody knows more or less why there has been a change in the position of no. 1 in the company! Given the situation then, the DSE should not assign the documents, prepared by the Issue Manager of a company where any of the members of the expert committee might have served as CEO and got out for not a happy reason, to those members. Otherwise, the purpose of expanding the market would be defeated jeopardising the healthy growth of the market.
We understand that before the IPO application is evaluated by the committee, the members are required to declare that they are not at the moment associated with the company or with the Issue manager’s company or its parent company or its any subsidiary, now it is required that the experts also need to declare that in the past they were also not associated with the issue manager’s company, its parent company or its subsidiary in any manner to avoid any conflict of interest.
There have been other regulations formulated after the scam and are now in place. This should not be lost sight of and attempts at over-control may also likewise lead to corruption and inefficiency which are harmful for the market. So much-talked-about regulations in place must be reviewed periodically so that investors’ interest and the overall market interests are not pushed to the backseat harming the proactive growth of the stock market.
What we understand is that the market should be fairly large, care be taken that there is no liquidity crunch for some policy decisions, insider trading and syndication be guarded against, demutualisation be put in place, and then the market be left to its natural operational wisdom.
The contributors to this paper belong to the research team of Prime Finance and Investment Ltd. Emailfirstname.lastname@example.org