Beginning:

The world has now run depending on the industrial system, we are studying
the opening of a new era known as the industrial revolution. It relates poles
apart of the world; make able the flawless stream of information revolution.
The satellite is the main theme song of this revolution and e-commerce
known as electronic commerce is its energy. To fight with the same category
of organization it must deal effectively with global competition and keep
pace with the modern financial system. The modern communication known
as Internet plays the basic function in transforming information from
organization to organization in the new era. In the present world developing
countries are now getting closer in share market; the enormous probability in
the sector of share market of stock trading from the theme of overseas
investors may be excavated if the market takes electronic trading methods. If
the information can transfer time to time to overseas investors it will help to
focus of this paper on e-trading and with special emphasis on e-broking. By
taking all kind of modern technology we can improve our e-commerce, e-
trading as well as our capital market.

Introduction of capital market:

The capital market is an important ingredient of the financial system in

Bangladesh. It is an important avenue for channeling funds to investors through
mobilizing resources from individuals. In view of the rapidly increasing role of
the stock market, volatility in stock prices can have significant implications on
the performance of the financial sector as well as the entire economy. There
exists important link between stock market uncertainty and public confidence in
the financial market. The policy makers usually rely on the market estimate of
volatility as the barometer of the vulnerability of the stock market. Stock return
volatility represents the variability of day-to-day stock price changes over a
period of time, which is taken as a measure of risk by the relevant agents. High
volatility, unaccompanied by any change in the real situation, may lead to a
general erosion of investors’ confidence in the market and redirect the flow of
capital away from the stock market. Excessive volatility also reduces the
usefulness of stock price as a reflector of the real worth of the firm. Volatility,
however, is not an evidence of irrational market behavior or inefficient markets.
Stock return volatility is usually asymmetric in its response to past negative
price shocks compared with the positive shocks, but what factors drive volatility
over time is not clear. Moreover, increase in firm-specific risk appears to
adversely affect its stock valuation. This note analyzes the volatility in stock
Research Economists, Policy Analysis Unit, Bangladesh Bank. Views expressed
in this note are authors’ own and do not necessarily reflect those of the
Bangladesh Bank. The authors would like to thank Dr. Mustafa K. Mujeri,
Chief Economist, Bangladesh Bank for his valuable suggestions and comments.
Return in the Dhaka Stock Exchange (DSE) during 2003-2007 and draws some
policy implications.

What is Capital Market?

The capital market is a market for securities, where companies and government
can raise long term funds. It is a market in which money is lent for periods
longer ten year. The capital market includes the stock market and the bond
market Capital market is the group of interrelated markets, in which capital in
financial form is lend or borrowed for medium and long term and, in cases such
as equities, for unspecified periods.

What is the meaning of stock?

Stock or Share is the smallest part of ownership of an asset, company, and firm.
For example you have a firm worth of Tk.20, 000 now if you divide the
ownership of the firm in 100 parts then every part will be worth of 100tk. Now
each of the part is called a share/stock. Now if you buy 20 shares from that
100part then you are partially an owner of the shop, firm, and company.

Which system it can be traded ?

For example if you want to transfer your part of ownership of the firm to other
then you should sale the deed of ownership to someone else. In that case you
have to maintain some papers. For example a sale deed will be signed and the
deed will be registered in government registry office.

In case of stock when you buy stock/share of a certain company you will be
given a share certificate. This certificate certifies that you own that much part of
the company. And you have to register your ownership certificate with
company's register. But due to some problems with paper certificate - (such as
copied certificate, maintenance of huge paper certificates) a new system of
electronic stock is made. In this system your stock is preserved in an electronic
system rather delivering you the paper shares. And you don't need to register
your ownership. The ownership is automatically transferred to you and
preserved in an automatic system. This system is called Central Depository
Bangladesh Limited (CDBL).

What is stock exchange?

Stock exchange is a organized place or arrangement where the buyer and seller
is brought together so they can buy sale their stocks/share. For example Dhaka
Stock Exchange has a electronic trading system called TESA and Chittagong
Stock Exchange has an electronic trading system called VECTOR. These two
system work as an arrangement to help buy/sale of listed securities.

Types of capital market:

1 primary market.
2 secondary market.

The Primary Market:

The primary market deals with newly issued securities and is responsible for
generating new long-term capital.

The secondary market:

The secondary market handles the trading of previously-issued securities,
and must remain highly liquid in nature because most of the securities are
sold by investors.
Role of capital market:

The primary role of the capital market is to raise long-term funds for
governments, banks, and corporations while providing a platform for the
trading of securities. This fund rising is regulated by the performance of the
stock and bond markets within the capital market.

Capital Market of Bangladesh :

Bangladesh capital market is one of the smallest in Asia but the third largest
in the south Asia region. It has two full-fledged automated stock exchanges
namely - Dhaka Stock Exchange (DSE) and Chittagong Stock
Exchange(CSE). It also consists of a dedicated regulator, the Securities and
Exchange Commission (SEC), since, it implements rules and regulations,
monitors their implications to operate and develop the capita market.

The controller of market:

SEC (securities and exchange commission) is the main controller of the

stock exchange.
The Securities and Exchange Commission (SEC) was established on 8th
June, 1993 under the Securities and Exchange Commission Act, 1993. The
Chairman and Members of the Commission are appointed by the government
and have overall responsibility to administer securities legislation. The
Commission is a statutory body and attached to the Ministry of Finance.
 Members perform the following functions:

• Serve as the members of the Commission and supervise its

management.
• Provide policy direction to industry and staff and promulgate legally
binding rules. Act as an administrative tribunal for decisions on the
capital market.

Mission of the SEC is to:

• Protect the interests of securities investors.

• Develop and maintain fair, transparent and efficient securities markets.
• Ensure proper issuance of securities and compliance with securities laws.

The Commission's main functions are:

Regulating the business of the Stock Exchanges or any other securities market.
Registering and regulating the business of stock-brokers, sub-brokers, share
transfer agents, merchant bankers and managers of issues, trustee of trust deeds,
registrar of an issue, underwriters, portfolio managers, investment advisers and
other intermediaries in the securities market.

Registering, monitoring and regulating of collective investment scheme

including all forms of mutual funds. Monitoring and regulating all authorized
self regulatory organizations in the securities market. Prohibiting fraudulent and
unfair trade practices relating to securities trading in any securities market.
Promoting investors’ education and providing training for intermediaries of the
securities market Prohibiting insider trading in securities. Regulating the
substantial acquisition of shares and take-over of companies.

Undertaking investigation and inspection, inquiries and audit of any issuer or

dealer of securities, the Stock Exchanges and intermediaries and any self
regulatory organization in the securities market. Conducting research and
publishing information.

SEC dominates the two capital markets of Bangladesh. One is Dhaka Stock
Exchange (DSE) and the other one is Chittagong Stock Exchange.

There are two stock exchanges in Bangladesh. They are:

i) Dhaka stock exchange.

ii) Chittagong stock exchange.

Background of Dhaka Stock Exchange:

The Necessity Of Establishing A Stock Exchange In The Then East Pakistan

Was First Decided By The Government When, Early In 1952.It Was Learnt
That The Calcutta Stock Exchange Had Prohibited The Transactions In
Pakistani Shares And Securities. The Provincial Industrial Advisory Council
Soon Thereafter Set Up An Organizing Committee For The Formation Of A
Stock Exchange In East Pakistan. A Decisive Step Was Taken The Second
Meeting Of The Organizing Committee Held On The 13th March, 1953. In The
Cabinet Room, Eden Building, Under The Chairmanship Of Mr. A. Khaleeli,
Secretary Government Of East Bengal , Commerce, Labor And Industries
Department At Which Various Aspects Of The Issue Were Discussed In Detail.
The Then Central Governments Proposal Regarding the Karachi Stock
Exchange Opening a Branch at Dhaka. , Did Not Find Favors With The
Meeting Who Felt That East Pakistan Should Have An Independent Stock
Exchange. It Was Suggested That Dhaka Narayanganj Chamber Of Commerce
& Industry Should Approach Its Members For Purchase Of Membership Cards
At RS.2000 Each For The Proposed Stock Exchange. The Location Of The
Exchange It Was Thought Should Be Either Dhaka Narayanganj Or
Chittagong . An Organizing Committee Was Appointed Consisting Of Leading
Commercial And Industrial Personalities Of The Province With Mr. Mehdi
Ispahani As The Convener In Order To Organize The Exchange.

The Chamber Informed Its Members And Members Of Its Affiliated

Associations Of The Proceedings Of The Above Meeting ,Requesting Them To
Intimate Whether They Were Interested In Joining The Proposed Stock
Exchange. This Was Followed By A Meeting , At The Chamber Of About 100
Persons Interested In The Formation Of The Exchange On 07.07.1953. The
Meeting Invited 8 Gentleman To Become Promoters Of The Exchange With
Mr. M Mehdi Ispahani As The Convener And Authorized Them To Draw Up
The Memorandum And Article Of Association Of The Exchange And Proceed
To Obtain Register Under The Companies Act.1913. The Other 7 Promoters Of
The Exchange Were Mr. J M Addison-Scott, Mr. Mhodammed Hanif, Mr. A C
Jain, Mr. A K Khan , Mr M Shabbir Ahmed And Mr. Sakhawat Hossin.

It Was Also Decided That Membership Fee Was To Be Rs.2000 And

Subscription Rate At 15 Per Month. The Exchange Was To Consist Of Not
More Than 150 Members. A Meeting Of The Promoters Was Held At The
Chamber On 03.09.1953 When It Was Decided To Appoint Orr Dignam & Co.,
Solicitors To Draw Up The Memorandum And Articles Of Association Of The
Stock Exchange Based On The Rules Of Stock Exchange Existing In Other
Countries And Taking Into Account Local Conditions.

The 8 Promoters Incorporated The Formation As The East Pakistan Stock

Exchange Association Ltd. On 28.04.1954. As Public Company. On 23.06.1962
The Name Aws Revised To East Pakistan Stock Exchange Ltd. Again On
14.05.1964 The Name Of East Pakistan Stock Exchange Limited Was Changed
To "Dhaka Stock Exchange Ltd."

At The Time Of Incorporation The Authorized Capital Of The Exchange Was

Rs. 300000 Divided Into 150 Shares. Of Rs. 2000 each and by an extra ordinary
general meeting adopted at the extra ordinary general meeting held on
22.02.1964 the authorized capital of the exchange was increased to Tk. 500000
divided into 250 shares of Tk. 2000 each. The paid up capital of the exchange
now stoods at Tk.460000 dividend into 230 shares of Tk. 2000 each. However
35 shares out of 230 shares were issued at TK. 80,00,000 only per share of TK.
2000 with a premium of TK. 79,98,000 .

Although incorporated in 1954, the formal trading was started in 1956 at

Narayanganj after obtaining the certificates of commencement of business. But
in 1958 it was shifted to Dhaka and started functioning at the Narayangonj
chamber building in Motijheel C/A.

On 1.10.1957 the stock exchange purchase a land measuring 8.75 Kattah at 9F

Motijheel C/A from the Government and shifted the stock Exchange to its own
location in 1959.
The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company
and its activities are regulated by its Articles of Association rules & regulations
and bye-laws along with the Securities and Exchange Ordinance, 1969,
Companies Act 1994 & Securities & Exchange Commission Act, 1993.

FUNCTION OF DSE:
Prime functions of DSE are given below:
 Listing of Companies

 Providing the screen based automated trading of listed Securities

 Settlement of trading

 Granting approval to the transaction

 Market Administration & Control

 Market Surveillance

 Publication of Monthly Review

 Monitoring the activities of listed companies

 Investor’s grievance Cell

 Investors Protection Fund

 Announcement of Price sensitive or other information about listed
companies through online.

Chittagong Stock Exchange:

The Chittagong Stock Exchange (CSE) began its journey in 10th October of
1995 from Chittagong City through the cry-out trading system with the
promise to create a state-of-the art bourse in the country.

Founder members of the proposed Chittagong Stock Exchange approached

the Bangladesh Government in January 1995 and obtained the permission of
the Securities and Exchange Commission on February 12, 1995 for
establishing the country's second stock exchange. The Exchange comprised
of twelve Board members, presided by Mr. Amir Khosru Mahmud
Chowdhury (MP) and run by an independent secretariat from the very first
day of its inception.

CSE was formally opened by then Hon'ble Prime Minister of Bangladesh on

November 4, 1995.

MISSION:

The Chittagong Stock Exchange believes that a dynamic, automated,

transparent stock exchange is needed in Bangladesh. It works towards an
effective, efficient and transparent market of international standard to serve
and invest in Bangladesh in order to facilitate the competent entrepreneurs to
raise capital and accelerate industrial growth for overall benefit of the
economy and keep pace with the global advancements.

OBJECTIVES:

 Develop a strong platform for entrepreneurs raising capital;

 Provide a fully automated trading system with most modern amenities to

ensure: quick, easy, accurate transactions and easily accessible to all;

 Undertake any business relating to the Stock Exchange, such as a clearing

house, securities depository center or similar activities;

 Develop a professional service culture through mandatory corporate

membership;

 Provide an investment opportunity for small and large investors;

 Attract non-resident Bangladeshis to invest in Bangladesh stock market;

 Collect preserve and disseminate data and information on stock

exchange;

 Develop a research cell for analyzing status of the market and economy.
 Problems Of capital market:

There are various types of anomalies and problems are situated in our capital
market. Most of them can be overcome by taking proper management. Common
problems are given below:

i. Lack of Fundamentally Sound Scripts:

The market does not have an adequate number of fundamentally sound

scripts. The authorities should not force major corporations to come into the
market, without creating an enabling environment. The focus should be on the
privatization of state owned enterprises through public offerings in the bourses.
The market has to reach such a stage of development that companies will take it
as a serious alternative to bank financing.

An estimate suggests that the ratio of institutional-to-retail investors relative to

other emerging markets. Institutional investors bring long-term commitment
and a is still low in Bangladesh, even greater focus on fundamentals and, hence,
stability in the market. The presence of institutional investors is also expected to
ensure better valuation levels due to their specialized analytical skills. While we
do have public sector as well as private sector institutional investors in the
economy, proprietary investment from these institutions is not significant --
other than the Investment Corporation of Bangladesh that was created in 1976
and currently manages several mutual funds.

ii. Lack of professional portfolio management:

The government has reduced the interest rates on savings instruments,
however this particular market is still limited to the commercial banks, and
 individual investors do not have access to these instruments. An estimate
suggests that the ratio of institutional-to-retail investors is still low in
Bangladesh, even relative to other emerging markets. The presence of
institutional investors is expected to ensure better valuation levels due to their
specialised analytical skills.

iii. Price Manipulation:

It has been observed that the share values of some profitable companies have
been increased fictitiously some times that hampers the smooth operation of
DSE.

iv. Market exploitation:

A number of bull cartels have been reported in the public dailies which point to
market manipulation by a number of uneven practices. It is supposed that these
bull cartels Consists of limited number of people including some members of
DSE/CSE, officials of SEC, political leaders, big businessmen, officials of
financial institutions, and owners of brokerage houses. Various incidence has
been reported in the newspapers as regards manipulating practices such as
operation of curb market in case of offering placement shares of IPOs, lifting
lock-in period in favour of selected companies, speculative trading of 'Z'
category shares to artificially raising the share prices, use of book building
system through syndicated practices, fake transactions through brokerage
houses, and access to price sensitive information prior to public announcement.
(There are rumors that these bull cartels with the support of share departments
of the respective companies have access to undisclosed and secret information
of the company such as information on buying and selling of shares by a large
 quantity.) Because of weak surveillance and monitoring system, SEC is usually
unable to prevent such illegal practices.

v. Provide regional constraints

The market does not have adequate number of fundamentally sound scripts.
Focus should be on the privatisation of state-owned enterprises through
public offerings in the bourses. Also, valuation of equity component in a
project is not always done appropriately leading to overvaluation of sponsors
equity base and therefore higher leverage from practical point of view.

vi. Anomalies in the economic arrangement:

Certain anomalous provisions of the financial system of the country concerning

the capital market are adversely affecting the development of the capital market.
First, although commercial banks are not allowed to invest more than 10 per
cent of their deposits in the stock market, a total of 12 commercial banks have
been identified by the Bangladesh Bank which have violated this rule. Though
the central bank has instructed these banks to adjust those investments within
the stipulated limit by November 2010, not much improvement has taken place
so far. Second, funds disbursed to industrial enterprises in the form of term loan,
working capital and over-draft against workers' salary have been reported to be
diverted to the capital market. The central bank has instructed commercial
banks to adjust such loan portfolios (particularly loans worth more than Tk. 10
million) by 15 February 2011. Third, different kind of announcements and
rumors as regard enforcement of the Insurance Act 2010 and the Insurance
 Regulatory Authority Act 2010 have fuelled prices of the shares of the listed
insurance companies. Fourth, while merchant banks are supposed to be issue-
manager at least for one IPO in a year, a number of these banks were unable to
comply with this target. This suggests that an excess number of merchant banks
are in operation in a small market. While operation of merchant banks should be
confined to portfolio management, often these banks are alleged to act as
'brokerage houses'.

vii. Inadequate banking facilities:

Because of lacking in banking sector, there are small facilities in most of the
part. They do not give loan at the crisis time; a long queue is a common
scene at the time of giving share money to the share company.

viii. Media statement is not accepted

In the newspaper and TV or Radio channel always published or telecasted

various problems and solutions of capital market of Bangladesh. But the
government and the authorities of SEC don’t accept these types of news.
They always deny these reports and acclaimed these reports are exaggerated
and wrong and deceptive. They always hide the main problems from the
public.

ix. Information irregularity

A handful of institutional investors may enjoy certain benefits, since they
have an investment/research unit manned with qualified officers; nothing
exists for retail investors. In the absence of independent research houses and
 filtering of information among different types of investors, retail investors
remain more vulnerable to manipulation.

x. Lack of organization among different financial

markets:
Lack of coordination among different financial markets including debt market,
equity market and bond market is considered as a major weakness for
sustainable growth of the capital market. Various decisions (or indecisions) of
different market regulatory bodies have often contributed towards significant
fluctuation in the market. For example, possible diversion of industrial credit to
the capital market was anticipated by the Bangladesh Bank in its Monetary
Policy Statement for July-December 2010, but necessary surveillance came at a
much later stage. Further, the margin rule instrument available to the SEC
seems to be applied without proper assessment of overall money supply and
demand in different sectors. Moreover, notwithstanding their mandated
responsibilities most market agents, such as brokerage houses, merchant banks,
investment banks, institutional investors, members of DSE, are involved in
short term 'trading'. Overall, lack of proper coordination between two leading
regulatory bodies of the financial sector, namely the Bangladesh Bank and SEC
is considered to have contributed to the irregular behaviour of the capital
market. In the backdrop of much apprehension about severe market correction,
the capital market has shown some hiccups in December, 2010.94 In this
connection, on 19 December 2010 DSE witnessed the highest fall in a day in the
history of stock market (6.7 per cent fall of total share price index in a day). It is
to be noted that within 15 days (6-19 December 2010) share price index dipped
by 1264 points (-16.1 per cent) incurring an estimated loss of capital of about
Tk.41,984 crore. While a number of actions (and inactions) of the SEC has been
 considered to be behind such falls, mopping up of liquidity by the financial
institutions in view of the instructions of the Bangladesh Bank has been
considered to be the major reason for the dip in the share price index. SEC has
taken a number of immediate measures, such as re-fixing margin loan ratio,
withdrawal of the requirement of extra deposit of the brokerage houses,
bringing back the shares of Grameen Phone and Marico to normal trading floor
from spot market, and extending the timeline for reporting of loans of the
commercial banks (as per instruction of Bangladesh Bank), which temporarily
smoothened the fluctuation of market prices.

xi. Rumour:
“Rumour-driven investments are too risky.”Our capital market is totally
based on various rumors. The small investors often hamperd by these
rumors. These rumors sometimes misguided and deceived the investors.
Media, broaker houses, the corrupted members of SEC and various gamblers
spreads these rumors for their immoral purpose.

xii. Difficulties in Access to high quality and credible

corporate information:
Access to high quality and credible corporate information remains a major
problem in the market. While a handful of institutional investors may enjoy
certain benefits since they have an investment unit manned with qualified
officers, nothing exists for retail investors. And, in the absence of
independent research houses, retail investors primarily focus on advice given
by their brokers, which often consists of market rumors. This is not
acceptable, and it often leads to enormous losses for small investors who are
 vital for a low-income and emerging market like Bangladesh. Filtering of
information among different types of investors may leave scope for
manipulation; this assumption had been proved right in the 1996 market
meltdown at the cost of many individuals and households.

xiii. Weak Corporate Governance:

Corporate governance of international standard is still lacking. Multinational

corporations and institutions operating in Bangladesh often adhere to a very
high international standard compliance regime. Parent companies of most of
these corporations and institutions have their scraps listed in developed
markets. Unless the local market adheres to, and effectively enforces, a
standard corporate governance system, there will not be a level-playing
ground for international business houses vis-à-vis local operators. Multi-
national corporations and institutions often adhere to very high international
standard compliance regime, but the local market has to adhere to and
effectively enforce a standard corporate governance system to ensure level-
playing ground for all.

xiv. Poor Monitoring and Market Surveillance:

Another problem was caused by poor monitoring and market

surveillance which resulted in abnormal price behaviour for many securities,
especially for those securities where free float shares are few or the company is
very small and so an imperfect market situation enabled the prices to rise
 significantly. All these factors caused the prices of most of the listed stocks at
DSE/CSE to reach an abnormally high level.

xv. Poor IT Infrastructure:

Poor IT infrastructure stymied the growth of Bangladesh's capital market,

lack of access to trading information was a barrier to greater investor
confidence. deficiencies in financial disclosure, weak corporate governance and
a lack of investor's confidence in fixed income securities as major constraints to
the growth of capital market.

xvi. Impediment of Settlement:

Financing procedure and delivery of securities sometimes take and unusual long
time for which the money is bogged for nothing .

xvii. Selection of Membership:

Some members being the directors of listed companies of DSE look for their
own interest using the internal information of share market. shareholders as well
as investors do not have any idea about position of the company.

xviii. Delays of settlement:

The financing actions and release of securities sometimes receive an unusual
long time for which the money is blocked for nothing.

xix. Irregular payment dividends:

 Some companies do not hold Annual General Meeting and eventually
declare dividends that do not reflect the real or actual financial positions of
the company and ultimately shareholders become confused.

xx. Improper Financial Statement :

Many companies of DSE do not focus real position of the company as some
audit firms involve in corruption while preparing financial statements. As a
result the shareholders as well as investors do not have any idea about
position of the company.

xxi. Echnical problems and political infighting:

The concept of centralization of securities market has not been implemented
that arises technical problems and political infighting.

xxii. Lack of skilled manpower:

In DSE as well as financial and non financial institutions involved in the
capital market has leakage of skilled manpower. because of improper

xxiii. The lack of proper policy :

Lack on structure that provides incentives and protection to investors the
securities market.

xxiv. Unawareness about awareness program:

The Securities and Exchange Commission yesterday urged merchant bankers
and brokerage houses to organize regular awareness programmes for investors
to help them make rational investment decisions.
xxv. Investors illiteracy :

At least one lakh new investors have entered the capital market in the last
two years and most of them have no clear knowledge about the market and
investment tools and techniques, said Faruq Ahmad Siddiqi, chairman of the
SEC.

Solution of the Problems Exist in Capital

Market Of Bangladesh:
The Bangladesh capital market still has a long way to go. The recent
measures taken by the transitional government have already begun to
positively impact the markets. If more investor-friendly policy reforms were
to be implemented, the capital market will undoubtedly play a critical role in
leading Bangladesh towards being the next Asian tiger with growth
comparable to India, Vietnam and the other most dynamic economies in the
region
As it is a market that involves both the sponsors and investors, the need for a
healthy and stable market became necessary. Through various forms of
reforms and automation the capital market of Bangladesh won the
confidence of investors from all walks of life. It is a fact that capital market
outperformed money market by far in the last couple of years but that was
only possible due to the uniform and state of the are technology that has been
used as the platform of our capital market. In addition to that, the
government facilitated our capital market by structuring its monetary and
fiscal policies in a pro-capital market manner.
The central bank (CB) played a thoughtful part in developing our capital
market. It brought transparency to the banking sector, which actually
welcomed the retail investors to join the capital market with high confidence.
The performance and healthy return of the banking sector worked as a
crucial component to bring in institutions and foreign investors. Power and
pharmaceutical sector also outperformed the expectations of general
investors; resulting fresh fund injection into our capital market.

Our emerging economy mostly invited the funds from all over the globe.
Market capital has shown amazing growth. Although current market price
earning ratio is higher than that of the neighboring country but it is my belief
that considering the demand for lack of avenue to invest, the capital market
of our country has a bright and attractive future and untapped sector.

Addressing the issue regarding our capital market, 'liquidity' and lack of
"instrument" would top the list of challenges that we have right now. The
major reason for the existence of the stock market is to provide liquidity of
shares and diversified instruments which helps increase market
capitalization. It also helps investors to gain more confidence and positively
impact Gross Domestic Product (GDP) of our country. Neighboring
countries such as India and Pakistan have market capitalization of more than
75% of their GDP. Comparatively, the Bangladesh capital market accounts
for a far lesser share of its GDP indicating ample scope for future
intensification in this sector. Hence, we should address the above to issues
with utmost seriousness and with a future vision.

The structural changes need to be at the SEC of Bangladesh. The

fundamental issue here is: what is the regulator doing to help minimize risk
for the investors? The absolute minimum the SEC can ensure is to have risk
minimizing tools. As a first step they can introduce scrip netting facility, like
 financial netting currently allowed, which could be in the form of settlement
of trades being T+0: T is for time and currently trades have a settlement
period of T+3 which means that investors buying any stock will have to wait
three days before he can sell out his position. Next, they can introduce short
selling whereby the investors has the facility to short sell if he thinks the
price of stocks would fall and then buyback. By introducing these facilities it
will allow investors to minimize risk as and increase liquidity as well. The
SEC should also have a good surveillance system in place to ensure fair play.
The introduction of equity derivatives should also most definitely be taken
into serious consideration to minimize risk, as there are no instruments to do
so.

Finally, the government of Bangladesh, who oversees the SEC, needs to

ensure that the SEC as an organization is run by more professional and
credible people who has sound knowledge of the capital markets and its
mechanisms. If that means hiring professionals from local or abroad and
paying them attractive salaries then be it.

The second part of the solution is to have more companies being listed. This
also applies to the government taking a dynamic approach in their
privatization

Manifesto and deregulating the economy so more of the state owned

enterprises can be brought to the market which in turn would benefit the
exchequer from more revenues. Investors would then have a wider selection of
stocks to choose from thus making the former state-owned enterprises
accountable to shareholder pressure and making them perform better.

Henceforth, we can see that, until and unless there are structural changes
brought about in the capital market it will not grow. Artificially creating
demand by pumping in more money in the capital market will only inflate the
market temporarily before falling again. This will never solve the underlying
fundamental problems. Whereas, when you open up the capital market by
addressing its structural problems and bring in new products and regulations the
market will grow, become more dynamic as capital flow will increase thereby
increasing profitability for all. Good examples of demutualised and highly
profitable exchanges can be seen all over the world like the LSE, NASDAQ,
NYSE, EURONEXT to name just a few. These exchanges have evolved to such
an extent that now the exchange business and the financial markets are in
trillions of dollars! So Bangladesh needs to wake up, as the benefits are
enormous!

Prospects of Bangladesh Capital Market:

The Securities & Exchange Commission of Bangladesh took appropriate
measures to separate different intermediary functions. Accounts of brokers,
dealers and that of investors are clearly separated. A central depository is in
place now. Most brokers use automated back office besides using on line
trading system. A number of cities are connected to the main trading system.
The IPO distribution and pricing will be automated soon and we will have a
securities institute, a learning centre, soon.

The last-minute interventions by the government were indeed a welcome

initiative. But, please do not kill the goose that lays golden eggs. The
government should take a pragmatic view and let the market work its own
course and mature without interventions throughout the year. Bangladesh is a
fledgling economy with its own problems and opportunities. The government’s
role should be more of a facilitator and less of a ‘punisher.’ The recent over
influencing and bureaucratic role of the SEC or the Bangladesh Bank has not
been conducive to the positive growth of the market and needs to be seriously
looked upon.

Sometimes changes take place inevitably, whether they are sought or not. The
capital market of Bangladesh is changing without much uproar. In last few
years the market has gone through some significant reforms. Almost silently.
Some reform efforts about 5 years ago by the Asian Development Bank was a
substantial endeavor. Some were initiated by the SEC and the exchanges
themselves and some were just demanded by the investors, although they are
not really formally organized in Bangladesh.

The ADB prescription was a general one. The recommendations were similar,
of not totally same, for the other countries in the region. In some countries, the
reforms are successful and distinctly visible. In others, the effects are not so
evident. In Bangladesh, the ADB reforms were not as effective as expected and
as it were observe red in other neighboring countries. Nevertheless, it is good to
see that SEC was not only busy with the implementation of ADB.
Prescription. SEC, albeit a small organization in terms of manpower and
financial resources, it managed to devise some investor friendly tools and
implemented those. In particular, the categorization of A, B and Z groups was a
wonderful one and welcomed by the general investors. The AGM defaulter
companies are on their toes to get things streamlined. Chittagong Stock
Exchange brokers are trading from 5 cities of the country. The network of
Dhaka Stock Exchange is also upgraded. There are stories of disappointment
and decision reversal, but in general, the total picture of the stock market is
much better and cleaner now, than it was ten years ago.
The most reputed business people of the country had remained aloof from the
stock market, at least collectively for a long time. On the contrary, recent ICC,
B conference on the capital market was a landmark attention of the private
sector business leaders. Stock market is necessarily private sector mechanism.
Private sector attention is therefore seen to be a spirit for fast future growths.

However, that does not mean that we already have a great market. A number of
issues have remained unattended in the capital market. In the economic world
map, Bangladesh market is yet to make a place. Many markets, smaller than
Bangladesh is displayed in the world media and attract international investors,
whereas, ups and downs of Bangladesh stock market is not news at all in the
world forums.

The setback that drives away investors' eye from Bangladesh is primarily a high
degree of uncertainty. The fluctuation of foreign currency or share price is not a
fear. The apprehension is all about changes in regulations, future development
and lack of trust worthy services. The efforts of the exchanges and the SEC risk
will be marred if these issues are not addressed soon. Investors at home and
abroad do not know what is going to happen in Bangladesh in short or medium
run. Therefore a preparation visible roadmap can be recommended. The road
map should be chalked out by a group of academicians in economics, finance
and law and market participants under the leadership of the commission. If
required experiences from neighboring countries can be studied for a quick and
inexpensive understanding. We have to take a path which many have already
traveled.

Southeast Asia is also coming up with India leading the way. Comparing the
local market scenario with that of the rest of the region, Bangladesh is in pretty
good shape as we have most of the infrastructure in place. Our market
capitalization is relatively smaller and it currently stands at $9.3 billion, which
is just over 13 percent of GDP. Higher liquidity is skewed towards a handful of
scripts, while a stagnant situation exists for few less profitable issuers.

At present, the government is heavily focusing on developing a debt capital

market. Such measures are certainly welcome as Bangladesh lacks a proper
secondary market for bonds. The market is yet to support short-term capital
requirements of corporations. Commercial Paper (CP) has not yet been tried
primarily due to interest rate volatility and illiquid risk-free instruments that can
be used as benchmark neither for short-term and hardly for long-term financing.
It can, therefore, be said that we have a somewhat flat yield curve in Bangladesh
at the moment.

Debut trading of state-owned oil companies like Jamuna Oil Company Ltd and
Meghna Petroleum Limited on the local bourses in January 2008 has spurred a
lot of encouragement among investors. This initiative taken by the government
to list SOEs will increase market capitalization and improved liquidity’s is also
contemplating the introduction of the book-building method in the valuation of
IPOs in order to ensure a fair price within this year. This will encourage
companies with sound financial health to come into the market.

Regulatory pressures are mounting on telecom companies to get listed. It is

estimated that the listing of the top telecom companies will attract more foreign
investment, increase the market capitalization by few folds, and bring about
higher standards of corporate governance.
Capital market: structural problems &
solution:
The recent debacle on the stock market has outraged small investors and fuelled
street agitation.

The recent performance of the capital markets in Bangladesh, notably from

December 2010 till February of 2011, has been very poor compared with its
performance over the last five years. The index fell from a high of around 8,900
points to 5,200 points, a drop of almost 42 percent in just three months.
Bangladesh capital markets have been in the top three best performing markets
in the world over the last three years. However, its recent performance has cast
a big doubt about its future performance. It is a case of “too much money
chasing too few stocks”.

This correction in the market has been long overdue because there was too
much money in the stock market in too few stocks. This inflationary pressure
was finally controlled by the central bank by raising its cash reserve ratio (CRR)
and statutory liquidity ratio (SLR) thus resulting in limiting the liquidity flow
into the capital market. The inter bank call money rate (DIBOR Dhaka Inter
bank Offer Rate) went up by 189 percent. One of the main reasons for this was
that the domestic banks had too much of their money invested in the stock
market, for quick and easy profit taking and as a result caused the stock market
to rise even higher. So, to control the excess money in the capital market the
central bank took these drastic measures, as it is within their right to do so, to
control inflation.

The problems of the capital markets in Bangladesh are structural, and, actually
quite far-reaching than what meets the eye. As we all know, the capital markets
here, notably the Dhaka Stock Exchange (DSE), is way overvalued due to,
firstly, the DSE index calculations being incorrect. Secondly, there are big
syndicates acting together to artificially influence the prices resulting in huge
profits for them at the expense of the average investors who put in their hard
earned lifetime savings. And last, but definitely not least, is the Securities and
Exchange Commission (SEC) whose total policy and regulations favors' the
syndicates which primarily consists of high net worth people and the stock
exchange members resulting in an “artificial demand driven market”. Until and
unless these fundamental issues are addressed the capital markets here will fail
to see the light of the day.

So, if we look at the issues individually like the DSE Index, the syndicates,
comprising of stock exchange members and the SEC we can find the common
link, which is the stock exchanges and the SEC.

So the question arises, what do we do about them? The answer, my dear

readers, rests with the question, which is to solve the problems at the two
exchanges and the SEC and you will get a vibrant, dynamic and progressive
capital market whereby all players involved starting from the stock exchange
members and employees, firms wanting to raise capital. The SEC and most
importantly the investors will enjoy the economic benefits because the markets
will multiply enormously resulting in big profits for all trickling down to higher
salaries, higher returns, dividends, more employment and capital market growth
which in turn will attract more capital for our markets which in turn creates a
virtuous cycle of wealth creation!

The solution is actually twofold. Firstly, there needs to be structural changes in

the capital markets and secondly, there needs to be more supply of good
companies getting listed.
Let's look at the structural changes first. What I mean by structural changes is,
in essence, changes required at the DSE, CSE and the SEC. Let's look at the
structural changes at the stock exchanges first which can be brought about
through demutualization. Demutualization is the process of transformation from
members associations into for-profit corporations. Stock exchanges across the
globe have rethought their business strategy and model due to the simultaneous
convergence of a number of powerful developments in order to find ways of
how best to survive. And, in the process the exchanges have evolved towards
new corporate, legal and business models to strengthen governance and face
competition through the process of demutualization. Currently, the DSE and the
CSE operate under a mutualised structure. Under demutualization the mutual
ownership structure will change to a share ownership structure. The process
entails first converting memberships into shares, which may or may not be
followed by a public issue. Ownership and trading privileges are effectively
separated. Stockbrokers are no longer owners but customers of the exchange.
Directors are elected by shareholders and answerable to them.

The reasons for demutualization are many but here are a few.

First and most importantly, in the case of Bangladesh, it is of

rationalized governance. The corporate model of the exchange under
demutualised structure will enable management to take actions that are in the
best interests of customers and the exchange itself. With the separation of
ownership and trading privileges, an exchange will achieve greater
independence from its members with respect to its regulatory functions. There
will be the requisite degree of transparency. Demutualised exchanges will be
forced to account to their shareholders regarding the bottom line as well as
corporate governance.
 Secondly, there will be more investor participation. The new
corporation will be more profit orientated due to shareholder accountability.
Unlike a mutual structure where often only broker-dealers a maybe member, a
demutualised exchange affords both institutional and retail investors the
opportunity to become shareholders. A demutualised exchange will have greater
flexibility to accommodate the needs of institutional investors as customers, and
potentially, as owners.

Thirdly, it is the resources for capital investment. A competitive stock

exchange must be able to respond quickly to global competitive forces and
technological advances. With the capital raised from initial public offerings or
private investment and a heightened awareness of accountability to
stakeholders, a stock exchange should have both the incentive and the resources
to invest in the competitiveness of its information systems. So to be
competitive, products and services must not only be timely and cost effective,
but also reliable.

The second part of the structural changes needs to be at the SEC of Bangladesh.
The fundamental issue here is: what is the regulator doing to help minimize risk
for the investors? The absolute minimum the SEC can ensure is to have risk
minimizing tools. As a first step they can introduce scrip netting facility, like
financial netting currently allowed, which could be in the form of settlement of
trades being T+0: T is for time and currently trades have a settlement period of
T+3 which means that investors buying any stock will have to wait three days
before he can sell out his position. Next, they can introduce short selling
whereby the investors has the facility to short sell if he thinks the price of stocks
would fall and then buyback. By introducing these facilities it will allow
investors to minimize risk as and increase liquidity as well. The SEC should
also have a good surveillance system in place to ensure fair play. The
introduction of equity derivatives should also most definitely be taken into
serious consideration to minimize risk, as there are no instruments to do so.

Finally, the government of Bangladesh, who oversees the SEC, needs

to ensure that the SEC as an organization is run by more professional and
credible people who has sound knowledge of the capital markets and its
mechanisms. If that means hiring professionals from local or abroad and paying
them attractive salaries then be it.

The second part of the solution is to have more companies being listed. This
also applies to the government taking a dynamic approach in their privatization
manifesto and deregulating the economy so more of the state owned enterprises
can be brought to the market which in turn would benefit the exchequer from
more revenues. Investors would then have a wider selection of stocks to choose
from thus making the former state-owned enterprises accountable to shareholder
pressure and making them perform better.

Henceforth, we can see that, until and unless there are structural changes
brought about in the capital market it will not grow. Artificially creating
demand by pumping in more money in the capital market will only inflate the
market temporarily before falling again. This will never solve the underlying
fundamental problems. Whereas, when you open up the capital market by
addressing its structural problems and bring in new products and regulations the
market will grow, become more dynamic as capital flow will increase thereby
increasing profitability for all. Good examples of demutualised and highly
profitable exchanges can be seen all over the world like the LSE, NASDAQ,
NYSE, and EURONEXT to name just a few. These exchanges have evolved to
such an extent that now the exchange business and the financial markets are in
trillions of dollars! So Bangladesh needs to wake up, as the benefits are
enormous!

Like emerging-market countries around the world, Bangladesh could benefit

from having a local-currency, fixed-income securities market. At present, its
main fixed-income financial products are bank deposits, bank loans,
government savings certificates, term loans, treasury bills, and government
bonds and corporate debt (syndicated loans, private placement, and debentures).
But in general the corporate debt market is still very small compared with the
equity market (see table 1).
Numerous factors in Bangladesh today suggest that Bangladesh will not be able
to develop an active, local-currency fixed-income market. Economic and
financial transactions are highly regulated, and the economy does not provide a
sufficient number of appropriately structured and skilled issuers and investors.
Although the government recently began privatizing selected state-owned
companies and deregulating the financial market, progress has been slow,
leaving financial market participants skeptical about whether the government
can succeed in this endeavor.

Bangladesh finds it difficult to move forward for several reasons:

• weak governance at the institutional and market levels;

• high nonperforming assets among the nationalized commercial banks
(NCBs);
• poorly defined and overlapping responsibilities of the Bangladesh Bank,
Securities and Exchange Commission, and Ministry of Finance;
• and the lack of incentives and private initiative to drive market
developments.
These four problems are the principal obstacles to the development of bond
markets in Bangladesh. The government is aware of them, and the World Bank
and other organizations have been pushing for solutions. However, change is
slow. Although there is no meaningful base for a secondary market in corporate
bonds today, the Bangladesh economy may well grow at an attractive rate in the
future, and if it does, capital-intensive industries such as gas and telecom will
invest heavily. Thus Bangladesh will eventually need an efficient capital market
that can mobilize domestic and foreign resources for investment. For the time
being, however, Bangladesh should focus on creating a well-organized,
regulated, and attractive primary market in both public and private placements.
This discussion is about some of the impediments to the development of fixed-
income market in Bangladesh and some ways to remove them.

MAJOR IMPEDIMENTS TO BOND MARKET

DEVELOPMENT:

The obstacles to bond market development can be divided into three broad
categories: those around and across the market, and those inside the fixed-
income markets.

Around and Across the Market

The obstacles in this group stem from the political situation, the macroeconomic
situation, and the broader financial system.

The Political Situation- The People’s Republic of Bangladesh has been a

parliamentary democracy since September 1991. The present government is
headed by the Awami League which has an absolute majority, but the
opposition party has stepped up its nationwide program of strikes, processions,
and mass meetings. These activities have weakened the government’s intentions
to foster changes such as the development of the financial market.

In addition, certain commercial and financial regulations are outdated in that

they tend to focus on institutions rather than functions. Governance and
accountability are lacking in certain areas, and there are elements of inefficiency
in the financial system, mainly concerning the state-owned banking sector.
Although the government is aware of these problems, it has been slow to
improve governance and develop strong institutional capacity. The problems
created by these weak institutions are compounded by an increasingly
confrontational political environment.

At the same time, the government has committed itself to launching financial
reforms that could help accelerate the country’s rate of growth. The main goal
of these reforms is to reduce the direct controls on the financial system, and to
deregulate and introduce a new set of market-oriented approaches to financial
sector activity. The Bangladesh National Budget for 1999–2000, for example,
earmarks funds for the creation of a central depository system (CDS) to help
streamline trading at the stock exchanges and improve authentication.

Furthermore, a proposal is under scrutiny that would amend the Trust Act to
allow provident and pensions funds to invest in the capital market. To achieve
that goal, it will be essential to ease the bad-loan situation, which is draining the
country of its monetary resources. But certain factions in Bangladesh oppose
those aims and commitments. Since no one has stepped forward to “champion
reform,” the government appears unwilling and unable to undertake the
requisite changes in due time. Because the political environment is so fragile,
laws and regulations are not being fully enforced.
 Macroeconomic Situation- Bangladesh’s macro economy was fairly
strong throughout the 1990s, with growth rates averaging a respectable 5%, and
inflation averaging a modest 9%–10%. The primary fiscal deficit during the past
five years has averaged about 5.5% of GDP, which has generally been within
sustainable limits. (However, the consolidated public sector deficit, taking into
account losses incurred by state-owned enterprises, is much higher and
underscores the need for improved fiscal management, although foreign
exchange reserves have become more stable recently owing to impressive
export performance and reduced imports.) Heightened foreign investor interest
in the country’s natural gas sector has opened up tremendous possibilities.
But despite these positive elements there are some serious constraints on the
development of active corporate bond markets in Bangladesh. First, Bangladesh
is one of the poorest countries in the world, with approximately 125 million
inhabitants, of which about 60 million live below the poverty line. Although its
GNP growth rates—in the range of 4%–5% year—are attractive, they suggest
that it will take Bangladesh 25 years to double its per capita income. In order to
reduce the incidence of poverty to about 11%, as it hopes to do, Bangladesh will
have to achieve economic growth rates of 7.5% or more a year. According to
several studies (see, for example, World Bank, “Bangladesh, Key Challenges
for the Next Millennium,” April 1999), economy has the capacity to move out
of poverty with increasing speed, but that will require decisive policy actions in
several areas, not least of which is the financial market.

However, a sense of urgency is missing in policymaking, despite the growing

imbalances in the economy and crowding out as Bangladesh continues to
channel vast monetary resources into servicing bad loans. Given that
macroeconomic changes can happen in short periods of time and that
nonperforming loans, which account for a third of the loan portfolio, can create
financial sector vulnerability, the bad-loan situation could trigger a severe
liquidity crisis nationwide. It can take decades to build a fixed-income market in
the wake of such crises. This issue clearly needs immediate and focused
attention.

If the country’s positive macroeconomic trends continue into the future, the
fiscal deficit and bad-loan situation will ease up and these factors would pose
less threat to the financial market.

Broader Laws and Regulations- Certain omissions or drawbacks of the

broader laws and regulations directly affect development of the fixed-income
market. First, with regard to the ownership of land, the law provides for the
registration of deeds rather than of ownership, which makes it impossible to
take land as collateral for bond issuance. Second, the law makes arbitration a
cumbersome and slow process; moreover, foreign arbitration awards are not
enforceable in Bangladesh. Third, in terms of obtaining issuers, there is no
privatization law to lend transparency and authority to the privatization process,
although one is at present being drafted. Fourth, Bangladesh’s laws represent a
mixture of codified British common law and legal principles from various
religious heritages. Although the court system derives from a common law
tradition, Bangladesh courts are limited in their ability to function effectively.
In view of these constraints, the legal system can move only so fast in amending
the laws and enacting new ones, even though the government acknowledges the
need for such changes. Contract laws and commercial codes seem to be fair, but
ensuring that they are observed is difficult because of a weak adjudication
system.

Broader Financial System- The broader financial system includes the

banking sector, non-banking sector, government securities market, and short-
term money markets.
 Banking sector- Bangladesh’s banking system which is dominated by
state-owned NCBs, creates two serious problems for a local corporate bond
market.

First, the system provides low-cost loans to state owned enterprises,

which account for a large part of the corporate sector. This undermines
development of the corporate bond market because other financial institutions
are unable to compete with these “under priced loans.” Indeed, the state-owned
enterprises constitute a large part of the NCBs’ business. To complicate matters,
development financial institutions (DFIs) also provide low-cost loans, priced at
a small percentage over bank deposits for similar maturities. 1 The Bangladesh
banking sector is composed of the central bank (Bangladesh Bank), 4 state-
owned commercial banks, 4 specialized banks, 13 local private banks, and 12
local foreign banks.

Second, the banking sector is faced with a substantial number of bad

loans; nonperforming assets account for about 30% of total assets. Although
these nonperforming assets can be said to create a need for an active bond
market, to the extent that banks are constrained in new lending and thereby
cannot meet the funding needs of corporate borrowers, they also rob the bond
market of needed investors. Yet the state-owned banks just keep on making bad
loans.
Non banking sector- The non banking portion of the financial sector
consists of two small stock exchanges (Dhaka and Chittagong), 2 both of which
have still not recovered from the bull market problems of 1996, which left the
public suspicious of corporate institutions because it is hard to get them to
disclose their figures. At that time, the stock exchange experienced a hefty run-
up in prices owing to a large inflow of funds from retail investors. This inflow,
drawn by the prospect of easy money, was a new experience for the Bangladesh
people, but it lasted only the second half of 1996. In those six months the index
soared from 500 to 3500 and the market came crashing down to about 600. The
stock market has not recovered yet: in May 1999 the index hit a 63-month low,
at about 465. The average daily turnover in the spring of 1999 was about US$1
million to US$2 million. The weak operating performance by listed companies
and low confidence in the market overall has made it difficult for the market to
recover.

In sum, the non banking sector has not evolved in a way that would allow it to
play an active role in the financial system. Nor, as discussed in the section on
intermediaries, is it prepared to play an 2 the non bank section is made up of 2
stock exchanges (Dhaka and Chittagong), 170 active brokerage firms, 19 non
banking financial institutions, and 17 merchant banks.

The Dhaka Stock Exchange (as of April 1999) has 208 listed companies on the
equity side, 9 mutual funds (of which 8 are issued by the Investment
Corporation of Bangladesh, ICB), a state-owned mutual fund company, 11
debentures, and a total market capitalization of approximately US$1.1 billion,
of which equity stands for approximately US$1 billion. The Chittagong Stock
Exchange has 136 equity shares listed, 9 mutual funds, 5 debentures, and a
market capitalization of about US$825 million. Membership is open to
foreigners at the stock exchanges.

Trading is done through an automated real time system and settlement occurs on
T + 5 active and skilled leadership roles in developing and participating in an
active fixed income market.
 Government securities market- The government securities market in
Bangladesh is small, does not provide much of a yield curve to support a
corporate bond market, and does not provide intermediaries with skills and a
profit base to support the corporate bond market.

At present, the government issues long-term savings certificates at high interest

rates and government bonds, and it only has market oriented rates for T-bills. At
the shorter end of the market, T-bills are auctioned weekly for 91 days and the
Bangladesh Bank (BB) occasionally issues paper for 180 days, 365 days, and
720 days. Commercial banks participate in auctions weekly for 91-day T-bills,
whereas the others are issued occasionally. Accepted bids are noted in the
newspapers. The market is small, with out standings of about US$800 million.
There is no secondary market and no market for repurchase agreements
(“repos”). T-bills are transferable, but settlement is manual and very slow, done
through BB. On the whole, T-bills are mainly used to satisfy statutory liquidity
requirements (SLRs). The past few years have seen a clear bias for short-term
borrowing. Government bonds, with maturities ranging from 3 to 25 years, are
issued when needed; they do not create a yield curve as T-bonds are
nontransferable, mostly because they are issued to recapitalize state-owned
banks. Their notable feature is that they are guaranteed by the government and
are eligible for SLRs.

Government savings certificates (GSCs) range in maturity from three to eight

years. GSCs are offered to different types of investors in the retail sector (but
small corporates are allowed to invest). The types of investors are mostly
individuals and families but also include charity and provident funds. GSCs are
issued in series through the year. The holder may redeem them at par at any
time. Finally, GSC issuances offer significantly higher rates than local bank
deposits, which create a relatively high rate for risk-free and tax-free
government securities. This establishes a high benchmark rate for corporate
fixed-income securities, creating a disincentive to invest in corporate securities.
GSC rates are 2%–3% higher after tax compared with rates on other
government paper. GSCs create a high benchmark interest rate foundation for
corporate securities. That matters because it is very hard to compete with risk-
free government debt.

At present, Bangladesh law and the government’s fiscal and monetary policy
combine to create a financial market monopoly for GSCs and NCBs, which in
turn keeps alternate financial intermediation from emerging. Bangladesh needs
a healthy nonbank financial institution (NBFI) sector to increase mobilization
and make competitive financing available in a fixed-income market. To achieve
that end, it must break the NCBs’ monopoly. Although the government is aware
of this problem and has put forward some relevant reforms, there are no real
incentives to speed up the process, maybe because of political considerations.

Short-term money markets- Money markets provide another foundation

for bond markets. The money markets in Bangladesh are quite small. There is
an inter bank market, in which commercial banks borrow and lend to adjust
their short positions (the size of this market is not publicly known). Normal
maturities range from overnight to 30 days. Bangladesh also has a forward
market for U.S. dollars against the taka, but only for short maturities. There is
no commercial paper market.

Inside the Fixed-Income Markets- The important factors to consider

inside the fixed-income markets are regulators and regulations, central market
infrastructure, and intermediaries.
 Regulators and Regulations- One impediment at the regulator and
regulation level is the overlapping authority between the two financial market
regulators, Bangladesh Bank and the Securities and Exchange Commission
(SEC), and no clear jurisdiction over the fixed-income market. In general, BB
regulates the commercial banks and their activities, while the SEC regulates the
NBFIs, the two stock exchanges, and the capital market.

A second problem is that the SEC has no authority to issue rules and
regulations, and the procedure as a whole is long and drawn out. As a result, the
SEC has not proposed any regulations for the issuance of bonds or debentures.
All rule proposals must first be submitted to the Minister of Finance for
approval and then passed on for approval from Ministry of Law. Furthermore,
potential issuers have to look at various sets of regulations and follow a long
and cumbersome procedure.

Third, although the SEC requires listed companies to meet international

standards on accounting and auditing, accounting information appears to be of
doubtful quality and reliability.

Fourth, the Securities and Exchange Act of 1993 confers vast regulatory
authority on the state, and is regarded as a constraint on capital market
development. There is a board of policymakers. Three of its members are
appointed by the state, another is from the Ministry of Finance and one from the
central bank, and the chairman is appointed by the government.

Fifth, in the present system, a company can float debentures up to a maximum

amount of its current asset value and has to register its assets in the name of the
Trustee as Security. Hence there is no provision for floating unsecured
debentures.
 Central Market Infrastructure- In the absence of a secondary market in
fixed-income securities, no effort has been made to build up a central market
infrastructure to support it. Bangladesh only has a telephone market for T-bill
trading and central market infrastructure at the stock exchange for trading
equities and debentures. In the T-bill market, the counterparts call each other
and settle transactions without any transparency in real time for other
participants in the market. At the stock exchange, the debenture market is fully
automated. The debenture market has a somewhat more transparent order-
matching system in that bids and offers are entered in the computer and then
matched automatically. Bangladesh has no central depository system, though
one is expected to start operating in 2000. Today, clearing and settlement are
done manually, which creates various risks to completing a transaction.

Also lacking are a credit rating agency, research and information companies,
and market information on screens; market participants are referred to other
media, such as the daily financial newspaper, and thus experience a delay in
obtaining essential economic information. According to some participants, even
that information is often unreliable.

Market Participants- Market participants can be divided into issuers,

investors, and intermediaries. Issuers. The foremost impediment here is that
Bangladesh lacks a significant number of potential, good-quality issuers. Its
economy continues to be agriculturally based; agriculture accounts for nearly
30% of the country’s GNP, and more than 70% of the labor force is engaged in
agricultural activities. The industry and service sectors contribute 20% and
50%, respectively, but compared with landholdings, the average size of
industrial and commercial enterprises is rather modest.
Most private sector enterprises are small and owner-run, many are of “cottage
size” and most are in the garment industry, which to date depends largely on
short-term bank loans for financing. These enterprises could benefit from
longer-term funding but are neither large enough nor well known enough to
issue bonds. Most of the large-scale industrial units and commercial enterprises
are state owned. Their shares are not listed, and they do not offer debentures
since their financing needs are met by the government or by the state-owned
NCBs. These state-owned firms generally stay outside the capital market. The
privatization program for state-owned companies works too slow to influence
the market.

Second, although Bangladesh has a debenture market, to date only a small

number of well-known issuers have used the market (see table 2). The liquidity
in those debentures at the stock exchange is insignificant because of the small
number of investors and their buy-and-hold mentality. The investor community
does not seem to find this market too attractive owing to weak disclosure by the
issuers, which in turn reduces credibility and investor confidence.

Third, companies find that issuing debt is costly, both in monetary and non
monetary terms. The interest rate distortion due to the GSCs mentioned earlier
raises the ongoing cost of borrowing, while various up-front costs amount to
about 7% of the value of the issue (these include registration costs—that is,
stamp duties—totaling about 2.5% of the issue value).

Fourth, it is difficult to persuade issuers to disclose sufficient information about

their companies (although prospectus requirements for listed debentures do
seem fair). Yet another problem is that most potential issuers are unwilling to
take the opportunity cost involved in issuing a long-term bond. In addition, the
absence of a yield curve makes pricing difficult.
On the investor side, few investors are sophisticated enough to think about
investing in bonds. About 80% of the base here is made up of retail investors,
whose primary concerns include the equity at the stock exchange or the
government savings certificate. Of the few institutional investors that could
support a bond market, most are either prevented from investing in corporate
bonds by restrictive guidelines or are not professionally managed. The major
institutional investors are the Investment Corporation of Bangladesh—a
government-owned financial institution—and the insurance companies. The
mutual fund industry in Bangladesh is the exclusive domain of ICB. There are
no private mutual funds to mobilize savings toward the debt market, and the
ICB’s monopoly has prevented new investor companies, that is, mutual funds,
from developing in Bangladesh. There are provident and pension funds (total
assets managed amount to Tk 6.7 billion; see The Financial Express), self-
managed by public and private corporate entities, but none are professionally
managed. The pension obligations of the gov-
Prominent Issuers in the Debenture Market
Issued debenture
Debenture Coupon Year of flotation (in millions of taka)a
Beximco Infusion Ltd. 17 1992 14.5
Beximco Synthetics Ltd. 14 1993 240.8
Bangladesh Chemical Industries Ltd. 17 1993 3.2
Eastern Housing Ltd. 15 1994 202.5
Beximco Knitting Ltd. 14 1994 188.4
Beximco Fisheries Ltd. 14 1994 94.3
Beximco Textile Ltd. 14 1995 222.8
B.D. Zipper Ind. Ltd. 14 1995 22.4
Beximco Denim Ltd. 14 1995 278.5
Bangladesh Luggage Ind. 14 1996 135.0
Arami Cement Ltd. 14 1998a 112.5
The Trust Act of 1882 prohibits those funds from being invested in equities,
corporate debentures, and private money market instruments.

In addition, no protective laws are in effect to ensure that investors will get their
dividend and capital back. Missing are higher audit standards together with SEC
regulations on disclosure standards in prospectus along with arbitrary
institutions. Furthermore, most investors lack a trading mentality and just buy
and hold because of SLR requirements or because they do not know how to
trade. Few foreign investors are attracted to this, mainly because of the weak
disclosure by the borrowers. As for the general public, it has little understanding
of debt products, and the intermediaries are not much help because few engage
in research on markets, companies, and industries to encourage investment.

Intermediaries- Intermediaries in Bangladesh lack many of the skills

needed to foster an active local corporate bond market. As mentioned earlier,
commercial banks dominate the financial sector and not enough intermediaries
are skilled in securities. Few are able to identify issuers and investors and bring
them to the market. They provide little or no research analysis on industries or
companies to encourage investment in the local debt market. Too few private
merchant banks are able to conduct financial advisory and trust services.

Nor do any feel motivated to become a market maker for an issue. Hence the
market is illiquid, with large spreads. At the same time, the fee structure and
pricing are high enough to allow intermediaries to make money, but because
transactions are so limited, the intermediaries seldom make money. Even if they
are able to participate, intermediaries are reluctant to take any risk in dealing.
Recent anomalies in DSE:
What crisis happened?
Stock prices at the country's main bourse -- the Dhaka Stock Exchange (DSE) --
witnessed Sunday the steepest ever single-day fall -- 551 points or 6.71 per cent.
Out of 243 issues traded Sunday, only 05 gained, 236 declined and two
remained unchanged. Banking and insurance issues were the major losers on the
day when total turnover stood at Tk. 14.90 billion, up by 17 per cent compared
to that of the last trading session.

The general index (DGEN) at the DSE has lost 2264 points or 25 per cent since
December 05 last after hitting the highest ever level-8918. The market shed 547
points within 80 minutes from the start of the day's trading on December 08.
But stock prices started regaining mysteriously as a section of investors took to
the streets and resorted to violent protests and ended the day with 105 points
lower. On December 13, Sunday, the market went through major price
correction-285 points. Stock prices at the DSE more than doubled over period
of last one year with the active participation of both institutional and general
investors.

Market insiders listed the profit taking by banks at the end of their accounting
year, liquidity shortage in view of the hike in the rate of CRR (cash reserve
requirement) Statutory Liquidity Ratio (SLR) and central bank's instruction
relating to banks' exposure to stock market as major reasons for the ongoing
erosion in stock price, Reason behind this crisis. The reasons are, actually,
multi-dimensional, combination of a number of inter-related factors such as the
regulator's uncoordinated, unjustified and too frequent actions, the central
bank's steps on liquidity in the banking system, the International Monetary
Fund's (IMF) warnings on the commercial banks' over proportional exposure to
the stock market, the institutional investors' year-ending move to present a
brilliant success to their shareholders and clients and last but not least the
"rumours"....

A high-powered committee investigating the debacle at Bangladesh's bourse

early this year has found heavy manipulation in the stock market and has
blamed the market regulator for failing to oversee the situation.

Constituted 10 weeks back, the three-member panel has made a series of

recommendations for a major overhaul of the regulatory Securities and
Exchange Commission (SEC), including the replacement of its current
chairman.

"All the institutions that have anything to do with the stock market were
responsible for the debacle," former central banker Khondkar Ibrahim Khaled,
who led the committee, told newsmen after submitting the report to finance
minister AMA Muhith.

He added that bad decisions and failure to oversee the situation by the SEC was
largely responsible for the debacle.

Briefing the newsmen later at his office, Muhith said the inquiry report would
be made public in 10 to 12 days but initially no name of individuals would be
published as the probe committee "did not get enough time to go into the
details".

The minister, however, acknowledged that the committee named some people
after getting "some indications" about their role in creating the crisis.
"I don't want to make individuals' names public without being sure of it. If I am
convinced about the sustainability of the allegations made in the report, I will
publish it," he said.

He said the committee pointed out 15 case studies showing how the market was
"heavily manipulated" by some people who took illegal advantage using their
relations with influential quarters in the government.

"But I don't think there was any political role behind the market debacle," he
said.

The former Bangladesh Bank deputy governor and currently the chairman of the
state-owned Krishi Bank, Khaled said, said they did not find the total figure but
have identified that some money has gone to private pockets.

But he estimated around Tk 4,000 to 5,000 crore to be going to private pockets

through direct listing.

Bangladesh's stock market was closed for several days in December 2010 and
January 2011 for crashes that caused fund losses of millions of small investors
as the benchmark Dhaka Stock Exchange general index (DGEN) fell nearly
1,800 points. DHAKA: Bangladesh will create a $700 million mutual fund, the
country's biggest ever, in a bid to stabilize the highly volatile Dhaka stock
exchange, the head of a state-owned investment bank said Monday.

The plan is part of the government's drive to restore calm to the market, whose
sharp fall has triggered angry protests by investors in the capital Dhaka and
cities and towns across the country.

Eight state-run financial institutions will invest cash to create the planned 50
billion taka ($700 million) Bangladesh Fund, said M. Fayequzzaman, chief
executive officer of Investment Corp of Bangladesh.

"It is the largest ever mutual fund in the country's history. It is aimed at
stabilizing the country's stock exchange and boosting liquidity in the crisis-hit
market," Fayequzzaman told AFP.

The Dhaka Stock Exchange has shed more than 40 percent in the last three
months, wiping over $16 billion off the share market's capitalization since its
benchmark index hit a record high of 8,918.51 points on December 5.

Tens of thousands of small investors have been worst hit as they started buying
shares when prices were peaking.

The benchmark DGEN index was trading up 2.90 percent, or 160 points, at
5,697 points in morning trade on the back of Sunday's announcement of the
fund's creation.

Monday's gains came on top of a 1.99 percent rise in the index on Sunday, a
trading day in mainly Muslim Bangladesh.

The fund comes on top of a reform package that includes tighter regulation and
other measures announced earlier by the government to prop up the market and
boost investor confidence.
Anxious to assuage investor anger, the government has also ordered a probe
into the sharp fall.

The Dhaka Stock Exchange has been one of the best performing markets in the
world with the DGEN index climbing 400 percent between 2007 and 2010. In
2010, it soared 80 percent despite repeated warnings that the market was
overheated.

DHAKA: Shares on the Dhaka Stock Exchange soared Tuesday when the
market re-opened after a series of plunges that forced trading to be halted
repeatedly and triggered clashes between investors and police.

Trading in the Bangladeshi capital was suspended Thursday after the

benchmark index slumped again, but it rose more than seven percent in the first
30 minutes of resumed business in Tuesday.

Hundreds of riot police were stationed outside the stock exchange building as
the DGEN Index gained 479.5 points or 7.57 percent to 6,806.84.

The rapid gains follow the government's announcement of a "reform package"

on Sunday that sought to restore investor confidence after days of angry street
protests over market plunges.

Thousands of investors have pelted police with rocks and vandalised cars in
recent weeks, demanding the resignation of the head of the central bank and the
finance minister.
The DGEN index has shed 30 percent from a historic high of 8,918.51 on
December 5, and in the face of mounting public anger the government has
admitted "mistakes" by regulators and ordered a probe into the dive.

However, the market has soared 400 percent since the start of 2007 and rose
more than 80 percent last year.

An electronic circuit breaker, which automatically halts trading and which many
experts blamed for triggering panic among retail investors, has been
discontinued, finance minister A.M.A. Muhith said Sunday.

Small investors greeted Tuesday's spike with suspicion, saying it was

"abnormal" and "artificially engineered".

"There are no sellers in the market, which is taking the market to abnormal
heights. I think manipulators are at it again. They are just fooling us," said
Fazlur Rahman Shuvo, one small investor.

Conditions for a crash have been building for some time, experts say, as the
number of retail investors nearly doubled over the past 15 months to 3.3
million, lured by the record gains.
What Went Wrong With The Dhaka Stock
Exchange?

There are financial markets located throughout the world. Some are larger than
others and represent more of the global economy. However, many countries that
have lagged behind the rest of the world economically have their own emerging
markets. In Bangladesh, this is the case with their primary securities market
being the Dhaka stock exchange. This market has recently seen a bubble
collapse similar to the one experienced by US markets in 2009 and 2010. This
has left many people wondering what went wrong with the Dhaka stock
exchange.
The Growth of Dhaka Stock Exchange in Last Few
Years

From 2003 to March 2010, this market has experienced steady growth in market
capitalization and share prices. On the surface, this looks like a positive factor.
To a certain extent, this is true. The market fundamentals have remained solid
with steady growth until February of 2010. Then, the market began to
experience a sudden surge in stock prices and market capitalization that was not
supported by the fundamentals.

A portion of this can be blamed on an exaggerated increase in the market index

that resulted from the addition of Grameen Phone IPO. However, this only
explains a small portion of the surge.

Putting this growth into perspective is important to realising what happened to

the market. At the end of 2003, the total market capitalisation was a mere 1.7
billion US dollars. Then a bull run began in the market that has resulted in total
market capitalisation of 34.2 Billion US Dollars.

Turnover, total stock sales per day has also seen an incredible increase. In 2003,
total turnover was only Tk 140 million. In February of 2010, this figure had
increased ten thousand percent to Tk 13.2 billion.
The Crash of Dhaka Stock Exchange

What caused the crash in this market? A sharp increase on the demand side
unsupported by fundamental analysis of the stocks being traded lead to
incredibly exaggerated prices being paid for stocks that had an actual value of
less than half the price per share.

Traders allowing emotions to guide them rather than study of fundamental

market indicators created a market in which investors could not see anything but
gains in value in the near future.

A large number of foreign investors entering the market for the purpose of
taking as much profit as possible contributed a great deal to this problem. It was
magnified when these foreign investors began selling off shares to take their
profits and pull their money out of the market.

In the end, domestic mutual fund managers and foreign investors began to fear a
market correction looming in the future and sold off as many shares as possible
in order to hold their assets as cash until this correction took place.

All of the stocks showed extremely high P/E ratios. While a high ratio can be
an indicator of healthy economic growth, Ratios reaching extremely high levels
should have been a warning sign that stock prices were becoming exaggerated
beyond reason.
A Lesson for Investors in Other Emerging
Markets

There are several emerging markets scattered around the world. Most of these
are experiencing positive growth, indicating that the economies of these
countries are improving.

The primary lesson investors in these markets should learn from the Dhaka
example is that allowing emotions to rule one's decisions can create a falsely
inflated market price for shares that are unsupported by the value of the
companies they represent.
Investors must step back and examine the fundamentals behind the stock values
and assure themselves that they are getting an actual value for their money. The
P/E ratio is an excellent example of a method of calculating actual value of
stocks. Ratios of 1 or more can indicate a company experiencing positive
economic growth. However, if these ratios rise beyond a certain amount, this
can be a warning sign that demand has become exaggerated and that share
prices are being pushed unrealistically high.

As with all major financial markets, the Dhaka stock exchange will recover
from the recent crash. This may not help the vast number of investors who lost
huge amounts of money when the market corrected itself. However, it serves as
an example to traders in other emerging markets of what can happen when
emotions rule the day rather than fundamental study and wise investment
choices.