Problems and Prospects of Capital Market In Bangladesh What is Capital Market? A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e. g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt).
Financial regulators, such as Securities and Exchange Commission (SEC) for Bangladesh or for the UK Financial Services Authority (FSA) oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.
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What is stock? Stock is a security issued in the form of shares that represent ownership interests in a company. There is both common stock (often simply called “stock,” “shares,” or “equity”) and preferred stock. Common stock holders elect the company’s board of directors and actively participate in the company’s success (or failure) through a rising (or falling) stock price. Common stock holders may also receive dividends, provided the company is profitable, obligations to commercial creditors and bondholders have been met, and the board sees fit to declare them.
How can it be traded? For example if you want to transfer your part of ownership of the firm to other then you should sell 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. In addition, you have to register your ownership certificate with company’s register.
However, due to some problems with paper certificate – (such as copied certificate, maintenance of huge paper certificates) a new system of electronic stock (dematerialized share) is made. In this system, your stock is preserved in an electronic system rather delivering you the paper shares. Moreover, you do not 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?
A stock exchange is an entity which provides “trading” facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.
Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which give them advantages of speed and cost of transactions. 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 systems work as an arrangement to help buy/sell of listed securities. Capital Market Participants: The participants of capital market are mainly those who have a surplus of funds and those who have a deficit of funds.
The persons having surplus money want to invest in capital market in hope of getting high returns on their investment. On the other hand, people with fund deficit try to get financing from the capital market by selling stocks and bonds. These two kinds of activities keep the capital market going. Surplus Unit: Surplus Unit has enough funds over all of their liabilities to invest in the capital market. It may broadly be classified into two investors (i) Individual Investors; (ii) Institutional Investors. i)Individual Investors: Individual Investors participate in the capital market through purchasing Govt. Bonds & Notes, Public Limited Co. ’s shares, or mutual funds. (ii)Institutional Investors: When the institutional investors have surplus funds that are not needed for a short time period, they seek to make money from their cash surplus by purchasing securities from the market. Institutional Investors may be Commercial Banks, Insurance Companies, Leasing Companies, Investment Corporation Bank (ICB), Asset Management Companies, and various other companies.
Deficit Unit usually takes loans or capital by selling bonds or shares to the surplus Unit to arrange necessary funds for investment in different promising business. Deficit group may further be classified into two groups (i) Government; (ii) Public Limited companies. (i)Government: The Government of Bangladesh always experiences its expending requirements exceed their tax revenues. To balance this difference, it needs to collect fund through borrowing. Government also borrows on behalf of nationalized industries, municipalities, local authorities and other public sector bodies.
It can borrow by selling Treasury Bonds and Treasury Notes to the surplus Unit through capital market. (ii)Public Limited Companies: Public Limited Companies arrange their equity capital and debt capital by selling shares bonds or debentures respectively to the surplus unit for the purpose of fund modernization or future business expansion. DIAGRAM OF FINANCIAL MARKET Dhaka Stock Exchange Dhaka Stock Exchange (Generally known as DSE) is the main stock exchange of Bangladesh. It is located in Motijheel at the heart of the Dhaka city.
It was incorporated in 1954. Dhaka stock exchange is the first stock exchange of the country. The management and operation of Dhaka Stock Exchange is entrusted on a 25 members Board of Director. Among them 12 are elected from DSE members, another 12 are selected from different trade bodies and relevant organizations. The CEO is the 25th ex-officio member of the board. As of January 20, 2010, the Dhaka Stock Exchange had 444 listed securities with a combined market capitalization of TK. 2,049. 34 billion. Chittagong Stock Exchange BACKGROUND
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 Honorable Prime Minister of Bangladesh on November 4, 1995. As of January 20, 2010, the Chittagong Stock Exchange had 227 listed securities with a combined market capitalization of TK. 1,640 billion. The key Indicators of DSE and CSE are shown in the following table: (as of January20, 2010) Sl. No. Indicators DSECSE 01. Total No. of Listed Companies 282209
02. Total No. of listed Mutual Fund 1816
03. Total No. of listed Bond & Debenture1362
04. Total No. of Listed Securities (01+02+03)436227 05. Total No. of shares4,428,589,137414,612,267
06. Total Issued Capital (Share)TK. 230. 62 billionTK. 223 billion
07. Total Market Capitalization (TK. )TK. 2,049. 34 billion. TK. 1,640 billion.
08. Total Market Capitalization (US $)29. 36 billion23. 5 billion
09. General IndexDGEN 4956. 73CSCX 9346. 70 The Potentiality of the Bangladesh Capital Market The capital market is the engine of growth for an economy, and performs a critical role in acting as an intermediary between savers and companies seeking additional financing for business expansion. Vibrant capital is likely to support a robust economy.
While lending by commercial banks provides valuable initial support for corporate growth, a developed stock market is an important pre-requisite for moving into a more mature growth phase with more sophisticated conglomerates. Today, with a US $ 89. 04 billion (TK. 6149. 43 billion)economy and per capita income of roughly US $621, Bangladesh should really focus on improving governance and developing advanced market products, such as derivatives, swaps etc. Despite a challenging political environment and widespread poverty, Bangladesh has achieved significant milestones on the social development side. With growth reaching 5. 8 percent in 2009, the economy has accelerated to an impressive level. It is noteworthy that the leading global investment banks, Citi, Goldman Sachs, JP Morgan and Merrill Lynch have all identified Bangladesh as a key investment opportunity. The Dhaka Stock Exchange Index is at a 10-year high, however, the capital market in Bangladesh is still underdeveloped, and its development is imperative for full realization of the country’s development potential. It is encouraging to see that the capital market of Bangladesh is growing, albeit at a slower pace than many would like, with market development still at a nascent stage.
The market has seen a lot of developments since the inception of the Securities and Exchange Commission (SEC) in 1993. After the bubble burst of 1996, the capital market has attracted a lot more attention, importance and awareness, which have led to the infrastructure we have in the market today. The Recent Surge in the Capital Market The Dhaka and Chittagong Stock Exchange Index was at a 10-year high in the 2009 year end. DSE General Index rose at 4,800 and CSE SCX rose at 8560 in the year end of 2009 which made it Asia’s one of the top performers.
The steady investment atmosphere prevailing throughout 2009 is considered one of the main reasons behind this surge. Good return prospects, stable market growth, and uninterrupted trading as a result of political stability attracted foreign investors to invest in local securities. The banking sector, followed by the power, pharmaceutical and cement sectors, received the most foreign investment. The government has also attracted investors by pledging to sell securities of state enterprises. The state-owned companies — Jamuna Oil Ltd, Meghna Petroleum Ltd, and Titas Gas Ltd — debuted in the bourses in 2008.
The P/E ratio now stands at least 20x as compared to 14.1x for emerging markets. It seems sustainable if the planned big IPOs of a few SOEs and the other telecom companies like Grameen Phone Ltd. take place in the market. More such large issues are required, which can emerge out of the energy, infrastructure and public sectors.
Challenges Ahead of the Capital Market
1. Information Asymmetry
Access to credible information is restricted – Retail investors lack dedicated investment process infrastructure. – Forced to look to brokers for advice that may consist of market rumors. Syndicate of large investors manipulate the market through price inflation, pump and dump strategies.
2. Supply Side Constraints
Lack of fundamentally sound scrips as companies prefer traditional bank finance to capital markets – Need to encourage listing of good scrips in the market. – Reducing supply side constraints generates liquidity, reducing scope for price manipulation.
3. Lack of Professional Portfolio Management
Ratio of institutional-to-retail investors remains low – Institutional investors bring stability through non speculative long term investments. Listing of more mutual funds can be a starting point to increasing institutional activity.
4. Valuation Disparity
Value of scrips is subject to speculative trading rather than sound fundamentals, resulting in market volatility – Education of investors, overall development of capital markets through time can address this issue.
5. Lack of a Formal Debt Market
Bangladesh does not have established secondary debt market – Markets are unable to provide short term financing solutions to corporations, i. e., commercial paper. Listing of debt instruments from quality issuers and institutional trading can increase activity. – Introduction of BASEL II guidelines by Bangladesh Bank likely to encourage banks to raise capital through debt instruments in 2010.
6. Quality Research and Analysis
Development of quality equity research in the country is yet to match the growth of local capital markets – Quality research increases investor awareness, reducing speculative trading and market volatility.
7. Central Co-ordination of Regulators Top down co-ordination between Bangladesh Bank, SEC and related bodies would: – Streamline regulatory processes. – Reduce time required for quality issuers and new capital markets products to reach mark.
Recent Regulations and Opportunity Space in the Capital Market
1. Strengthening of Surveillance
Following the stock market crash of 1996, measures have been taken to prevent future incidents of the sort – Constant market surveillance by the SEC. – Increasing standards of corporate governance. – Dematerialization of Trading. Focus on investor education – establishment of Capital Markets Institute.
2. Introduction of BASEL II Guidelines
Introduction of BASEL II guidelines by Bangladesh Bank likely to encourage banks to raise capital through debt instruments in 2010 – Issuance of debt and equity by banks through capital markets likely to generate increasing liquidity.
3. Introduction of Book building / Price Discovery
Introduction of book building is a big step towards developing Bangladesh capital markets – Book building reduces risk of undervaluation for issuers. Ensures fair pricing by factoring in demand, likely to encourage listing of large, well-reputed companies. – SEC qualifying conditions for book-building set certain criteria for companies to be eligible.
4. Infrastructure Development through Capital Markets
Focus on infrastructure development may see Government of Bangladesh (GoB) seek capital markets as an avenue for financing – GoB plans to issue TK. 5. 0 billion (US$72mm) in securitized bonds to fund Bangabandhu Bridge. – Cabinet approval for the issue of TK. 42 billion (US$650mm) in bonds to fund Padma Bridge likely. Plans to construct second bridge over Padma at a cost of US$1. 89bn signals potential financing needs. – Further GoB funding requirements arise from needed development in the power sector and development – of roads and highways.
Bangladesh Capital Markets – The Future
1. Institutionalization of the Market
We expect to see more institutional investors bringing long term commitment and liquidity to the market -Longer investment horizons reduce market volatility. -Institutional investment strategies are fundamental focused rather than speculative.
2. Listing Fundamentally Sound, Well-reputed Companies With the improvement of corporate governance, we can attract sound corporations to come to capital markets -Quality scrips provide liquidity and motivation for educated investors to participate in capital markets. -Listing of large, reputable corporations attract foreign investments, increases liquidity. -Introduction of new scrips in different sectors provides investors with broader options. -Recent addition of telecom sector likely to generate interest among other large cap companies to list. -Inclusion of well reputed, large companies will reduce ability of select “investor syndicates” to manipulate prices.
3. Flotation of Mutual Funds Strong pipeline for listing of mutual funds (US $ 300mm in mutual funds expected to enter the market by mid 2010) -Provide retail investors with safer, indirect market access, preventing wealth & capital losses. -Reduces dependency on retail investors, allowing institutions to bring commitment and stability to the market. -Bring much needed market stability that only institutional investors can provide.
4. Facilitation of Private Equity Investments
Recent introduction of certain foreign private equity investors in Bangladesh -Provide stable flow of capital given mid to long term investment horizon of PE investments. High risk hurdles and selective investments direct PE funding to quality local corporations.
5. Inclusion in Global Indices
Bangladeshi companies are now included in global indices -The Dow Jones SAFE Index already includes 5 Bangladeshi banks and a power company. -Inclusion of high quality scrips in the index can result in inclusion of our index in global indices such as MSCI Emerging Markets, etc.
Other Major Future Prospects
Within the next 2 years, 26 large profitable state-owned enterprises (SOEs) are going to be listed under Direct Listing Method to increase depth of the market. The Private Public Partnership (PPP) will be implemented through capital market for financing government projects.
The Telecom companies (Aktel, Teletalk, and Banglalink) are interested to be listed in capital market like Grameen Phone. British High Commissioner of Bangladesh Stephen Evans has recently said about 1 million Bangladeshis living in UK are willing to invest in the capital market. Bangladesh Shipping Corporation (BSC) is almost ready to float the share and it is expected that it will raise TK. 50 billion from the market
Power and energy sectors demand for capital is 5 to 10 billion dollar within short time to meet the immediate needs of 5000 MW power demand.
Introducing book-building method that is well accepted by everybody and it is expected that the SOEs will also be off-loaded through the method.
A deep-sea port requiring 1 billion dollar is going to start with a policy decision that it will also be listed.
Export oriented food processing industry needs huge capital and technical capacity to meet the growing standards in global market for marine food, fruits and poultry. IT sector with our talented developers, yet to demonstrate the massive potentials of software industry of the country. Problems of the Capital Market in Bangladesh The unexpected rise and fall in share prices are mostly followed from the general confidence of the investors about political stability, euphoria of investment in shares, prospect of quick capital gains, a vacuum in respect of institutional presence in the share market, monopolistic dominance of member brokers, inefficiency of the SECS to cope up with the developments, xistence to Kerb market, and absence of proper application of circuit breaker etc. Delivery versus payment mechanism was used as one of the main vehicles of manipulation. Kerb market gave birth fake and forged share certificates. Although there are increasing trends in all the indicators, DSE, CSE are not free from problems. The problems of DSE, CSE may be summarized as under:
1. Price manipulation It has been observed that the share values of some profitable companies has been increased fictitiously some items that hampers the smooth operation of Stock market.
2. Delays in Settlement: Financing procedures and delivery of securities sometimes take an unusual long time for which the money is blocked from nothing.
3. Irregulations in Dividends: Some companies do not hold Annual General Meeting (AGM) and eventually declare dividends that confused the shareholders about the financial positions of the company
4. Selection of Membership: Some members being the directors of listed companies of DSE, CSE look for their own interest using their internal information of share market. 5. Improper financial statement:
Many companies 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 that company
The concept of centralization of the securities market has not been implemented that arises technical problems and political infighting.
The intrinsic values for securities traded are sometimes estimated without considering the current market prices of the securities.
The absence of comprehensive legal and supervisory framework. Lack of skilled manpower as well as financial and non-financial institutions involved in the securities market.
The lack of proper policy framework that provides incentives and protection to investors.
The dominance of bigger public sector and borrowing of public sector as well as government form the institutional sources rather than the market. Suggestions to Improve the Activities of Capital Market
To introduce automated monitoring system that may control price manipulation, malpractices and inside trading.
To introduce full computerized system for settlement of transactions. To force the listed companies to publish their annual reports with actual and proper information that can ensure the interests of investors.
To control and abolish kerb market form premises of stock market.
To take remedial action against the issues of fake certificates.
The Composite Quotation System (CQS) should be introduced and implemented that available the exchange specialist bid-ask quotes to the subscribers.
To create arrangement to set-up merchant banks, investment banks and floatation of more mutual funds particularly in the private sectors. Banks, insurance companies and other financial institution should be encouraged deal in share business directly.
The brokers should not be allowed to deal in the Scripps on their own accounts.
The management of DSE and CSE should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms. Conclusion To expedite the market development process, it may be a good idea to decide on certain milestones and link them to the disbursement of Development Credit Support of the World Bank.
The government is making good progress in other sectors, including monetary management, corporatisation of public-sector banks and others through this linkage. The missing link between the SEC, Bangladesh Bank, Bangladesh Telecom Regulatory Commission and other regulatory bodies is now getting established. Individually, they were not serving each other’s interests, and there was no effective coordination among them, hence the country was deprived of great initiatives.
A dedicated financial market cell at the Ministry of Finance could be formed to coordinate with these regulators as well as other ministries. In terms of creating market depth, more state-owned-enterprises that are profitable should be listed. The supply of securities can be increased if the SOEs are allowed to operate through the stock exchanges. Floatation of SOE scrips is expected to expand the market by couple of times. Corporatisation of SOEs will bring in transparency as well as confidence on the government financial system. The Bangladesh capital market still has a long way to go.
The recent measures taken by the transitional government have already begun to influence the markets positively. 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. Appended Part Index DSE: Dhaka Stock Exchange CSE: Chittagong stock Exchange DGEN: DSE General Index CSCX: CSE Selective Categories Index SOEs: State-Owned Enterprises
SEC: Securities & Exchange Commission CQS: Composite Quotation System AGM: Annual General Meeting BSC: Bangladesh Shipping Corporation GoB: Government of Bangladesh FSA: Financial Services Authority in UK IPO: Initial Public Offering CDBL: Central Depository Bangladesh Limited BSB: Bangladesh Shilpa Bank BSRS: Bangladesh Shilpa Rin Shashta ICB: Investment Corporation of Bangladesh Data Sources http://www. dsebd. org http://www. csebd. com http://www. scribd. com/document http://en. wikipedia. org/wiki/Capital_market http://en. wikipedia. org/wiki/Stock_exchange