Economic Affairs are Politically Connected
Dr Abul Barkat
Photo: Zahedul I Khan
Dr Abul Barkat professor and chair, Economics Department, University of Dhaka, is regarded as one of the most reputed political economists in the country; his research interest, thoughts and writings cover a wide range of development discourses including economic development, human development, human rights and women's rights, land and water rights, policy research in health-population, electricity and poverty reduction, welfare economics, right to development of the religious minorities and indigenous peoples. With numerous research books, and journal articles to his credit, most of his publications are marked by an unparallel commitment to the cause of the have-nots. In recent years he has been a leading exponent of the fight against religious fundamentalism. At present, he is also the president of Bangladesh Economic Association and the chief advisor of Human Development Research Centre. Dr Barkat shares his views about the factors behind the share market debacle and what should be done to put an end to it.
By now we all know about the quantum leap that the premium bourse made from December 2009 to December 2010, resulting eventually in the biggest slump in the capital market since 1996. Although speculations on what had brought about such a catastrophic fall were widespread following the disaster, it was with the stock market probe report that we came to know about the unprecedented scam involving the regulators, business magnates with political clout, merchant banks, brokerage houses and so on. What is your take on the underhand deal between the stakeholders?
The trend of a steep rise in the share market followed by a similar, steep fall is an obvious sign that the market is in a 'crash mode'. If all the fundamentals of the market were in place, then a situation such as this would not arise. It is quite predictable that a number of major players were behind this as has partly been implicated in the probe report.
The first thing to consider here is how more and more common people were attracted to the capital market expecting quite a justifiable return over the last decade which is a very positive sign. In 1996 there were only three lakh BO (Beneficiary owner) account holders whereas today the number stands at an astonishing 35 lakh holders. Ninety percent of the present investors are small investors, and not only do a large number of investors, but also their families rely heavily for their living on the ups and downs of the market. Speaking mathematically, if a household has five members on an average, then what you get multiplying 35 lakh by five is no less than one crore and 75 lakh. But speaking from an economic point of view, the number will double since an economist must take into consideration the socio-cultural dimensions of the region whereby a large sum of money in a family is often produced not in a strictly individualistic way like Europe, rather in a joint-family structure. For example, may be through your BO account, you have invested your uncle's or brother's money. So with only one account is intertwined the fate of many in a very complicated way. And the reason I'm saying all these is to pinpoint that when the market goes through the 'crash mode', these are the people who are affected most and rendered penniless.
So the players who were behind this gargantuan manipulation should be given exemplary punishment so that such corrupt practices are not repeated and lives of common are never badly affected again.
Although the probe report has pointed out several factors, how do you think the whole thing had come to the stage where it is now?
To begin with, the policymakers especially those concerned with the financial and fiscal policies dealt with the whole affair in an uncoordinated manner, providing the scamsters ample opportunities to take things to their benefit. And the scamsters did not seem to be as uncoordinated as the policymakers.
When other government bodies such as the Bangladesh Bank came up with some pre-emptive measures, they were just as uncoordinated. The decision of credit tightening inevitably triggered the negative momentum- the time just before the 'crash mode'-which was amplified by draining of liquidity into two large IPOs (initial public offering, an event whereby a company offers its shares for sale to investors)-Mobil Jamuna and MI Cement. As a result, Tk 4,000 crore was drained out of the market for a month, giving rise to a full-blown investor panic. Corrective measures in the form of monetary policy tightening are a common practice. But it ought not to have been followed by draining of such a huge liquid amount. It could have been dealt in a relatively easier way through coordinated buy actions by institutions. Traces of this mismanagement are mentioned in the probe report as well.
Then there are the influential business tycoons and institutions that joined hands with a section of the SEC(Securities and Exchange Commission), DSE(Dhaka Stock Exchange) and CSE (Chittagong Stock Exchange) officials, and manipulated the market price by misusing book building process and offering lucrative dividends for the share holders. What is your observation on this?
As I told earlier, the players are far more intelligent than our policymakers. With the help of the brokerage houses and the rating companies, they manipulated the book building process (it's an off-market public event whereby demand and value of a company is discovered and prices of its shares are fixed), and got through to unduly overprice their share. As the SEC didn't monitor properly, the company that sank deep into loss and was selling its share at a price of Tk 100, was able through this process to unreasonably fix its price at Tk 1600. A good number of the business institutions that overpriced their shares in this way have been mentioned in the report.
The probe committee has also mentioned the negative role of pre-IPO placement and has suggested that pre-IPO placement be either stopped completely or restricted to 25 percent of the IPO. What do you think about this?
Pre-IPO placement is one of the major reasons for the debacle. Consider the rules and regulations of pre-IPO placement which has to be differentiated from IPO where the offer is made public. As it is a non-public event happening before the IPO, you make the offer privately to your near or dear ones or to those with whom you have strong business links. And a lot of people literally vie for buying these placements since prices further increase when shares are made public. As it involves a select few having crores of taka, it remains far beyond the reach of common people. The more demand the concerned company has, the more corruption it sees. So I think for the benefit of common people, pre-IPO placement should be strictly controlled by regulatory bodies.
So all these factors had led to the crash. When such a share market crash 'unwinds', it will threaten the stability of the financial system. I believe that regulators have failed to understand the gravity of the whole situation. So if immediate measures are not taken, it won't be possible for the government to contain the social as well as political unrest that may ensue.
Now let us shed some light on the political affiliation of the scamsters. The report has made it quite clear that political high-ups or businessmen affiliated with both political parties were involved with the debacle. What do you think are the implications of this?
In Dhaka alone, there are 248 brokerage houses. If they have political allegiance to both political parties, then I believe that the anti-liberation forces are taking the lead. It is quite natural since the country, ever since its independence, was ruled by anti-liberation forces. It was during those times that the brokerage houses were formed. Thus economic affairs are politically connected. At the same time we should not ignore the fact that a number of pro-Awami League businessmen were also proved to be actively involved with the scam. So the present government should be very wary of both parties and take immediate measures to put an end to such volatilities.
Under these circumstances, what do you think are the measures that should be taken immediately by the regulators and other governing bodies to rein in the capital market and ensure security to the small investors in the long run?
In order to turn the capital market around, we need to take certain preventive measures. But this requires very careful synchronised steps on the part of the regulators and other government bodies, and strong political will.
In fact, I have worked out a ten-step package strategy. Apart from those steps, book building must be stopped and should not be reintroduced without intricate critical analysis. The IPO process should be conducted in a shorter period of time, so that more shares can enter the market.
In addition to what SEC officials do according to the probe report, they are very inefficient at what they do. Their surveillance system is also very poor. So the SEC should be strengthened. Then all the state-owned banks including ICB (Investment Corporation of Bangladesh) should play an active role in the capital market.
The Ten-Point Market Stabilisation Strategy recommended by Dr Barkat
Dr Barkat has worked out a ten-step package strategy which if implemented, he believes, will be very effective in stabilising the market. But fragmented implementation, he cautions, will do more damage than good.
1. Get signed off for implementing the whole package at the highest level and keep markets closed till all the following measures are put in place. Then keep those individuals, who were involved with market manipulations, away from the market for at least 30 days.
2. Limit all negative public statements regarding the market debacle because they further demoralise investors about the market. Statements from ministers, advisors and regulators should be very limited and only positive.
3. Create a “capital market crisis control centre”. A centre comprising a small, select group with implementation and monitoring powers should be formed immediately to work as the central co-ordination body. It should be entrusted with the responsibility to monitor SEC, DSE and CSE. It should also maintain secrecy and confidentiality.
4. Create a consortium of buyers-'the institutional consortium'. The market needs massive buying support at this stage. A broad set of institutions including banks, NBFIs (non-banking financial institutions), insurance companies, merchant banks, and large private companies that profited from the market in the last few years must form a consortium of buyers to collectively provide stability. And the consortium members must report all buy/sell activities on a daily basis to the monitoring committee.
5. Create a centralised market stabilisation fund. The size of the fund should at least be Tk 2,000 crore. Pooled from government funds that are already allocated but remain unused (EEF, BIFF), and from institutions and individuals that profited in the last three years, the fund can provide quick and dynamic support to the market when needed. It will buy from the 'buy list' and selectively from outside (IPOs and fixed income) if necessary. It will also provide buying support to a list of shares under a certain price floor (for example, prevent GP shares from falling below Tk 175).
6. Create “position of capital market stabilisation Czar”. Such a position with authority to formulate policy and solicit cooperation from SEC, Bangladesh Bank and Finance Ministry will prevent in-fighting between different political and civil service quarters.
7. Create a 'buy list' prioritising high-quality, highest impact shares. It will help channel the buying pressure into shares that have the highest positive impact on the index. No shares outside this list will be allowed for the first two weeks. The list will contain shares that minimise speculation and reward companies with good fundamentals. Such a practice will 'teach' investors the importance of investing in fundamentally solid companies and in funds managed by professionals.
8. Implement confidential 'switch-off' for top-20 sell terminals. This step will selectively shut down terminals from which aggressive sell pressures are placed. Thus sell pressure, and as such unreasonable overpricing can be checked.
9. At brokerage level, limit sell order size. By limiting the lot size for sell orders (how much can be sold per trade), the sell pressure will be spread out over the day and not flood the system all at once.
10. Impose a uni-directional 'automatic' circuit breaker. It will prevent downward spiral in the market, and give regulators time to come up with and implement additional measures and help calm investors. But it should not be arbitrary, in which case, it may amplify panic.