Cover Story

Watching the Numbers

The pale face of the middle aged woman gradually turned red. Besides her, the retired elderly man was biting his nails. The distorted face of the handsome youth was at odds with his fashionable attire and hairstyle. Despite the temperature of the room being fixed at 22 degrees centigrade, he was perspiring profusely. All eyes were fixed on the screen of the share index as if their lives depend on the numbers. With each drop in share price, their despair fell thick on the silence. Only heavy sighs formed the sounds of frustration. Not getting their usual orders the brokerage house employees looked frustrated; even two days ago they could barely lift their eyes from the computer monitor. The unemployed youth began hurling expletives, his fury shared by the others. Gravely worried about the continuous dip over the passed three days, the elderly retiree started reacting like the youth in fear of losing his last assets. Even the seemingly mild mannered housewife could not resist screaming at the top of her voice. She hurled abuses at the individual on whose advise she had purchased her shares. The brokerage region in Motijheel was in chaos in the last days of spring. A large number of people gathered in front of the stock exchange building. Their anger was more palpable than the scorching heat. They broke into angry slogans, "DSE-er dui gale juta maro taley taley." (Slap the DSE in the face). After a while they spontaneously moved towards the SEC building.

Ershad Kamol
Photos: Zahedul I Khan

Like everyone else Masudur Rahman dreams of a life free from financial worries. His limited income from the taxicab business is not enough for his four-member family. Last February, his brother-in-law had sent Taka 28 lakh as remittance from Germany to Masud's account to hand it over to a relative. Usually, Masud would hand it over without delay. But this time he thought of investing the money in the capital market for a week being sure that he would make a quick buck or two for his own future investment. He was tempted by the quick success stories of his friends in the capital market two years ago.

He approached a brokerage house in Dilkusha, in the same building where the SEC office was located.

“I don't know much about share market” says Masud. “But, I want to invest for a week." The manager at the brokerage house assured him a lucrative profit and suggested that he take a margin loan. As advised by the manager, Masud purchased shares of four companies investing this time, Taka 56 lakh.

After the first day's trading, Masud's portfolio showed Taka 72,000 in profits. He was excited but reluctant about paying the high charges required for a merchant bank loan interest and brokerage house service charge. Masud continued maintaining his portfolio as suggested by the manager. He traded again on the fourth day. Meanwhile, he received a call from his brother-in-law, who was concerned that the money had not reached the relative. Masud promised the anxious relative that he would hand the money over soon.

On the following day, Masud told the brokerage manager that he wanted out. But as per the trading rule, Masud had to wait at least for the next three days to sell his shares. Meanwhile, the share index started plummeting at full speed. His brother-in-law kept calling. A distressed Masud sought advice from the brokerage manager.

"If you withdraw all of your investment at the current downward market, you will face a huge loss. If you can collect an additional taka six lakh you can tackle the situation. Don't sell the shares of the bank that offered share dividend," suggested the manager.

Seeing no other way, Masud somehow managed to raise the money from his friends and by selling a taxicab.

Most of the 24 lakh investors are new in the market and buy or sell shares at the suggestion of others. As a result, the market is rumour ridden. And a few speculators are taking advantage of the situation. Improvement of IT and telecommunication sectors in the country have made the situation even more complicated. Unscrupulous persons are using several social networks in the Internet and cell phone to create rumours in the market. Because of the misuse of cell phone, investors, especially gamblers sometimes instantly gets the internal information regarding any sensitive decisions of any meeting and even high court proceedings on a case related to the capital market.

It is also true that there are many mature retail investors in the market who consider investment to be more profitable than keeping deposits in the bank or purchasing FDR. “Studying several books and publications, I've developed my market assessment skills. I invest targeting a year-long plan, which is safe and more profitable than getting interest from the bank,” says a Bank employee, who invests in the market as an additional source of income.

But in most cases, retailers illogically expect that the share index will always increase. As a result, even a marginal drop of the index gets them panicky, thus the processions and abuses hurled at the stock exchanges.

"Individual investors lost money due to their lack of knowledge of maintaining portfolios in a downward market," says capital market analyst Professor Abu Ahmed, who is also a professor of the Department of Economics of Dhaka University, "Very often they behave like gamblers. As a result, they are losing money in the declining market. And the number of such investors is very high."

Accusing the brokerage houses and merchant banks for misguiding the investors. Professor Abu Ahmed says, "The excessive profiteering tendency of both of the brokerage houses and merchant banks has fuelled the loss of the naive retail investors. Instead of giving them proper advice to change their portfolio management strategy during downward market trends, these institutes rather pursued the retail investors to continue abnormal trading just to earn huge commissions and huge interest (16 percent) on the margin loan as well. When the market behaved upwards during 2007-2008, it was easy and safe to make quick profits. But, now that is not possible.

Investors' are glued to the screen displaying the share index	A few companies are offering training programmes for the investors

"These institutions don't teach the retail investors the basics of investment analysis neither are they publishing market analysis reports as per the mandate. Rather, violating the rules of brokerage act, many houses insist to purchase specific shares. "

Anticipating a future drying up in the volatile market for misusing the retail investors, Professor Abu Ahmed says, "24 lakh middle class investors which in other words over one crore people are totally or partly dependent on the capital market. Actually, merchant banks, leasing companies, insurance companies, brokerage houses, big investors, issuers and fund managers have targeted these 24 lakh retail investors to make money. They should realise that these institutions will dry up if the retailers leave the market."

A huge gap between demand and supply
After initiating some endeavours such as trading system automation, reducing bank interest rate and merchant bank assessment as well new issues being floated by the private and public sectors, many investors were able to make huge profits between 2007 and the middle of 2009 from the capital market when the share index shot up more than double from 1,600 to 3,500. Till writing the report the index was 4,549. This trend attracted mostly unemployed youths and low income earning people. At the same time many institutional investors such as mutual funds, insurance companies and leasing companies came in the market with huge investment. Since 2009 not an insignificant numbers of new companies have off loaded their shares in the market. The government announced that it would bring 26 state-owned enterprises to the market, a pledge that has not yet materialised. As a result, there is a huge gap between the supply and demand in the market that has increased the price-earning ratio to a high level and has made the market volatile.

Even in the case of the handful number of shares issued by big private companies, the major shares have been retained by the owners. Thus the number of free flowing shares is very small against the ever-increasing demand. Which is why most of the shares in the market are over priced, making the market imperfect. In such an imperfect market, if an investor purchases a huge amount of shares, the price will increase further and make the market even more volatile. Subsequently, a correction is a must. The lack of monitoring from the regulators and sometimes their inappropriate decisions, have failed to control market manipulation by the speculators.

Mirza Azizul Islam	Monzoor Elahi

It is true that many big investors all over the world take huge risks when they speculate, but the only very successful markets can contain such gambling. Only a sufficient supply of stocks in the market and proper monitoring can neutralise the situation. But in an imperfect market like the DSE, it is absent, observe at least three renowned market analysts.

"To me DSE has failed to bring more private and public issues in the market against the increased demand,” observes the former CEO of DSE Professor Salahuddin Ahmed Khan, a teacher at the Department of Finance of Dhaka University, “As a result, the price index is increasing abnormally. We see their initiatives are limited only in their speeches. Even the government has not yet brought the shares as it had promised. Considering the investment in portfolio management more profitable than bringing new issues or companies in the market, the merchant banks, on the other had, are reluctant to take responsibility of bringing new issues.”

“The private entrepreneurs don't show interest in the capital market mainly because of their tendency of dodging taxes. To be in the capital market transparency is a must and proper audit is required. And those who come in the market, sponsors of the companies keep maximum shares in their possessions,” he adds.

Eminent entrepreneurs who have shares in the market also agree with this observation. Entrepreneur and a former Advisor to the Caretaker Government Manzur Elahi says, “Since most of the entrepreneurs in the country are first generation businessmen, they want to keep the companies as family business. The entrepreneurs show reluctance, partly due to their mindset and partly to avoid transparency and regular audit, especially those who don't want to disclose their business and want to dodge taxes. But, my company took advantage from the capital market. To me, borrowing money from the market is a better option than taking a bank loan. It also boosts the capital market. ”

But he believes that unless the power sector improves, business expansion will be restricted. “As a result the flow of new issues will not increase.”

Professor Abu Ahmed, however, criticises the government's role for not being able to keep promises to bring shares of the state owned enterprises and multinational companies in the capital market.

Professor Abu Ahmed says, “I don't understand why the government is not forcing the multinational companies to come to the capital market with a maximum share off-loading. Only one mobile operator came in the market. Why are the other operators not coming? If those companies claim that they are running at a loss, the government should re-audit their business. When Uniliver is a listed company in India and Pakistan, why has the Bangladesh government failed to force it to enlist with the DSE? Bangladesh Bank must force the foreign banks to be local subsidiaries. The government must make it compulsory for the multinational companies to be enlisted with the stock market while giving licenses.”

Long queues in front of the banks to submit IPO applications.

“When the government does not want to borrow from the World Bank and ADB, the capital market could be a great opportunity. There is no need for organising road shows to collect funds for the government projects. It's not that difficult to collect three to five thousand crore taka from the capital market. But the government is not taking the advantage. Can you show me any country where a government owns hotels and airlines?”

He believes that the government is not taking appropriate steps to resist the bureaucratic tangles creating the obstacles. He comments, “Suspecting a possible financial 'loss', we are told that the bureaucrats who are heading the state owned enterprises, are creating resistance. However, the government has not yet taken any action against them.”

Former Advisor Mirza Azizul Islam also admits that inside resistance is a big problem for the state-owned enterprises. Sharing the efforts that he made to bring these shares in the market Islam says, “Due to the bureaucratic tangles and resistance from the workers of the state-owned enterprises, it becomes difficult to bring the public companies in the capital market. There are some vested interest groups in the bureaucracy who don't want to let go of the opportunity to take undue advantages while the workers want financial benefits without working. In case of Titas Gas, we could tackle such resistance through negotiations. I think the political will of the government can solve such problems. If the government just rely on the bureaucracy for implementation of the government's decision, it will never happen."

Instead of focusing on increasing supply the government is planning to invite more investors including the Non Resident Bangladeshis (NRBs). Mirza Aziz says, "Demand is not an issue, which is why I refused to attend the road show to attract the NRBs. In fact, the government, stock exchanges, issue managers should work together to immediately bring more shares in the market. Already, the hurdles during issuing shares for the private companies has been solved through new policies such as announcing premiums and the book building method,. The problem with our entrepreneur class is that they don't want to be accountable," says Mirza Azizul Islam, a former SEC chairman.

DSE President Shakil Rizvi claims that the DSE is in the right direction in bringing more shares from the private and public sectors. "Already many new issues are in the pipeline. And the government is also very concerned about bringing state-owned enterprises soon."

Rizvi is rather critical about some 'market analysts' and the media, who, he says are giving wrong

Professor Abu Ahmed	Professor Salahuddin Ahmed Khan	SEC Chairman Ziaul Haque Khondokar.

messages about the market. "Whenever, the bull run began two years back many people intentionally gave wrong messages comparing it with the bull run in1996, which ultimately reduced many investors to beggars. Instead of focusing on any concrete allegation, they give some negative generalised overview even in the newspapers. Some investors, on the other hand, who sold their shares at the initial stage of the bull run, could not take the advantage from it and are intentionally delivering such wrong messages, which distorts the market. I don't see anything so alarming or abnormal in the market. It's true that there are shares that are overpriced; at the same time there are many shares which are still under priced."

Policies to protect the investors are needed
Though trading had begun in 1956, Dhaka DSE started truly functioning as a capital market since the 1990s. Structurally, however, the capital market has not yet matured. The policymakers still do not have any proper idea on capital market. Mostly they misinterpret the market considering it as a market for the gamblers. Any long-term goal is missing in the market. Policymakers and regulatory bodies such as SEC and DSE, rather encourage the investors for short-term investments. The regulatory body SEC is frequently changing its policies. Even the investors are not properly informed about the new policies. Thus distorted messages are circulated. Such misinterpretation may have huge impact on the market, since valuation of a share depends on expectation or speculation. And no initiative has been taken to make the market structurally sound.

Recently, the National Board for Revenue (NBR) has asked for the TIN numbers of the Beneficiary Owners (BO) account holders. The market analysts, DSE and SEC people are also criticising the act considering it a harmful step for the market. "Any thought to levy tax on BO account holders will be harmful for the market, says Professor Abu Ahmed, “Since most of the investors have no tax payable income and have opened BO accounts in their mothers' names and wives' names. That is why it will not be fair to make it mandatory of having TIN numbers for opening BO account. Such wrong message has damaged the market already. The market is not mature enough to ask for TIN number. In fact, most of the bureaucrats and policymakers have poor idea on the market."

"We have observed some instabilities, "says Professor Salahuddin Ahmed Khan, "It's due to wrong messages delivered from the government and SEC. And in many cases, the regulatory commission responded very late and could not stick on its decision. Even, the decisions were not made through a thorough analysis consulting with the stakeholders."

Both market analysts have observed that the frequent interference of the Ministry of Finance on the independent security exchange commission has created confusion. They also observe a lack of co-ordination amongst stakeholders, which, they blame, have made the investors impatient.

Professor Salahuddin Ahmed Khan emphasises on the transparency and proper function of SEC to ensure public interest. The former CEO of DSE Professor Salahuddin Ahmed Khan says, “If the SEC employees maintain BO accounts by names or in phoney names, then it is not possible to regulate the market properly.

Admitting some drawbacks such as shortage of manpower, SEC chairman Ziaul Haque Khondokar denies most of the allegations of the market analysts. Denying the allegation that the independent SEC is functioning according to the Finance Ministry prescription the SEC Chairman says, "We are not prescribed by the government, however, we exchange views and take suggestions from the top level of the Ministry of Finance in only macro economics issues. The market is so big now that the government's suggestions are very natural in macroeconomics. Even in the US, the regulatory commission CSE takes suggestions in such cases. We take decisions independently in issues related to microeconomics. But the government has no pressure on us, we don't even face any pressure from political leaders. The commission is independent and accountable to the parliamentary standing committee."

The research wing of DSE provides the required information for the researchers.	Vendors on the footpath adjacent to the DSE building, sell magazines, books and market analysis reports as well as IPO application form.

The SEC chairman claims that the commission has always taken decisions considering public interest, however, he admits the commission sometimes might have taken decisions late due to shortage of manpower. He also claims that the commission is not biased. "I don't agree that we are biased or politically motivated in case of categorising the issues. There is a fixed criterion and we follow it accordingly. But, there are some other types of obstacles for which sometimes we cannot stick on the decisions: many accused companies and institutions get stay orders from the high court."

To safeguard the investors from the corrupt companies in case of right share, SEC has taken an effective policy to force the companies to be more accountable, claims the Chairman. Despite the shortage of manpower, claims the chairman, the commission has taken instant decisions on the drawbacks of the newly introduced book building method initiated by the DSE. "We have found some problems in the bidding process of the new method. To bring accountability of bidding, we have made it mandatory to present at least 15 bidders including at least five well-recognised merchant banks. The bidders will also give statement. And the bidding date must be published in the newspapers so that the interested bidders can participate.

Admitting the leaking of market sensitive information during the trading hours as a problem, the SEC chairman Ziaul Haque Khondokar says, " We have instructed the companies to take price sensitive decisions after the trading hours and to inform all the stakeholders accordingly before starting of the following day's trade. As eye opener initiatives, we are also holding our meetings after trading hours. We have even instructed all the employees of CSE not to operate BO accounts. They used to apply for the IPO. I think they should be completely detached from the investment."

According to the chairman, SEC and DSE have been regularly initiating awareness generating programmes for the new investors. “Moreover, a few merchant banks are also organising orientation and training programmes as per their mandate”, he says, “We are forcing all of the merchant banks to take such initiatives.”

But most merchant banks and brokerage houses are not giving guidelines to the investors on what constitutes 'good share' and 'bad share' as well as on market trends, which they are supposed to do. In fact, monitoring and surveillance is fundamentally the DSE's responsibility. "But, the self-regulatory organisation is not playing the role effectively," the SEC Chairman claims.

"To make self regulatory organisation DSE more active in its surveillance the ministry of Finance has taken some new policies such as de-mutualisation and separate settlement corporation," informs SEC Chairman, "The concept of demutualisation is that the managerial body of the stock exchange will not be able to function as a broker. At present some members of the DSE are executive body members cum brokers cum shareholders. Which is why its monitoring capacity has not developed. "

The SEC chairman further informs that the government is very sincere to be establishing an institute on capital market to make the market structurally sound and effective. Already taka 8 crore budget has been allocated and an organogram has been finalised. Hopefully the institute will start functioning from July, he says.

Such initiatives taken by the government have been welcomed. The capital market boosts the economy by playing a vital role wherever the growth rate is beyond seven per cent. India had the 10 per cent growth rate after Bombay Stock Exchange was buoyant. When Shanghai Stock Exchange boomed, the growth rate in China reached 11 percent. Ironically, Bangladesh has failed to take the advantage of the market so far. It is expected that the current government will take the issue seriously considering the economic development as well as to safeguard thousands of people involved with the market. Awami League had a bitter experience on capital market collapse, it is expected that Awami League led government takes the market forward by creating an investor friendly atmosphere.

opyright (R) thedailystar.net 2010