Capital Market of Bangladesh: An Assignment On

InvestmentManagement:CapitalMarketofBangladesh|1
AnAssignmenton
CAPITALMARKETOFBANGLADESH
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LETTEROFTRANSMITTAL
Date:
Mr./Ms.
FacultyofBusinessAdministration
SchoolofBusiness
Subject:SubmissionoftheAssignmentonCapitalMarketofBangladesh.
DearSir/Madam,
ItisagreatpleasureforusthatwehavetheopportunitytosubmittheassignmentonCapital
MarketofBangladesh.
Wehavetriedourlevelbesttoputmeticulouseffortforpreparethisassignment.Any
shortcomingsorfaultmayariseasourunintentionalmistakes.Wewillwholeheartedly
welcomeanyclarificationandsuggestionaboutanyviewandconceptiondisseminatedthrough
thisassignment.
Thankyou.
YoursSincerely,
AKNOWLEDGEMENT
One of the most pleasant parts of writing this report is the

opportunity to thanks those who have contributed to it.
Unfortunately, in any establishment, the list of expression of
thanks no matter how allembracing is always imperfect and
insufficient, this acknowledgement is alike other is not an
immunity.
At first we want to thanks our Almighty Allah who gave me
energy and patient and also knowledge for making that kind of
report. Secondly we want to thanks our course instructor
withoutwhomwemustbeunabletomakeit.Weareveryhappy
toparticipateinthisAssignment.
Finally we want to thanks our friends and course mates who
helped us for gaining information and complete the assignment
successfully.
TABLEOFCONTENTS
1.
INTRODUCTION
01
2.
THEPRIMARYMARKET
02
3.
THESECONDARYMARKET
03
4.
BANGLADESHSTOCKEXCHANGES
04
5.
THEROLEOFCAPITALMARKETSINANECONOMY
06
6.
BANGLADESHCAPITALMARKETOUTLOOK
07
7.
BANGLADESH:THEPROSPECTS,POSSIBILITIES&CHALLENGES
09
8.
THEPOTENTIALOFTHEBANGLADESHCAPITALMARKET
12
9.
REASONSBEHINDTHEUNDERDEVELOPMENT
13
10.
OPPORTUNITIESOFBANGLADESHCAPITALMARKET
16
11.
RECOMMENDATIONS&CONCLUSION
18
REFERENCES
1.
INTRODUCTION
Acapitalmarketisamarketforsecurities(debtorequity),wherebusinessenterprises(companies)and
governmentscanraiselongtermfunds.Itisdefinedasamarketinwhichmoneyisprovidedforperiods
longerthanayear,astheraisingofshorttermfundstakesplaceonothermarkets(e.g.,themoney
market).Thecapitalmarketincludesthestockmarket(equitysecurities)andthebondmarket(debt).
Financialregulators,suchastheBangladeshFinancialServicesAuthorityortheBangladeshSecurities
andExchangeCommission(SEC),overseethecapitalmarketsintheirdesignatedjurisdictionstoensure
thatinvestorsareprotectedagainstfraud,amongotherduties.
Capitalmarketsmaybeclassifiedasprimarymarketsandsecondarymarkets.Inprimarymarkets,new
stockorbondissuesaresoldtoinvestorsviaamechanismknownasunderwriting.Inthesecondary
markets,existingsecuritiesaresoldandboughtamonginvestorsortraders,usuallyonasecurities
exchange,overthecounter,orelsewhere.
TheCapitalmarket,animportantingredientofthefinancialsystem,playsasignificantroleinthe
economyofthecountry.
Thecapitalmarketisthemarketforsecurities,wherecompaniesandgovernmentscanraiselongterm
funds.Thecapitalmarketincludesthestockmarketandthebondmarket.Capitalmarketspromote
andkeepcapitalismalive.Themarketsareacriticalpiecetomaycountryseconomiesandthebigger
themarketsthemorepotentialforeconomicgrowth.Itallowsforconsumersandbusinessestohavea
shareinthenationswealth.Theavailabilityofseveralwaystoraisemoneyneededisattractivebecause
theycancontinuetostrikeintonewsourcesofmoneyovertime.Thegoalofthemarketsistoincrease
investorconfidencebymoreactiveparticipation.Themarketsrequireafreeflowofinformationtorun
smoothlyandefficientlyandtheinternetcanbeusedforuptotheminutetradeinformation.
2.
THEPRIMARYMARKET
Theprimarymarketisthatpartofthecapitalmarketsthatdealswiththeissueofnewsecurities.
Companies,governmentsorpublicsectorinstitutionscanobtainfundingthroughthesaleofanewstock
orbondissue.Thisistypicallydonethroughasyndicateofsecuritiesdealers.Theprocessofsellingnew
issuestoinvestorsiscalledunderwriting.Inthecaseofanewstockissue,thissaleisaninitialpublic
offering(IPO).Dealersearnacommissionthatisbuiltintothepriceofthesecurityoffering,thoughit
canbefoundintheprospectus.Primarymarketscreateslongterminstrumentsthroughwhich
corporateentitiesborrowfromcapitalmarket.
Featuresofprimarymarketsarethisisthemarketfornewlongtermequitycapital.Theprimarymarket
isthemarketwherethesecuritiesaresoldforthefirsttime.Thereforeitisalsocalledthenewissue
market(NIM).
Inaprimaryissue,thesecuritiesareissuedbythecompanydirectlytoinvestors.Thecompanyreceives
themoneyandissuesnewsecuritycertificatestotheinvestors.
Primaryissuesareusedbycompaniesforthepurposeofsettingupnewbusinessorforexpandingor
modernizingtheexistingbusiness.Theprimarymarketperformsthecrucialfunctionoffacilitating
capitalformationintheeconomy.
Thenewissuemarketdoesnotincludecertainothersourcesofnewlongtermexternalfinance,suchas
loansfromfinancialinstitutions.Borrowersinthenewissuemarketmayberaisingcapitalforconverting
privatecapitalintopubliccapital;thisisknownas"goingpublic."
Thefinancialassetssoldcanonlyberedeemedbytheoriginalholder.
Methodsofissuingsecuritiesintheprimarymarketare:
Initialpublicoffering;
Rightsissue(forexistingcompanies);
Preferentialissue.
3.
THESECONDARYMARKET
Thesecondarymarket,alsoknownastheaftermarket,isthefinancialmarketwherepreviouslyissued
securitiesandfinancialinstrumentssuchasstock,bonds,options,andfuturesareboughtandsold.[1].
Theterm"secondarymarket"isalsousedtorefertothemarketforanyusedgoodsorassets,oran
alternativeuseforanexistingproductorassetwherethecustomerbaseisthesecondmarket(for
example,cornhasbeentraditionallyusedprimarilyforfoodproductionandfeedstock,buta"second"
or"third"markethasdevelopedforuseinethanolproduction).Anothercommonlyreferredtousageof
secondarymarkettermistorefertoloanswhicharesoldbyamortgagebanktoinvestorssuchas
FannieMaeandFreddieMac.
Withprimaryissuancesofsecuritiesorfinancialinstruments,ortheprimarymarket,investorspurchase
thesesecuritiesdirectlyfromissuerssuchascorporationsissuingsharesinanIPOorprivateplacement,
ordirectlyfromthefederalgovernmentinthecaseoftreasuries.Aftertheinitialissuance,investorscan
purchasefromotherinvestorsinthesecondarymarket.
Thesecondarymarketforavarietyofassetscanvaryfromloanstostocks,fromfragmentedto
centralized,andfromilliquidtoveryliquid.Themajorstockexchangesarethemostvisibleexampleof
liquidsecondarymarketsinthiscase,forstocksofpubliclytradedcompanies.Exchangessuchasthe
DhakaStockExchangeandChittagongStockExchangeprovideacentralized,liquidsecondarymarketfor
theinvestorswhoownstocksthattradeonthoseexchanges.Mostbondsandstructuredproductstrade
overthecounter,orbyphoningthebonddeskofonesbrokerdealer.Loanssometimestradeonline
usingaLoanExchange.
4.
BANGLADESHSTOCKEXCHANGES
TheSecuritiesandExchangeCommissionexercisespowersundertheSecuritiesandExchange
CommissionAct1993.Itregulatesinstitutionsengagedincapitalmarketactivities.BangladeshBank
exercisespowersundertheFinancialInstitutionsAct1993andregulatesinstitutionsengagedin
financingactivitiesincludingleasingcompaniesandventurecapitalcompanies.TheSEChasissued
licencesto27institutionstoactinthecapitalmarket.Ofthese,19institutionsareMerchantBanker&
PortfolioManagerwhile7areIssueManagersand1(one)actsasIssueManagerandUnderwriter.There
aretwostockexchanges(theDhakaStockExchange(DSE)andtheChittagongStockExchange(CSE))
whichdealinthesecondarycapitalmarket.
Astockexchangeisanentitythatprovides"trading"facilitiesforstockbrokersandtraders,totrade
stocks,bonds,andothersecurities.Stockexchangesalsoprovidefacilitiesforissueandredemptionof
securitiesandotherfinancialinstruments,andcapitaleventsincludingthepaymentofincomeand
dividends.Securitiestradedonastockexchangeincludesharesissuedbycompanies,unittrusts,
derivatives,pooledinvestmentproductsandbonds.
Tobeabletotradeasecurityonacertainstockexchange,itmustbelistedthere.Usually,thereisa
centrallocationatleastforrecordkeeping,buttradeisincreasinglylesslinkedtosuchaphysicalplace,
asmodernmarketsareelectronicnetworks,whichgivesthemadvantagesofincreasedspeedand
reducedcostoftransactions.Tradeonanexchangeisbymembersonly.
Theinitialofferingofstocksandbondstoinvestorsisbydefinitiondoneintheprimarymarketand
subsequenttradingisdoneinthesecondarymarket.Astockexchangeisoftenthemostimportant
componentofastockmarket.Supplyanddemandinstockmarketsisdrivenbyvariousfactorsthat,as
inallfreemarkets,affectthepriceofstocks(seestockvaluation).
Thereisusuallynocompulsiontoissuestockviathestockexchangeitself,normuststockbe
subsequentlytradedontheexchange.Suchtradingissaidtobeoffexchangeoroverthecounter.This
istheusualwaythatderivativesandbondsaretraded.Increasingly,stockexchangesarepartofaglobal
marketforsecurities.
BangladeshcapitalmarketisoneofthesmallestinAsiabutthethirdlargestinthesouthAsiaregion.
IthastwofullfledgedautomatedstockexchangesnamelyDhakaStockExchange(DSE)andChittagong
StockExchange(CSE)andanoverthecounterexchangeoperatedbyCSE.Italsoconsistsofadedicated
regulator,theSecuritiesandExchangecommission(SEC),since,itimplementsrulesandregulations,
monitorstheirimplicationstooperateanddevelopthecapitalmarket.ItconsistsofCentralDepository
BangladeshLimited(CDBL),theonlyCentralDepositoryinBangladeshthatprovidesfacilitiesforthe
settlementoftransactionsofdematerializedsecuritiesinCSEandDSE.
DHAKASTOCKEXCHANGE
DhakaStockExchange(GenerallyknownasDSE)isthemainstockexchangeofBangladesh.Itislocated
inMotijheelattheheartoftheDhakacity.Itwasincorporatedin1954.Dhakastockexchangeisthefirst
stockexchangeofthecountry.Asof18August2010,theDhakaStockExchangehadover750listed
companieswithacombinedmarketcapitalizationof$50.28billion.
History
ItfirstincorporatedasEastPakistanStockExchangeAssociationLtdin28April1954andstartedformal
tradingin1956.ItwasrenamedasEastPakistanStockExchangeLtdin23June1962.Againrenamedas
DaccaStockExchangeLtdin13May1964.Aftertheliberationwarin1971thetradingwasdiscontinued
forfiveyears.In1976tradingrestartedinBangladesh.In16September1986wasstarted.Theformula
forcalculatingDSEallsharepriceindexwaschangedaccordingtoIFCin1November1993.The
automatedtradingwasinitiatedin10August1998.In1January2001wasstarted.CentralDepository
Systemwasinitiatedin24January2004.AsofNovember16,2009,thebenchmarkindexoftheDhaka
StockExchange(DSE)crossed4000pointsforthefirsttime,settinganothernewhighat4148points.
Formation
DhakaStockExchange(DSE)isapubliclimitedcompany.ItisformedandmanagedunderCompanyAct
1994,SecurityandExchangeCommissionAct1993,SecurityandExchangeCommissionRegulation1994,
andSecurityExchange(InsideTrading)regulation1994.TheissuedcapitalofthiscompanyisTk.500,000
whichisdividedupto250shareseachpricingTk.2000.Noindividualorfirmcanbuymorethanone
share.Accordingtostockmarketruleonlymemberscanparticipateinthefloorandcanbuysharesfor
himselforhisclients.Atpresentithas230members.MarketcapitalizationoftheDhakaStockExchange
reachednearly$9billioninSeptember2007and$27.4billioninDec9,2009.
CHITTAGONGSTOCKEXCHANGE
ChittagongStockExchangeisastockexchangelocatedintheportcityofChittagonginsoutheastern
Bangladesh.Itwasestablishedin1995asthesecondstockexchangeofthecountry.Theexchangeis
locatedintheAgrabadcommercialareaofthecity.
Timeline
1April1995CSEincorporatedasacompany.
10OctabarFloortradingstartedincrioutsystem.
4November1995formallyopenedbythenformerPrimeMinisterBegumKhaledaZia.
30May2004InternetbasedTradingsystemopened.
5.
THEROLEOFCAPITALMARKETSINANECONOMY
Providesanimportantalternativesourceoflongtermfinanceforlongtermproductive
investments.Thishelpsindiffusingstressesonthebankingsystembymatchinglongterm
investmentswithlongtermcapital.
Providesequitycapitalandinfrastructuredevelopmentcapitalthathasstrongsocioeconomic
benefitsroads,waterandsewersystems,housing,energy,telecommunications,public
transport,etc.idealforfinancingthroughcapitalmarketsvialongdatedbondsandasset
backedsecurities.
Providesavenuesforinvestmentopportunitiesthatencourageathriftculturecriticalin
increasingdomesticsavingsandinvestmentratiosthatareessentialforrapidindustrialization.
TheSavingsandinvestmentratiosaretoolow,below10%ofGDP.
Encouragesbroaderownershipofproductiveassetsbysmallsaverstoenablethembenefitfrom
Bangladeshseconomicgrowthandwealthdistribution.Equitabledistributionofwealthisakey
indicatorofpovertyreduction.
Promotespublicprivatesectorpartnershipstoencourageparticipationofprivatesectorin
productiveinvestments.Pursuitofeconomicefficiencyshiftingdrivingforceofeconomic
developmentfrompublictoprivatesectortoenhanceeconomicproductivityhasbecome
inevitableasresourcescontinuetodiminish.
AssiststheGovernmenttocloseresourcegap,andcomplementitseffortinfinancingessential
socioeconomicdevelopment,throughraisinglongtermprojectbasedcapital.
Improvestheefficiencyofcapitalallocationthroughcompetitivepricingmechanismforbetter
utilizationofscarceresourcesforincreasedeconomicgrowth.
ProvidesagatewaytoBangladeshforglobalandforeignportfolioinvestors,whichiscriticalin
supplementingthelowdomesticsavingratio.
6.
BANGLADESHCAPITALMARKETOUTLOOK
Capitalmarketscontinuestrongperformance
SubprimecrisishasleftlittleimpactonBangladeshmarkets
MarketcapitalizationisaboveUS$20bnin2009fromUS$10bnin2007
AveragedailyturnoverisapproximatelyUS$75mmin2009fromUS$24mmin2007
OpportunitiesandChallenges
Keyopportunitiesforfuturegrowth
Institutionalizationofmarketbringsgreaterliquidityandlowervolatility
Attractinglargecorporateforlistingprovidesinvestorswithviableinvestmentoptions
Challengesahead
Retaildominatedmarketresultinginhighervolatilityfromspeculation
Large,wellreputedcompaniesprefertosourcefundsfromtraditionalbankfinanceagainst
capitalmarkets
Remittanceinflowhasbeenresilienttoglobalturmoil
BangladeshisabroadsenthomeUS$887.9mminSeptember09
Inflationcontinuestodecline
Fellto6.04%inJuly09,from6.66%inJune09and8.90%inDecember08
GDPgrowthforecasthasbeenreviseddownwardsto5.88%,comparedto6.19%inthe
previousfiscalyear
ExportshavebeenrelativelyshelteredduetolowcostnatureofBangladeshiproducts
RecoveryintheUSandEurope,themajorbuyers,expectedtoboostexportearnings
KeyCommentary
Localmarkethasbeenrelativelyshelteredfromtherecentglobalmeltdownin2008
Marketwasvolatileinearly2009buthasstabilizedwithhighturnoverandmarketcapitalization
FIIinteresttoexplorenewfront
Impressivegrowthinliquidityinrecentyears
AverageDailyTurnoverincreasedfromUS$24mmin2007toUS$75mmin2009
HighestrecordedliquidityofUS$166mmonJuly2,2009
MarketCapitalizationofDSEin2009hasbeenaroundUS$20bn,upfromaboutUS$10bnin
2007
15newissuesin2008with3directlistings
7newissuescompletedin2009
RecentlycompletedlargestIPOinBangladeshhistory.
7.
BANGLADESHCAPITALMARKET:THEPROSPECTS,POSSIBILITIESAND
CHALLENGES
THErecentgrowthofcapitalmarketofBangladeshwasbehindtime.Wehavewitnessedthemoney
marketgrowstableinthiscountryoverthelastdecade;oureconomywasstarvingforamaturedand
stablecapitalmarket.Thestabilitycamethroughavarietyofsourcesnamely,educatedretailinvestors,
institutionalinvestorsandlastbutnotleastthecapitalmarketregulators.
Asitisamarketthatinvolvesboththesponsorsandinvestors,theneedforahealthyandstablemarket
becamenecessary.ThroughvariousformsofreformsandautomationthecapitalmarketofBangladesh
wontheconfidenceofinvestorsfromallwalksoflife.Itisafactthatcapitalmarketoutperformed
moneymarketbyfarinthelastcoupleofyearsbutthatwasonlypossibleduetotheuniformandstate
ofthearetechnologythathasbeenusedastheplatformofourcapitalmarket.Inadditiontothat,the
governmentfacilitatedourcapitalmarketbystructuringitsmonetaryandfiscalpoliciesinaprocapital
marketmanner.
Thecentralbank(CB)playedathoughtfulpartindevelopingourcapitalmarket.Itbroughttransparency
tothebankingsector,whichactuallywelcomedtheretailinvestorstojointhecapitalmarketwithhigh
confidence.Theperformanceandhealthyreturnofthebankingsectorworkedasacrucialcomponent
tobringininstitutionsandforeigninvestors.Powerandpharmaceuticalsectoralsooutperformedthe
expectationsofgeneralinvestors;resultingfreshfundinjectionintoourcapitalmarket.
Ouremergingeconomymostlyinvitedthefundsfromallovertheglobe.Marketcapitalhasshown
amazinggrowth.Althoughcurrentmarketpriceearningratioishigherthanthatoftheneighbouring
countrybutitismybeliefthatconsideringthedemandforlackofavenuetoinvest,thecapitalmarketof
ourcountryhasabrightandattractivefutureanduntappedsector.
Addressingtheissueregardingourcapitalmarket,'liquidity'andlackof"instrument"wouldtopthelist
ofchallengesthatwehaverightnow.Themajorreasonfortheexistenceofthestockmarketisto
provideliquidityofsharesanddiversifiedinstrumentswhichhelpsincreasemarketcapitalisation.Italso
helpsinvestorstogainmoreconfidenceandpositivelyimpactGrossDomesticProduct(GDP)ofour
country.NeighbouringcountriessuchasIndiaandPakistanhavemarketcapitalisationofmorethan75%
oftheirGDP.Comparatively,theBangladeshcapitalmarketaccountsforafarlessershareofitsGDP
indicatingamplescopeforfutureintensificationinthissector.Hence,weshouldaddresstheaboveto
issueswithutmostseriousnessandwithafuturevision.
Asweknow,oureconomyisanemergingone;thereisamplescopeofgrowthofourcapitalmarket.Our
marketcap,accountsforalowershareofourGDPinacomparativeregionalperspective.Withthehelp
ofupcomingissues(IPO)weareveryoptimisticthatthemarketcapitalisationisreachahigherlevel
withinashortspanoftime.AutomationandintroductionofCentralDepositoryhelpedourcapital
markettogrowconsiderably.Theregulatorybody,namelySecuritiesandExchangeCommission,is
continuouslyfacilitatingourcapitalmarketwithitsinternationalstandardsurveillanceandmonitoring.
ThecontinuousendeavouroftheSEChasresultedinourcapitalmarkettobefreefromfraudulentand
manipulativeactivities.ThuspresenceoftheSEChasimpactedsignificantlyinthedevelopmentofthe
market.However,consideringourmarketsize,theSECshouldemploymoreprofessionalsfromprivate
sector.Wouldbringmoredynamismtothemarket.
Themajordrawbacksofourcapitalmarketarelackofinstrumentsandliquidity.Wecanaddressthese
twoissuesbyattractingmorecompaniestothemarket.Inordertomakethemarketmoreattractive,
thecorporatetaxbracketcanbeloweredinordertoencouragesponsorstolisttheircompaniesinthe
exchanges.WecanalsointroduceFutureandOptionMarketandhelpouralreadyexistingbondmarket
tobemorevibrantleavingtheinvestorswithmoreinstruments.Althoughwehavesomemutualfunds
(MF)currentlytradinginthesecondarymarket,yetwebelievethereishigherdemandforsuch
products,sinceMFprovidestheclientstheopportunitytoreduceinvestmentrisk.Withthehelpofthe
bourse,weshouldwelcomehedgefundsfromdifferentpartsofworldtoinvestinourcapitalmarket.
Cashmanagementcanalsoplayasignificantroleinovercomingthedrawbacksofourcapitalmarket.
Withthehelpofefficientandonlinecashmanagementourcumbersomesettlementprocedurecouldbe
streamlined.Thereareothernumerouswayswecanreducethedrawbacksofourcapitalmarket.Last
butnotleast,internationalauditingstandardhastobeadopted,resultinginmoretransparencyinthe
financialactivitiesandreporting.Thiswoulddrawtheattentionofgeneralinvestorsandgainthen
confidencetoinvestineverysector.Moreimportantly,inthecontextofonlinecentraldepository
system,guaranteedclearingagentforsettlementisobviousformarketdevelopment.
Absenceofcapitalgaintaxisthemostattractivereasonforforeigninvestors(FI)toinvestinBangladesh
capitalmarket,whichisnotverycommoninemergingeconomiessuchasBangladesh.Inadditionto
highreturnandsignificantdividendyield,FIsshouldbeattractedtoourcapitalmarketbecauseofthe
easyandhasslefreerepatriationoffunds.
Fromthepresentpointoftimethefutureseemsbright,notonlybecauseofourvibrantcapitalmarket
butalsoofourroomfornewproducts.Withtheintroductionofdirectlistingandpossiblebookbuilding
method,ourprimarymarketisimprovinginlinewiththesecondarymarket.Themarketcapwillgrow
significantlywithinnextfewyearsandturnovershallreachaninternationallevel.Moreover,
institutionalclients,namelybanksareenteringthemarketwiththeirhugeliquidfundcausingthe
capitalmarkettogrowveryrapidly.Domesticandinternationalbankshavestartednotonlytoinvestin
thecapitalmarketbutalsotooperatebrokerageandmerchantbankingwing.Crossbordertradingand
indextradingareideaswemightadoptinfuture,whichwillresultinliquidityandnewavenuesfor
investmentandminimiseourcashmarketrisk.
TheBangladeshiandforeigninvestorsareexperiencingthescarcityofdiversifiedproductsin
Bangladesh.Theplatformofthismarketissupplyanddemand.Duetotheabsenceofdiversified
products,theliquidityofmarketisdeclining.
Introducingoptionandfuturemarkettoourcapitalmarketcanbeasolutiontotheaboveissue.
TurnoverandmarketcapitalofIndiagrewsubstantiallyafterintroducingtheoptionandfuturemarket.
However,theinvestorshavetobeeducatedproperlytoreducespeculation.Derivativesandoption
marketisunavailableonlyduetoourlackofprofessionalsandtechnicalweaknessandalsothereareno
specificregulationsrelatingtotheseproducts.However,inaveryshortspanoftimecapitalmarket
intermediariesarebringingininfrastructurechangessuchasbookbuilding,derivativeandoption
markettoourmarket.Introductionoftheseproductswillfurtherbroadeninvestmenthorizonandbring
enhanceddepthandliquiditytoourmarketandattractglobalcustomers.
Althoughwehaveabondmarketbutcomparedtoothercountriesitisveryweak.Wehavetoattract
privateandpublicsectorcompaniestoissuemorebondsandthusincreaseliquidityinourbondmarket.
Theneedforcooperationamongthestockexchangesinthisregionhastobeemphasisedherinorder
reaptremendousbenefits.Atpresent,thelevelofsuchcooperationsremainsataverylowlevel.The
experiencewehavehadinourrespectivemarketscanbevaluabletoeachotherandoughttobe
exchanged,eventhoughthesizesandspecificationsofourmarketsmayvary.Regionwise,wearebound
bycommonalitiesinculture,environment,tradition.ThesameSociopoliticalfactorsaffectusrather
similarly.Hence,theknowledgegatheredinourrespectivecountriescanbevaluabletous,whobelong
tothesameregion.Throughafriendlydisseminationofknowledgeandexperience,wecanrevitalise
andenergiseoureconomies.Sharedknowledgecanfuelthegrowthofastrongerandmorevibrant
capitalmarket.
8.
THEPOTENTIALOFTHEBANGLADESHCAPITALMARKET
Thecapitalmarketistheengineofgrowthforaneconomy,andperformsacriticalroleinactingasan
intermediarybetweensaversandcompaniesseekingadditionalfinancingforbusinessexpansion.
Vibrantcapitalislikelytosupportarobusteconomy.Whilelendingbycommercialbanksprovides
valuableinitialsupportforcorporategrowth,adevelopedstockmarketisanimportantprerequisitefor
movingintoamorematuregrowthphasewithmoresophisticatedconglomerates.Today,witha$67
billioneconomyandpercapitaincomeofroughly$500,Bangladeshshouldreallyfocusonimproving
governanceanddevelopingadvancedmarketproducts,suchasderivatives,swapsetc.
Despiteachallengingpoliticalenvironmentandwidespreadpoverty,Bangladeshhasachieved
significantmilestonesonthesocialdevelopmentside.Withgrowthreaching7percentin2006,the
economyhasacceleratedtoanimpressivelevel.Itisnoteworthythattheleadingglobalinvestment
banks,Citi,GoldmanSachs,JPMorganandMerrillLynchhaveallidentifiedBangladeshasakey
investmentopportunity.TheDhakaStockExchangeIndexisata10yearhigh,however,thecapital
marketinBangladeshisstillunderdeveloped,anditsdevelopmentisimperativeforfullrealisationof
thecountry'sdevelopmentpotential.
CraigBrewer
ItisencouragingtoseethatthecapitalmarketofBangladeshisgrowing,albeitataslowerpacethan
manywouldlike,withmarketdevelopmentstillatanascentstage.Themarkethasseenalotof
developmentssincetheinceptionoftheSecuritiesandExchangeCommission(SEC)in1993.Afterthe
bubbleburstof1996,thecapitalmarkethasattractedalotmoreattention,importanceandawareness,
thathasledtotheinfrastructurewehaveinthemarkettoday.
9.
REASONSBEHINDTHEUNDERDEVELOPMENT
Accesstohighqualityandcrediblecorporateinformationremainsamajorprobleminthemarket.While
ahandfulofinstitutionalinvestorsmayenjoycertainbenefitssincetheyhaveaninvestmentunit
mannedwithqualifiedofficers,nothingexistsforretailinvestors.And,intheabsenceofindependent
researchhouses,retailinvestorsprimarilyfocusonadvicegivenbytheirbrokers,whichoftenconsistsof
marketrumours.Thisisnotacceptable,anditoftenleadstoenormouslossesforsmallinvestorswho
arevitalforalowincomeandemergingmarketlikeBangladesh.Filteringofinformationamong
differenttypesofinvestorsmayleavescopeformanipulation;thisassumptionhadbeenprovedrightin
the1996marketmeltdownatthecostofmanyindividualsandhouseholds.
Themarketdoesnothaveanadequatenumberoffundamentallysoundscrips.Theauthoritiesshould
notforcemajorcorporationstocomeintothemarket,withoutcreatinganenablingenvironment.The
focusshouldbeontheprivatisationofstateownedenterprisesthroughpublicofferingsinthebourses.
Themarkethastoreachsuchastageofdevelopmentthatcompanieswilltakeitasaseriousalternative
tobankfinancing.
Thegovernmenthasreducedtheinterestratesonsavingsinstruments,howeverthisparticularmarket
isstilllimitedtothecommercialbanks,andindividualinvestorsdonothaveaccesstotheseinstruments.
Thesesavingsinstrumentsareconsideredriskfree,andsincetheyarenotpresentinthecapitalmarket,
theoverallriskofinvestmentforaninvestorremainsveryhigh.Aportfolioinvestordoesnothavethe
optionofreducinghisaverageportfolioriskbyaddingtheseriskfreeopportunities.
AnestimatesuggeststhattheratioofinstitutionaltoretailinvestorsisstilllowinBangladesh,even
relativetootheremergingmarkets.Institutionalinvestorsbringlongtermcommitmentandagreater
focusonfundamentalsand,hence,stabilityinthemarket.Thepresenceofinstitutionalinvestorsisalso
expectedtoensurebettervaluationlevelsduetotheirspecialisedanalyticalskills.Whilewedohave
publicsectoraswellasprivatesectorinstitutionalinvestorsintheeconomy,proprietaryinvestment
fromtheseinstitutionsisnotsignificantotherthantheInvestmentCorporationofBangladeshthat
wascreatedin1976andcurrentlymanagesseveralmutualfunds.
Corporategovernanceofinternationalstandardisstilllacking.Multinationalcorporationsand
institutionsoperatinginBangladeshoftenadheretoaveryhighinternationalstandardcompliance
regime.Parentcompaniesofmostofthesecorporationsandinstitutionshavetheirscripslistedin
developedmarkets.Unlessthelocalmarketadheresto,andeffectivelyenforces,astandardcorporate
governancesystem,therewillnotbealevelplayinggroundforinternationalbusinesshousesvisavis
localoperators.
Animportantaspectforcapitalmarketisreflectionoffairvalueofscrips.Thisisnotadequatelypresent
inthecurrentscenario,andduetothisreasonthemarketisnotreceivingtheattentionofanimportant
segmentofinvestors,bothforeignandlocal.Investorsareperhapsdependingmoreonspeculative
analysis,resultinginvolatilityinthemarket,asopposedtofundamentalanalysis,whichcouldattract
morestablelongterminvestorswhoaresureabouttheirinvestmenttenureandexpectations.
Thebullrunthattookplacein1996hasleftanumberofpositivesforthemarket.Alotofinvestment
friendlyregulatoryreformshavebeenimplementedbytheSEC.Wenowhavestrongersurveillanceand
improvedrulesrelatingtopublicissue,rightsissue,acquisition,mergersandsoon.Allthese
fundamentaldevelopments,whichwerewelloverdue,followedthe1996bullrun.Itwasalearning
experienceforBangladesh,andthedesiredlevelofchangeswasinitiatedbythemarketwatchdog
subsequently.
Inthesecondarymarket,surveillanceismoreactiveandparticularthanbefore.Thesedevelopments,
thatarewidelyappreciated,areactuallythefundamentalrequirementsthatareinplacetodayresulting
fromthecontinuouseffortsofthegovernmentandmultilateralagencies.
Tradinghasnowbecomeautomated,ledbytheChittagongStockExchangethroughthecentral
depository.Inthepresentautomatedtradingenvironment,bids/offers,depth,andrequiredbroker
particularsareallrecordedandcanberetrievedforfuturereference.TheCentralDepository
BangladeshLimited(CDBL)wascreatedinAugust2000tooperateandmaintaintheCentralDepository
System(CDS)ofElectronicBookEntry,recordingandmaintainingsecuritiesaccountsandregistering
transfersofsecurities;changingtheownershipwithoutanyphysicalmovementorendorsementof
certificatesandexecutionoftransferinstruments,aswellasvariousotherinvestorservicesincluding
providingaplatformforthesecondarymarkettradingofTreasuryBillsandGovernmentBondsissuedby
theBangladeshBank.
Thestockmarketsurveillancemechanicsinplaceatpresenthasnoresemblancetothatof1996.There
arestrictrulesandguidelines,tradingcircuitbreakersandinternationalstandardsurveillancetoprotect
investorrightsandensurefairplay.Thedisclosurerequirementsanditstimingforbothlistedscripsand
IPOsasdevisedbytheSECarenowmorereflectiveofinternationalpractices.TheSECisalsoadopting
newvaluationmethodsthatresultinfairpricingofnewissues.Whilethereisstillalackofcredible
researchorganisations,afewfirmslikeAssetandInvestmentManagementServicesofBangladeshLtd.
(Aims)havecomeup,andtheyareinvestinginresearchandbuildingupstockmarketrelated
credentials.
THERECENTSURGEINTHESTOCKMARKET
TheDhakaStockExchangeIndexwasata10yearhighinthe2007yearend(up66percent),which
madeitAsia'stopperformerafterChina.Thesteadyinvestmentatmosphereprevailingthroughout
2007isconsideredtobeoneofthemainreasonsbehindthissurge.Goodreturnprospects,stable
marketgrowth,anduninterruptedtradingasaresultofpoliticalstabilityattractedforeigninvestorsto
localsecurities.In2007,foreigninvestorsboughtsharesworth$205.7million,whiletheamountof
sellingwas$78.6million,accordingtoaDSEstatistic.AccordingtotheDSE,in2007,netforeignor
portfolioinvestmentontheDhakaStockExchangesurged8.3xto$129million.Thebankingsector,
followedbythepower,pharmaceuticalandcementsectors,receivedthemostforeigninvestment.
Thecaretakergovernmenthasalsoattractedinvestorsbypledgingtosellstateenterprises.Thestate
ownedcompaniesJamunaOilCompanyLtd.andMeghnaPetroleumLtd.debutedinthebourses
earlythismonth.Someanalyststhinkthatthemarkethadbeenundervaluedbeforethesurge,andthe
uphilltrend,therefore,playedtheroleofanupwardcorrectionofthemarket.
TheP/Erationowstandsat20xascomparedto14.1xforemergingmarkets.Itseemssustainableifthe
plannedbigIPOsofafewSOEsandthetoptelecomcompaniestakeplace.Moresuchlargeissuesare
required,whichcanemergeoutoftheenergy,infrastructureandpublicsectors.
10.
OPPORTUNITIESOFBANGLADESHCAPITALMARKET
ThecapitalmarketsinAsiaaregettingmoreandmorefocuswiththegrowingcorporatisationofthe
Asianeconomies.EasternAsiahasprogressedalotwithrespecttoattractingwesterncompaniestoget
listedinAsianboursesaswellassupportinginnovativeinstruments,andSoutheastAsiaisalsocoming
upwithIndialeadingtheway.Comparingthelocalmarketscenariowiththatoftherestoftheregion,
Bangladeshisinprettygoodshapeaswehavemostoftheinfrastructureinplace.Ourmarket
capitalisationisrelativelysmalleranditcurrentlystandsat$9.3billion,whichisjustover13percentof
GDP.Higherliquidityisskewedtowardsahandfulofscrips,whileastagnantsituationexistsforfewless
profitableissuers.
Atpresent,thegovernmentisheavilyfocusingondevelopingadebtcapitalmarket.Suchmeasuresare
certainlywelcomeasBangladeshlacksapropersecondarymarketforbonds.Themarketisyetto
supportshorttermcapitalrequirementsofcorporations.CommercialPaper(CP)hasnotyetbeentried
primarilyduetointerestratevolatilityandilliquidriskfreeinstrumentsthatcanbeusedasbenchmark
neitherforshorttermandhardlyforlongtermfinancing.Itcan,therefore,besaidthatwehavea
somewhatflatyieldcurveinBangladeshatthemoment.
DebuttradingofstateownedoilcompanieslikeJamunaOilCompanyLtdandMeghnaPetroleum
LimitedonthelocalboursesinJanuary2008hasspurredalotofencouragementamonginvestors.This
initiativetakenbythegovernmenttolistSOEswillincreasemarketcapitalisationandimprovedliquidity.
SECisalsocontemplatingtheintroductionofthebookbuildingmethodinthevaluationofIPOsinorder
toensureafairpricewithinthisyear.Thiswillencouragecompanieswithsoundfinancialhealthto
comeintothemarket.
Regulatorypressuresaremountingontelecomcompaniestogetlisted.Itisestimatedthatthelistingof
thetoptelecomcompanieswillattractmoreforeigninvestment,increasethemarketcapitalisationby
fewfolds,andbringabouthigherstandardsofcorporategovernance.
Thereisstillhugepotentialinthemarketforsecuritisationandotherdebtinstrumentslikecommercial
papersandcorporatebonds,andderivatives,whichwillhelpforeigninvestorshedgetheirexposure.
11.
RECOMMENDATIONS&CONCLUSION
Themarketneedsmoreandmoregoodscrips.Theprocesswouldbeeasierifwecoulddrawattention
ofgoodissuersbyimprovingthemarketgovernancesystemandeliminatingscopeformanipulation.
Thereareonlylimitedinstances,suchasincommercialbanks/leasingcompanies,whereregulatorscan
imposeguidelinesrelatingtocapitalstructure.Hence,itmaybedifficulttoforceacorporatehouseto
listunlessitagreesatthetimeoflicensingorregistration.Inadequatedisclosurerequirement,anda
cultureoffamilyownedconglomeratesdetertheexpansionofcorporategovernanceintothelocal
industry.Theregulatorsneedtoplayanactiveroleinremovingthebureaucraticbottlenecks,and
promoterulesthatprovideincentivestothesegroupsofcompaniestolist.
Toexpeditethemarketdevelopmentprocess,itmaybeagoodideatodecideoncertainmilestonesand
linkthemtothedisbursementofDevelopmentCreditSupportoftheWorldBank.Thegovernmentis
makinggoodprogressinothersectors,includingmonetarymanagement,corporatisationofpublic
sectorbanksandothersthroughthislinkage.
ThemissinglinkbetweentheSEC,BangladeshBank,BangladeshTelecomRegulatoryCommissionand
otherregulatorybodiesisnowgettingestablished.Individually,theywerenotservingeachothers'
interests,andtherewasnoeffectivecoordinationamongthem,hencethecountrywasdeprivedof
greatinitiatives.AdedicatedfinancialmarketcellattheMinistryofFinancecouldbeformedto
coordinatewiththeseregulatorsaswellasotherministries.
Intermsofcreatingmarketdepth,moreprofitablestateownedenterprisesshouldbelisted.Thesupply
ofsecuritiescanbeincreasediftheSOEsareallowedtooperatethroughthestockexchanges.
FloatationofSOEscripsisexpectedtoexpandthemarketbycoupleoftimes.CorporatisationofSOEs
willbringintransparencyaswellasconfidenceonthegovernmentfinancialsystem.
Incentiveforprivatesectorentrepreneurstoaccessthecapitalmarketshouldbemorenoticeable.Tax
gapbetweenlistedandnonlistedcompaniescouldbeincreased.Infrastructureprojectsshouldaccess
capitalmarkettoraisefinancingthroughbondsandcorporationsshouldraiseshorttermfinancing
throughcommercialpapers.Securitizationsshouldbeencouraged.Weneedtobeproactiveandtake
initiativestopromotenewproductsinthemarket.
Inamoredevelopedmarket,institutionalinvestorssuchasmerchantbanks,commercialbanks,
insurancecompanies,aremajortradersofsecurities.Weneedenforceableandmoreeffectivelawsand
rulestoattractforeigninstitutionalinvestors.
EquityresearchisnotyetverypopularinBangladesh,qualityofbrokerageshousesshouldbeassessed
bythequalityofresearchproducedbytheirindependentresearchdepartments.SECisexpectedtotake
aneducationalroleintheprocessbybringingininternationalresourcesandcreatinginvestors
awarenessthroughtelevisionandothermedia.LocalTVchannelsfocusonbusinessbutwealsoneed
educationfortheyounggenerationfinancialeducationforthecollegeanduniversitystudents,
irrespectiveoftheirdiscipline,shouldbepromoted.Youngpeoplehaveeveryrighttolearnthe
mechanismsofsaving,investingandtheimportanceofpersonalfinancialmanagement.
Qualityanalysisneedstoaddressthisvaluationissueinamoreproactivemanner.Theindependent
analystsshouldraisetheflagwhenascripisovervaluedorundervalued,theintrinsicvalueofatraded
securityshouldbecoveredintheresearchpaper.Investorsareperhapsdependingmuchonspeculative
analysisresultingintovolatilityinthemarketasopposedtofundamentalanalysis,whichcouldattract
morestablelongterminvestorswhoaresureabouttheirinvestmenttenureandexpectations.Itis
observedthatwheneverthereisadownturninthemarket,individualinvestorsgoonrampage.
However,theseinvestorsshouldunderstandthatdownturns,bearishtrendsandmarketcorrectionsare
anintegralpartofstockmarkets.
TheBangladeshcapitalmarketstillhasalongwaytogo.Therecentmeasurestakenbythetransitional
governmenthavealreadybeguntopositivelyimpactthemarkets.Ifmoreinvestorfriendlypolicy
reformsweretobeimplemented,thecapitalmarketwillundoubtedlyplayacriticalroleinleading
BangladeshtowardsbeingthenextAsiantigerwithgrowthcomparabletoIndia,Vietnamandtheother
mostdynamiceconomiesintheregion.
REFERENCES
Books:
CorporateFinance,StephenARoss,13thedition.McGrawHillInc.
NewsPapers:
TheDailyStarForum2008May
TheFinancialExpress,Thursday,December20,2007
Websites:
http://www.thedailystar.net/forum/2008/may/potential.htm
http://www.bangladeshbank.org/research/policynote/pn0708.pdf
http://www.thefinancialexpress
bd.com/search_index.php?news_id=20305&page=detail_news
http://en.wikipedia.org/wiki/Stock_market
http://en.wikipedia.org/wiki/Primary_market

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