Working Paper

WP2013/05
April 27, 2013

Regulatory Framework of Bangladesh Stock Market

Faruq Ahmad Siddiqi

Faruq Ahmad Siddiqi is a former Chairman of Bangladesh Securities and Exchange Commission (BSEC) and a retired Secretary to Ministry of Education, Ministry Post and Telecommunications, and Ministry of Commerce, Government of Bangladesh.

Copyright 2013 by Accounting for Capital Market Development (ACMD). All rights reserved. No part of this working paper may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by information storage or retrieval system, without permission from the project management.

Accounting for Capital Market Development (ACMD)

(A Research Project under the Academic Innovation Fund (AIF) of the University Grants Commission (UGC) of Bangladesh and the World Bank)

Department of Accounting & Information Systems (AIS)

Project Office: Room#302 Academic Building, Faculty of business Studies University of Dhaka, Dhaka-1 000 Tel: +88 02 9661920-70/Ext.7914 (O), 01817684202 (M) Fax: +88 02 8615583 E-mail: mizan@univdhaka.edu, Web: www.acmd.com.bd, www.acmd.com.bd/AccCMD

Regulatory Framework of Bangladesh Stock Market

Mr. Faruq Ahmad Siddiqi
Regulatory authority As in other countries, stock market in Bangladesh functions under a regulatory regime. Prior to enactment of Securities and Exchange Commission Act, 1993, Government was the regulator of capital market. SEC assumed powers and functions of the government as regulator of capital market since then. The Commission consists of a chairman and four commissioners. The Commission is an autonomous body which is empowered to function independently without government intervention. Its autonomy is demonstrated by the fact that it is empowered with rule framing power for implementation of the Act without requirement of any approval of the government. However, government retains the authority to give special instruction to the Commission after prior consultation with it. Functions of the Commission Its main functions are regulation of capital market and issue, protection of investors interest and development of securities market. This will include regulation of stock exchanges, stock brokers, bankers to the issue, merchant banks, issue managers, underwriters, portfolio managers, investment advisors, trustees, asset management companies, custodians, credit rating companies, mutual funds etc. Its function also includes prohibition of fraudulent practices and insider trading, undertaking inquiry and auditing. Some important functions of the Commission have receded into background. These are promotion of investor education and training of market intermediaries. Responsibility regarding conducting necessary research for improvement of capital market appears to have been forgotten altogether. Important responsibilities Its responsibility includes conducting transparent trading, stop fraudulent practices like market manipulation, insider trading, short selling, ensuring submission of transparent accounts as per rule, statements, reports and returns, carrying out inquiry to alleged irregularities and taking legal action for all kinds of violation of securities law and regulations. A very important function is to ensure submission of annual financial statement in time containing balance sheet, profit and loss account, cash flow statement and notes to the accounts. Commissions responsibility is to examine audited financial statements, ensure that audit has been conducted in accordance with prescribed rules and take necessary action for deficiencies.

BSEC and price index Commissions responsibility is to ensure transparent trading without fraudulent practices. This is a challenging responsibility in a small market where various kinds of manipulation, insider trading, circular trading, pump and dump practices may prevail and create market distortion. Therefore, Commission needs to concentrate on transparent listing procedure, proper IPO pricing, adequate financial disclosure, market surveillance and monitoring and promote investor confidence. Day to day price index should be left to market forces. It has become a general perception that SEC should somehow interfere in controlling day to day market index. Commission is held responsible- often unfairly- for any kind of price fluctuation. BSEC has to take responsibility for undue distortion due to its faulty decision or undue interference. Other than that, price index should be the reflection of free market mechanism in an environment of transparency and fair practice. Unfortunately, wrong public perception gradually built up due to frequent interventions by the regulator; attempt to monitor price index on regular basis and, in some cases, failure to act independently. BSEC and market stability In a country like Bangladesh, regulator sometimes needs to play due role in maintaining long or midterm market stability and protect the market from external influences. For instance, back in 2010 market was finding it difficult to cope with rapidly increasing demand due to unrestricted cash flow to the market from various sources. This created a serious demand and supply mismatch. One major source of this excess liquidity was heavy investment by some banks and financial institutions in violation of the legally permissible limit of exposure to stock market. Perhaps in the middle of 2010, SEC should have taken up the matter with the central bank and stop excess bank investment violating provision of law. Similarly, during the same period, hundreds of branches were opened by the brokers all over the country. This allured thousands of totally inexperienced investors from remote areas to the over priced market. Many of them never heard of a stock market before. Most of them lost everything they had. I wonder why SEC did not come forward to stop such proliferation of broker branches well in time. After the market crash, various kinds of promises were being made by different quarters for salvaging the market as if it was the responsibility of everybody. We heard of Bangladesh fund, market stabilization fund, promise of imminent bank investments (this promise was made several times) and so on. There were even newspaper advertisements regarding forthcoming bank investments. Most of these promises remained unfulfilled eroding investor confidence very seriously. During the entire episode, SEC preferred to remain a silent spectator. I wonder again why SEC did not come forward to take necessary action to stop these irresponsible comments and acts.

Demutualization of exchanges Demutualization of exchanges is in progress. Separating management from trading through demutualization is a current trend and this is likely to bring long term benefit. But an idea is being floated that demutualization is a solution to the current problems. This is again raising a false hope of market recovery through demutualization. Demutualization in itself may not improve market stability or stop rumors, manipulation and fraudulent practices. There can be sharp market corrections under that situation also. Besides this may involve initial teething problems. Demutualization is a good idea. But expectations of immediate benefit should not be raised. BSEC may have a role in disseminating the correct position to the investors. Strengthening of BSEC BSEC needs capacity building. It needs adequate professionally qualified staff with ethical integrity, regular training and total commitment. Law has made provision for autonomy of the commission. BSEC needs to assert and exercise this autonomy without interference from any quarter. In spite of autonomy in its regulatory function, the commission is seriously handicapped due to administrative and budgetary control of the government. Employees salary and allowances are determined by the government. Government pay structure may not attract the kind of qualified professionals that the commission needs. The commission is also not competent to create posts without approval of the government- a process that may take months or even years. The commission can not spend any money beyond the budgetary sanction of the government. It is difficult for an organization like BSEC to operate efficiently with these constraints.