Present State of Bangladesh Stock Market

Course Code:

Course Title:

SUBMITTED TO:

Jamal Uddin Ahmed

Professor,

Department of Finance,

Faculty of Business Studies,

University of Dhaka.

SUBMITTED BY:

Name: Tahmina Chowdhury

ID: 40059

Sec:

Submission Date: 2019

 Letter of Transmittal
May 10, 2019

Jamal Uddin Ahmed

Professor,

Department of Finance,

Faculty of Business Studies,

University of Dhaka.

Subject: Submission of Term Paper on “Present State of Bangladesh Capital Market’’.

Dear Sir,

It is a great pleasure for me to submit the report on “Current State of Bangladesh Capital
Market.”, which is prepared as a fulfillment of the requirement of the course named “Financial
Markets & Institutions”. This study has given me the opportunity to learn the basics of Capital
Market and also given me the practical Knowledge through the study of capital market inception
& its mechanism. I have also learned the reasons of major crashes of Bangladesh Capital Market.
The analysis that I observed through this report will help me in our future, indeed.

I would like to convey my special thanks and gratitude to you for patronizing my effort & for
giving me proper guidance and valuable advice. You will be delighted to know that, I have tried
my best to make this report more & more informative and factual.

Sincerely Yours,

Tahmina Chowdhury

ID: 40059

Department of Finance,

University of Dhaka
 ACKNOWLEDGEMENT

First of all, thanks to Almighty Creator for giving me the knowledge and strength of doing this

report properly within the scheduled time. All of the hard work ended at a desired point for the

sincerity and seriousness of me and also for the friendly interaction with several financial

analysts, Capital market investors, BSEC officials which was really helpful for making this

report. So, a portion of credit of this report should go for them. For the successful completion of

my report I would like to thank and convey my sincere gratitude to my respected course teacher

expressing deeply indebtedness to, Jamal Uddin Ahmed, Professor, Department of Finance,

Faculty of Business Studies, University of Dhaka for his assistance, excellent pedagogy and

precious advice in preparing the Report.

 TABLE OF CONTENTS

Name Page No.

Chapter 1
1.0 Executive summary 1
1.1 Introduction 2
1.2 Objectives 3
1.3 Methodology 3
1.4 Analysis 4
1.5 Scope and limitations 4
Chapter 2
2.1 History of the Bangladesh Stock 5
Market
2.2 About stock exchange of Bangladesh 5
2.2.1 DSE 5
2.2.2 CSE 6
2.3 Regulatory body of capital market 7
2.4 Product, player, parameters of capital 7-8
market
Chapter 3
3.1 Crash in BD capital market 8
3.2 Causes of stock market crash 8
3.3 Background of the 1996 crush 9
3.4 Background of the 2011 crush 10
3.5 Comparison between two crashes 11
Chapter 4
4.1 Indicators of market size & efficiency 12
4.2 Sector wise Listing companies (DSE) 12
4.3 Sector wise Listing companies (CSE) 12
Chapter 5
5.1 Current stock market of BD 14
5.2 IPO number 15
5.3 Major focus on equity market 15
Chapter 6
6.1 Findings on current market situation 16
6.2 problems of stock market in BD 17
6.3 Future prospects & opportunities of 18
stock market
Chapter 7
7.0 SWOT Analysis 19
8.0 Findings & Recommendations 20
9.0 Conclusions & Remarks 23
10. References 24
1.0 Executive Summary
In a market economy, the capital market plays a vital role in the efficient allocation of scarce
resources. Well-functioning and developed capital markets augment the process of economic
development through different ways such as encourage savings, draw more savers and users into
the investment process, draw more institution into the intermediation process, help mobilize non
financial resources, attract external resources, bring disciplines in the sick organizations and
invest for organizing production of goods and services and create employment opportunities.

Stock market crash is a sharp and unexpected decline of stock market prices for a very short
period of time, usually accompanied with the decline of many other assets’ prices mentioned by
stock market crashes. It causes significant capital losses of investors and speculators. The market
participants become panicked which leads to more losses.

Bangladeshi Stock Market has experienced a big crash twice from its inception. In 1996, the
market was crashed because of speculative bubble whereas; it was an asset bubble in the year
2011. The stock price was overvalued this time. Price was inflated about 500-700 percent
compare to the face value. DGEN Index climbed at point 8918.51 on December 05, 2010 which
signaled a steeper bubble.

This study postulates the present scenario of Bangladesh Stock Market through various
quantitative and qualitative data which are extracted from the secondary sources. Quantitative
data are gathered from the web site of Dhaka Stock Exchange and other qualitative data are
collected from published research journals, newspapers, websites etc. This study has revealed
that, Gap between the Demand and Supply of stock, extraordinary over pricing of stock, market
manipulation, lack of knowledge about the stock market mechanism among the general
investors, price distortion, inefficient regulations, political unrest, etc caused the crash of DGEN
Index in the FY2011.

The recent volatility of the capital market of Bangladesh is an abnormal phenomenon and such
volatility tends to economic instability. I believe it will be interested enough to look into the
causes of the problem. As such volatility affects mass people (many investors), it is essential to
try to minimize such volatility by identifying the causes (esp., Regulatory failure) and solving the
problems.
1.1 Introduction
Capital Market mainly refers to the Stock and Share market of the country. Stock market is one

of the most important financial institutions of any economy as well as Bangladesh. It opens door

for companies to raise huge amount of capital from a lot of individual investors inside & outside

of a country. When banking system cannot totally meet up the need for funds to the market

economy, capital market stands up to supplement it. Companies and the government can raise

funds for long-term investments via the capital market. The capital market includes the

stock market, the bond market, and the primary market. Securities trading on organized cap-ital

markets are monitored by the government; new issues are approved by authorities of financial

supervision and monitored by participating banks. Thus, organized capital markets are able to

guarantee sound investment opportunities. This paper reveals the present aspects of the Capital

Market in Bangladesh.
1.2 Objectives
Capital market, being an essential element of today’s economy, demands an intensive and special
attention. The objective of this study is to look into every aspect of Bangladesh capital market
and identify its various pros and cons along with some recommendations to overcome the
existing problems. The specific objectives of this study are:

 
 To give an overall idea about the capital market-its structures, functions, importance, etc.
 To identify the current situations of our capital market of Bangladesh.
 To compare the relative conditions of Bangladesh capital market to other countries of the
world.
 To sort out the problems associated with our capital market.
 To suggest some practical solutions to the problem.

1.3 Methodology
Secondary data and information were used in preparing this seminar paper, and thesewere
collected through teamwork by adopting the following processes:

 Dhaka Stock Exchange (DSE)

 Dhaka Chamber of Commerce (DCC)
  Bangladesh Bank (BB)
 Monetary Policy Department (MPD), BB

Consulting books from different libraries of:

 Bangladesh Institute of Development Studies (BIDS)

 Dhaka Chamber of Commerce (DCC)
 Bangladesh Bank (BB)
 Other Books
1.4 Analysis:
The main factors of DSE have been analyzed from the perspectives of SWOT analysis.

     

1.5 Scope and limitations

A comprehensive knowledge on stock market crash has come under the scope of the report. The
present study is an attempt to evaluate the stock market of Bangladesh.

The report is limited only to gather knowledge about the determiner of the crash of the share
market of Bangladesh. Here the past history & present condition of Bangladesh share market will
also be taken into consideration.

Limitation

There are some limitations, which act as a barrier to conduct the program and for doing an
empirical research work. The limitations were:

 Large scale analysis was not possible due to constraints & restrictions this report is
limited only to the share crash, it does not cover the whole perspectives.

 In many cases, up to date information was not published.

 In some cases, access to relevant papers & documents were strictly prohibited.

 Another Problem was time constraints.

 Insufficiency of necessary information, lack of experience and budget constraint.

2.1 History of the Bangladesh Stock Market
The inception of Bangladesh stock market started on April 28, 1954 as East Pakistan Stock
Exchange Association Ltd. At that time Pakistan ruled Bangladesh and the name of the country
was East Pakistan. Other than trading on this market started in 1956 with a total paid up capital
of Taka 4 billion and 196 securities were listed on this market. Besides, the exchange was
renamed as Dhaka Stock Exchange (DSE) Limited on June 23, 1962. On the other hand, trading
on Dhaka Stock Exchange was suspended from 1971 to 1976 because of liberation war and its
post independence weak economy. In 1976, the trading was started again with 9 listed securities
having a total paid up capital of Taka 137.52 million. However, in its sixty-two year’s history the
stock market of Bangladesh crashed two times, first in 1996 and then in 2010-2011. At first, the
market crashed in December of 1996 and the index started to decline significantly since then
resulting in a cumulative decline of 83.44 percent from 1996 to 1999 with the annual rate of
27.82 percent. Stock index of Bangladesh, which has dropped 55% since early 2011, continues to
fall. One of the main reasons behind this unstable stock market is the lacuna in the regulatory
frameworks and weakness in stock market governance. In this situation, sustainable
improvement of the legal framework of the stock market stock market is a vital issue for the
protection of the investors and the development of its economy.

2.2 About stock exchange of Bangladesh

A stock exchange is a body that provides services to stock brokers and traders to trade stocks,
bonds, and other securities. Stock exchanges also provide facilities for issuance and redemption
of securities and other financial instruments, capital events including the payment of income and
dividends. Bangladesh has two exchanges. Their acquaintances are given below:-

Two stock exchanges:

DSE
CSE

2.2.1 Dhaka Stock Exchange (DSE): Dhaka Stock Exchange is the first & biggest stock
exchange of Bangladesh. The business of Dhaka Stock Exchange started on May 14, 1964 after
renaming East Pakistan Stock Exchange Limited. Dhaka Stock Exchange (DSE) is registered as
a Public Limited Company and its actions are regulated by its Articles of Association rules &
regulations and bye-laws along with the Securities and Exchange Ordinance - 1969, Companies
Act - 1994 & Securities & Exchange Commission Act - 1993. In the beginning it was a physical
stock exchange and used to buy and sell in the open out-cry system. After that automated trading
system was introduced to secure smooth, timeliness & effective operation on the market.
The major functions are:
 Listing of Companies (As per Listing Regulations).
 Providing the screen based automated trading of listed Securities.
 Settlement of trading (As per Settlement of Transaction Regulations).
 Gifting of share / granting approval to the transaction/transfer of share outside the
trading system of the exchange (As per Listing Regulations 42).
 Market Administration & Control.
 Market Surveillance.
 Monitoring the activities of listed companies (As per Listing Regulations).
 Investors’ grievance Cell (Disposal of complaint by laws 1997).
 Announcement of Price sensitive or other information about listed companies through
online.

Nature of DSE: There are four markets in the system-

1. Public Market-Only trading of market lot share is done here through automatic
matching.
2. Spot Market-Spot transactions are done here through automatic matching which must be
settled within 24 hours.
3. Block Market-A place where bulk quantities of shares are traded through pick and fill
basis.
4. Odd Lot Market- Odd lot scripts are traded here based on picks and fill basis.

2.2.2 Chittagong Stock Exchange (CSE)

The Second stock exchange of Bangladesh is Chittagong Stock Exchange. As it introduces
modern technology & sophisticated logistic support, it is said that CSE is the pioneer of the
modern capital market of the country. Besides, it was incorporated as a self-regulated non-profit
organization on 1st April, 1995 and formally opened on November 4, 1995. Though it started its
trading through cry-out system but after that Chittagong Stock Exchange started first automated
trading bourse of the country. CSE started its automated trading on 2nd June, 1998 and internet
trading service on 30th May, 2004. Moreover, there are four different markets in CSE same as
DSE which are public, Spot, Block & Odd Lot market. In addition, trading is done through all
these four markets. The Five categories of company listed in CSE are A, B, N, G and Z but in G
category there is not any company. Chittagong Stock Exchange has its own indices to calculate
movements of its total market value. CSE maintained only one index that was All Share Price
Index until 10th October, 1995. Now CSE has 3 indices in the stock exchange those are All
Share Price Index (CASPI), CSE Selective Index (CSE30) and CSE Selective Categories' Index
(CSCX).
2.3 Regulatory Body of Capital Market: The Securities and Exchange
Commission of Bangladesh (SEC) was established on 8th June, 1993 under the Securities and
Exchange Commission Act, 1993. The Chairman and Members of the Commission are appointed
by the government and have overall responsibility to administer securities legislation. The
Commission is a statutory body and attached to the Ministry of Finance. However, SEC was
renamed to BSEC (Bangladesh Securities Exchange Commission) in 2013.

Commissions’ Main Functions:

 Regulating the business of the Stock Exchanges or any other securities market.
 Registering and regulating the business of stock-brokers, sub-brokers, share transfer ,
agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of an
issue, underwriters, portfolio managers, investment advisers and other intermediaries in
the securities market
 Registering, monitoring and regulating of collective investment scheme including all
forms of mutual funds.
 Monitoring and regulating all authorized self-regulatory organizations in the securities
market.
 Prohibiting fraudulent and unfair trade practices relating to securities trading in any
securities market.
 Promoting investors’ education and providing training for intermediaries of the security
market
 Prohibiting insider trading in securities
 Regulating the substantial acquisition of shares and take-over of companies
 Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of
securities, the Stock Exchanges and intermediaries and any self -regulatory organization
in the securities market.
 Conducting research and publishing information.

2.4 Product, Player, Parameters and Indicator of BD.

Capital Market: In a capital market there are a lot of important elements which control
a capital market. If any general person does not know these things they are sure to face failure in
market.
Share Market key product: Shares, Debentures, Mutual funds, Bonds, Derivatives, Future and
options. Players of capital market: Investors, PLCs, Stock Exchanges, Brokers and Dealers,
Merchant banks, Securities and Exchange Commission, CDBL.
 Parameters used to measure size of capital market: Number of listed companies, number of
securities, size of market capitalization, Index, Daily trade volume, GSP ratio to market
capitalization.
Efficiency indicators of capital market: P/E multiple, Dividend yield, Liquidity, Visible
presence of regulators, Exit route regulation for sick PLC.

3.1 Crash in Bangladesh Capital Market: The capital market of

Bangladesh had two major debacles which occurred in 1996 and 2010-11, creating some bad
impacts upon the country’s total capital market.

3.2 Causes of stock market crash in 2011

1. Increase of BO a/c

But due to scarcity of new securities market price increased substantially. This demand- in a new
height and finally turned into a big depression that is still going on.

 2. Increase of listed securities

The fundamental strength of the market essentially comes from financial strength of the listed
companies. The market witnessed that last few years many fundamental companies with strong
financial strength have been listed in the market. From the graph, it is seen that number of
security listing are increasing year to year and highest amount is in the year 2011.

 But growth of market demand for stock was much then that of supply that inflated the market in
recent years and made the market most volatile one in the region

3. Increase of Market Cap and Turnover value

The graph shows that market capitalization and turnover of Dhaka stock exchange, prime bourse
of Bangladesh increased substantially in consecutive three years that might be considered as a
good factor for capital market development. But as the supply side response was poor, stock
price might go up due to excess liquidity. SEC had nothing to do with this as they had no direct
tool to control money supply and also they cannot force companies to come to the market.

The DSE General Index (DGEN) crossed 3000 marked point in December 2007 for the second
time. Since the third quarter of FY09, the DGEN gained sharply and it jumped to 8918.51 in
December 2010 increased by 5908.51 points or 197 percent from the index of end June
2009(3010 points).

4. Fluctuation of DGEN
In December 2010, DSE index had crossed 8500 points. The market had called bullish during
this period. After this period, the market became bearish. The exchange lost 1800 point between,
December 2010 and January 2011. In January 2011, the General Price Index (DGEN) fall 660
points. Again that during December 2011 to January 2012 Dhaka Stock Exchange general Index
(DGEN) felled by more than 50% during that period, i.e., DGEN lose its value by 50% during
the period that says that this is not simple volatility and it can be defined as a collapse.

January 2011, the General Price Index (DGEN) fall

After climbing the highest point it started to fall sharply and came down below 4000 in
December 2011 to January 2012 less than half of the highest point.

 5. Faulty listing methods

 In the year 2010, regulator introduced Book building method to attract new companies to the
market. Some companies abused this opportunity to exploit maximum benefits from listing that
inflated the market. SEC allows companies to float securities through IPO (Fixed Price and Book
Building method), Direct Listing and Repeat IPO where Book building method is used mostly in
the year 2010.

6. Recently listed Companies with financial information

Twenty three companies (including three direct listing companies) raised new equity of Taka
18.2 billion in the capital market in FY10, higher than the Taka 5.9 billion raised by the sixteen
companies in FY09.

Currently 493 securities (Debt and Equity securities) are being traded in Dhaka stock exchange.
Few numbers of companies are making fresh issue every year. 13, 18 and 10 companies listed
their securities respectively in 2009, 2010 and 2011

 Traditionally DSE used fixed price method for flotation of new companies. But fixed price
method does not attract good companies always. So, to attract new companies, SEC decided to
introduce Book building method that is a globally acceptable method for IPO. But in
Bangladesh, Book Building method is handled very roughly that caused loss for millions of
investors.

 7. Changes in Face Value (Stock Split) of Securities

With similar financial condition or weaker financial conditions lower face value companies were
overvalued relative to higher face value companies in same industries. This situation was
persisting for many years and regulator failed to identify the face value of all listed companies
that created some overvalued securities in the market. Investors were eager to buy the securities
of these companies that were going to change face and before split price of these were jumping.

 8. Stock price Manipulation:

Stock price manipulation was very common in last few years as some company’s stock price
grew by more than 4000% in one year without any significant change in company fundamentals.
Stock price was inflated with the help of serial trading by few numbers of big investors that was
one of the reasons of recent collapse of stock market in Bangladesh.

 9. Investment of bank in the capital market

In 2010 & 11 banks and financial institutions invested huge amount of deposit money in the
stock market. As a result share prices sky rocketed until December 2010. When Bangladesh
Bank restricted more than 10 percent investment of deposited money, increased CRR and SLR
ratio, created liquidity crisis and market crashed.

 10. Omnibus account

Investigation report found Omnibus accounts of ICB and merchant banks as another major
reason behind the stock market debacle. Every branch of merchant bank operates only one
omnibus account. There could be 3-10 thousands BO Accounts under the omnibus account
which are not under the surveillance of SEC. So, information of individual accounts and its
transaction 40 are kept only with merchant banks. As investigation reports shows that this kind
of account made a lot of illegal transactions. It publishes name of 30 big players including ICB
for a lot of suspicious transactions and says most manipulators traded from the omnibus
accounts. It was also reported at least Taka 2.5 billion has been traded from hidden or omnibus
accounts.

11. Asset revaluation & Rumor

 By taking chance of weak asset revaluation method companies have overvalued their asset. In
this process dishonest auditors generated artificial audit reports. So, calculating of NAV on
overvalued asset indicates wrong signal. Some companies issued Bonus shares against unrealized
gain of revalued asset price which is a faulty accounting practice. There is rule to maintain
provision against “deferred tax” during asset revaluation to pay tax in future, but companies are
not following it.

12. Block placement

There was a lot of suspicious block trading of mutual funds. Some investors got enormous
amount of placement time to time.
 13. Direct listing: With the approval of SEC few companies have been directly listed in the
stock exchange. These companies come to the market with inflated share prices.

 14. Suspicious transaction of top players

Investigation report reveals some names of individual and institutional investors as top buyers
and sellers during abnormal increase and decrease of index in different time periods. The
transactions of these investors were suspicious and affected the market heavily and liable for
abnormal rise and fall.

15. Serial and artificial trading

 Some manipulators created artificial active trading environment among themselves through bulk
transaction and increased share 41 prices. Moreover serial trading and price manipulation by
many buy-sell orders through different accounts and broker houses which overheated the market.

3.3 Background of the 1996 crash

The scenario of stock market crash in 1996 was totally different. The number of BO account
holders was only 300,000 and most of them were very new in the market. During the crash of
1996 paper shares used to be sold in front of DSE and it was not easy for investors to indentify
fake and original shares. The market was enough developed to gain confidence of investors.
There was no automated trading sys-tem, surveillance was not enough strong and no circuit
breakers as well as international protections.

From 1991 to the end of 1995 DGEN price index gained by 139.3% and reached to 834 point.
But in 1996 the market experienced dramatic change and pushed the price index up by 337%.
DGEN Index recorded high growth from July and stood at 3648.7 points or by 280.5% on 5th
November 1996.

During the ‘Bull Run’ period new records were posted almost every day in both bourses for
example market capitalization achieved to $2 billion which is equal to 20% of total GDP. As
market became overheated government took step by selling state owned institutions and Taka 2
billion will be given to ICB for buying shares and support the market. But the steps taken by the
government did not work.

Finally abnormal rise of share prices started to fall and Bangladesh stock market experienced its
first crash of the history in 1996. The index lost over 233 points on Nov 6, 1996. After the
bubble burst DGEN index dropped to its lowest point and stood at 957 in April 1997. It stood at
around the same point where it was 10 months before and DSE General Price index lost almost
70 percent from its highest point of November 1996.
Reasons of the 1996 crash
Manipulation

Some foreign portfolio, 28 managers, few brokers and sponsors of few listed companies were
behind the stock price manipulation in October 1996. As a result all share price index of DSE
dramatically sky rocketed to 3600 point from 1000 point in six months time. Few foreign & local
investors that had inside information made huge profit and a lot of general investors paid heavily.

Demand Supply mismatch         

The cause of stock market crash in 1996 was the failure of market regulators (2006). Stock
exchanges did not take any action against the dramatic price in-crease of listed securities during
June to November 1996. Bubble formed due to abnormal demand of securities by new investors
where the numbers of listed securities were very few. The reason of huge influx of investors was
political stability in the country and bringing confidence in investor`s mind.

 Defective (DVP) system

The delivery versus payment (DVP) system of trading used to allow buyer-seller to settle their
transactions between them without stock exchange participation. Many brokers/dealers used it as
a tool to show fake trading to increase demand of share from the general investor’s side.
Moreover, SEC could not handle the crisis for its defective infrastructure. Weak regulations and
surveillances could not monitor market manipulators and market intermediaries. Even
information inefficiency, artificial financial statements certified by chartered accountants, false
information and rumor were other important factors that overheated the market and burst the
bubble.

3.4 Background of the 2011 crash

History of the stock market crashes show that ‘Bull Run’ before a stock market crash is kind of
normal phenomenon. There was no exception for the stock market crash of Bangladesh in 2010-
11.

According to CPD (2011), the total number of BO Account holders on 20th December, 2010
reached to 3.21 million though the number was 1.25 million in December 2009. Most of these
new investors don’t have enough knowledge about the stock market but invest their most or all
savings in the market.

As CPD (2011) found, internet-based trading operation, opening branches of brokerage houses
across the country, easy access to the market information, arranging a countrywide ‘share mela
(fair)’ are the factors for increasing investors. But supplies of new securities through IPOs were
not enough to chase huge capital of too many investors in the market.

Last couple of years broad money made excess liquidity and the main motive behind it was
Bangladesh Bank`s ex-change rate policy. A big portion of this excess liquidity had gone to the
stock market but there were very few shares in the market. The policy that was adopted by BB to
grow economy by increased exports & investment eventually misguided and ended up blowing
the mother of all bubbles.

Moreover Security & Exchange Commissions was not capable to monitor the market conditions
properly. Due to the poor monitoring & market surveillance share prices of Z Category
Companies and small companies increased dramatically

Institutional investors including financial institutions started selling shares from the be-ginning
of December to show high return on investment at their balance sheet. As the Institutions &
banks started selling their shares from the beginning of December the turnover of DSE was the
highest ever in its history on 5th December.

19th December was a historical day of the financial year 2010-11 in Bangladesh stock market.
On this day DSE witnessed its biggest one day fall in 55 years history until the date with losing
551.76 points or 6.71 percent. The losing index was even higher than 284.78 points or 3.32
percent of 12th December. Prices started to nosedive in an hour after the trading started and
about 200 points were wiped off. In the middle of the session it recovered little bit and ended up
the session at 7654 point.

3.5 Comparison between two Crashes:

2010-2011
Trading was automated, Computer based
Surveillance was strong
Circuit breakers and international protections
were in place
Being automated there were no forged shares
traded.
There were also omnibus accounts in the
market
The BO account value was 35 lacs 2010- 2011
1996
Trading was not automated, Paper Based
Surveillance was weak
Circuit breakers and international protections
were not properly in place
Being not automated there were no forged
shares traded.
There were no omnibus accounts in the market
Compared to 3 lacs before the 1996 crash was
 crash was an asset bubble a result of a speculative bubble
While in 2011 it lost up to 660 points, nearly In the end, in 1996 the index lost 232 points,
10 percent, Maximum Lost Index in one day Maximum index lost by one day

4.1 Indicators of Market Size & Efficiency: However, we have to

know some measures, indicators to evaluate our capital markets. Based on these, we can collect
respective transaction data, regulations acts and quantitative and qualitative measurements.

Parameters used to measure size of capital market: Number of listed companies, number of
securities, size of market capitalization, Index, Daily trade volume, GSP ratio to market
capitalization.

Efficiency indicators of capital market: P/E multiple, Dividend yield, Liquidity, Visible
presence of regulators, Exit route regulation for sick PLC.

4.2 Sector wise Listing Companies (DSE):

NO NAME OF THE INDUSTRY COMPANY NUMBER
1 Bank 30
2 Cement 7
3 Ceramics Sector 5
4 Corporate Bond 2
5 Debenture 8
6 Engineering 33
7 Financial Institutions 23
8 Food & Allied 18
9 Fuel & Power 18
10 Insurance 46
11 Mutual Funds 35
12 Miscellaneous 11

4.3Sector wise Listing Companies (CSE):

NO NAME OF THE INDUSTRY COMPANY NUMBER
1 Bank 29
2 Cement 7
3 Ceramics Sector 5
4 Corporate Bond 2
5 Debenture 8
6 Engineering 27
7 Financial Institutions 22
8 Food & Allied 12
9 Fuel & Power 16
 10 Insurance 42
11 Mutual Funds 36
12 Miscellaneous 14

4.4current market indicator:

5.1Current stock market of Bangladesh
At some points of its business operation every company needs to raise money. To do this,
companies can either borrow the same from somebody or raise the amount by selling ownership
of the company. The later is known as issuance of stock. When a company go for public issue for
the first time it is known as Initial Public Offering (IPO). IPO can be made through fixed price
method, Book Building method and direct listing. Book Building Method is the process by which
an underwriter attempts to determine the offer price of an IPO based on demand from
institutional investors. This method is basically a process to aid price and demand discovery. In
our country book building method was introduced in 2009 but unfortunately it is now postponed
because the system was one of the salient reasons for the 2010 stock market crash. Though the
system is widely used in some developed and developing countries but in our country the context
was different. It was mainly caused by fixing a high indicative price as the offer price of the IPO
depends on the indicative price under this system. Because of the high indicative price the offer
price was also high and investors expected that other stocks value is undervalued and it would go
up in future. Under this speculation the investors invested in the capital market and it was back
fired. As a result book building system was found to be the major reason major for the stock
market crash. However, the system that is widely used found improper in country but this
situation can be improved if there is a strong regulations and follow up by the SEC for
determining the indicative price and the lock in period of 15 days can be increased to discourage
higher bidding by the institutional investors. More importantly, room should be allowed for the
IPO issues to be somewhat under-priced to attract the general investors for a win-win situation
from both issuers and investors’ perspectives.

5.2 Initial Public Offerings

Below table shows number of IPOs of Bangladesh during 2014-2016 along with number of
IPOs in Asian countries. A total number of 17 Bangladeshi companies raised funds
through IPOs in 2014 which came down to 11 companies in 2015 and 2016 respectively.
However, most of Asian countries except Malaysia and Philippines are ahead of
Bangladesh in terms of raising funds through IPOs. For example, Vietnam accommodates
37 IPOs in 2014 followed by 72 and 38 IPOs in 2015 and 2016, respectively. Malaysia and
Philippines did not display better picture as compared to Bangladesh.

Table: Number of IPOs in Asia: 2014-2016

Country 2014 2015 2016

Bangladesh 17 11 11
Indonesia 23 16 15
Malaysia 14 11 10
Philippines 6 4 3
Singapore 29 13 16
Thailand 40 38 24
Vietnam 37 72 18

5.3 Major focus on Equity Market: Investors’ Role Investors‟ role is sine
qua non for equity market development. In a matured share market, multiple investors like retail
investors, institutional investors, mutual funds, pension funds, merchant banks and foreign
portfolio investors participate actively. Participation of various types investors is necessary for
barring unscrupulous investors to take undue benefits from asymmetric market, public and
private information. However, smooth operation of primary and secondary market, strong issuer
base and multiple financial instruments are necessary to attract various types of investors in a
share market.

Some problems-

Problems Faced in the Primary Market: Oversubscription indicates high demand for new
securities in the primary market. Despite this enormous response to initial public offerings,
investors feel uncomfortable for several reasons. These are insufficient and/or reliable
information in prospectus, time consuming process and hassle, small size of IPO, excess
premium, etc. Authority may take necessary steps to address these problems.

Problems Faced in the Secondary Market: The secondary market of Bangladesh sometimes
experiences unreasonable ups and downs despite neither any change in macro-economic
variables nor any earnings forecasts downshift by any leading companies. Investors make
decisions based on rumors in most of the cases instead of analyzing company specific
fundamentals. Small and new investors are pronouncedly affected by rumors. The BSEC,
merchant bankers and brokerage houses can organize regular awareness program for investors to
help them make rational investment decisions and to warn them against rumors to mitigate
possible stock market overreactions/under-reactions. Additionally, ensuring transparency,
minimizing insider trading, strengthening monitoring and supervision, rationalizing margin loan
ratio and minimizing price volatility may induce investors to invest in secondary market.

Expansion of the Issuer Base: The market suffers from a dearth of quality securities. To
overcome this problem, quality issuers need to be attracted. Bangladesh has the potential to do
so. Profitable state-owned enterprises, multinational corporations and large home grown private
enterprises with clean and strong balance sheets should be listed. Issuance of SOE securities will
include transparency in their operations besides multifold expansion of the equity market. The
government can improve guidelines relating to the capital structure of SOEs making it similar to
those for financial institutions and banks.

Innovative Financial Products: Apart from ordinary shares, preference and seasoned shares
might be made available in the market. The introduction of zero-coupon bonds and fixed-coupon
bonds merits due consideration. Bonds like treasury inflation – protected securities (TIPS),
SUKUK Bond, High – Yield Bonds (HYB) and Deep Discount Bonds may also help to lay out
the corporate bond market architecture in Bangladesh. The government may initially issue these
types of bonds targeting their development projects. Corporations from various sectors may be
encouraged to step in later.

Foreign Portfolio Investments: Foreign portfolio investments that are irregular and nearly
absent in some years in Bangladesh stock market can be attracted by the creation of a favorable
environment. This requires developed information infrastructure, selective deregulations,
political stability, etc. Moreover, image building activities through seminars, symposium and
fairs at home and abroad deserve due consideration.
6.1Findings on Current Market situation of both
markets:
Bangladesh capital market has experienced various rotations till February 2017. At this time, our
markets noticed to be influenced by the changes of fiscal & monetary policies of govt.

Management ability: the economic ability of the managers of these two markets has increased
despite some negative notions.

Foreign Domestic Investment (FDI): In this course of time, though the expected goal of FDI
inflow in industrialization has not been achieved, the FDI on monthly basis has increased by
28% in the market resulting from positive progress of Macroeconomics variables, lower interest
rate, deviated inflation, growing profit of domestic & MNCs, the dividend growth and above all
stable political condition. Domestic Investment: The amount of domestic investment also
increased due to marginal gain in confidence of investors, active corporate behavior &
governance of BSEC and initiative taken by govt. to create ideal investors.

Market size, Trade volume, trade value, Market Capitalization: Despite mixed reactions,
the size of market, trade volume, trade value, market capitalization, and the number of investors
has increased to some extent both at DSE and CSE.

New Capital Push-Up: The capital push-up has been deterred to some extent due to inability of
domestic & foreign companies to expand their firms. It is because of the lack of supply of Gas &
electricity, higher business cost, senile administration power

Economic Performance of listed companies: The P/E ratio, price/NAV, dividend growth rate
of DSE & CSE companies are of positive indication. This creates hope in the mind of domestic
investors.

Liquidity of Market: On the basis of analyzing the buy-sell behavior of investors, it can be
commented that the net investment has risen due to intensity of average buying than average
selling activities. We studied 40 companies of DSE & CSE and found that the average liquidity
was up to optimum level at market.

Sector wise Performance: A study shows that despite fluctuating trend of market, there has
been indication of positive performance of some industries at DSE & CSE. Based on indexes,
due to vulnerability of risk- fuel & Power, Services, Miscellaneous, are at negative performance.
But, it is expected about 19 sectors at DSE, CSE like Banking, Pharmaceuticals & Chemicals,
Investment, Paper & Printing sectors will be in positive trend in coming days.
6.2 Problems of Stock Markets in Bangladesh:
Problems of DSE

There are some problems in Dhaka Stock Exchange and these are the barriers to development
and growth of country’s prime bourse. The DSE has a low level of supervision and the major
market players—such as stock exchanges, brokers, dealers, and asset managers—have limited
professional capacity. Transparency is poor and there is inadequate disclosure both in trading and
in the quality of information provided for listed companies. The introduction of up-to-date
technology to support market infrastructure has been slow. Widespread reports of malpractice
culminated in a domestic stock market crisis in 1996. As a result, investor confidence is low. The
stock exchanges are owned and dominated by brokers, so their businesses take precedence over
the governance of their respective exchanges. The management of the exchange is weak at the
strategic, senior, and mid-management levels; hence their members’ activities are not supervised
or regulated effectively. The major problems of DSE may be summarized as below.

1. Gaps in Legal and Supervisory Framework and Weak Implementation Capacity:

Governance structures are deficient and market regulators have ineffective enforcement and
weak implementation capacity. The Securities and Exchange Commission (BSEC) was
established and given the mandate to oversee the operation of the capital market; however,
recurring violations of securities laws and regulations have been reported. The BSEC is
understaffed and its staff lack technical knowledge and skills.

2. Inadequate Systems and Surveillance: The trading and surveillance systems and standards
are inadequate. Good governance depends on having sound technical infrastructure in place, but
neither the BSEC nor the exchange has effective automated systems of surveillance to help them
detect market abuse.

3. Shortage of Fundamental Securities: The limited number of listed securities has

constrained increases in the liquidity and market capitalization of the stock exchanges. In
addition, investors have restricted investment choices because of the lack of fundamental equity
issues, investment-grade equities, and debt instruments in the market.

4. Lack of Professional Standards for Licensing: The categories of market participants

requiring a license from the BSEC include (i) brokers, who provide trading services to clients;
(ii) dealers, who are permitted to trade for their own account; (iii) merchant bankers, who
provide underwriting, issue management, and portfolio investment services; (iv)investment
advisors, who provide investment advice to clients.

5. Lagging Development of Bond Market: Bond markets link issuers having long-term
financing needs with investors willing to place funds in long-term, interest-bearing securities.
Bangladesh has both the issuers and the investors in place but it still has not been able to link
them effectively through a bond market.
6.3 Future Prospects & Opportunities of the Stock
Market: The capital markets in Asia are getting more and more focus with the growing
corporatization of the Asian economies. Eastern Asia has progressed a lot with respect to
attracting western companies to get listed in Asian bourses as well as supporting innovative
instruments, and Southeast Asia is coming up with India leading the way. Comparing the local
market scenario with that of the rest of the region, Bangladesh is in pretty good shape as we have
most of the infrastructure in place. Our market capitalization is relatively smaller and it currently
stands at $9.3 billion, which is just over 13 percent of GDP. Higher liquidity is skewed towards a
handful of scraps, while a stagnant situation exists for few less profitable issuers. At present, the
government is heavily focusing on developing a debt capital market. Such measures are certainly
welcome as Bangladesh lacks a proper secondary market for bonds. The market is yet to support
short-term capital requirements of corporations. Commercial Paper (CP) has not yet been tried
primarily due to interest rate volatility and illiquid risk-free instruments that can be used as
benchmark neither for short-term and hardly for long-term financing. It can, therefore, be said
that we have a somewhat flat yield curve in Bangladesh at the moment. Debut trading of state-
owned oil companies like Jamuna Oil Company Ltd and Meghna Petroleum Limited on the local
bourses in January 2008 has spurred a lot of encouragement among investors. This initiative
taken by the government to list SOEs will increase market capitalization and improved liquidity.
BSEC is also contemplating the introduction of the book-building method in the valuation of
IPOs in order to ensure a fair price within this year. This will encourage companies with sound
financial health to come into the market. Regulatory pressures are mounting on telecom
companies to get listed. It is estimated that the listing of the top telecom companies will attract
more foreign investment, increase the market capitalization by few folds, and bring about higher
standards of corporate governance.

There is still huge potential in the market for securitization and other debt instruments like
commercial papers and corporate bonds, and derivatives, which will help foreign investors hedge
their exposure.

 The Telecom & It Giants in Bangladesh are to be finalizing their offers for IPO in the
market.
 Power and energy sectors demand for capital is 5 to 10 billion dollar within short time to
meet the immediate needs of national power demand.
 A deep sea port requiring 1 billion dollar is going to start with a policy decision that it
will also be listed.
 The Pharmaceutical sector and API enjoying WTO benefit is growing sharply.
 Textile sector as backward linkage to thriving export oriented garments industries is
booming.
 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.
 7.0 SWOT Analysis of Stock Market: Strength, weakness,
opportunity, and threats (SWOT) of Bangladesh Stock Market is given as follows

Strength:
The first and for most thing of strength of Bangladesh stock market is-
 its ability to Provide high return.
 Regulatory body of Bangladesh stock market that protects the interest of the
investors.
 Large number of securities which provides medium for investment.
 Large number of Brokers who plays a role of facilitator for investment.

Weakness:
The weak point of Bangladesh stock market is-
 its volatility (i.e., high risk).
 It is a kind of gambling where no guarantee of return and sometime it
depends on luck also.

Opportunity:
Stock market provides an opportunity to money lender and money seeker to invest and
use money for their plan.
 It provides an opportunity to the investor to be the owner of the company and
contribute in the business decision of the company.

Stock market is a kind of indicator of the economic growth of the country where it provides an
opportunity to gain according to the inflation of the country or more than that.

Threats:
There are many competitors of stock market such as post office savings, public provident
fund, company fixed deposits, fixed deposits with bank etc. which provides fixed and
assured returns. Some threats are-
 Changing of economic condition.
 Capital market instrument is highly risky then money market.
 Changing of government rules and regulations.
 Speed of growth in Capital Market not complemented by the controlling
8.0FINDINGS & RECOMMENDATIONS
After preparing this report, it has been come to my mind that only one factor cannot be
mentioned greatly for this share market crash. But it is the collective of various factors who are
responsible for this huge crash. The followings are some findings that are

8.1 Findings:
 Investors are influenced by other investors’ decisions.
 Individual investors invest most of their investment in the stock market without
any research.
 Investors most of the time take decisions based on the rumor.
 They want to grab short term profit rather long term profit.
 Most of the investors think, behind the market there are some people who
manipulate the market.
 Some people are giving false information so that they can take some advantages.
 Regulator bodies are failing to control the false information.

Financial institutions are the biggest investors in the market and there aggressive
involvement increased market liquidity manifold in recent years. Financial Institutes
could invest more than 10% of their demand and time liabilities to the stock market and
greater involvement of financial institutes increased the liquidity in the market that
created a bubble in the stock market. BSEC must be aware about this.

8.2 General Recommendations:

1. Demutualization of Stock Exchanges: Stock Exchanges of Bangladesh are controlled by its
members under the supervision of SEC. But such control creates conflicts of interests in the
market. In India, Bombay Stock Exchange was demutualized under the pressure of Government.
Bangladesh should follow the same. Peoples heading the DSE are highly debated for his rule in
market manipulation (Ibrahim Khalid Report). According to the report “conflict of Interest”
made the body almost inactive on its rule. Government should force Exchanges to be
demutualized. In this regard, government can take the help of any donor agency (World Bank or
Asian Development Bank) to develop necessary infrastructure.

2. Strengthening the Market Surveillance Systems: To strengthen the BSEC’s operations and
governance, (i) a real-time market surveillance system should be installed, and (ii)capacity
building to be provided to improve monitoring, supervision, and enforcement capacity of the
BSEC. The SEC surveillance system should complement the stock exchanges’ own market
surveillance activities and ensure that the exchanges are performing their regulatory functions
well. The two stock exchanges can form an inter-market surveillance unit, to share and discuss
matters of mutual concern and to share information.

3. Ensuring Integrity and Efficiency of BSEC Members and Staffs: Staff of BSEC, CSE,
and DSE will be trained in modern market surveillance and enforcement techniques to enable
them to be more effective at detecting trading irregularities and market abuses. The training will
include examination of evidence and analysis of trading accounts of brokerage firms. In addition,
staff will be trained not to contaminate evidence obtained from the surveillance system that could
later be used in prosecuting a matter in the courts.

4. Bank Finance in Capital Market: Commercial Banks relies heavily on capital market by
investing directly and indirectly (Margin Loans) that creates high risk on depositor’s money. So
Regulators should impose restriction on investment on Capital market by Banks. In India, Banks
can invest a certain portion of their owner’s equity/capital (not deposit) to capital market but in
Bangladesh Banks can invest 10% of their total liability that is not rational at all. Such huge
investment by banks pushes only the demand side and creates bubble to the market as supply
side response is very low in Bangladesh. SO, regulators should set new limit on the basis of
Shareholders equity and should monitor this very strictly.

5. Introduction of Asset Revaluations Policy: In Bangladesh there are no certified surveyors

and also don’t have any Chartered surveyor Institute. So, their jobs could not be reliable and
that’s why regulators should establish clear guideline for Asset revaluation. Chartered
Accountant (CA) firms can play a rule to revalue asset until Chartered surveyor Institute. But CA
firm that conduct asset revaluation should not audit the company account. Also companies
should take BSEC nod before disclosing the asset revaluation result and BSEC should check the
result with due diligence.

6. Consistency in Regulation: From the analysis made in this report, I found various
inconsistencies in the BSEC regulations. BSEC notification came only when the market rises
continuously for many days that do not reflect good regulation. The Bangladeshi stock market
needs to move towards a market based system of regulation for capital market activities and
BSEC should act proactively instead of its reactive response. BSEC does not measure the costs
and benefits of its rapidly changing guidelines/regulations. BSEC and Govt. should have long
term visions regarding market and should make cost-benefit analysis before making any rule/law
as it affect investor’s return.

7. Supply of adequate securities: Supply side response during last two years was very poor
relative to sky rocking demand of securities that helped to inflate the price of almost every share
traded in Dhaka and Chittagong stock exchanges. Government initiated to offload more
securities of government owned enterprises several times to meet unanticipated demands of the
market but finally it has failed to offload these securities. Government should take measures to
bring good companies (both local and MNCs) by allowing easy access and good IPO price to
promote the market.

8. Transparency in listing procedure: As listing methods (Book Building methods and direct
listing) played a vicious rule to damage the stability of the market; major change should be
brought to make it acceptable and transparent. In this regard, BSEC should promote only Fixed
Price method as it lack less opportunity to manipulate the offer price.

8.3 Recommendations for the Government: There is no doubt that

the failure of the government in making various decisions regarding capital market played role
behind the recent crash:- Government should ensure the supply of fundamentally strong shares in
the market to meet the demand which will make the market efficient as investors would not go
for buying junk shares. For ensuring the supplies of such shares, Government can offload the
shares of different companies which it possesses now. It also can urge the private limited
companies to go public by offering tax benefits Government should delegate all power to the
BSEC to take legal actions against the criminals. Even if necessary, new Act may be passed in
the Parliament in this regard.

8.4 Recommendations for Bangladesh Bank: Former DSE chief executive

officer professor Salahuddin Ahmed told New Age that the recent shortage of cash in the
banking sector following the Bangladesh Bank’s move created a liquidity crisis in the capital
market resulting in the market collapse. The banks and financial institutes accumulated funds by
borrowing from other banks or by selling off shares on the capital market to fulfill a BB directive
to increase their SLR and CRR. So BB should take positive Bank exposures limit which help
Capital market.

8.5 Recommendations for DSE: Dhaka Stock Exchange has important role
to play as the monitoring authority of the Broker Houses. So, it needs to play vital role by
ensuring the followings:

 It must ensure proper monitoring of the brokerage houses for which more skilled
manpower should be appointed in the Monitoring and Surveillance Team.

 Any sort of irregularities in case of trading should be identified promptly and

immediate action should be taken.

 The operating software of the stock exchange should be updated as often these fail to
take immediate sale or buy order. So, it must bring new software within the shortest
possible time to bridge a gap between the prices of script in stock exchange.
 9.0 Conclusions and Remarks

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. Bangladesh's stock market is poised for rapid development. For this the BSEC,
DSE, CSE and all market players should work together with the support of the government.
Market confidence is sure to erode if conflicting signals are received from different authorities.
At the same time investors will have to understand that in any stock market there are ups and
downs and they cannot blame others whenever stock prices slide down. Fortunately, investors
are getting matured gradually and hopefully we may not have to see shouting and slogan in front
of the exchanges any longer. Bangladesh should really focus on improving governance and
developing advanced market products, such as derivatives, swaps etc. It is necessary to reform
the legal frameworks to support financial development and to protect the investors. Strong
framework rules should be framed to restore the investors’ confidence. Flexible legal
frameworks must be adopted. The regulators must cope with continuously to the changed global
economy.
10. REFERENCES:
Text:
Financial Markets & Institutions by Jaffe Madura

Websites:
http://www.academia.edu/

Http://www.scribd.

http://www.dsebd.org/

http://www.cse.com.bd/

http://www.stockbangladesh.com/users/index

http://www.financialexpress.org/

http://www.thedailystar.net/business/tribunal-moves-1996-stock-scam-122539

http://news.priyo.com/story/2010/dec/20/15063-1996-revisits-stock-market

http://dspace.bracu.ac.bd/xmlui/handle/10361/2876