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MBL AND INVESTOR RELATION DEPARTMENT
Marico Bangladesh Ltd
MBL Investor Relation Department
Two Way Communication
Retail Shareholders Institutional Shareholders Regulatory Bodies Financial Media Analyst
Although Investor Relation practice is the most efficient way for any publicly held firm to keep connected with its diverse stakeholders, the matter of fact is that, Bangladesh corporate sector has yet to develop a full fledge Investor Relation Department. So, the Investor Relation Department of MBL will be the first full fledges attempt to act as an intermediary between MBL and its stakeholders, especially investor community; which will certainly be one of the real life application of ‘Uncommon Sense’. As an intermediary, IR department will not only facilitate communication flow from MBL to externals but also it will make the reverse flow happen as well. That is too say the information loop will be like ‘duplex transmission’ rather simplex. And this duplex format obviously helps MBL to be more market oriented that will ultimately serve long run sustainable profitability for the firm.
2. ACTION PLAN 1: DISSEMINATING PRICE SENSITIVE INFORMATION
The most critical success factor of MBL Investor Relation department would be to disseminate material information towards investor community in a timely manner. By doing so we can simultaneously facilitate a informative trading decision as well as communicate our willingness to ensure full transparency and openness. Now the matter of concern is that what should be the information content, how much should be disclosed, and finally when and how it should be disclosed? As a prime part of my study, I tried to resolve these basic underlying questions that are very much crucial for our success. In the most basic form, we will comply all sorts of regulations of ‘Corporate Disclosure Policy’ prescribed by SEC. Then I tried to show market oriented evidences of information failure in the existence of current law. And lastly again in the light of empirical evidences, I propose some specific tasks that have to be accomplished to apply ‘Uncommon Sense’.
2.1 Regulatory Requirements Regarding Disclosure
Any material information of a factual nature that can influences the value of a company security or investor decisions as to whether or not to invest or trade must have to be publicly disclosed in a manner that can be ensure equal treatment for all related parties therein. The information contents are: The declaration or omission of dividend and/or earnings. Acquisition or loss of a significant contract. A significant new products or discovery. A change in control or a significant change in managements. The borrowing of a significant amount of funds. A joint venture, merger, acquisitions or takeovers. Significant litigations. The purchase or sell of a significant assets. A significant change in capital investment plan.
Significant labor dispute with subcontractors or suppliers. A tender offer for another company’s securities.
Policies and Timing of Disclosure
The exchange expects a company to notify the exchange in advance of any disclosure if the material information is of a non routine nature or is expected to be or is expected to have substantial impacts on the market for the securities. Besides that any public disclosure of material information should be made by an announcement released simultaneously to be business and financial news media.
Evidences of Information failure in Existing Regulatory Systems
Some market oriented evidences suggest that existing regulatory requirements fail to eradicate the problem of ‘asymmetric information’ from market transaction. So it will be our continual trail to improve both our information content and medium which will at least create an approximate perfect market for our security in weak form of efficient market. Now let’s discuss some aspects of information failure in the light of empirical evidence:
1. RUMOR SPREADING AND SPECULATIVE ACTION
Case 1 Company: Keya Cosmetics Ltd.
Situation Analysis: In market, there are a lot of rumor regarding this specific firm. For example, some most common rumors are- this firm might establish factory in Meghalaya, might assign its overall marketing responsibility to any specialized Malaysian firm, they might takeover any foreign firm to broad its operational portfolio etc. As such types of rumors are spread, instantly market price goes up to reflect these hopeful expectations. And afterwards with the decrement of index value, enthusiasm of investors become vanishes like bubble and price shifted down warded. In face of huge volatility both in market price and trading volume, in August 2008 DSE formed an inquiry committee to investigate the real causes. But nothing was disclosed from the investigation. Besides that, from firm side no
clarification has been provided with respect of these rumors. And investors have known that they wouldn’t get any feedback to clarify these ambiguous situations. So they communicate with the firm very rarely. All of these events have made the firm security completely
speculative class and throughout last one and half years, Both its trading volume and market price have experienced substantial volatility. Let’s verify these discussions in the light of statistics. From the above table, we are seeing that the variability of this share rate of change is almost four times greater than overall market measure. Besides that it is evidential that the first force behind price change is new information, which is solely related to particular firm fundamentals. Second force in particular price change is the change with overall market index. Here it found that there was no important price sensitive information about Keya Cosmetics during this particular period, besides that its very low covariance with market index
proves that there was some third force behind this abnormal level of variability. Now what is that third force? It is nothing but above mentioned rumors.
Now let’s investigate the roots of these rumors. To see this in my own eyes, I visited some brokerage houses such as ARIES, International Leasing and Finance Securities Etc. There I talked with investors who have real hand practical knowledge by facing all of these adverse things.
FINDINGS FROM THE FACTS
There exist some syndicate in our market comprising of individuals with huge purchasing power and sometimes Brokers themselves. These syndicates possess such extent of purchasing power that they can manipulate any particular share price as their willingness by spreading rumor and distort market perception. As a vehicle of rumor spreading they use some agents who wandering houses to houses and try to spread baseless rumors. As a common technique, sometimes they shout by mentioning any particular security and persuade people by saying that, “just purchase the share as much as possible, it will increase within two/three days or “leave it, price will fall. And maximum time general, even knowledgeable investors fall in their trap, because everyone knows that these particular guys are big fishes. Brokerage houses fail to take any action against them because of either their non corporate structure or they, themselves are linked with them. Their main targets are firm with relatively small market capitalization, because with their purchasing power they can create both abnormal buying and selling pressure in the price of these particular securities.
Now I want to give an example of strength of these manipulation syndicates by using the example of BD Auto Car Ltd.
Case 2 Company: BD Auto Car
From the table it is evident that the recent price hike is quite abnormal in terms of any sort of new information arrival in market. There has no logical reason behind this abnormal price hike. The only price sensitive information throughout last few months is the announcement of including 3rd compressor in its productive capacity. Although the firm expected 75% revenue increment, analysts think that this is overestimation of revenue increment and this share is the victim of gambling action.
IMPLICATION FOR MBL SHARE
What is the implication of these events and evidences for MBL share?
We are going to float 5% of our total share of post IPO age. Now say that our share would be traded in market at a price of 80 taka. In that case the capitalization of frequently traded shares would be near about 120 million taka. As I mentioned earlier gambling syndicate possess such extent of huge purchasing power that they can very easily manipulate the market of relatively small capitalization share. So in that sense we will be in potential area of danger.
Now to protect ourselves from this malpractice, I want to recommend some specific courses of action:
Firstly we will have to detect the prime causes of these rumors. Generally it is seen that maximum rumors are spread about these firms whose have no clear disclosure regarding their basics. Sometimes, investors even don’t know about the firms’ operating areas. And gamblers take this golden opportunity to manipulate market as per their self fulfilling interest. Most fearing fact is that, in the face of rumors, investors very rarely communicate with firms to clear the facts. Because firms have yet to develop a compact system to fulfill information demand. So it will be our main target to make the people believe that we are always here to serve your information demand. And to do so we have to establish some medium for information dissemination with widely recognition and very much easy access.
Our IR team will has to stay visible and factual in tone in the face of rumor.
Besides that in the time of overall market volatility we have to focus on long run and balance sheet strength.
I am not ensuring that by doing the above tasks we can certainly stop the rumor flow and speculative action toward our share thus smooth the price trend. It will take time to absorb such sophisticated service by the overall market. But let’s hope for the best.
2. FAILS TO PROVIDE FULL EXPOSURE TO TAKE INFORMATIVE TRADING DECISION
Besides regulatory disclosure policy failure, our investor’ have a very common tendency that without knowing fundamentals, even smallest piece of information, they trade by following others. For example, it is very common that Z category shares with very many distressful fundamentals capture position in the list of top gainers by price, trading volume etc. In this context, I want to mention the name of ‘Rangamati Food Company’. Most of the time their office kept locked and even their productive capacity is completely halted for many days. Despite these facts, their shares are regularly traded in market and they placed in the list of top gainers. Apart from this particular example, there are too many Z category shares about which investors have no concise piece of information. And alarming facts are that neither regulatory bodies nor their regulations can do anything to stop the trading of this particular type of shares.
Performance Analysis of Z category share for the week 28th march to 2nd April 2009
Company Name Meghna Condensed Milk Lexco Company Anwar Galvanizing Meghna Pet Sonali Paper Aziz Pipe Market Performance Trade Vol. Value in BDT. 1320500 17047900 1970 463200 40000 13404100 432000 330034000 400 5900 15590 4055000 Weekly Return 42.16% 40.59% 54.61% 17.14% 13.85% 12.44% Market Cap. 25.12 Cor 8.45 Cor 45.34 Cor 13.92 Cor 21.12 Cor 12.4 Cor Fundamentals 5 yr EPS range (14.46)-(.41) (121.19)-5.38 (34.97)-6.65 (1.99)-(.03) (3.67)-.15 (159.54)-(6.64) NAV -34.36 -46.65 117.3 2.85 -2.35 -254.39
3. FAILS TO CREATE LEVEL PLAYING FIELD FOR ALL SHAREHOLDERS: It is very much important that every investor has equal access of price sensitive information in approximately same time frame. But as stated earlier, our current regulations fail to ensure this fundamental right to all, especially for retail investors. Institutional investors always posses both better information and analytical power to verify the impacts of these information than retail investors. And this discrimination is most acute for qualitative piece of information, sometimes which may create substantial impact on trading decision. In present context, maximum firms don’t disclose facts regarding change in industry dynamics, competitive position etc. which certainly push retail investors into disadvantageous positions. I want to show you an example in this respect.
Case3 Company: Apex Foot ware
Situation Analysis: From the price chart is clear that the price of this particular firm was much higher in 2008 in comparison to 2009. And from the table we can see that the proportion of retail investors is higher in 2009. Now the fact is that, in the ending of 2008, recession pushed the price of all sort of lather products substantially down. As a rational consequence, price of final product of this particular firm was also substantially down in international market. And as the contribution of export market in total revenue was approximately 60%, overall revenue fall into immense pressure. In addition to that a large part of its inventory Consists of lather purchased in higher price. So it is obvious that in the face of recession its gross margin was reduced substantially. Institutional investors can predicted this alarming situation and stated to sell their holdings and as retail investors were not aware they purchased share on the basis of past performance of this firm. And when the stock price is lower, maximum of it is held by retail investors, which make some of them experience substantial loss.
IMPLICATIONS If this firm makes any appropriate disclosure to all that make retail investors aware about the alarming future, certainly this information discrimination can be prohibited. I don’t want to indicate that, by doing so firm can stop the downward pressure of price. I just want to say that at least all shareholders share this burden equally, rather profiteering solely by institutions at the cost of individuals.
2.3 Scope to apply ‘Uncommon Sense’
By observing all of the abovementioned facts, it is quite obvious that there still remains a lot of scope to improvise the price sensitive information dissemination system for us. By improving our system we can very easily differentiate ourselves in comparison to others as well as fulfill our pre mentioned purposes. Following are the recommended aspects in which we can improve ourselves.
1. PROVIDE VERY CONCISE AND DETAILS INFORMATION ABOUT EARNINGS
To our investors most valuable piece of trading sensitive information is about earnings. Track record shows that, more or less all firms only disclose the quantitative value rather provides qualitative judgment and rationale behind change in earnings as well. And this practice sometimes create abnormal market panic, thus shift the price very abruptly. Here is an example,
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Case 3 Company: DESCO Date: November 2007 Situation Analysis
This was the first year of enlisting for the firm. So rationally there was lot of ambiguity in the mind of investors regards the firm’s expansion and dividend policy. Their half yearly EPS was 35 taka. So everyone expected that annual EPS would be at least 70-80 taka because it is generally seen that firms perform
relatively well in second half. But when annual EPS was announced, everyone became frustrated by seeing that it is only 55.94 taka. Besides that recommended dividend was 25% cash which is also far below expectations. All of these perceived negative facts created substantial market panic that forced the price to 1150 taka within next few days after announcement, from 1350 taka in announcement day. And within next one and half month it reduced to 960 taka.
Rationale and Implication
The first reason behind this market panic was unexpected annual earnings. Like most generalized case, this firm also announced only quantitative value of earnings rather providing any sort of rationale and explanation behind this unexpected earning. Actually the main reason was the inclusion of ‘Tongi project’ in operational portfolio of DESCO, which was taken over from DESA in 4th April as per government directives. This particular project had substantial system loss for previous managerial flaw as well as accumulated loss in profit and loss accounts. So after accumulating this loss into DESCO accounts, logically it pushed the total earnings down. But from the side of this firm, there was no disclosure regarding this consolidation of loss in its profit and loss accounts. So market
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participants failed to detect whether the reason was for deteriorating operating performance or something other. The second reason was unexpected low dividend announcement. As usual firm didn’t provide any rational behind dividend recommendation. As a newly enlisted firm, this firm had several expansion projects that will ultimately create greater shareholders’ wealth. So it is quite obvious that if the firm properly provided rationales behind its action, surely market could understand the long run prospect and act positively.
OUR LEARNING AND DOING: As mentioned earlier, the most crucial piece of information to our market participants is about earnings and dividend. So we will have to disclose proper rational and explanation rather solely announce the quantitative values. In the face of earnings variation from year to year, it is compulsory to disclose all facts, whether external or internal, as well as long run impacts associated therein.
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2. CAUTIOUS STEPS TOWARD DETERMINING DIVIDEND POLICY AS WELL AS PROVIDING DETAILS DISCLOSURE.
Case 4 Company: Square Pharmaceuticals Ltd. Date: July 2008
Throughout last several years, this firm provided 90-100% dividend at various combination of cash and stock. So everyone expected that this trend will continue for this year too and market expectations were 80% stock dividend. Basis of this expectation was a rumor that as market leader and mature firm, Square will provide at least 80% bonus. By tracing this rumor market participants started to bid the price up. And in the day of announcement price hike to 5500 taka at 12 pm from starting price 4990 taka. But at 12 pm when the actual announcement of only 35% bonus was come into market, investors promptly replied at a much greater pace than that of pre announcement. Price reduced to 4600 taka within 2-3 minutes. After this collapse, price never back to its actual level and most staggering fact is that throughout last several months, share is traded at a price below 3000 taka.
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Critical Analysis of facts Now let’s find the underlying causes of this price failure which made many retail investors suffer great loss.
Firstly it is clear from the table that capital growth rate was much higher than the earnings growth for last several years. This created substantial pressure upon EPS because of dilution at a great pace. Now during March/April a market research firm published a report in which it was predicted that Bangladesh pharmaceutical sector may experience negative growth in next fiscal. As market leader, Square enjoyed positive growth within this adverse environment which is obviously a symbol of success for the firm. But growth will not like previous years. So it is rational that in the face of low earnings growth, if any firm declare substantial bonus than its earnings will diluted hugely which may create questions about firm’s ability to successfully manage the operating success. So management announced such dividend that will create less pressure upon earnings. But most of the people was neither aware about actual dynamics of industry nor the report regarding it. Which result the formation of irrationally higher expectation.
OUR LEARNING AND DOINGS
Keep the overall market aware about the change in industry dynamics. Because industry may pose major threat or create opportunities over operating performance. As change in industry dynamics affects every firm within it, we can make our stakeholders visualize our success over our competitors that certainly prohibit rumor and undesirable expectations formations.
We should adopt such a dividend policy that will create value both for current and prospective shareholders. So our dividend will follow sustainable long run growth of earnings rather abnormal shift. By doing so our price trend will be smoothed as well as dividend cut can be avoided. This second point is very much important, because dividend cut
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perceived as a signal of severe performance deterioration and market over react in this situation. Change dividend policy as per maturity stages and provides proper level of disclosure in this regards. Clearly describe our expansion plan and opportunity. This includes disclose the analysis regarding most valuable options and their impacts on overall firm value.
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3. PROVIDES CLARIFICATION REGARDING NATURE OF RELATIONSHIP/TRANSACTION WITH RELATED PARTIES.
Case 4 Company: Aftab Automobiles Ltd. Date: March, 2009 Situation Analysis
From February price started to show unusual hike. To investigate this abnormal pattern, DSE asked explanation from management. But they inform that there have no known facts to them. Most interesting fact is that, among market participants there was a rumor that ‘Navana CNG Ltd’, a concern of Aftab is going to be directly enlisted in market. And this perceived good news encourage speculative actions and force participants to bid the price up. Within15th May price hike to 1500 taka and in 18th May, DSE halted its trading.
Critical Analysis of Facts
Reality is that fundamentals of Aftab haven’t improved to such an extent that can rationalize this price hike. Rather this was occurred because of ambiguity about its relationship with related parties. And speculators completely took this opportunity of information failure and spread rumor to fulfill their selfish interest at the expense of many retail investors.
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Market participants locked in this trap, because they correlate Aftab with ACI. But these two cases are completely different. ACI Formulation was fully owned subsidiaries of ACI Ltd. ACI floated 36% of its holding in market and used these proceed to take two expansionary projects for ACI Formulation that was substantially value additive. Now as per ISA rules, if any company holds more than 50% share of another company, then it possesses controlling power and financial statements will be on consolidated basis. So financial interest of ACI Ltd shareholders is directly related with the value additive projects of ACI Formulation. And it is very much rational that this will reflect in the market price of ACI Ltd).
Now come to the point of Aftab Automobiles, both Aftab and Navana CNG are sister concern of Navana Group, thus both of the firms are in equal line in terms of relationship. However, Aftab has purchased 15% share of Navana CNG at face value, so neither it has any neither partial nor full controlling power over Navana CNG. Its financial interest is just like other general shareholders. And as the financials or expansion policy of Navana CNG is not disclosed to public, its financial prospect is not clear at all. But market observers expect that may be its share will be traded at 80-90 taka. So it is quite irrational to hike Aftab price up to that extent.
Matter of fact is that most of the investors don’t have clear idea regarding the basic difference between the cases of Aftab and ACI. And speculators are taking this opportunity to manipulate price. It seems from reality that insiders are also taking the chance. Totally near about 50000 shares are sold during this abnormal hiking period. Now implication of this market manipulation lays in the long run stock performance and reputation of this firm. Certainly lot investors will loose even their entire capital when this bubble will vanish and price correction start.
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From the above mentioned case it is clear in order to establish ourselves as a highly ethical firm and maintaining price stability, we have to clearly disclose the nature of relationship as well as transaction with them. If we do this, no one can spread any sort of rumor in this regards and capitalize abnormal gain in the expense of general investors, our long run reputation standings depends on whom. Besides that any insider shouldn’t take the opportunity of ambiguity to capitalize abnormal gain at the expense of general shareholders.
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4. CLEARLY STATE FACTS ABOUT CONTRACT WITH THIRD PARTY
Case 6 Company: Bata Shoe Company Date: May, 2008
During May 2008, there was a rumor in market that Bata is going to sign a manufacturing agreement with NIKE, a highly branded company for stylish shoes. Market participants thought that there may be some joint venture between these two firms. As usual, not verifying this highly encouraging news, market started to respond very enthusiast. And the price goes to 375 taka from just 265 taka within 15 days.
Actually Bata executed a little dealership agreement with NIKE Singapore, under which NIKE products will be sold in selected Bata store and this company will entitle only trade discount at a variable rate mutually agreed upon time to time. But a specific class of investors probably got the news advance of public disclosure and distorts it into such a pattern that persuades general investors to bid the price higher and higher. There was some sort of information lick with which certainly insider(s) was/were related. And lastly when overall market becomes fully aware about the reality price started to fall, although it remained a higher level than pre hike age.
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As per rules, whenever companies become knowledgeable about rumor spreading regards them, instant clarification note disclosed to public are compulsory. But it is very much common convention in Bangladesh that always companies waits until receiving solicitation from Exchanges and in the interim periods gamblers start to manipulate market. So whenever we will become knowledgeable about any rumor relating us, in the initial phase we will try to detect the actual nature of rumor and immediately disclose the facts to the general investors instead wait for regulatory disclosure.
5. DISCLOSE REPORT AND FACTS REGARDING CHANGE IN INDUSTRY ECONOMICS
From the case of ‘Apex Foot ware’ and ‘Square Pharmaceuticals’ it is obvious that information regarding change in industry dynamics is very much important in terms of trading decision. But in Bangladesh, more or less no firm discloses this important information in their own system. So here lies great scope for us to detail disclose these information in timely basis.
6. DETAILS DISCLOSURE ABOUT MANAGEMENT
Information relating to persons behind the actual operations of firm is considered as very much valuable piece of information to investing community. Reputation of directors and /or managers acts as a prominent factor to decide whether a particular firm will be a ethical and profitable one. For example, Mr. Mahbub Jamil, former Chairman of Singer Bangladesh Ltd, also acting as Founder Chairman of International Leasing And Finance Ltd. And solely his career track record helps ILFS to grow rapidly. So we can use our IR website to provide details about our very much young as well as successful managers.
7. INFORMATION REGARDING BUSINESS POLICY, STRATEGY AND COMPETITIVE POSITIONING
At first glance it may seem that disclosing these information can serve our competitors to let them know about ourselves. But reality is not like that. In developed market this sort of information is elaborately disclosed in web sites. Reputed firm like Nikkon, IBM, GM etc also among the disclosers.
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This disclosure helps investor community to transparently know about firms’ qualitative insight and make a much more informative trading decision. Its true that situation is very much different in our country. But if we can follow a such structured pattern that will simultaneously enhance our transparency and keep our corporate confidentiality, it will certainly add our value.
8. PUBLISH FULL FLEDGE FINANCIAL STATEMENTS
By following the ‘Corporate Governance Guidelines’ formulated by Bangladesh Enterprise Institution and Regulatory Guidelines we can provide a full fledge FS to our investment community. From functional aspects Square Pharmaceuticals and IDLC and Aesthetically Berger paints can be example for us.
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2.4 Medium of Information Provision
We will use the following medium to provide relevant information to our investment community: Passing to Regulatory Authorities. Investor Relation Web Sites. Phone Call/Hot line. Face to face meetings. Press Release. Seminars, presentations and press conferences. Conference Call.
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ACTION PLAN 2: PROHIBIT INSIDER TRADING
Insiders are those have the possession of price sensitive information of a particular firm in advance of its public disclosure. In our country this malpractice is so acute that market observers strongly believe that one of the major reasons of unreasonable market volatility is inside trading, especially by managers and directors. As the corporate disclosure is very much insufficient in our country that means general investors know very little about investing firms and insiders hold superior knowledge regarding the change of fundamentals of firms, always insider trading is taken as a signal by the overall market. If any insider submits buy order than market takes it as a change within the firm that may improve overall fundamentals and vice versa. So insider trading forces the market to react irrationally in absence of material information. Besides that possession of material information by insiders in advance of public clearly provide undue advantage to insiders, which is completely unethical. And when regulatory authorities can detect such malpractice and impose any penalty to relevant person(s) it creates very much bad impression about firms’ integrity to market participants.
Now to show the impacts of inside trading in the price trend and volume of trade, I want to present two market oriented examples.
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Case 7 Company: Mutual Trust Bank Date: March, 2006
Sequences of Events 25th February, 2004 41st board meeting. In this meeting financial statement for FY 2003 was placed to Board and discussed. Rules are that date of AGM and dividend recommendation should be announced in the same meeting. But this firm refer it to 42nd meeting rather comply with rules. One of the directors and members of audit committee Mr. Samuel S. Chowdhury, a family relative of Mr. Tapan Chowdhury was present in the 41st meeting. So he must have the knowledge regarding the actual financials of the firm, which was undisclosed to general public. 31 March, 2004
Mr. Tapan Chowdhury declared his intention to buy 6000 share of this particular firm. 42nd board meeting Board fixed the date of AGM as well as declared 20% stock dividend on the basis of financial statement, 2003. As usual stock price increased after the declaration of dividends.
4 April, 2004
IMPLICATIONS OF THESE EVENTS
General rule is that fixation of AGM date and recommendation of dividends, if any, should be accomplished in the same board meeting in which financials are placed. This rule is like that because whenever financial statements are placed and discussed in meeting, everyone presenting the meeting becomes aware about the undisclosed fundamentals of the firm. And if dividends, which are generally based on financials, are not disclosed in the same meeting, it creates opportunity for insiders to trade on the basis of undisclosed public information. This is
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completely unethical. For this particular case the same was happened. When the firm referred FS of 2003 to submit in next general meeting, it was clear from circumstantial evidences that Mr. Tapan Cowdhury knew the undisclosed information through Mr. Anjan Chowdhury and attempted to involve him in inside trading by giving declaration for buying bank’s share ahead of the recommendation of 20% dividend made in 42nd board meeting. This is a wonderful example how the flaws of firm can give opportunity to insiders to act in the basis of undisclosed information.
Case 8 Company: Popular Life Insurance Company Date: March- September, 2008
SEC formed a inquiry committee in March 2008 to find why the price of this particular share goes to taka 5000 from taka 811 in June, 2007. And they found that Arif Ahmed, brother of four directors of the firm, purchased 181150 shares during the period March to July, 2007. And several very important price sensitive information came into market during July, 2007. It is quite obvious from the facts that as an insider of the firm Mr. Arif knew about these information in advance of their public disclosure. Because it is rational that with the disclosure of these information, market will bid the price up to reflect the change in company fundamentals. And if anyone can purchase bulk of share before price goes up, then he/she can capitalize abnormal return by selling shares during booming period. This event was just like that. Price was started to rise during July, 2007 and it reached to 5000 taka from 811 taka. The most valid proof of this inside trading is that just before the announcement of increment of operating revenue in 7th march 2007, he purchased 10150 shares in his own accounts. And his wife also purchased a bulk of share as like him. Main reason behind this abnormal price hike is that when any insider start to purchase bulk of share, everyone tries to mimic them and thus ultimately price become far higher than its intrinsic level. And after their findings, inquiry committee accused Mr.Arif for involving with inside trading as well as manipulating the
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market. So they imposed 10 million taka penalty to Mr. Arif and also imposed monetary penalty to one of the directors of the company. And the next event of inside trading happened during July to September, 2008. during this period, five directors of the firm sold share to take the chance of bullish market of their security holding. Besides that two positive price sensitive information came into market. But trading by directors offset these good news and price started to fall very sharply. So it is the repetition of the argument that, market participants always overreact as per insiders trading rather makes the appropriate adjustment of information into prices.
Our learning and Doings
Establish and enforce effective procedures to prohibit open flow of price sensitive among insiders, especially among employees, who always remain keeping in touch with such information.
Agenda of BOD meeting should be fixed in such a manner that will ensure level playing field for all shareholders ( Mutual Trust bank)
We have to establish some specific procedures that restrict insider trading with following the release of annual statements or other releases set forth the financial condition and status of the company. ( Regulatory Prescription)
Prohibit very frequent trade by insiders within very short span of tome. (Mutual Trust Bank) We can establish our own policy in this regards.(BOC Ltd.) There should have some policy that directors and managers have to inform firm about detail of their BO accounts.( Sakman F.Rahman Case)
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ACTION PLAN 3: KEEP THE FIRM CONNECTED WITH DIFFERENT STAKEHOLDERS
As a intermediary between MBL and its different stakeholders, it will be the mere responsibility of IR department to keep connected the firm with different stakeholders. The numerous types of stakeholders communication process is below:
4.1 Regulatory Authorities
One of the most crucial tasks of IR department will be to help the overall firm to avoid all sort of regulatory violations and adopt new regulations as soon as come into enforcement. These tasks are crucial; because our standing as a highly ethical and transparent firm might be deteriorated if any market related violations will be occur by us. Besides that as market regulator SEC always encourage the full compliance of rules not only for the sake of overall market stability but also smooth the price trend of individual firm and establish a positive image in the mind of market participants. Sometimes regulatory authorities change rules to cope with the changing nature of environment. And in most of the cases, it is seen that firms are not aware about these change, thus conduct regulatory violations later. To establish a positive corporate image in sustainable basis, firstly we have to identify major areas of regulatory violations and then take appropriate measures to avoid such unexpected events.
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Areas of Regulatory Violations
Irregulations found By Corporate Finance Department Summaty of Action Taken By Commission Reffered to Enforcement dept.to take action for not submission Asked Explanation on Audited Financial Statements from companies Audietd Financial Statements Reffered to Enforcement dept.to take action against whose expalnation were not satisfactory Reffered to Enforcement Dept to take action for non Submission Of Unaudited Financial Statements Asked Explanation for not preparing unaudited Financial Statements as per BAS-34 Half Yearly Financial Statements Reffered to Enforcement to take Action against whose explanation were not satisfactory Retention of Auditor Exceeding Consecutive periods Appontment of Statutary Auditors Reffered to Enforcement department to take action for not holdind AGM AGM Asked explanation for non submission of audio visual record Non submission Audio Visual Recording of AGM Reffered to Enforcement department to take action against whose explanation were not satisfactory Asked Explanation for non submission of dividend statements Statements of Dividend payments Description 2007-08 40 106 44 18 12 9 2 3 1 2006-07 42 99 28 21 81 7 24 25 6 20 14
FY 2007-08 2005-06 2004-05
No of Irregulations 81 67 51
Irregulations found by Surveillance Department Reffered to Stock Exchanges DSE CSE Inspections Enquiaries Reffered to Enforcement 12 6 47 6 10 18 11 24 14 7 7 10 25 9 4
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Irregulations Found By Supervision and Regulation of market and intermediary departments 2006-07 2005-06 2004-05 Non/ Delayed Payment of dividends 38 Dissemination of price sensetive info 1 3 8 Non submission of Shareholding positions 10 33
Actions taken by Enforcement Departments Nature of legal Actions 2007-08 2006-07 Penalty 42 32 Directives 1 1 Warnings 68 117
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4.2 Financial Media
As per regulation any sort of material information should be publicly disclosed by an announcement released simultaneously to be business and financial news media as promptly as possible
But in the time of publishing price sensitive information through financial media, we have to be conscious about both the content and language used in publication. Because regulatory authority always advises to avoid disclosure activity beyond that necessary to inform investor and explicably essential as an attempt to influence securities prices. Because these types of disclosure is considered as promotional and unwarranted, which attracts penal provision. And might influence the market perception as well as security pricing that might shift the price downward.
For example, recently Uttara Bank Ltd.has been included in Dow Jones SAFE Index, obviously it is a great momentum for this company to include in such a prestigious index. Because companies have to fulfill some pre specified criterions, which mainly depend on financial performance. So normal notion is that after publishing this favorable news in different international and domestic newspaper, price will certainly experience upward shift. Uttara bank advertised this facts in Daily Prothom Alo in 31st March issue. But point to notice is that language of this advertisement was inappropriately worded, which violated securities law regarding newspaper advertisement. And DSE authority warned the bank to for violating law. Now what was the impacts of this wrong doing. Clearly it distort the perception of overall market about the firm. and most staggering fact was that despite the good news, price experienced very sharp decline. Although overall market was experiencing bearish trend in that moment which affected all firms, price decline of this particular firm was abnormal. Practical implication is that in security market price of stocks mainly depend on perception of participants about firms. Fundamentals are necessary in that sense these help to shape perception, nothing else. And besides fundamentals, many other things can influence perception, integrity and transparency in one of these.
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OUR LEARNING AND DOING:
From the above event, it is our learning that in time of delivering any price sensitive news for newspaper publishing, we should be more conscious about our wordings. Safest way is that fully comply Corporate Advertisement Policy prescribed by regulatory authorities.
4.3 Securities Analysts, Journalists and Others
We will arrange press conference, meetings etc. to communicate some of very important price sensitive information such as new product inauguration, releasing earnings in historical and prospective basis, start a new venture or merger etc. In time of delivering information we will have to observe a open door policy. That means the process of dissemination will be like that will ensure level playing field to all.
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ACTION PLAN 4: ENSURE A SOUND PRACTICE OF CORPORATE GOVERNANCE
5.1 Guideline Regarding Corporate Governance at a Glance
Regulatory authority has prescribed a guideline to ensure a sound practice of corporate governance by all sorts of firms. This guideline is prescribed on ‘Comply or explain’ basis. That means it is not mandatory to follow all of the section of this rule, if for any reason any firm become unable to comply with any rule, then it has to explain the valid ground behind this non compliance.
Here the overall guideline is summarized by focusing on the most crucial parts to give a view of it. 1. The size of the board should be 5-20. 2. To ensure efficiency and transparency, there should be at least one tenth (1/10) of the total number of company board, subject to minimum one (1) independent director in board. 3. The Chairman of the board and CEO of the firm preferably be separate person. 4. BOD has to report to shareholders the following things transparently and adequately Ensure the fair and true representation by FS. Ensure that accounting policies and estimates are reasonable enough and prudently judged. FS are prepared in accordance of IAS, as adopted in Bangladesh. Assurance about firm’s ability to continue as going concern and causes of doubt, if nay. Explain the causes behind significant deviation in operating performance from year to year. Details and adequate disclosure regarding dividend policy. Details shareholding pattern.
5. Audit Committee: Work as a sub committee of BOD to ensure a fair internal control system. There should be at least three (3) members who would be elected by directors and at least one of them should be independent director. Audit committee should report to BOD, authorities and shareholders.
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5.2 Corporate Governance practice in Bangladesh
To get practical exposure about one of the important aspects of corporate governanceprotection of minor shareholders’ interest, I attended the 13th AGM of International leasing and Finance Ltd. and the findings are below:
Company: International Leasing And Finance 13th AGM. Date: 20th March, 2009.
Findings: Time of the meeting was fixed at 10.30 am. But shareholders started to from 8 am. But most interesting fact is that near about 1000 shareholders left just by taking the gift pack and they didn’t show any interest to attend the meeting. After starting the meeting I observed with surprise that only 25-30 shareholders were attend. Then Chairman invited shareholders to discuss upon the agenda. Only 4-5
shareholders participated in the discussion and most part of their discussion was about very mere topics like appraising BOD and management. Trial to protect the interest of minors was rare. From this it is quite obvious that probably these people were linked with company authority. Very important part of shareholders discussion is nominate their own Director and oppose managers’ proposed directors, if they want. But these things were completely absent in this particular meeting. Every decision and recommendation of BOD was passed without any sort of opposition, even solicitation of explanation. When Chairman told them to express their opinion by raising hand only few people from front row expressed their consent combined. And surprising fact was that this people were same who participated in discussion. And rest of the hall remains silent in all respect. This meeting completed in 11.30 am, just after one hour since its inception.
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Recommendation to ensure a sound practice in MBL
From the above discussion, the very poor scenario in Bangladesh regarding corporate governance is clear. Now to establish a sound system that will help to protect the interest of minor shareholders as well as establish a favorable perception about us, I want to recommend adopting The code of corporate governance for Bangladesh prescribed by a special taskforce of Bangladesh Enterprise Institute as the basis of establishing our internal system. Besides that I want to recommend some specific course of action.
1. Ensure shareholders’ right: Give ample opportunity to discuss in AGM. Establish practice of open voting in AGM. Disclosure of agenda in advance of AGM that help shareholders to understand the impacts of agenda on their investing interest. Disclose information on equity of major shareholders. Ensure the right of shareholders in nominating directors. Right of shareholders to oppose candidate nominated by management.
If we can ensure these aspects then it will facilitate: A higher and effective attendance by general shareholders in AGM. Help us to take sensitive decisions in pluralistic environment.
2. Ensure transparent Disclosure This aspect is already discussed.
3. Ensure effectiveness of Board
Presence of independent directors who are really independent in mind setup. Performance evaluation of CEO. Presence of at least three committees- Audit Committee, Nomination Committee and Compensation Committee.
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6 BOTTOM LINE OF ACCOMPLISHMENTS
Inside Trading Prohibition Ensure Sound Corporate Governance Price Sensitive Information Dissemination Regular Communication with Stakeholders Establish effective Feedback System
Beyond Regulatory Requirements
Create Clear Conception what the firm actually is Stop Gambler Action & Rumor Facilitate Information Trading Decision Achieve Fair Price
Protect the Interest of Minor shareholders
Making the Share Investing Class
Corporate Branding of MBL
Reduce Cost of Capital Enhance Profitability
Successful Brand Extension
Fair Price during Seasoned Issue
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7 CONCLUSIVE MASSAGE
At first glance it may seem that IR department has no factual market value that can validate its worthwhileness from MBL perspective. But after the details discussion based on market oriented evidences, hopefully I can make it clear that this project will be a perfect ‘Strategic Option’. That is to say although it has no market value of its own, but certainly it will facilitate the attempt of building Corporate Branding, for which MBL is striving. And it is redundant to say, in the context of Bangladesh, how much important corporate branding is. So in order to be true multi brand firm and succeed profitably in long run, MBL needs successful brand extension of multiple category rather extensively depend on single brand. Because if any single brand is extended too broadly then even its origin itself will seem confusing to overall market. Hopefully through successful Corporate Branding, we can inaugurate several blockbuster brands that will ultimately make us Branded house of branded products.
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