A Study of Securities Market in Bangladesh: Prime Finance Securities Ltd 1.0 executive summary Analyzing the Security market in Bangladesh appears to be relevant in view of on-going structured adjustment, financial liberalization and economic deregulation policy adopted by the government of Bangladesh. These reforms aim at macro economic stabilization in a free market economy, where stock market reform and development can play a vital role. In order to support the stock market activity towards growing liberal policy for investment and as a vehicle for effective privatization, understanding prevailing stock price behavior and the requirements of marketing securities market effective ones in terms of liquidity and competitiveness is a must. This paper is a modest attempt towards these ends. This paper eventually throws some light on the perceived dominant problems faced by Bangladesh Securities Market (BSM), issues to be addressed for restoring investor’s confidence and potentiality of growing BSM as an emerging market. In doing so, the paper draws attention of the research findings on securities market and is based on logical arguments put forward an observations being made by the author and interviews with diverse groups of market participants. The securities market of a country is not a thing apart from its economy. Rather typically, a weak economy trudges the stage along with the vicious burdens of a frail and sickly capital market. Conversely, robust securities market serves as a strong part to a country’s forward economy. The Bangladesh stock markets and said to have enormous potential for luxuriant growth. This report focus threadbare analysis of the prevailing situations in the country’s securities markets, probes deep into their great potentialities for growth to substantially back his optimism, and identifies sources that can feed our present climax of security market back to health and prosperity. Objectives of the Report: The objective of the report is to make us known the practical situation of Securities market in Bangladesh and prepare me to face the complex situation in any organization in this country. The objectives are also represents here chronologically: • • • • • • • •
To make the ratios as a measure of important financial issues that is considered as important aspect of a firm. To survive with the current market situation. To monitor the practice of modern technology of security market. To know the various strategy of securities market. To develop our proficiency on capital market. To assess strengths and weaknesses of a company. To know the strategy of making financial control. To examine and evaluate financial statement and identify major field needs to improve.
Overview Of a Security Market 2.0 A brief Description of Security Market
Security market is a place or places where securities are bought and sold, the facilities and people engaged in such transactions, the demand for and availability of securities to be traded, and the willingness of buyers and sellers to reach agreement on sales. Securities markets include over-the-counter markets. The developing economics are looking forward to their capital markets as the engine for future growth as its presence insures mobilization of funds from surplus units to the ones suffering from deficits. Business firms (deficit units) need money to pay to their factors of production, i.e. land, labor, capital and entrepreneurship. Households (surplus unit) have residual earnings, i.e. savings after there consumption but usually in fewer quanta compared to the business firm needs. It is the financial intermediary that usually pools the money from a wide number of people and channels it to the ultimate borrowers. Two stock markets in Bangladesh, one is named Dhaka Stock Exchange (DSE) in Dhaka and another one is called Chittagong Stock Exchange (CSE) in Chittagong. A central regulatory agency which is the Securities and Exchange Commission (SEC) overseeing the activities of the entire capital market including issue of capital, monitoring the issue of stocks, and operation of the stock markets. The number of listed companies in DSE are 378 of which are shares, 11 debentures, and 9 mutual funds. A liquid stock market induces individual investors and institutional to keep their savings in shares market to make investment less risky and more attractive in profit taking because they allow savers to acquire the capital gains and to sell it as quickly at the least cost in a situation they need to access to their savings or want to alter portfolios. Alternatively, the stock market also provides companies a permanent access to capital raised through equity issues so that companies can expand its infrastructure in services or products to block the market share competitively and allows to be multinational companies, linked up with international companies and financial institutions. More attractively, institutional investors can invest in infrastructure projects in anticipation of long-term revenue and capital gains on shares of market leaders companies. The studies show based on collected data on 47 countries from 1976 to 1993, banking and the stock market liquidity, size, volatility, and integration with world capital market accelerate the current and futures rates of economic growth, capital accumulation, productivity growth, and private savings and they are robustly correlated to real per capita gross domestic product growth. Financial intermediaries include banks (the central bank, commercial banks, investment banks etc), Security and Exchange commission (SEC), specialized financial institutions, development financial institutions and institutional investors (i.e. Investment Corporation of Bangladesh). The market can be classified into a number of ways, but from the duration point of view, it is classified into two-money market and capital market. The money market is the market where financial securities maturing in less than one year are transacted while in capital market financial assets maturing within more than a year change hands. Capital Market is the market, or realistically, the group of interrelated markets, in which capital in financial form is lent or borrowed for medium and long term and, in cases such as equities unspecified periods. The capital markets, in distinction from other parts of the financial market, i.e., the money market are those, for long-term governmentâ€™s securities, corporate bonds, and stocks, municipals bonds issued by stay and logical government units, and mortgages. Industry and commerce as well as government and local authorities raise capital from the capital market, which perform several important functions in the process of economic development. Most important among them are the promotion of saving and
investment and efficient allocation of funds among the competing uses. Participants in the capital market are many. They include the commercial banks, saving and loan associations, credit unions, mutual saving banks, finance houses, finances companies, merchant bankers, discount houses, venture capital companies, leasing companies, investment banks, investment companies, investment clubs, pension funds, stock exchange, securities companies, under writers, portfolio- managers, and insurance companies. Capital market instruments are broadly the securities- debt and equity instruments. Both money and capital market undeveloped in Bangladesh. A number of reasons may explain why this is happening. First of all, Bangladesh Bank (BB) only holds 91-day bills but the buyers have been limited into commercial banks. In case of capital market, debentures issued by both autonomous bodies and corporation (housing and petroleum) are primarily held by BB and Nationalized Commercial Banks (WB, 1994). 3.0 Historical Background of Stock Exchange It first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June 1962. Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in 1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh. In 16 September 1986 DSE all Share Price Index was started. The formula for calculating DSE all share price index was changed according to IFC in 1 November 1993. The automated trading was initiated in 10 August 1998. In 1 January 2001 DSE 20 Index was started. Central Depository System was initiated in 24 January 2004. As of November 15 2007, the benchmark index of the Dhaka Stock Exchange (DSE) crossed 3000 points for the first time, setting another new high at 3013 points. Stock Exchange organized market for trading of stocks and bonds. In early 1952, five years after the independence of Pakistan, the Calcutta Stock Exchange prohibited transactions in Pakistani stocks. This necessitated the formation of a stock exchange in East Pakistan and the East Pakistan Stock Exchange Association Ltd. was incorporated on 28 April 1954. It changed its name to East Pakistan Stock Exchange Ltd on 23 June 1962 and finally to Dhaka Stock Exchange (DSE) on 14 May 1964. Although incorporated in 1954, formal trading started in 1956 in Narayanganj. In 1958, the stock exchange was shifted to Narayanganj Chamber Building. DSE purchased its own land, and moved to its own premises at 9/F Motijheel C/A in 1959. Prior to independence in 1971, the number of listed companies in DSE was 196 with a total paid up capital of Tk 4 billion. The daily average transaction during that period was about 20,000 shares. After the Independence, the government of Bangladesh took charge of the abandoned industrial units and pursued a policy, under which large industrial units were nationalized. The trading activities of DSE remained suspended till 1975 and following change in the economic policy of the government, DSE resumed its activities in 1976 with only 9 listed companies, having a total paid up capital of Tk 137.52 million. The actual growth of the stock exchange in Bangladesh (the DSE) started since 1983, when the market capitalization was Tk 812 million. The year 1987 experienced a relatively steep rise in the market with 92 listed companies. With the liberalization of policies in the 1990's the stock market gradually started to prosper. On 30 June 2001, the number of securities listed in the DSE was 244, the number of listed companies 224, number of listed debentures 10, number of shares of all
listed companies 666,553 and that of all mutual funds 72,250 and the market capitalization Tk 72,168 million ($1226 million). A stock exchange, securities exchange or (in Europe) bourse is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors which, as in all free markets, affect the price of stocks. There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-thecounter. This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global market for securities. 3.1 Formation Dhaka Stock Exchange (DSE) is a public limited company. It is formed and managed under Company Act 1994, Security and Exchange Commission Act 1993, Security and Exchange Commission Regulation 1994, and Security Exchange (Inside Trading) regulation 1994. The issued capital of this company is Tk. 500,000 which is divided up to 250 shares each pricing Tk. 2000. No individual or firm can buy more than one share. According to stock market rule only members can participate in the floor and can buy shares for himself or his clients. At present it has 230 members. Market capitalization of the Dhaka Stock Exchange reached nearly $9 billion in September 2007 and $15 billion a year later. Management The management and operation of Dhaka Stock Exchange is entrusted on a 25 members Board of Director. Among them 12 are elected from DSE members, another 12 are selected from different trade bodies and relevant organizations. The CEO is the 25th ex-officio member of the board. The following organizations were holding positions in DSE Board: • •
Bangladesh Bank ICB
President of Institute of Chartered Accountants of Bangladesh
President of Federation of Bangladesh Chambers of Commerce and Industries
President of Metropolitan Chambers of Commerce and Industries
Professor of Finance Department of Dhaka University
President of DCCI (Dhaka Chamber of Commerce and Industry)
3.2 Corporate profile of a security market Introduction: With roots of professional involvement in the financial sector, “Prime Finance Securities Limited” has been established to earn a reputation in the investment community for providing high quality service and advice to corporate in the country. The company has refined its business model constantly maintain a cutting-edge approach in the areas which it operate. Clients can take advantage of the range of services required to succeed in today’s capital markets. Market support is provided by the experienced institutional teams that work handin-hand with PFISL’s growing market-making departments, and they are aided in this by inhouse researchers. In short, PFISL’s team can provide a complete service for the corporate clients. PFI Securities Limited, an associated company of Prime Finance and Investment Ltd. is a stock brokerage company having membership of both the Dhaka Stock Exchange and the Chittagong Stock Exchange. Prime Finance owns 50% shares in PFI Securities Ltd. (PFISL) holding 25% voting right in the board of directors meetings. Out of 12 Directors of PFISL, 3 Directors have been nominated by Prime Finance to represent it in the Board of PFISL. In shareholders meeting, Prime Finance enjoys 50% voting right. As per BAS 28: Accounting for Investment in Associates, investment in PFI securities Ltd. is treated as investment in associate company PFI Securities Limited is the only associate company of Prime Finance. Particulars of the investment in PFI Securities Limited are given below: Name of the Nature associate
Face Description % of value of shares Shareholding of held shares
Share PFI Securities Brokerage trading in Ordinary Limited House DSE and CSE
Book value per share 165.67
The book value per share of associated company is calculated based on un-audited financial statements and the management believes that audited result will not differ materially. Unrealized gain on investment in listed securities At 31 December 2006, there was Tk. 20.00 million of gross unrealized gain on investment in listed security. .
3.3 Corporate Mission: To be a specialist in wealth creation by applying a unique breadth and width of innovative expertise to the benefit of clients, shareholders and staff. PFISL believe in building strong relationships with clients, in maximizing value of clients’ investment portfolios and in continuous innovation and improvement in services offered. It believe that it prosper only if its clients do. Company Profile: Prime Finance is one of the leading financial institutions operating in Bangladesh. Our core competencies cover lease finance, term finance, real estate finance, SME finance, public issue of shares, portfolio management, margin loan, share trading etc. The client is the focal point of all our activities. The company is committed to providing clients with excellent, innovative and fast solutions across all business segments. They want to be the preferred financial institutions for our clients as they enjoy distinct service culture. Prime Finance holds a leading position in the capital market operations. It is the undisputed number one in providing comprehensive and integrated capital market services. Prime Finance boasts up a broadly diversified business profile. This enables us to offer our clients the full range of services, they expect from a leading financial institution. Prime Finance seeks to constantly increase its return on equity for its shareholders, building on a systematic program of value-based management. 3.4 Prime Finance Investment Securities Limited: PFI Securities Limited (PFISL) is one of the leading brokerage house has been set up to cater to the needs of the capital market in Bangladesh was incorporated on 6 August 1997 as a Private limited Company. It is a 50% owned associated company of Prime Finance and Investment Limited and rest 50% owned by the individual who are also sponsors of Prime bank Limited and Prime Finance and Investment Limited. Having membership in both Dhaka and Chittagong Stock Exchange Limited, inevitably PFISL became a trusted brokerage house to the clients investing in Bangladesh. It also got the license of Stock dealer including Stockbroker license from Securities and Exchange Commission. PFISL is the opening member of Central Depository Bangladesh Limited (CDBL). It has two branch offices in Bangladesh. PFISL located at the same premises of Prime Finance and Investment Limited: 63, Dilkusha C/A, Dhaka-1000. As a securities broker, the Company act as an agent in the purchase and sale of listed securities. PFISL charges commission to their clients on transactions, in accordance with the established commission schedule, the Company earned Tk. 37.6 million as net profit after tax (2006: Tk. 5.61 million). And earnings per share were Tk. 253.21 (2006: Tk.37.79).
3.5 Features of PFISL: International standard corporate brokerage house. Corporate member of both Dhaka Stock Exchange Limited (DSE) and Chittagong Stock Exchange Limited (CSE). Full service Depository Participant (DP) of Central Depository Bangladesh Limited (CDBL). Provides CDBL related services including dematerialization/rematerialization of scripts, freeze/release of requests and suspension, pledge/unpledge and confiscation, BO link setup and securities transmission/transfer, ownership change etc. Facilities to open trading account for buying and selling of securities for individuals. Facilities to open trading account for institutional buy and sale of securities. Facilities to deal the block market trade for Sponsor and Institution. Facilities to open BO account for both resident and non-resident Bangladeshi. Modern IT infrastructures for efficient data processing and to provide services to the clients. Provide margin loan to the clients in line with Margin Rules, 1999 at a competitive rate. Proper arrangement for safe keeping of all paper scripts and other instruments in the vault. Strict adherence to compliance of regulatory requirements and PFISL rules. 3.6 The aims and objects for which the Company is established: (As per Memorandum of Association under the Companies Act’1994) 1) To act as consultants, professional advisers, Managers and equity analyst and to provide professional expertise and to act as investment counselors to individual person/persons, firms/ firms, trusts, companies or corporations, local and Govt. authorities and to receive fees therefore. 2) To act as financial consultants for issue of shares of and/or debentures or other types of transferable instruments and for public offer soliciting subscription thereof and to act as managers of such issues and to receive fees therefore. 3) To promote formation of and manage funds, trusts, undertakings for collective investment in transferable securities and portfolios of shares, stocks, debentures and securities and of financial assets in general and to render management services to any individual firm, trust, corporation or association whatsoever in Bangladesh or outside Bangladesh and generally to manage, supervise such funds or investments portfolios. 4) To carry on the business of stock-brokers, investment brokers, insurance brokers, security brokers, property brokers, ship brokers whatsoever for or on behalf of any individual or
firm, trust or association, companies or corporations, local or Govt. authorities and receive brokerage thereof. 5) To buy, sell and deal in shares, stock, debentures, bonds and other securities. 6) To become member of Stock Exchanges in Bangladesh and or elsewhere and undertake all the functions of a Stock Exchange member. 7) To act as a stock-broker, CDS-broker, Stock-dealer, underwriter, portfolio manager, fund manager, equity analyst, investment adviser, management consultant, share transfer agent, manager to issue, register to issue, trustee to trust deed and such other intermediary as required in the capital and securities market. 8) To establish, maintain, carry on, transact and undertake all kinds of business other than banking business. 9) To advance or deposit money, securities and properties to or with such persons or bodies, corporate or unincorporated, and on such terms as may seem expedient, and also to discount, buy, sell and deal in bills, notes, coupons and other negotiable or transferable securities or documents. 10) To borrow or raise or secure the payment of money by issue or sale of shares, bonds, debentures, other securities and obligations, either perpetual or terminable and redeemable or otherwise, and to change or secure the same by trust deed or otherwise on the undertaking of the company including its uncalled capital or upon any specific property and rights, present and future of the company. 11) To negotiate all kinds of loans and advances, aid or assistance from any source, local or foreign and to take all such steps as may be required to complete and effectuate such dealings. 12) To pay all expenses incidental to the formation or promotion of this or any other company, organization, body and to conduct its business and to remunerate any person, company, or bodies for services rendered in placing or assisting to place or guaranteeing in the placing of any of the shares or debentures or other securities of the company or in or about the promotion, formation of business of the company or any other company promoted wholly or in part by this company. 13) To purchase or otherwise acquire and undertake, the whole or any part of or any interest in the business, goodwill, property, contracts, agreement, rights, privileges, assets and liabilities of any other company, corporation, partnership, body, person or persons and carrying on any, for the time being business which the company is authorized to carry on, or possessing property suitable for the purpose of the company and upon such terms and subject to such stipulations and consideration, if any, in money, shares, moneyâ€™s worth or otherwise as may be deemed advisable. 14) To pay for any property or rights acquired by the company either in cash or fully or partly paid shares or by issue of securities or partly on one mode and partly in another and generally on such terms as may be determined. 15) To invest the capital and other moneys of the company not immediately required in the purchase, exchange, or upon the security of shares, stocks, debentures, debenture stocks bonds, mortgages, obligation and securities of any kind issued or guaranteed by any company. Corporation, government, municipal authority or body or undertaking of whatever nature and whatsoever constituted or carrying on business or to invest in any manner as may determined by the company. 16) To establish and open offices, branch offices to carry on all or any of the above businesses abroad and within Bangladesh. 17) To draw, make, accept, endorse, discount, execute and issue cheque, promissory notes, and bills of exchange, bills of lading, debentures and other negotiable or transferable instruments.
18) To form, manage or subscribe to any syndicate, consortium, or any company or trust or individuals abroad or within Bangladesh and to carry on the business of underwriters of any issue. 19) To conduct and carry out any kind of research work calculated to advance any business or activity which the company is authorized to carry on, or in any way related to or connected with. 20) To publish magazines, journals, periodicals, documents and papers whatsoever the company may deem expedient and in this connection the company may purchase or otherwise acquire printing press and do all sorts of printing and publishing business and to do all other works incidental thereto. 21) To enter into any arrangement or agreement with any person or firm, institution, corporation, company or with any government or Autonomous bodies for the purpose of introducing, encouraging any of the aforesaid objects. 22) To distribute any of the properties of the company whether upon distribution of assets or division of profits among members in specie or otherwise. 23) To buy, underwrite, invest in, acquire and hold, pledge, sell or otherwise dispose of shares, debentures, debenture stocks, bonds obligation and securities issued or guaranteed by any company or body corporate or association, and to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof, 24) To form, promote, organize and assist or aid in forming, promoting, organizing companies, syndicate or institutions including subsidiaries in Bangladesh or abroad or enterprises or acquire any interests therein. 25) To act as agent, correspondent and representative of any bank, financing institution, corporation, company, firm, body, authority or individual whatsoever, whether foreign, local or otherwise, for the purpose of any business of the company. 26) To act as trustees, nominees or agents in the matter of issues, purchase and sale of debentures, bonds, stocks of any nature and description including improvements, development and management of any real estates and property or any other purpose in Bangladesh and abroad. 27) To enter into any arrangement with any Government or other authorities supreme, municipal, local, statutory or other bodies and to obtain from any such Govt. or authority all rights concessions and privileges that may seem conducive to any object of the Company. 28) To assist in merger, amalgamation and takeover of firms/enterprise/companies etc. 29) Generally to do all such other acts and things as are incidental or conducive to the attainment of the above objects. And it is hereby declared that the objects specified in each paragraph above, except where otherwise expressed in such paragraph, shall be separate and independent objects of the company, and shall in no way be limited or restricted by reference to or inference from the terms of any other paragraph or the name of the company. 3.7 Total Solution- Capital Market: PFISL is one of the very few business houses, which have got the total range of product offering in the capital market. Its sister concern and major shareholder Prime Finance is the leading merchant bank of the country. In addition to that PFI is one of the fasted growing multi product financial institutions. Stock Broking Service:
PFISL provides stock broking services to corporate investors. Rigorous attention to each client’s needs ensure a professional yet personal service. Portfolio allocation and asset management are driven purely by the client’s investment goals. These goals differ from client to client; therefore PFISL offers a spectrum of services that can be tuned to suit diverse wishes and needs: •
Brokerage Service • Buy & Sale of Security: Executed the order for sale and purchase of share with the guideline. • Receipt & Delivery of Securities: To collect and delivery of shares from and to the DSE, CSE and clients.
Custodian Service • Safe Custody: It ensures the safety of security of share. • Transfer of share: Except for unusual situation it will transfer all shares of the clients in their name. • Physical verification of securities to prevent forgeries. • Collection of shares and dividend from issuers. • Advisory Service:
PFISL has years of experience advising clients on portfolio strategies. As well as being tuned in to market, your broker can draw on internal research technical analysis to help you maximize returns on your investments. Whether you need an option on a specific company or just compare notes with a market professional, PFISL can guide you. A client will benefit form: • • • • • • • •
Professionalized broker who understands your investment objectives Monthly in house research report on trading Online account viewing. Company research, Economy research, Industry research Analysis and news on new IPOs Personally tailored portfolio advice Regular updates and recommendations Portfolio holding valuations
3.8 Types of Brokerage Trading Account: PFISL offers two broad types of accounts: • Cash Account • Margin Account •
Cash Account: Under this type of account the customers deposits cash account with PFISL and operates the trading activities under standard operating procedure detailed in the account opening agreement. An accountholder may open and transaction this account without any prior deposit.
Margin Account: A Diversified Product Offering from PFISL Realizing the market situation and the potential of margin trading facilities, the management of PFISL has structured and introduced this type of its valued clients. Definition of Margin: Margin means the aggregate amount of cash and market value of securities deposited by a client into his margin account, excluding securities, bought in the margin account. Nature ant Objective of Margin Account: To give financial support to the clients for investment in the secondary market against the margin deposit of the client within the limit set by the management from time to time and Margin Rules & Regulations, 1999. Deed of Agreement: An agreement must be executed between the margin account holder and PFISL all the terms & conditions stipulated in the agreement will be binding on both the parties. Margin Deposit / Equity: Margin shall be deposited before the first transaction either in the form of • Cash (cheque, PO, DD) • Listed securities valued at last traded price or • Both Investment Limit: Investment limit in market value up to 300% of margin deposit. Authorization for Mortgage, Pledge etc: Client shall authorize the PFISL to mortgage, pledge or hypothecate the securities for a sum not exceeding the loan in the margin account. Financial charge on loan: Interest @15.5% per month to be charged at the end of every month.
3.9 Portfolio Management Service: PFISL is one among the few privileged brokers in Bangladesh who has got strong association with sister concern financial institutions licensed to offer the entire spectrum of services for investment activity management in capital markets. Its major shareholder and sister concern Prime Finance & Investment is registered Merchant Bank and Portfolio Manager under SEC Regulation to offer this portfolio management service. PFISL’s portfolio management schemes are a way of providing solutions to your various problems. PFISL will try to fulfill your hopes, dreams and aspirations. Its investment planning will consider specific individual needs and preferences to the possible extent. These schemes are backed by its experienced, professionally qualified, dedicated teamwork. Getting a team of professionals to manage your money will improve your chances of beating the markets.
Its investment professionals will regularly track your investments. This way one could spend more quality time with his/her core business activities, instead of poring over investment papers. Under the portfolio management schemes PFISL offer two different services: (A) Portfolio Management Service (Discretionary Service); (B) Portfolio Advisory Service (Non-discretionary service). Portfolio Management Service (Discretionary Service): This money management service where it will accept ones funds and would manage his/her portfolio at its complete discretion, for a minimum term and fixed fees, meaning it would act as clients’ agent and invest on his/her behalf in various asset classes such as mutual funds, debt instruments, primary and secondary equity markets. The main features of this service are follows: Investment Decision- As ones portfolio managers, it will manage clients’ portfolio at its complete discretion and in line with ones policy statement and SEC guidelines. Size of Portfolio- It will need to develop a minimum portfolio of Tk. 0.50 million either by way of cash or securities. Bank and Depository Accounts- Funds and Shares of all the clients will be placed in a separate Bank account and Depository account. Shares will be bought/sold in the firm’s name. Similarly the funds will be transferred to the firm’s PMS bank account. It will constantly track clients’ portfolio and keep them informed through its management information systems. Investment Horizon- A minimum investment span of 1 year is recommended. Investment Process- After the account opening formalities in completed it will prepare a policy statement. This statement will constitute ones investment objectives, liquidity needs, time horizon, and other needs and preferences. Understanding ones objectives and constrains will help its investment team to allocate there funds to various asset classes. (A) Portfolio Advisory Service (Non-Discretionary Service) In this service it will provide you a comprehensive advisory package designed to help your investment decisions. Here you will handle your funds and take your own investment decisions based on its research reports and proposals. Such research reports will provide independent recommendations, corporate details and reasons to invest in equity, debt and mutual funds. Moreover our investment professionals will help to restructure your portfolio as per your investment objectives. The following are the characteristics of these schemes: Investment Decision- It will have total discretion to handle own portfolio.
Size of Portfolio- It will need to develop a minimum portfolio of Tk. 0.50 million. Research Reports- Reports will be sent on a fortnightly basis. Fees & Charges: Financial Charge on Loan- Interest @ 15.5% per month to be charge at the end of every month. Brokerage Commission- 0.35% on transaction value. Documentation Charge- Tk. 10,000 (Ten thousand) on amount opening/commencement of year (for margin account). Margin Fee- 1% per annum on investment to be charged. 3.10 PFI Securities Limited Income Statement For the year ended 31 December 2007 Figure in (BDT)
Operating Income: Commission on securities trading Interest on margin loan Other operating income
50,287,505 3,131,765 3,562,086
5,907,211 1,949,831 2,129,385
16 17 18
Total Operating Income:
Operating Expenses: Laga & Howla charges Management expenses
Total Operating Expenses: Profit before income tax: Provision for income tax:
13,649,498 43,331,858 5,730,112
2,921,251 7,065,176 1,453,450
Net profit after income tax:
Basic earning per Share (EPS):
The annexed notes 1 to 32 form an integral part of these financial statements. The Broad of Directors approved these financial statements on 30 March 2008. Balance Sheet of PFI Securities Limited As at 31 December 2007 Figure in BDT
Sources of Fund: Shareholdersâ€™ Equity: Share capital Proposed cash dividend Proposed stock dividend Retained earnings
14,850,000 35,046,000 8,170,115
14,850,000 4,455,000 5,614,369
Total Investment: Current Assets: Advance, deposits & prepayments Margin loan to clients Accounts receivables Advance corporate tax Cash & cash equivalents
287,502 99,311,287 170,894,256 6,102,710 5,188,714
128,800 40,314,721 31,213,159 762,234 12,054,462
Total Current Assets: Current Liabilities: Margin deposit from clients Short term borrowing Accounts payables Provision for current tax
3,039,200 25,000,000 205,039,287 9,072,967
2,540,200 29,854,986 36,735,335 3,342,855
Total Current Liabilities: Net Current Assets:
Property, plant & equipments: Total Assets & Investments
Total Applications of Fund: Investment: Membership of stock exchanges Fixed deposit with banks
6 7 8 9 10
11 12 13 14
The annexed notes 1 to 32 form an integral part of these financial statements. The Broad of Directors approved these financial statements on 30 March 2008. 3.11 PFI Securities Limited Cash Flow Statement For the year ended 31 December 2007 Figure in BDT
Operating Activities: Net profit before tax Depreciation on fixed assets
Net profit before change in working capital
components Change in working capital component: (Inc)/dec. in advance, deposit & prepayments (Inc)/dec. in accounts receivables (Inc)/dec. in margin loan to clients Inc./(dec) in accounts payable Inc./(dec) in margin deposit from clients Cash generation from operating Income tax paid A. Net cash flows from operating activities Investing Activities: Acquisition of property, plant & equipments Fixed deposit with bank B. Net cash flows from investing activities
(158,702) (139,681,097) (58,996,566) 168,303,952 499,000 (30,033,413) 13,636,361 (5,340,476)
(3800) (19,884,677) 8,255,531 20,992,015 1,597,758 10,956,827 18,230,366 (368,878)
(851,647) (5,000,000) (9,309,986)
Financing Activities: Payment of dividend (4,445,000) Inc/(dec) in short term borrowing (4,854,986) C. Net cash flows from financing activities (9,309,986) Net change in cash & cash equivalents (A+B+C) (6,865,748) Add. Cash & cash equivalents at the beginning of the 12,054,462 year Cash & cash equivalents at the end of the year 5,188,714
(2,025,000) (6,111,622) (8,136,622) 96,26,816 2,427,646 12,054,462
The annexed notes 1 to 32 form an integral part of these financial statements. The Broad of Directors approved these financial statements on 30 March 2008. 3.12 Financial and Capital Market Scenario Financial Market scenario: Financial institutions represent one of the most important segments of financial system and play very important role in mobilizing and channeling resources in Bangladesh. The financial institution numbering as of December 2007 are regulated by the financial institution Act, 1993 and the regulations made there under. In view of their increased role in financial industry, trade and commerce, transport, information technology, housing etc. the minimum capital requirement of the FIs was raised to tk. 205 million vide FID circular 2 dated 29 th June 2003. Most of the FIs have risen their require capital. All FIs were asked to raise their capital through IPO (Initial public offer) within 2007. The amount of paid up capital and reserve of FIs thus increase up to Tk. 17.85 billion as of 2007. The financing modes of FIs are long term in nature. Total investment by the FIs up to june 2007 was Tk. 91.97
billion, which was 25.75 percent higher than that of the previous year (73.14 billion as of June 2006). The rate of the financial institution is quite low. Credit growth in commercial banks decreased by 8.01 percent points in the first 10 months of the FY 2007 compared with the corresponding period 2006 despite having over BDT 140 billion surplus liquidity in banks. Deposits in the banks also declined by 4.19 percent point during the period. Decrease in disbursement of the bid loans last year is the reason for the declining credit growth. Capital Market Scenario: 2007 was a turbulent year for the country’s stock market since the 1996 ‘bubble burst”. On the onset of the year, the market witnessed a bullish trend on easing political uncertainty. But ‘fear fobia’ gripped enthusiastic investors following government’s anticorruption drive, leading the market trend to a bearish one. The market also witnessed a slum upon imposition of some restrictions by SEC on merchant bank lending, the much talked about issue throughout the year. The market however bounced back when SEC withdrew its restriction on banning the margin loan disbursement. However the market at one stage whooped with many new records in term of turnover and indices because of government’s positive attitude towards stock investors. Both the primary and secondary markets were vibrant in 2007. The investor also had confidence in IPOs. There were 14 IPOs with 4.63 billion in 2007 against 7 with Tk. 1.43 billion of 2006. All the IPOs oversubscribed which was a proof of investor strong faith in the market. The over all price earning ratio reached around 23 which was below 15 in the previous year. Trading took place in 237 days on DSE and total of 282.27 crore shares worth Tk. 32286.77 crore were translated. The highest transaction in term of value in a single day was Tk. 316.83 crore on august 21, while the lowest transaction was Tk. 23.37 crore on January 7, 2007. The daily average turnover was tk. 136.23 crore. With remarkable 139 percent rise at the end of the year, market capitalization stood at the Tk. 74219.59 crore, which is around 16 percent of GDP. The total market capitalization on the DSE closed at Tk. 742.2 billion on December 30 opening with Tk. 310.66 billion on January 3 of 2007. At the end of 2006 the DSE market capitalization to GDP ratio stood at 7.59 percent. The ratio is still lower compared to the neighboring countries India and Pakistan. At the end of 2007, the ratio of market capitalization of Mumbai Stock Exchange to GDP for India stood at around 130 percent with a total market capitalization of US$ 1.61 trillion. Market capitalization of the National Stock Exchange of India stood at $ 1.48 trillion at the end of 2007. Presently such ratio to GDP for Pakistan is around 75 percent. We expect the 2009 capital market will remain stable with new support of quality shares from telecommunications, gas, oil and energy sector. We are also expecting introduction of a modern pricing method such as book-building to encourage the private sector entrepreneurs to list their companies on the bourses.
3.13 Operation of the Company: All the divisions of Prime Finance contributed to the companyâ€™s year on year increase of operating profitability in 2007. These results are practically positive, given the fact that during the year a major divisional process was successfully implemented to enhance their future profitability. Investment Division: Increase of 7.52 percent despite economic slowdown and low industrial investment. Capital market division: fantastic growth of almost 7 times due to robust capital market. Business activities: Prime Finance offers diversified products and services which include lease finance, term finance, real state finance, SME finance, short term finance, margin loan, portfolio management, issue management, underwriting etc. Diversification: Prime finance has a well balanced diversified portfolio in major sectors which ensure sustained and stable revenue growth. Highest allocation was to dyeing, finishing and accessories sector at 13.46 percent followed by service and entertainment 13.41 percent, construction and engineering 12.08 percent, transport 11.99 percent and spinning, weaving, and knitting 10.81 percent. Financial activities: Considering the socio-economic condition in leading operations, our approach to new leading remained extremely cautious in 2007. The quality of finance and maintain high credit requirements for clients and pricing has been systematically linked to risk profile of the transaction. Leasing: Leasing finance is the principal fund based activity of Prime Finance. Until now the company concentrated only on full payout financial lease transaction for financing a wide range of capital machinery, equipment and vehicles. Customer represents different segments of local markets. They provide services to developing companies, SMEs and market-leading concerns. In 2007, Prime Finance was able to maintain consistent growth in lease finance. Despite stagnation in the financial market, innovative offerings, such as option of structured payments, make its easier to draw up concepts for customize solutions whilst using standardized procedures. The ongoing assessment procedures of investment proposals help measuring credit risks entitled in the lease proposals. 3.14 Corporate and Financial Reporting Framework
The directors in accordance with SEC notification No. SEC/CMRRCD/2006158/Admin/02-08 dated 20 February 2006, confirm compliance with the financial reporting for the following: a) The financial statements prepare by the management of Prime Finance, present fairly its state of affairs, the results of its operations, cash flows and changes in equity. b) Proper books accounts of the company have been maintained; c) Appropriate accounting policies consistently applied, expect for the changes disclose in the financial statements in preparation of financial statement and accounting estimates are based on reasonable and prudent judgments. d) International Accounting Standards, as applicable in Bangladesh, have been followed in preparation of financial statements and any departure there from has been adequately disclose. e) The system of internal control is sound in design and has been effectively implemented and monitored. f) There exist no significant doubts as to the companyâ€™s ability to continue as a going concern. Activities of a Broker House Company 4.1 Introduction: The capital market leads the growth of economic development, industrialization, employment generation and thus the national growth of a country. It plays a pivotal role for financing industrialization and national growth in developed and developing countries. The capital market of Bangladesh is mainly operated by Dhaka Stock Exchange (DSE), Chittagong Stock Exchange (CSE), Central Depository Bangladesh Limited (CDBL) and Broker House Companies, which are regulated by Security Exchange Commission (SEC) of Bangladesh. DSE, CSE and CDBL provide three different software for the Broker House Companies. Through the DSE and CSE the broker house companies buy or sell shares and through the CDBL software receive or deliver electronic shares to CDBL. The capital market of Bangladesh is growing rapidly which increases fraud in the market. At present the total numbers of members of DSE is 230 of which 173 members are registered by the Commission for securities trading. To understand the operational procedures of a broker house company we have to have clear idea of all the works of a company. This chapter is dedicated to describe the detailed schedule of the whole tasks assigned to a broker house company 4.2 Tasks of a Broker House Company: A broker house company can acts as a Stock Dealer or a Stock Broker or both. As a Stock Broker, a broker house company can buy or sale shares against the investors. But a stock
dealer can buy or sale shares against its own portfolio. The rules and directives of Securities Exchange Commission, DSE, CSE and CDBL regulate all the tasks of the broker house companies. The basic tasks are as under:
To open customer account at DSE, CSE & CDBL software.
To import trading data to back office from DSE & CSE software
Print confirmation & deliver to customers & collecting with signatures
Share TypeDSE or Receive shares from CSE and preserve in the vault according to customer.
Buy or sale shares through DSE or CSE software on every working day.
Collect trading data from DSE & CSE software
Share Buy or Sale
Collect money from customer & pay to DSE or CSE
Collect pay in forms from customers against sale
Collect Buy & Sale orders from customers
Receiving money from DSE or CSE & pay to customer
Share Type Pay in shares Deliver sharesfrom to DSE or CSE (in case customersâ€™ BO ofaccount physicalto shares) through CDBL from vault. CDBL software
If Electronic Pay out share to customersâ€™ BO account from CDBL through CDBL software
Fig: 1.1 Tasks of a broker house company The main income source of a broker house company is the commission against the total buy and sale amount. A broker house collects money from customer against buy with commission and pays money against sale after deducting commission. 4.3 Trading System through Dhaka Stock Exchange: Dhaka Stock Exchange purchased an automated trading system named TESA (The Electronic Securities Architecture) from Scandent Solutions Corporation Limited. Dhaka Stock Exchange provides the software at every broker house company. The trading is now in continuous session from 10:30 am to 2:00 pm. The session is divided in 5 parts: pre-opening session, opening session, continuous or regular trading session, closing session, and post-closing session. All transactions of brokers are settled and cleared through the 3rd and 5th working day respectively, calculated from the date of contract (hawla) and the procedure followed is presented in chart II.
Chart I I
The clearing house operates manually. Working hours of the clearing house are from 9:00am to 5:00pm. The Stock exchange remains open from Saturday to Thursday and remains closed on Friday. The management of DSE is vested on a 24-member council having a chairman, one senior vice chairman and one vice chairman. Among the 24 council members, 12 are elected and nominated by DSE members. The other members are representatives from the Bangladesh Bank, finance ministry, law ministry and ministry of industries, presidents of the CA institute, FBCCI, MCCI, DCCI, Supreme Court Bar Association and bankers/insurance corporations associations and the chairman of the Department of Finance and Banking/Economics of the University of Dhaka. The operational management of the DSE is headed by a CEO, who works as an independent entity under the general policy framework set by the council. â€˘ Principal Function of TESA Market Information: Supplying all market information needed to formulate the buy and sale decisions. Order Management: Accept, validate and store orders and quotes from broker workstations and/or systems. Order Execution: Automatically executes orders when buy and sell prices match. Trade Reporting: Trade execution reports are provided to each trade participant, to the settlement system and/or the depository and to the market. Index Calculation: Calculates and publishes market indices (DSE General Index & Weighted Average Index).
Market Access: Provide exchange members with efficient affordable GUI-based tools for accessing the market. Trading Sessions: TESA conducts trading in-5-phases. (1) Enquiry: In this session broker can log on to the system. No order will be submitted in this session. No trade will be executed. Only previous orders can be withdrawn in this session. (2) Opening: The opening is a pure, single-price action. All buy and all sell orders are compared and calculate the open-adjust price. No trades will be executed in this session. (3) Continuous Trading: During the phase, participants enter orders and immediate execution or for inclusion in the book. Automatic matching and execution takes place based on best price/first in, first out trading rules. (4) Closing: Closing prices are calculated and disseminated to market participants. (5) Enquiry: Market will be closed in this session and other facilities like the previous enquiry session. â€˘
Market Control: The Market Control Workstation allows administrative staff to control the operation of the market, e.g.
(1) Session Control: Opening and closing the market via interactive control or by preset timers. (2) Validation Parameters: Setting and viewing parameters that control the trading engine validation e.g. tick size, circuit breaker, circuit filter, market lot, price protection percentage. (3) Messaging: Allows the dissemination of company announcement data and general market administrative messages. â€˘
Market Information: Market Information is a real-time market data system. It collects, manages, generates and stores information relating to trade instruments and issuing companies. Market Information is responsible for, (1) Collecting Real-Time Market Information: Bids, offers, last trade, book and other data are gathered via the trading engine. It supports TESAâ€™s automated and manual trading modules and can process the trades of external and off-market systems. (2) Collecting Company Information: All information supplied by the listed companies is maintained in the TESA database. (3) Generating Market Statistics: TESA generates market indices on a real time basis. It generates other statistical information such as price.
5.1 Business Procedures & Existing Problems Share Categories
There are five categories of companiesâ€™ shares in the Bangladesh capital Market, which are listed in both the Stock Exchanges (DSE & CSE). The basic definition of these share categories is as under: A-Category Share: Companies, which are regular in holding the current annual general meetings and have declared dividend at the rate of ten percent or more in the last English calendar year. B- Category Share: Companies, which are regular in holding the annual general meetings but have failed to declare dividend at least at the rate of ten percent in the last English calendar year. G- Category Share: Companies, which is new but not start operation yet. G categories companies are also called Greenfield companies. N- Category Share: All newly listed companies except Greenfield companies will be placed in this category. Z- Category Share: Companies, which have failed to hold the current annual general meetings or are failed to declare any dividend or which are not in operation continuously for more than six months or whose accumulated loss after adjustment of revenue reserve, if any, is negative and exceeded its paid up capital. There are two types of shares according to its format, which are as follows: 1. 2.
Demat or Electronic Shares Physical Shares
5.2 Markets Types: Four types of market at DSE. These are as follows: (1) Public Market: In this market instruments are traded in normal volume. (2) Spot Market: Instruments are traded in normal volumes under corporate action if any. (3) Odd lot Market: Odd lots of all instruments are traded in this market. (4) Block Market: Instruments are traded in bulk volume. Some Definition a. Clearing House: It means the facilities provided by DSE or CSE for completion of transactions through receipts and deliveries of shares and/or cheque/pay order/demand drafts. b. Contract: It means a contract of transaction executed between the Buying Member and Selling Member in the trading system of DSE or CSE. c. Trading Day: It means the specific working day on which transactions are carried out by the Members (Broker House Company) in DSE or CSE. (i.e. T+0)
d. Member: It means member of DSE or CSE who are registered as the stock broker/dealer by the Securities and Exchange Commission under the Securities and Exchange Commission (Stock-Broker, Stock-Dealer and Authorized Representative) for buying and selling shares. e. Settlement Day: It means the day on which transactions that are carried out by the Members on a trading day are settled by them through delivery of securities and/or cheque/pay order/demand draft to the clearing house of DSE, and which shall be the first day subsequent to the trading day, i.e. T+1 for A and B category companies, and the fourth day subsequent to the trading day, i.e. T+4 for Z category companies. If any settlement or clearance day falls on any holiday, the next day subsequent to the holiday shall be the settlement or clearing day. 5.3 Tasks of a Broker House Company: A broker house company has two types of licenses such as Stock Dealer and Stock Broker from Security Exchange Commission. As Stock Broker, a broker house can buy or sell shares against customers as Stock Dealer, a broker house can buy or sell shares against it’s own name. PFI Securities Ltd. has two types’ licenses. Its main task is to purchase and sell shares against its own name and its customer’s name. To do the job completely it has to do the followings: If any transactions occurred in a broker house company, two types settlement are done by the company, which is as under:
a. Share Settlement b. Money Settlement. a. Share Settlement Details Share settlement is done through the following procedure: In Case of Purchasing Share at Public Market: If a house will purchase A or B or G or N categories shares, this shares will be saleable at T+3, i.e. this shares can be sold at T+3. Say a house purchases (A or B or G or N) category share at June 01, 2008, it will be saleable at June 04, 2008. This shares will be pay out from CDBL clearing account to the customer account at T+3. On the other hand, if a house will purchase Z category shares, these shares will be saleable at T+7. These shares will be pay out from CDBL clearing account to the customer account at T+7. In Case of Selling Share at Public Market: If a house sales A or B or G or N categories shares, these shares will be Pay-in to CDBL clearing account within T+1 and if a house sales Z category share, these shares will be Pay-in to CDBL clearing account at T+4. In Case of Purchasing Shares at Spot Market:
If a house buy A or B or G or N or Z categories shares, these shares will be saleable at T+1, i.e. these shares can be sold at T+1. Say if a house purchases A or B or G or N or Z category share at June 01, 2008, it will be saleable at June 02, 2008. These shares will be pay out from CDBL clearing account to the customer account at T+1. In Case of Selling Shares at Spot Market: If a house sales A or B or G or N or Z categories shares at Spot Market, this share will be Pay-in to CDBL within T+0. The share settlement of Block & normal market is as like the same above. Share Settlement Details of Block & DPV Market: Members shall be allowed to carry out transaction of foreign buyer and/or seller involving a custodian bank to be settled directly between the members through the custodian bank within the fifth day subsequent to the trading day, i.e. T+5, in respect of the transactions carried out on each trading day with intimation to the clearinghouse. The members concerned shall submit details of the settlements along with the documentary evidence thereof, as prescribed by DSE in this behalf, which shall include a confirmation certificate issued by the custodian bank concerned to DSE or CSE in respect of settlement of transaction, to the clearing house within 10:00 A.M. of the sixth trading day subsequent to the concerned trading day (i.e. T+6). b. Money Settlement: Money settlement of a broker house will be done in two ways, which is as under a. Money settlement with customer. b. Money settlement with Stock Exchange. In Case Purchasing Share of A, B, G or N Category at Public Market: a. Member house will have to receive money from customer against buy amount with additional specific commission of the total transaction volume at T+0. b. Member house will have to pay only total buy amount to DSE or CSE at T+1 through A/C payee cheque. c. Member house also will have to pay to DSE the following charges at T+1: d. Howla Charges: It is equal to 3 times of the number transaction. e. Laga Charges: It is equal to 0.025% of the transaction volume. f. AIT Charges: It is equal to0.015% of the total transaction volume. In Case Selling Shares of A, B, G or N Category at Public Market:
a. Member house will have to receive money from DSE against sale at T+3. b. Member house will have to pay to DSE the following charges at T+1: c. Howla Charges: It is equal to 3 times of the number transaction. d. Laga Charges: It is equal to 0.025% of the total transaction volume. e. AIT Charges: It is equal to 0.015% of the total transaction volume. f. Member house will have to deposit total sale amount against the customer account after deducting commission charges from sale amount at T+3. In Case of Purchasing Shares of Z Category at Public Market: a. Member house will have to receive money against buy amount with additional specific commission of the total transaction at T+0. b. Member house will have to pay total buy amount to DSE or CSE at T+3. c. Member house will have to pay to DSE or CSE the following charges at T+3: d. Howla Charges: It is equal to 3 times of the number of transaction. e. Laga Charges: It is equal to 0.025% of the total transaction volume. f. AIT Charges: It is equal to 0.015% of the total transaction volume. In Case of Selling Shares of Z Category at Public Market: a. Member house will have to receive money from Stock Exchange against sale at T+7. b. Member house will have to pay the following charges at T+3: c. Howla Charges: It is equal to 3 times of the number transaction. d. Laga Charges: It is equal to 0.025% of the total transaction volume. e. AIT Charges: It is equal to 0.015 of the total transaction volume. f. Member house will have to deposit total sale amount against the customer account after deducting commission charges from sale amount at T+7. In Case of Purchasing Shares of any Category at Spot Market: a. Member house will have to receive money from customer against buy with additional specific commission of the total transaction volume at T+0. b. Member house will have to pay total buy amount to DSE at T+0 through pay order.
c. Member house also will have to pay to DSE the following charges at T+0: d. Howla Charges: It is equal to 3 times of the number transaction. e. Laga Charges: It is equal to 0.025% of the total transaction volume. f. AIT Charges: It is equal to 0.015% of the total transaction volume. In Case of Selling Shares of any Category at Spot Market: a. Member house will have to receive money from DSE against sale at T+1. b. Member house also will have to pay to DSE the following charges at T+0: c. Howla Charges: It is equal to 3 times of the total number of transaction. d. Laga Charges: It is equal to 0.025% of the total transaction volume. e. AIT Charges: It is equal to 0.015% of the total transaction volume. f. Member house will have to deposit money against sale after deducting specific commission in the customer account at T+1. 5.4 Money Settlement with Current Netting Policy: In our capital market, a netting policy is applicable. If a member house buy or sale the shares of (A or B or G or N) category, the member house will collect or receive the netted buy-sale amount from customer with additional commission charges at a specific rate of the total transaction volume and pay the netted amount to DSE with Howla charges, Laga charges and AIT. 5.5 Weak-Form Market Efficiency of an Emerging Market: Evidence from the Dhaka Stock Exchange of Bangladesh It is usually believe that the markets in developing and less developed countries are not efficient in semi-strong form or strong form. The study seeks evidence of weak form efficient market hypothesis (WFEMH) in a less developed emerging market like DSE. It is very much convenient to test the weak form efficiency of the market rather than semistrong form and strong-form efficiency. The test of semi strong form and strong form efficiency is very rare in less developed countries because of absence of sufficient data in a convenient form, structural profile, inadequate regulations, lack of supervision and administrative loose in the implication of existing rules. The market moved dramatically over a period of time to become a speculation market and then a gamble market. That means there is a trend of market movement and most of the investors in the market become speculators. Moreover, share price indices data are available and reliable to test the weak form efficiency of the market. The empirical research on market efficiency can be divided into two broad categories; one is technical analysis, which is mainly concerned with testing for availability of exploitable information in past security prices, is widely used in examining the weak form efficient market hypothesis. The other is fundamental analysis, which rests on the assumption that factors other than past security prices are relevant in the determination of the future prices. The first category of WFEMH testing
can be divided into two sub approaches: one is to determine the existence of predictability using past return series or price information. Another is to use technical trading rules if they can be exploited as profit making strategy. The aim of the study is to test the former on the DSE. The study restricts attention exclusively for WFEMH or return predictability using time-series analysis of stock return behavior in an emerging market. 5.6 Interaction between weak from Market Efficiency and Emerging Market: A few studies conducted on the test of efficient market hypothesis (EMH) in emerging markets compared to the volume of studies published on the developed market. It is generally assume that the emerging markets are less efficient than the developed market. Emerging market highlighted on the growth potentiality as well as rapid growth of size of the market. However, it is not unlikely that the market participants are not well informed and behaving irrational compare to well organize markets. The causes of lack of financial development especially in capital markets are due to certain market imperfection such as transaction costs, lack of timely information, cost of acquiring new information, and possibly greater uncertainty about the future (Taylor, 1956; Goldsmith, 1971; Mason, 1972; Wai and Patrick, 1973). The different researchers define the emerging market in different ways. According to Samuelâ€™s (1981), asserts the nature of the emerging market in terms of information availability such as follows: "Prices can not be assumed to fully reflect all available information. It can not be assumed that investors will correctly interpret the information that is released. The corporation has greater potential to influence its own stock market price and there is a greater possibility that its price will move about in a manner not justified by the information available.â€? In the emerging markets speculations are common; large investors can easily speculate the market. As a less organized market without market makers and timely available information, there is always remain a possibility to make profit by large investors and insiders. The ability to predict stock price changes based on a given set of information lies behind the notion of stock market efficiency. The lower the market efficiency, the greater the predictability of stock price changes. The WFEMH tests measures whether past series of share prices or returns can be used to successfully predict future share prices or returns. The major empirical investigation of the above test measures the statistical dependence between price changes. If no dependence is found (i.e., price changes are random), then this provides evidence in support of the WFEMH, which implies that no profitable investment trading strategy can be derived based on past prices. On the other hand, if dependence is found, for example, price increases generally followed by price increases in the next period and vice versa; clearly indicates that this can be the basis of profitable investment rule and violates the assumption of the WFEMH. However, whether any trading rule is profitable depends largely on the operating cost (such as brokerage cost, interest cost, trading settlement procedure) and on whether transactions can be made at the exact prices quoted in the market. In general, the results of previous research evidence that the market of developed economies are generally weak form efficient. On the other hand, the researcher find on the market of developing and less developed countries are controversial and some of the researcher find evidence of weak form efficiency and can not reject the random-walk hypothesis in emerging market. The Security Exchange Commission
6.1 Overview of the Commission: The Securities and Exchange Commission (SEC) was established on June 8, 1993 under the security and exchange commission Act 1993 (Act 15 of 1993) as a capital market regulator with a view to insuring proper issuance of securities, protection of the interest of investors in securities, development of the capital and the securities markets, and regulation of the capital and the securities markets in Bangladesh. The commission consists of a chairman and four full time members who are employed by the government or a period of 3 years renewable for another similar term. The service of the chairman and members of the commission are also determined by the government. The chairman of the chief executive officer of the commission. 6.2 Mission of the SEC: Protect the interest of secretaries’ investors. Develop and maintain higher, transferee and efficient securities markets. Ensure proper issuance of securities and complains with securities laws. 6.3 Functions of SEC: Regulating the business of the stock exchange or any other securities market. Registering and regulating the business of stockbrokers, sub-brokers, share transfers agent, merchant banker and managers of issues, trustee of trust deeds, and register of an issue, underwriter’s portfolio managers, investment advisor 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 organization in the security market. Prohibiting fraudulent and unfair trade practices relating to securities trading in any securities market. Promoting invertors, education and providing training for intermediaries of the securities market. Prohibiting insider-trading insecurities. Regulating the substantial accusation of shares and take-over of companies. Under tracking investigation and inspection, inquires and audit of any issuer or dealer of securities, the stock exchange and intermediaries and any self-regulatory organization in security market. Conducting research and publishing information. 6.4 The Dhaka Stock Exchange (DSE): As on 30th June, 2004 there were 267 securities listed with DSE against which total issued capital was taka 48,940 million and total market capitalization was taka 1,42,370 million. The Dhaka Stock Exchange is a self-regulated non-profit organization. It has 24 members council of which 12 are elected from the exchange members and 12 are nominated from the non-exchange members by the elected exchange member-councilors, subject to the approval of SEC.
The executive power of DSE is vested in the chief executive officer (CEO) and under the leadership of CEO of the executive body conducts daily affairs of DSE. The board of Directors DSE appoints to the CEO with the approval of SEC. The Chittagong Stock Exchange (CSE): As on 30th June 2004 there were 195 securities listed with CSE against which total issued capital was 44,360 million and total market capitalization was taka 1,25,910 million. The Chittagong Stock Exchange is also a self-regulated non-profit organization and formation of the bard of directors, size and the rules of the election of Directors also are similar to DSE. The Executive power of CSE is also vested in the CEO, and the executive body conducts the daily affairs of exchange. The CEO is appointed by the board with the approval of the commission. Bond market: The countryâ€™s capital market is predominantly equity-centric. Of the total 267 scripts traded on the Dhaka Stock Exchange only eight are debentures issued by the corporate houses. The total outstanding amount against the aforesaid debenture was taka 230.00 million only as the June 30th, 2004. Under the financial institution development project an expatriate firm has also been engaged to suggest a draft of compromise rule of issuance, trading payment and settlement of the government, municipal and corporate fixed income securities in Bangladesh. Apart from the above, a few financial institutions, with the regulatory support of Bangladesh Bank and SEC, have taken initiatives for their assets securitization. It is hoped that aforesaid installment would provide the investors alternative investment options in near future. 6.5 Rising of Capital through Initial Public Offering (IPO): During 2003-2004 fiscal years of ten companies raised taka 2400 million capitals though initial public offeri9ng to the general public. Out of the aforesaid ten companies, five obtained consent from the commission to raise capital in the fag end of FY 2002-2003 but subs cribbed by the general public during 2003-2004. The five companies that received consent from the commission and subscribed by the general public within FY 2003-2004 raised taka 1520 million by was of taka 730 million from the general public, taka 60 million from foreign placement and taka 730 million from local placement. Listed Companies: To increase awareness of the investors in the capital market, the listed companies have been categorized as A, B, Z and G based on profit-loss, status of annual general meeting (AGM) and commercial operational status of the companies. A, category companies are those which pay 10% or more dividend, B, category company are those which pay less than 10% dividend and Z, Category companies are which that fail to pay any dividend, hold AGM, and whose accumulated loss exceeded to issued capital or companies which are not in operation for more then six months.
As at 30th June, there were 123, A, category companies (47.49% of total listed companies), 39, B category companies (15.06% of total listed companies), 96 Z category companies (37.06% of total listed companies) and only 1 G category company. 6.6 Depositary System started functioning in the Capital market: Central Depositary Bangladesh limited (CDBL) has started its commercial operation upon received of business commencement certificate from the Securities and Exchange Commission on December 23, 2003. Now on the issuance of primary shares though public offering has to be made the CDBL in dematerialized from that would enhance the transference and would bring dynamisms in the capital market. The dematerialized of securities listed on the stock exchange began on December 24, 2004 and 15 companies was brought with a that fold of central depositary system by 30 th June 2004. These companies account for 22.02% of market capitalization. The remaining securities listed on the exchange would be dematerialized in phases. 6.7 Merchant Bank: As on 30th June 2004, there were 29 companies that obtained registrations certificate from the commission to work as merchant banker and portfolio manager. Most of them are fullfledged merchant bankers (issue manager, under writer and portfolio manager). The break up of the aforesaid 29 companies are given below (a) Full flagged merchant banker
(b) Issue manage
(c) The portfolio manager
The performance of most of the aforesaid companies not satisfactory. One of the merchant bankers named Saudi- Bangladesh Industrial and Agricultural Investment Company Ltd. With the consent of the commission has stopped operating of its merchant-banking wing for the time being. 6.8 Mutual Fund and Asset Management: As far the Securities and Exchange Commission (Mutual Fund) rules, 2001 the commission accord registration to mutual fund. As on June 30 th 2004, only ten mutual funds including one managed by AIMS of Bangladesh ltd, a private sector asset management company, where listed on the stock exchange. Govt. owned Investment Corporation of Bangladesh issued eight and Bangladesh Shilpa Rin Sangstha (BSRS) issued tat the remaining one mutual fund. ICB asset Management Company is going to issue another two mutual funds named “ICAB AMCL Islamic Mutual Fund” and “pension Holders unit fund” in the market. In the men time, the commission has accorded registration to “ICB AMCL Islami Mutual Fund” and also approved the draft of trust deed of “ICB AMCL Pension Holders Unit Fund” during this financial year. As institutional investor more mutual funds would pay a significance role in the capital market. 6.9 Credit Rating Agency of Bangladesh Limited:
The commission accorded registration to Credit Rating Agency of Bangladesh Ltd (CRAB) on February 24, 2004 that increased the number of register Credit Rating Company into two. With the operation of new Credit Rating Agency, it is accepted that competition would result in improvement of quality as regards Credit Rating. In Bangladesh, Rating is mandatory for issuance of debt installment though public offering, issuance of rights shares and issuance of share at premium. 6.10 New System Introduced for IPO Distribution: The Security and Exchange Commission introduced a new system for IPO distribution to attract small investors toward capital market. In this respect, the entire applicant shall be treated as apply for one minimum lot. If there is over subscription then lottery shall be held amongst the applicants allocating one identification number for each application, irrespective of the application money. On the other hand, if there is under subscription, then all the applicants first be distribute with a single lot and thereafter, for the balance amount, lottery shall be held for applicants who had applied for multiple lots on the basses of dividing the application money by the amount of a market lot separately. SEC Consent Mandatory for pre-IPO Placement: The Security and Exchange commission has taken measure to insure complains of the security laws for raising capital through pre-IPO placement by issuer companies. 6.11 SEC Imposed Limitation on Cash Transaction in the Stock Market Deals: To insure complains with the Antimony laundering law in the country, the security and exchange commission has issued notification restricting cash transaction over taka 5 lacs for purchase or sale of listed compani3es share. Transaction of securities exceeding the aforesaid cash limit has to be made through the banking channel by account payee checks, bank payment order or draft or any other mode of transaction available with the banking system. ISSUE OF CAPITAL 7.1 Controls over Issue of Capital: (1) No company incorporated in Bangladesh shall, except with consent of the commission, make an issue of capital outside Bangladesh. (2) No company, whether incorporated in Bangladesh or not, shall, except with the consent of the commission(3) Make an issue of capital in Bangladesh (4) Make an Bangladesh any public offer of securities for sale, (5) Renew or postpone the date of maturity or repayment of any security mattering for payment in Bangladesh. (6) The commission may, on an application make to it, make an order according regulation to an issue of capital made to be outside Bangladesh. (7) Although giving consent under sub-section (1) and (2) commission shall hope fix the price of the issue.
7.2 Control Over Prospectus and Other Documents: (1) Every prospectus or other document offering for subscription or publicly offering for sell any securities shall, before its issuance, be submitted to the commission for its examination, in such from and manner and containing such information as may be prescribed, and such prospectus for together documents shall be issued only after the commission permits its issuance on being satisfied that it has complied with all the requirements of these ordinance or the rules and of any their law relating thereto. Provided that the consent of the commission to the issue or offer of the securities shall not absolve the responsibility of the issuer for the merit and accuracy of the offering. (2) No person shall issue in Bangladesh any prospectus or other document offering for the subscription or publicly offering for sale any securities which does not include a statement that: â€˘ Its issuance has been permitted by the commission and â€˘ The consent of the commission has been obtained to the issue or offer of the securities. 7.3 Purchase of Securities: No person shall accept or give any consideration for any security in respect of an issue of recognizing of the commission has been accorded to such issue of capital. 7.4 Power to Impose Condition: Notwithstanding anything contained in the companies Act, 1994 (Act XVIII of 1994) or any other law for the time being in the force, or in any contract or any Memorandum or Articles of Association of any company, any consent or reorganization accorded under section 2A, section 2B or section 2C, whether before e or after the commencement of these section, shall be subject to such condition, if any, as the commission may, from time to time think fit to impose. 7.5 Power to Exempt and to Condone Contravention: (1) The commission may, by general order which shall be notified in the official Gazette, provide for the granting of exemption from all or any of the provisions of section 2A, 2B and 2C. (2) The commission may, by order, condone a contravention of any of the provisions of section 2A or section 2B and the making of such order the provision of this ordinance shall have effects if an exemption had been granted under sub-section. (3) Of this section in respect of the thing done or omitted to be done in contravention of the section 2A or section 2B, as the case may be. 7.6 Power to Call for Information: Any offering authorized in this behalf by the commission may, for the purpose of inquiring into the correctness of any statement made in an application for consent or reorganization to an issue of capital or for the purpose of ascertaining whether or note the frequents of any condition attached to a order according such consent or reorganization have been complete with, require any company, or any officer of a company, which has made such application r obtained such order to submit to him such accounts, books or
other documents or to furnish to him such information as he may reasonably think necessary. False Information: No person shall, when companying with any requisition under section 2E or when making any application for consent or reorganization to an issue of capital given any information or make any statement which he knows, or has reasonable causes to believe, to be false or not t in any material particular. Continuity of Orders: All order made or demand to have been made under the capital Issue (Continuity of control) Act 1947 (XXIX of 1947), and enforce on the any commencement of this section shall continue to be enforce can be demand to be orders under the ordinance. REGISTRATION AND REGULATION OF STOCK EXCHANGE 8.1 Stock Exchange Operate With Registration: No stock exchange shall operate or carry on its functions, and no person shall use or utilized, for the purpose of any transaction or dealing in any security, the facilities or services of a stock exchange, unless such stock exchange is registered under this ordinance. 8.2 Eligibility for Registration: (1) Any Stock exchange which full fills such conditions or complies with such requirements as may be prescribed to insure fair dealings and to protect investors shall be eligible for registration under this Ordinance. (2) The condition or recurrent which many be prescribed for the purpose of sub section may, among other matters relate toa) Qualification for membership and admission, exclusion, suspension, expulsion and readmission of members there into or there from, b) Constitution and powers of the governing body and the powers and duties of the office bearers, c) Representation of the 2[Commission] on the governing body of the stock exchange or any of its committees d) The manner in which business should be transacted including registrations on the business of the members e) Memorandum and Articles of Association, rules, regulation and by law of a stock exchange and
f) The maintenance of accounts including those of members, and their audit. 8.2.1 Registration: A. Any Stock Exchange which is eligible for registration under section 4 may, in such form and manner as may be prescribed, apply to the [commission] for registration. B. The Commission if it is satisfied, after such inquiry and after obtaining such further information as it may consider necessaryâ€˘ That the Stock Exchange is eligible for registration, and â€˘ That it would be in the interest of the trade and also in the public interest to register the Stock Exchange, may grant a certificate of registration to the Stock Exchange. C. No application for registration shall be refused accepts after giving the application and opportunity of being heard. 8.2.2 Accounts, annual reports, return, etc: 1. Every Stock Exchange and every director, officer and member there of shall prepare and maintain of such books of accounts and other documents in such manner as may be prescribed, and every such book of accounts or documents shall be subject to inspection at all re4sonable times by any person authorized by the [commission] in this behalf. 2. Every Stock Exchange shall submit to the [commission] in such manner and contain such particulars as made may be prescribed, an annual report and periodical returns relating to its affairs. 3. Without prejudice to the prevision of sub section (1) and sub section (2) Every Stock Exchange and every director of officer or member their of shall furnish such documents, information or explanation relating to the affairs of the Stock Exchange or as the case may be, relating to the business on the Stock exchange of such director, officer of members as the [commission] may, at any time, by order in rating require. 8.2.3 Cancellation of registration: Where the [commission] is of opinion that Stock Exchange or any member director or officer of a Stock Exchange has contravened any provision; has otherwise neglected or fails to company with any requirement, of this ordinance, or of any rule, registration or direction made or given there under, the [commission] may, if it is considers its necessary for the protection in investors or to in sure fair dealings or fair administration of the Stock Exchange so to do, by order in writing a) Suspend for such period as may be specified in the order the transaction of any business in the Stock Exchange. b) Cancel the registration of Stock Exchange
c) Supersede the governing body or other authority of Stock Exchange. d) Remove the director officer or member from his office in, or membership of, this stock exchange. Provided that no such order shall be made except after giving the governing body or other authority or, as the case may be, the director, officer, or member, and opportunity being heard. An order made under clause © or clause (d) or sub-section (1) may also direct that the functions of the governing body or other authority which has been superseded or of the director or officer who has been removed shall be performed by such authority or person as may be specified their in. An order under sub-section (1) shall have effect notwithstanding anything contained in any other law for the time being enforced or in any Memorandum or Articles of Associations. Provided that no order made under clause (a) or clause (b) or sub- section (1) shall affect the validity of any contract lawfully interred into before the date of such order. 8.2.4 Registration on dealings in Securities: No person shall transact any business in securities on any stock exchange unless he is a member thereof. No business shall be transected on a Stock Exchange in a security, other then a government securities or a bonus entitlement voucher, which is not listed on such Stock Exchange. No person shall act a dealer in a Security listed on a Stock Exchange outside such Stock Exchange. No person other than a member shall act as a broker or a jobber for any security not listed on a stock exchange. Provided that the prohibition in this sub-section shall not apply to discounting to any security evidencing a loan. CAPITAL MARKET DEVELOPMENT OF BANGLADESH 9.1 Bangladesh Capital Market: The Bangladesh capital market is vulnerable to contingencies owing to its relatively new entry, tiny size, and market shallowness and then weaknesses and inadequacy of market controlling authorized an instrument. Investors are still market- shy and different after the 1996 market crash. In the following executive analyses, wit races the phases of capital
market development and equities the complex web of market forces and their relation to the countries overall economy and finally makes recommendation as to how are stock markets can best be entranced against unethical manipulation, ramps and scams, and how investors, confidence level can be raised and our share markets beefed up out of the present slump in the swamp. The capital market is a market for long-term funds. The facilities and efficient transfer of resources from savers to investors and beams conduits for challenging investment funds from investor to growers. The capital market is required to meet at list two basic requirements: (a) it should support industrialization through savings mobilization, investment fund allocation and maturity transformation and (b) it must be safe and efficient in discouraging the aforesaid function. It has two segments, namely, Security segment and non-security segments. Scurrility segments- The security segment is concerned with the process a firm distribute its securities to the public in the primary market and the securities are then traded in the secondary markets. Financial intermediaries, such as merchant banks, asset management company underwriters, broker-members etc are involved in the process. Security segments of capital market have two important rules to play; information production and monitoring. The prospective allocating rule of stock price areas because the markets have information that manager does not have. The current stock price is indicative of the potential investment decision making to profitable industrial sectors to which resources must be allocated. If the stock prize was down manager is less likely to invest while he/she is more likely to invest if the price goes up. It shows how stock prices influence the equity fund allocation decisions. Non-securities segment- are those markets in which loan equity loan provided by the Banks and Financial institutions such as NCBs, BFIs, ECBs, ICB. We need to recognize that the conditions in the bank-based system are unpalatable in the sense of huge knownthen performing loans, high degree of calcified and default loans, capital, inadequacy of banks and the life. These are causing the banking system in Bangladesh to maintain wide spared between lending and bowings rates. It is therefore, need of the our to stream line the banking regulatory and supervisory frame works, particularly in the wake financial de-regulation. The financial of economic development warrants two basic issue; First, how base to provide external finance for the business sector, the ingrain of growth and second how to monitor the behavior and performance of corporate growers under an effective system of corporate governance, internally generated firma are essential for sustainable growth but are inadequate, specialize when firm and economics are rapidly growing. A fundamental choice then is between a stock-market-based system (AngloAmerican Model) and the bank based- system (Japanese-German model) of external finance. Of course, the choice of the system is curtail in involving a financing system and developing appropriate incentives institutions. An active and vibrant securities market which offers positive real returns on a variety of financial instrument, provide an alternative investment opportunity the selecting the best portfolio through diversification of risk according to investor preference. The banking sector can be reacting to mach this by offering alternative investment opportunities. Nevertheless, the securities market might have an edge over the banking sector in that securities provide relatives liquid means of sharing risk and its holder can liquidity the holding at any time.
9.2 Status and Development of the Stock Market in Bangladesh: Among the most common developmental and institutional obstacles of a merging stock markets including the Bangladesh stock market are small capitalization in relation to GDP, limited liquidity in the market and an out dated and in efficient regulatory frame work. The natural sequences of such a satiation are higher return required by the investor cause by higher uncertainly, higher transaction cost and fees etc. In addition, the usual problems associated with relatively then market remains with the fact that price are unduly influenced by the actives of a small number of dominant participants. Size and equinity of the company provide some distinguishing features of developing markets. The market capitalization ratio, define as the value of listed stoke dividend by GDP is used as a measure of stock market size. It has got economic significance because the market size is positively correlated with the ability to mobilize capital and diversify risk. Bangladesh Stock markets have grown significance during the last delicate. Still, a size of market is relatively small compared to other Asian markets table-1 indicates the total market capitalization of the DSE was US$ 86 per billion in 1999 compare to US$ 189.605 billion in India, US$ 6.965 billion in Pakistan, US$ 308.53 billion in South Korea and US$ 145.445 in Malaysia. This market is also small relative to the size of the economy. Market capitalization in Bangladesh was only 2.42 percent of GDP in 1998 against 8.55% in Pakistan, 10.86% in Sri-lanka, 31.35% in Thailand and 135.96% in Malaysia. No liquidity level in the emerging market is termed thinness of trading of securities that approach the board. Many emerging markets suffer from vary serious thinness of trading. If the market for a security is thin, any attended at selling a r3elatively large quantity cause a large decrease in price, i.e. an erosion of capital value, hence contributing to liquidity. It is observed that trading on some stocks takes place once a month or even at some longer intervals. High turnover is often considered to be indicative of law transaction costs. A small but active market will have small capitalization but high turnover ratio. Liquidity represented by the turnover ratio, measured as the as the value of total shares traded divided by market capitalization, was 83 percent for Bangladesh in 1999 compared to 84.4 percent in India, 26 percent in Pakistan, 89.2 percent in Thailand,39.8 percent in Malaysia and 346.7 percent in south Korea. The average size of companies in Bangladesh was only US$ 4.1 million at the end of 1998 in terms of market capitalization. Bangladesh ranked 98th by average size of companies among 100 stock market listed by S&P in 1999.The prices earning multiple has come down to 8.06 in recent times from 10.1 indicating the bearish sentiments of investors that are willing to pay lower prices for the same one Taka earning generated by firms. In brief, the stock market in Bangladesh is characterized by thin market capitalization ratio and low level of liquidity. 9.3 Selectivity of Stocks and Timing Ability Tracking economic environment for investors, fundamental analysis relies on long-term forecast of the industry and the companyâ€™s financial prospects to determine the fair value of the firm and thereby to select the stock for investment. This process is called the topdown approach since it goes from the macroeconomic environment viewpoint to the individual company. Fundamental Analysis-top-down approach
Economy Analysis Industry Analysis Company Analysis Economy analysis fundamental Analysis–top-down approach Industry Analysis Company Analysis On the other hand, whether issuers will float the issue or not depends upon the market condition. If the market condition turns out to be bull, then issuers would like to come to the market to raise funds favorably. In other words, issuer’s superior ability to time issues. In 1997, a large number of IPOs came in demonstrating issuers, superior timing ability. 9.4 Analyzing Emerging Markets and a Lesson for Bangladesh: Despite the idiosyncrasies of each emerging market, it is possible to offer a broad description of several phases common to all equity markets. These emerging markets are found to have gone through different phases of development associated with the stage of economic development process and political stability of a particular country. In the initial phase, equity prices tend to rise. With the implementing process, growth-oriented policies and attainment of some degree of economic and political stability, the market starts to again the confidence of domestic investors and become more widely accepted as an investment alternative to bank deposits and often to short-term government bonds. The equity markets of Belarus, Kazakhstan, and Ukraine of the former Soviet Union may be considered to be in this phase. The second phase relates to the deregulation of capital markets for easy access by the international investors and for cheaper capital funding by the domestic investors since the equity markets have gained some degree of credibility at this phase. As markets liquidity increases and risk-adjusted returns rise, international investors begin to reap the diversification benefits if investing in these markets. The markets of Brazil, India, Pakistan, Philippines, Bangladesh and the like have entered this phase. The third phase is concerned with expansion. The markets offer prospect of higher return with less volatility and the investors easily absorb new issue of stock and corporate bonds. These lead to increase trading activity more effective intermediation while the growing need for a risk transfer merchant spurs the development of equity and currency – risk heading instructions such as derivatives and index products. Finally, the market depicts the phase of maturity. As equity risk falls to internationally competitive level relative to government treasury bills rate or equivalent short-term money market rates, the equity market begins to achieve the stable growth that make a nature of development state. Studies have mentioned three reasons for the lack of confidence on the part of individual investors in securities of emergence markets (Tarumizu, 1993). First, there is a dearth of appropriate financial and other relevant information about the domestic security market in general and listed securities in particular. Second there is an inadequate of the accounting and auditing of financial reports. Third there is the liability of the regulatory authorities to effectively monitor and supervise the market and thereby protect investor’s against market manipulation and other market abuses. All these lead to another school of thought
relevant to the developing capital market condition usually associated with McKinnon (1973), Shaw (1973), and many others. They have explicitly stressed upon the role of a financial sector for long-term economic growth. Their proposition is mainly connected around three issues, viz. financial depending financial repression and liberation. In order to overcome such inefficiency credit market need to be supplemented by a wellfunctioning equity market (1986). 9.5 Relative Contribution of Stock market: An understanding the role of capital market of equity may be conceived by examining its relative contribution in resource mobilization. Table-3 presents the share of corporate security issue to funds mobilized by other investor’s opportunities available in Bangladesh. As can be seen the proposition of funds raised via the stock markets has increased to 7.28% in recent years from 3.13% in 1987-88 registrations the growth rate of 8.8% over the last decade. The higher share of corporate securities is attributed to different tax incentives offered in equity market and reduction of interest rate on govt. saving scheme and bank deposits. In addition though the corporate bond market had come into being as a new investment vehicle in 1987, the market has not yet been board-based. Only ten companies have outstanding corporate debentures listed with DSE in June 2000. Government bonds are not traded on the DSE/CSE. Rather the government regulates its market through certain specified bank counters. The continuation of the equity markets to financial development represented by the ration of new issue to gross investment as well as national saving has not been significant as against more than 10% for developed stock markets. Many of the constrains associated with equity market are concerned with the overall development of the country and hence investment in equities is likely to continue to be some highly risk affairs for a great many potential investors with pronounced risk aversion attitudes. Consequently, transformation of short-term deposits into instrument of long-term debt and ownership need to be entrusted to a set of different institution pending the eventual development of the securities market of Bangladesh for a while. 9.6 The Other Striking Features of Bangladesh Stock Markets are Laid Down as follow: • • • • • • • • • •
Lack of infrastructure is physical facilities. Existence of only dealer-broker members (no specialized: market maker) Market dominated largely by unsophisticated investors. Lack of diversity in products, availability in market. Inefficient capital market- operation and informational Lack of proper and adequate disclosure The certificate of financial statements and property values of the company are the same/ identical. Management and owners (councilors) of DSE are entwined. Lack of enforcement with the complains of rules and regulation Corporate governance-sponsor-owners are managing the firm. All most all causes, on professional management are hired to a run the affairs to the listed company.
Only since 1992, Bangladesh stock market has started to get momentum. With the success of the public issues in 1994 and 1995, entrepreneurs presumed the securities market to be an alternative to bank based system as a source industrial financing. It was
established that an agreement amount of the taka 20 billion has been raised against public issues, right issues and private placement of share and debenture during 1992 through 1996. Some growth future of the stock market over time may appear to be implicit but the market has not attend sufficient depth, although there has been a trend of gradual increases in the number of companies that are available for trading. Liberalization of the foreign exchange policy, covert ability of taka a in the current amount equal treatment foreign and domestics investors attracted the investors including portfolio managers. It was a estimated that a total of net taka 29644 million was invest by the foreign portfolio managers at the emend of March 1988 investors, confidence was accepted to be restored due to establishments of SEC in 1993 with a task to oversee the market. 9.7 Share Market Debacle in 1996: The stock market in Bangladesh experienced abnormal uprising and downswings in 198788 and again in 1996-97. The market upsurge in 1996 unfortunately ignored market fundamentals leading to a nose –dive crash. The worst stock market crash in the history of Bangladesh stock marker occurred in December 1996. This was mainly the result of market manipulation by selection of stockbrokers in collaboration with some other market participating (report of the commit formed by SEC, 1997). In the words of Ahmed (2000), the 1996 stock market crash market can be interpreted as a disastrous bubble causes by unscheduled investors euphoria and an absent an attention to the relation between the stock price and economics and/ or company fundamentals. In addition, the collusion between promote-directors of the listed companies and a handful of unscrupulous broker-members may be responsible to be act work for manipulating share prices. The notable reasons behind the stock market crash affecting the demand and supply side, among others are: • • • • • • • •
Insider-trading and of-loading of shares by directors of the company Activities of syndicate-a handful of broker members and issuers. Impact of withdrawals of lock-in period causing a remittance of resources Disclosure of under regulated rumors and sensitive information Drum-up euphoria caused by price cause by manipulation by certain quarters Influx of new and unsophisticated investors and speculators Superior timing ability of timing and an unscrupulous shipping of funds by the sponsor out of the business. Code of ethics it is not been followed dubious rule played by professional (CAS) in certifying financial statements along with the valuation of assets and property.
9.8 Belated Action by Regulatory Bodies: The regulatory bodies concerned did not react in time with effective majors against undescribeadable development in 1996. Again SEC was then not fully equipped with expertise and organizational strength to cope with the solution. More importantly, the absent of legal frame work for securities markets renders then watchdog helpless against a distortions solution. 9.9 Lack of Investor’s Confidence:
The stock market crash in 1996 has shocked the confidence of the investors and after words the continue response of hidden syndicate manipulating the market crowded out the real retail investors from the equity market. There is no denying in the fact that the crush of the stock market problems now is the chronic lack of investor’s confidence in the system. Mostly neeting and a small real trading out of the total present trading are taking place in the market. This market tends to be shallow without fully developed system of regulation, institutional framework, international accounting and auditing standard and so froths. A very small probation of market capitalization to the GDP, extremely small share of the population with a negligible proportion of equities in the assets suggested its vulnerable condition. 9.10 Role of the Corporate Governance for the Development of Bangladesh Capital Market: Now a days the issue of corporate governance has attacked enormous significant both the policy makers and the individual firms and is a subject of much debit and empirical research. The revive of the economy literature and literature n human behavior suggest that every rational individual tricks to maximize his/her own utility to satisfy various needs there are chancel of frustrating owners interest and needs when the decision marker is not the owner of the corporation. Corporate governance in general, indicates the polices and picadors applied by a company in attaining its sit objectives, is corporate mission and vision and regards to its stock holders, customers, employees, suppliers, and define regulatory agencies and the community at large. Those who matter most in the process should make themselves accountable to authority. Such process again takes into account laws and regulation s and Val entry practice use to direct and mange the business towards enhancing business prosperity. For a group of people working in particular economy corporate governance is a culture for an individual it is a mindset. 9.11 Government System in Bangladesh: The size and realm of companies and corporate in Bangladesh are relatively small. There are about 45,000 private limited companies and over 200 public limited company were listed in the Bake Stock Exchange (DSE) and the Chittagong stock Exchange (CSE). The corporate sector is a mixture of local-private for a multinational and state own companies. Moreover in companies where there some kind of internal audit units, the auditors are no independent, financial reporting if faulty, there is no audit committee and there’s no audit chartered for internal audit. Regulatory Environments: Capital market regulations determine the rights and mobilization of capital market participant. Different regulatory environments may result in different capital market imperfection e.g. effective prohibition of an insider trading may ruin the ability of the price mechanizing to aggregate and transmit insider knowledge, whereas ante take over regulation element and disciplinary effects of an active market for corporate control. Bangladesh still follows the hybrid system of legal system inherited from the British administration. Currently, the Companies Act of 1994 is the law that governs incorporated domestic corporation and institution. The other significant laws, which has important role in governing the corporate sectors, are: security and Exchange Ordinance
1969, Bangladesh Bank Order 1972, Bank Companies Act 1991. Financial Institution Act 1993 Securities and Exchange Commission Act 1993 and the Bankruptcy Act, 1997. Shareholders in the Corporation: The companies Act provides certain right to the shareholders i.e, right to the participate in the decision making elect and remove the directors and access to information, right to dividend and right and power to fundamental corporate change. Monitory protection actions are filled in the court of Bangladesh with some regulatory, although a large number of this are not related to the issued covered under the rubric of monitory share holder protection. Moreover, many shareholders are not aware of the section 233 under which minority share holder shareholders lest 10% of the share may seek remedies in the court in cause of any reservation about the corporate activity. Board of Issues: There are no statutory provisions and guidelines about the duties of the directors of the companies other then share holding and for independent directors. Bangladesh bank has been issuing circulars providing the duties and responsibilities of the board of directors specifying work planning, lending, deposit and risk management internal control, constitutions of the board of directors and the appointment of the chief executive officer (CEO) in the best interest of the depositors. For the banking sector the number of director is limited to thirteen including two independent directors that represent depositors. For the issuance companies at list one- third of the directors should represent the policyholder, at list another one-third come from public subscribed shareholders and the rest from sponsor shareholders in case of Life Insurance Company. In Bangladesh small number of independent directors is appointed for their expertise and others for there exiting connections to company management or in the future. So, there is Rome for appropriate guidelines in this respect. 9.12 Corporate Environment and Ownership Structure of Listed Corporation: The governance structure of the public limited companies is also responsible for the weak condition in that these companies prefer to keep ownership holdings within the family connections i. e. closely held companies. It is revealed that in Bangladesh 72.5% of their outstanding share are own by house holds/ sponsor and individuals. In significant concentration is observe red by bank and financial institutions i.e., 3.1% and foreigner held 16% and government/ financial institution held only 16% of the outstanding share in 2000. It is also reported that even when the company is listed in the stock exchange few shares are available for trading, as majority remain held by the original sponsors. The original sponsors obtain buy additional share from the market to raise their holding to as high as 70% or 80% though shares are floated in the primary market on 50:50 basis. Financial Sectors: In Bangladesh financing for commercial purpose obtained by growing mainly from none-segment rather then issuing financial climes i.e. debt and equity in the security segment. It is observed that institutional investors constitute a very large segment of the
potential demand for stock market securities, but they are reluctant to invest in this securities due to usability of securities in terms of both quantity and quality, and organizational and legal restriction on the security investment, although it was reveled that the official of intuitional have reasonable ability to analyze information for the making sound investment. Moreover, because of the insufficient and corrupt-ridden banking system, there was apprehension that a large part of the credit flow would turn into bad loans and the wide spread culture of loan default has lead to rise in a high cost of financial intermediations by financial institutions. However banks are required to company to International Accounting Standard 30 (IAS 30). The discussion no doubt called for strong corporate governance systems. The condition of management practices, internal control governance in most of these companies is very poor. There are some weak nesses in its regulatory frame work in the corporate sector regarding methods of trading protection of share holders, financial reporting and conduct of members. t is revolted that market fundamentals are not inappropriate order. The minority shareholders are undereducated and lacking knowledge in understanding the financial report published by the financial corporations. Moreover, in most of the cases the cases market price does not reflect the net asset value or the actual situation that the company is going through. As a result the stock market does not have any disciplinary rule in terms of price activist policies and thus promote the idea of nontranslucence in the corporate sector. A big share market scheme lace in October 1996, when manipulators from both hoe and abroad siphoned off over tk 5000.00 cores from mainly smaller investors and bank However, the Security and Exchange Commission of Bangladesh which is responsible for monitoring the market, needs and give attention to this issuance so that proper transference insured and code of conduct of the participating is well defined and adhered to in order to mitigate agency conflicts and expropriation problem among different practice. Nonetheless publicsâ€™ awareness and development of governance structure i.e. enforceable regulation, in Suring financial transference, stop financial malpractice and any form of market manipulation are essential for the development of the capital market. It is believed rigorous auditing improvement f legal system and Judicial enforcement capacity would improve governance to a large extend and bring back the confidence of the investors and the capital market will be able to work as an engine for colleting anode allocation nationâ€™s limited resources for the overall economic development of the country in the years to come. 9.13 Necessity and Potential of Bangladesh Stock Market: A mature and sizeable stock market is perceived across the globe as a barometer of the economic health and prospect of a country as well as a register of the confidence of domestic and global investors. A significant correction between the development of the stock market and economic growth has also been revealed in a number of recent studies. In particular, the researcher at World Bank found an active correlation between stock market indicators in 1976 and economic growth averaged over 1976-1993. Well â€“ functioning stock market in develops and newly industrialized countries promoted economics growth by efficiently channeling domestic and foreign funds into protective sector.
The prime objective pf this article is to analyze the necessity of a vibrant stock market as well as identifying the potent indicators of flowering of the stock market in Bangladesh. Section-1 examines the rule that an active market can play in the economy of Bangladesh. Section-2 attempts to point out the potential of expansion of stock market activities in Bangladesh. 9.13.1 Industrial Finance: The stock market can work as the best cost-effective alternative source of industrial finance by attracting small as well as institutional savings and channeling them into productive sectors. Usually industrial units require a long-term commitment of capital but investors are often reluctant of relinquish control of their saving for long-term periods. A liquid stock market induces investors to keep their savings in shares to make investment less risky and more attractive because they allow savers to acquire an asset-equity and to sell it quickly at the list cost if they meet access to their savings or want to alter portfolios. Simultaneously, the stock market provides companies with permanent access to capitalize through equity issues. Moreover, a vibrant stock market can also lead to more investment by investment less risky and more profitable. The practice of providing long-term loans through commercial banks appear suicidal for the reason that bank may fall into peril providing long term loans because funds of banks mainly stem from short term deposits. 9.13.2 Financing of Development Projects: A buoyant stock market can become a prolific source of financing development activities. There are three major channels available to support the finance of development projects in which an active stock market play a vital role to drift away funds to productive sectors. First, funds can be raised though Multinational Corporation (MNCs) to invest in build-operate-transfer infrastructure projects. Second, the domestic private sector can be linked up with international companies and financial institutions. Third, institution investors can invest in infrastructure projects anticipation of long-term revenue and capital gains on shares of listed companies. For all channels, the existence of a dynamic stock market is crucial to rise funds and lower investment cost. 9.14 Acceleration of Privatization Process: A stock market can also accelerate the pace of privatization process in Bangladesh. Rapid privatization I a must in Bangladesh because state-owned enterprise (SOEs) have already cost the nation Tk. 425 billion since nationalization. Their loss has been estimated at Tk. 25 billion per annum which is 1.5% of GDP. Bangladesh can undertake Share-Issue Privatization (SIPs) as a method of rapid privatization, which has been proved effective round the glove. Since 1979, over 60 governments have raised 500 billion though about 600 separate public sales of stock in SOEs. As a result, SIPs have emerged as the preferred method of divestment for the following reasons: â€˘
SEPs are the only effective and practical method of selling off the largest SOEs from both an operational and a financing. Privatization Board (PB) in Bangladesh can
consider privatization commercially viable state owned Enterprise (SOEs) through SIPs. SIPs can make the privatization process transparent. It is the high most urgent need to convince the public that the nation’s assets are being sold fairly and honestly.
SIPs can crept great favors among potential investors because in most cases the government is willing to accept the under pricing of Initial public offering (IPO) in order to generate excess appetite for shares and to pave the way for subsequent issuance of share.
Share issue privatization (SIPs) also enhances the supply of shares as well as trading volume and market capitalization. The capital markets of developing nations are usually a major portion of privatization program as was the case under Thatcher’s government in the U.K and SIPs has the largest providers of shares in the nation’s history. A stock market can also help the government support private financed fully funded pension to promote the formation of capable and sophisticated instruments.
There is ample evidence that SIPs help promote equity among investors. Privatization under Thatcher’s government increased the number of share holding citizens in the U.K from 7% in 1979 to 24% in 1990. More then 3 million Frenchmen and 2 million Germans purchased shares in the IPO of Banque paribas (January, 1987) and Dutches Telekom (November 1996) respectively. In both cases the number of shareholders citizens has been increased as in Italy, Spain, Denmark and many other countries.
Professional in Brokerage Business: Brokerage business all over the world has reached its pinnacle. Now we can see that quite a great many brokerage houses are much bigger than many big stock exchanges. They are innovative, aggressive and doing their business professionally. Their services range from investment advice to the clients to asset management, investment bank to portfolio management. Development and reconstruction of our vulnerable market mostly depend on their professionalism and commitment. Non-banking Financial Activities: Non-banking financial activities are ailing in our country. Hence this sector needs to be gradually reinvigorated. Unrealistic regulation making it difficult for banks and insurance companies to established merchant banks. The complex SEC requirements for merchant banking activities will result in failure to function profitable need to be made flexible in order to help this institution grow. The recent SEC decision wing instead of creating a separate subsidiary is a welcome move. 9.15 Capital Market Needs More MNCs: The country’s capital market needs to woo companies to get listed with the bourses that lack quality shares to value potential investors. Foreign companies, despite their strong present in the country and continued growth in business, have not been coming into the capital market in a bigger way due to absence of necessary policy guideless. The government must negotiation the issue strongly while multinational companies enter into the country and incorporates certain provision so that they rise at lest some
portion of their investment from the market and share a part of their profit with local investors. There are potential investors, who want to put money in the stocks, but the market faces scarcity of good securities and multinational companies can meet the security to a large extent. Market regulators said they are also looking into the fact as they already initiated the process of drafting boarder policy guidelines for bringing quality securities, but the regulators are not work fairly. They publish rule but there are not maintaining the rules and regulation properly for some corrupted person. The Securities and Exchange Commission told New Age that the commission is working on a guideline which will include provisions for both local and multinational companies certain portion of capital from the capital market. Actually, the capital market needs more MNCs to raise their capital. 9.15.1 Action Plan Needed for Capital Market Growth: In Bangladesh capital market does not follow the SECs the rules and regulation properly. The investors can not invest their capital by following by SECs rules. As a result there, confidence level is very low. In 1996, capital market falls for not marinating the SECs rules. But after this accidents the investors are loss their capital. For these accidents the investors are faired and they are not interest to invest in capital market. These types of accidence occur in the capital market for lack of proper planning. In this person the capital; market growth totally fall down. So action plan needed for the growth of capital market by which investorâ€™s can build their faith. Potential prosperity of stock market market in bangladesh 10.1 Potential for a Prosperous Stock Market in Bangladesh: The size of the world stock market is estimated at about $36.6 trillion US at the beginning of October 2008. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.) The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include the London Stock Exchange, the Deutsche BĂśrse and the Paris Bourse, now part of Euro next. Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock
exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders. Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery. It would appear no wonder that Bangladesh put offer a large congenial platform for voluminous stock market activities if we shed light on the following indicators. 10.2 Importance of stock market Function and purpose The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate. History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an up coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d'ĂŞtre of central banks. Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction. The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.
10.2.1 Relation of the stock market to the modern financial system The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via the traditional bank lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another. 10.2.2 The stock market, individual investors, and financial risk Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables). With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly. This is a quote from the preface to a published biography about the long-term valueoriented stock investor Warren Buffett. Buffett began his career with $100, and $105,000 from seven limited partners consisting of Buffett's family and friends. Over the years he has built himself a multi-billion-dollar fortune. The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st century.
10.2.3 The behavior of the stock market From experience we know that investors may 'temporarily' move financial prices away from their long term aggregate price 'trends'. (Positive or up trends are referred to as bull markets; negative or down trends are referred to as bear markets.) Overreactions may occur, so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments have since been put forward against the notion that financial markets are 'generally' efficient. According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short term, where random 'noise' in the system may prevail. (But this largely theoretic academic viewpoint known as 'hard' EMH also predicts that little or no trading should take place, contrary to fact, since prices are already at or near equilibrium, having priced in all public knowledge.) The 'hard' efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a generally agreed upon definite cause: a thorough search failed to detect any 'reasonable' development that might have accounted for the crash. (But note that such events are predicted to occur strictly by chance , although very rarely.) It seems also to be the case more generally that many price movements (beyond that which are predicted to occur 'randomly') are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period seems to confirm this. However, a 'soft' EMH has emerged which does not require that prices remain at or near equilibrium, but only that market participants not be able to systematically profit from any momentary market ' inefficiencies'. Moreover, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for such large and apparently non-random price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact. The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the period running up to the 1987 crash, less than 1 percent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 bear market, the average did not rise above 5%). In the run up to 2000, the media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market. 10.3 Stock market cycles A cycle or a wave represents a process that tends to repeat itself in time in a more or less regular approach. There are many types of business cycles. Some of the most
common ones are those that impact the stock market. Some of these cycles have been quantitatively examined for statistical significance. Many investors and market traders take recourse to these cycles and the insights they provide when making investment decisions. For example investment advisor Mark Hulbert has tracked the long term performance of Norman Fosback’s a Seasonality Timing System that combines month-end and holiday-based buy/sell rules. According to Hulbert, this system has been able to outperform the market with significantly less risk. According to him it has the best risk-adjusted performance of any system his newsletter tracks. Other authors and investment advisors contend that there are four stages in any major cycle whether it is an individual stock or a market sector. These four stages are (1) period of consolidation or base building (2) upward advancing stage (3) top area and (4) declining phase. Causes Many have theorized as to the possible underlying causes of these statistical cycles. The four year U.S. presidential cycle for example is attributed to politics and its impact on America's economic policies and market sentiment. Either or both of these factors could be the cause for the stock markets statistically improved performance during most of the third and fourth years of a president's four year term. The monthend seasonality on the other hand is generally attributed to the automatic purchases associated with retirement accounts. There other cycles however, for which the explanations are less clear. Compound cycles The presence of multiple cycles of different periods and magnitudes in conjunction with linear trends, can give rise to complex patterns are mathematically generated through Fourier analysis. In order for an investor to more easily visualize a longer term cycle (or a trend), he sometimes will superimpose a shorter term cycle such as a moving average on top of it. A common view of a stock market pattern is one that involves a specific time-frame (for example a 6-month chart with daily price intervals). In this kind of a chart one may create and observe any of the following trends or trend relationships: • • •
A long term trend, which may appear as linear Intermediate term trends and their relationship to the long term trend Random price movements or consolidation (sometimes referred to as 'noise') and its relationship to one of the above
For example, if one looks at a longer time-frame (perhaps a 2-year chart with weekly price intervals), the current trend may appear as a part of a larger cycle (primary trend). Switching to a shorter time-frame (such as a 10-day chart using 60-minute price intervals), may reveal price movements that appear as shorter term trends in contrast to the primary trend on the six month, daily time period, chart.
Use of multiple screens A stock market trader will often use several "screens" or charts on their computer with different time-frames and price intervals in order to gain valuable information for making profitable buying and selling (trading) decisions. Often expert traders will emphasize the use of multiple time-frames for successful trading. For example, Alexander Elder suggests a Triple Screen approach. Longer-term screen: To identify the long term trend and opportunities. Middle screen: To identify the best day(s) on which to locate a buy or sell opportunity Finer screen: To identify the optimum intra-day price at which to buy or sell a given security
• • •
10.4 Low Market Capitalization- GDP Ratio: The most commonly slandered to major the size of a country’s stock market is the ration of market capitalization to GDP. A small ratio of market capitalization to GDP revels the small size of Stock market and vice versa. Generally the ratio of market capitalization to GDP in advanced countries, newly industrialized countries and our neighboring countries is relatively high. Even it is seen that the market capitalization of the stock exchange of some countries exceeds the volume of GDP of those countries (Table-1). The ratio of the market capitalization is very insignificant in Bangladesh, which is now below 3 (table-2) as compared to 47 in India 17 in Pakistan, 28 in Srilanka, 89 in Thailand, 259 in Malaysia, 51 in South Korea 256 in Singapore and 270 in Hong Kong (Table-2) and 140 in the USA. The low ratio of market capitalization to GDP relevance that the Bangladesh stock market has protection for thriving at a great pace. Table-1 Fiscal Year
GDP at market price
10.4.1 Over Subscription of IPO’s:
The Over subscription of initial public offering (IPOs) indicates bright prospects for the growth of a securities of a market in an economy. From April 1992 to June 1996, Bangladesh stock market went bullish, obviously owing to the adoption of a wide range of institutional, legal, fiscal and monitory reform packages including approval foreign portfolio investment (FPI). During this period, tremendous fervor of investors towards stock the market resulted in a higher over subscription of initial public offering (IPOs) floated by a good member of companies. This implies that the stock markets in Bangladesh are capable of handling big flotation, and an army of large investors may emerge to keep their money stock in a congenial investment environment. In September 1999, the initial public offering (IPOs) of two companies, namely Bionic seafood and prime Bank, were oversubscribes. So the higher rate of over subscription indicates that there is a grate scope for the growth of a luxuriant stock market in Bangladesh and it is noted base less fantasy but a real possibility. IPO during 1993-99 (June) Table-2 Fiscal Year
No. of companies
Public offer (tk in Public core) subscriptions (tk in core)
No. Of time over subscribed (tk in core)
10.4.2 Introduction of Automated Trading System: The launching of the auto mated on line real time screen- based treading system in both the boorish in the country (CSE on June 2, 1998 and DSE on August 10, 1998) is a mile stone on the countryâ€™ stock market history. The benefits of the auto mated trading system are not only animus but also prove far-reaching in the expansion of the stock markets of activities in Bangladesh. Firstly, an automated trading system can ensure transference and stop manipulation to a large extent a large in share transaction. Prior to it, under the traditional outcry system, investors could not know the instant price movements of shares and used to depend on drillers- brokers for making investment and they often alleged that their orders were not excluded on the basis of a fair price. It is a fact that the stock market was exclusively turned into a broker market in the old outcry environment. The auto matted trading system can enable the investors to observe market information on the computerized screen and help them take wish investment decisions. Dealers/ brokers are able to accept validate cancel and store orders can their respective workstation. So an
automated trading system can turn the stock market into a market for both drillers/brokers and investors and forge a strong, reliable and dynamic trade relationship among them. Secondly, automated trading can compel much needed and desired efficiently and dynamic in the trading and settlement operations of the bourses. Thirdly, automated trading can bring all cities including the commercially important places of the country under the network of shares market activity through LAN, WAN, VSAT and internet communication which would enable the dealers/ brokers to execute orders received from clients from anywhere of the country. The Chittagong Stock Exchange (CSE) has already connected Dhaka Stock Exchange (DSE) and Sylhet with its trading network through online facilities and also taken decision to pull other district towns into is trading network. The exciting automated trading system will boost the image of the capital of Bangladesh capital market abroad that also helps attract portfolio investments (FPIs) In fac6 the full benefit of automation depends on the quick introduction of a central depository system (CDS). Legal initiatives have already been taken to introduce a CDS. It is obvious that the automation of stock trading has created golden opportunity for a larger pool of invitation all domestic non-residential and foreign. Automation has made stock markets geographically neutral, creating a great prospect a thriving Bangladesh stock exchange. 10.4.3 Small Number of Investors: The Bangladesh stock market are characterized by a small number of investors with a peculiarity that 80% of total demands for securities emanate from retail investors while the rest of the demands come from institutional investors such peculiarity is not conducive to the stability of a share market for the reason that the frequency of share transactions by retail investors in high, and most of them invest on a short-term basis due to small capital and a desire to earn to quick capital gains. The dominance of institutional is crucial to the established to the stock market as has been experienced in the advance stock markets of the world. There is amorous potentiality of the Bangladesh stock market for an in page of the number of retail and institutional investors. At present number of active small investors will not be more than 30 thousand excluding the investors, who have accounts with ICB. The number of retail investors can be increased through country wide massive educational programs on opportunities on risk as well as operation of the securities market. In this context, special security market educational programs can be broadcast on BTV on a regular basis. A research Institute on investment may be set up to channel them level of investment analysis and research as well as professionalism in the securities industry. As part of the effort to increase the number of institutional visitors, the Securities and Exchange Commission (SEC) has already issued licensees to a number of companies for operating as merchant banks. A number of mutual funds may emerge in the private sector as a result of formulating certain necessary laws regarding the flotation of the mutual funds in the private sector. Furthermore, restriction can be relaxed to allow provident and insurance funds to be invested in the capital market. Besides, 43
banks including 13 foreign banks now operating in Bangladesh may create a merchant banking arm to participate in the securities market. So it is obvious that wide spared educational programs relating to the securities market, along with active participation of provided and insurances funds, merchant banks, banks and non-banking financial institutions may enhance the number of retail and institutional investors. 10.5 Foreign Portfolio Investment: It has been observed that the foreign portfolio investments (FPIs) have a profound impact on stock market and case a countryâ€™s resources consistent for development finance. Portfolio investments can contribute towards creating additional fund for industrial finance. Proving stock market liquidity modern management skills and technology, and improving the efficiency and quality of service rendered. Foreign portfolio investment surged markedly in the stock markets of developing countries since 1960s as s reflected in table-4. For the first time in 1993, foreign portfolio investment become the most important inflow in total capital into developing country with a share of 41.5%, overtaking need for a direct investment; need commercial banking landing and official grants and aids. It I anticipated that the importance of foreign portfolio investment would continue to grow in financing infrastructure and industrial projects. In the developing countries of Asia along, it is estimated that investment in infrastructure fro 1995 to 2004 will require US$ 10 trillion. So it is easily predictable that foreign portfolio investment will continue to be the most important source of capital for developing countries in the coming years in backdrop of decline official grants aids and other source of foreign capital. To reap such benefits of FPIs, Bangladesh stock market was opened in April 1992. But the causes that Bangladesh stock markets have not been able to attract adequate amount of FPIs in Bangladesh have been attributed to the lack of quality securities, the absent of sound handling of the bourses, a dearth of efficient players such as merchant banks inadequate dissemination of sensitive information, and the light. Moreover, the share market crash of late 1996 had particularly distanced foreign portfolio investors. The supply of quality shares, prudent management of Stock market, and an active participation of institutional players may attack increasing amounts of FPIs. Flotation of IPOs by Joint venture companies with foreign participation may draw significant foreign investment in stock market. 10.6 Foreign Portfolio Investment in Bangladesh during 1992-99 (June): Table-3 Fiscal Year
Investment in share Repatriation of sale Balance after (Tk in cores) proceeds (Tk in cores) Repatriation of sale proceeds (Tk in cores) 2
10.7 Economic Scenario World Economy: The world economic activity in 2007 remained resilient despite economic slowdown in USA soaring oil prices and rising inflationary pressure. The global economy has grown 5.21 percent in 2007 lower than 5.4 percent in 2006. The robust growth was mainly attributed to the vigorous expansion of developed economics and the sustained growth of china, India and other major developing countries. China and India have kept the momentum of fast growing, making them a strong drive for world economic growth. North America remains the global economy’s hub. Any assessment of the world economy in 2008 depends on the likelihood, depth length of US economic downturn and the magnitude of a global spillover. In 2007, the US economy managed to expand by 3.3 percent, two-year high even as it coped with a painful housing slump. The IMF downgraded its protection for US growth this to the current 2.2 percent increase that had been forecasted in September 2007. The economics of Canada and Mexico two neighboring countries more likely to experience spillover form the US economic slowdown is experience to grow by 2.4 percent and 3.4 percent respectively in 2008. That’s a bit weaker than the IMF’s forecast in the fall. In Europe the IMF is projecting Germany to expand by 1.8 percent in 2008, an improvement from a previous projection of 1.3 percent growth. Germany is expected 1.9 percent growth in 2009. Runway oil prices, racketing food cost and a feeble US economy hurt Asia Pacific economic growth in 2007. The recent oil price rise, a slowing US economy, global financial market turmoil and escalating inflation make for a powerful combination that could hobble export oriented Asia’s economic growth in 2008. Russia is expected to witness increase in economic activity by 6.4 percent in 20028, compared with 6.7 percent in 2007. In 2008 Russia economy is expected to grow by 5.9 percent. Japan, meanwhile, continues to recover from a decade long stagnation. It is expected to post economic growth of 2.3 percent. South Koreas economy could ship to a 3-year low of 4.8 percent in 2008 while growth in Singapore, Southeast Asia’s most advanced economy could slow to 5.6 percent from 7.7 percent in 2007. Thailand’s grow is expected to slow moderately to 4.6 percent in 2008 but domestic confidence has been given a life by the return to democracy after smooth election in December 2007. Another global powerhouse, China is expected to log blistering growth of 10 percent in 2008 and 9.5 percent this year. The china’s economy expanded by 10.7 percent in 2007. India which grew by 9.2 percent in 2007 will moderate to 8.4 percent in 2008. Looking forward, the world economy should turn in an energetic performance in 2008, even though its biggest player, the United States is expected to experience its weakest growth in the five years, according to IMF forecast, specifically, the IMF is projecting the world
economy to grow by 4.9 percent the year. While that would be moderation from the years 5.4 percent advance, it would still represent a remarkable healthy showing. The medium-term outlook for the world economy therefore remains solid which is projected to grow by about 4.8 percent in 2008. In 2009 the strength of global growth is expected to ease modestly. A slower than expecting easing of housing market turmoil in the high income countries, especially in the US, or a more volatile energy prices with high spikes could dampen the global growth trend much more abruptly than expected, thus weakening the global demand for developing countries exports. Furthermore, higher growth in productivity than assumed in all OECD emerging Asian countries could dampen growth. However recent projection of international oil prices show further raising trend but export is both develop and developing countries shows solid pace in 2008 which could play prominent role in global GDP growth. Overall, the balance of risks to world growth is judged mostly on the downside. Bangladesh Economic Outlook: Bangladesh Economy went through a string of stresses through 2007. Soaring prices of essentials and fuel, an abnormal raise in inflation, huge government borrowings, acute shortage of electricity and labor unrest in garments sector, erosion of business confidence, twin floods and deadly cyclone hit the economy. Bangladesh economy grows on an average at above 6.0 percent in the last four years. Such growth was aided by increased inflow of workers remittance, sustained manufacturing growth, robust export and growth in telecommunication and service sectors. The industry and service sector grew at 9.5 percent and 6.2 percent respectively. Volume of export increase by 16 percent led RMG sector despite several month of political turmoil and labor unrest along with anarchy and vandalism that led ransacking of approximately 100 factories in and around the capital city of Dhaka. The total remittance inflow in FY 2007 was $6.56 billion registering a growth of 1.08 billon dollar more than 2006. This record remittance also pushes up the foreign exchange reserves to tk. 5.5 billon ever highest since countryâ€™s independence 1971. Moreover countryâ€™s external current account balance continued to record a significant surplus with a substantial increase in remittance more than offsetting trade deficit and services deficit. The economy of Bangladesh has been suffering from double digit inflation. The point to point inflation soared to record high of 11.21 percent December last with food inflation reaching an unexpected level of over 13 percent. As the food prices recorded further increase, the food inflation in recent months might has increase by a few more percentage points. The Bangladesh bank for something has been exercising caution in credit expansion in a bid to reducing the mountain inflationary pressure in the economy. But because of cast push nature of inflation, the respective monetary policy was not been that helpful in meeting this particular objective. Because of restricted credit policy and some other domestic and external factors, the economy has showed down, leading to downward revision of its GDP growth projection for the current fiscal twice by the central bank. The Bangladesh now expects the economy to grow between 6.0 and 6.2 percent. The projection however is still higher than that of the IMF that predicts the GDP to grow at around 5.5 percent this fiscal year.
The economic slowdown is clearly visible in the revised growth projection made by the central bank in its latest monetary policy for the agricultural and the industry sector. The growth of both agricultural and industry sector is expected to be 1.0 percent less than that of last fiscal. It is nothing unusual for the agricultural sector which remains vulnerable to shocks such as natural calamities and input supply storage to suffer production disruption. But the declaim in growth of industry sector by 1.0 percent would come as a rude shocks to all stakeholders where the private sector had been the main engine of growth. Low investment and sluggish economic activity resulting in erosion of business confidence had affected pressure on the economy. Bangladesh has achieved reasonable success in areas of human development, population control, food security, poverty reduction and disaster management. It has weathered several external financial shocks, debt crises, and achieve on average economic growth rate of over 5.0 percent in recent past and over 6.7 percent in the last fiscal. However against the backdrop of all these achievements, reduction in poverty level is still not satisfactory over percent of the population being below the poverty line. Poor governance, inadequate infrastructure, system corruption and deterioration of law and order continue to be major deterrents to a private sector led higher economic growth. The business community is now faced with multiple problems. But it is expected that the newly formed better business forum will help the government resolve many business related problems. The steps being taken would definitely contribute to forming a strong base for the future economy. The major so far taken by the government including separation of judiciary, reconstitution of election commission, Public service commission and Anti-corruption commission as well as in curbing corruption will have a positive impact in the long run. The most important reforms Bangladesh should make to be able to complete in the global economy are to privatize the state owned enterprise, deregulate and promote foreign investment in high potential industries like energy and telecommunication, and take decisive steps toward combating corruption and strengthening rule of law. Market Fundamentals: The bourses of country are now passing through a capital phase with a chronic bearish trend persisting since them occurrence of crashes in Bangladesh stock market in late November, 1996, following the phenomenal flash boom in share prices during July-November, 1996 causes by machinations and manipulations. Since November 15, 1996 all share price syndicates of DSE and CSE continued to fall with some erratic rise and stood at 502.33 and 207.38 in late September 1996. It is evident that the unusual boom in the stock market during July-mid- November 1996 was not consistent with market fundamentals. The bearish mood persistently prevailing in the stock market for quite some time now is rather unusual and inconsistent with market fundamentals, too. It has been observed that the prices of the many good companies have fallen lower then their face values. Blue chips companies have announced dividends indicating better performance and the better future. Value indicators such as price- earning ratio and book value ratio are pointing to an all-time low. Such positive and favorable market fundamental signals a strong revival of the stock market in Bangladesh. Fair Valuation is the Key:
An important aspect for capital market is reflection of fair value of scrip’s. An analyze touching the raise or drop in stock price on a post –facto basis, but investors would be glad to receive project and recommendations from research analysts. This is not adequately present in the current scenario, and dew to this reason the market is not receiving attention of an important segment of investors, both foreign and local. Quality analysis needs to address this valuation issue in a more pro-active manner. The independent analysts should raise the flag when scrip’s is observed valued or under valued, the intrinsic value of traded security should be covered in the research paper. Investors are perhaps repenting much on speculative analysis resulting into volatility in the market as opposed to fundamental analysis, which could attract more stable long-term investors who are sure about their investment tenure and expectations. Findings: The findings of this report are that Bangladesh must have dynamic security markets, which can play a greater role as the prime source of industrial finance as well as vehicle for rapid capitalization of state-owned enterprises. It has also been regulated that there is strong potential for the expansion of stock market activities in Bangladesh. But it is unfortunate that when a robust stock market is badly needed to finance industrial and other development activities in order to overcome the limitations of the country’s banking system in providing term loans and the problems of a decaling trend of a foreign aid the stock market in Bangladesh are now in a tailspin with no sign of improvements, and struggling to survive. Given the developments in the regional security markets, we believe, it is now a matter of time for Bangladesh to initiated privatization through capital markets. SOEs that have profitable track record or have potential for turn around shall be properly valued. Privatization through public flotation creates the most public awareness widespread ownership, and this process can be easily used when large amounts of capital needed to be raised. We need to develop capacity to price these issues by using acceptable valuation particles so that the subscriptions are acceptable to international investors. Conclusion In the final analysis, Bangladesh security market still has a long way to go. It is growing but the peace needs to be faster. With the support from government multilateral institutions for capacity building this market has very responsibility to improve. We are yet to have in place several missing parts of the vital market infrastructure, and valuation and appropriate rules are essential segment of this expected infrastructure. In the securities market brokerage business all over the world has reached its pinnacle. Now we can see that quite a great many securities market brokerage house build up safety and marketability of securities to a level where they could be used temporary homes for the profitable employment of short term money. They are innovative, aggressive and doing their business efficiently. Their services range from investment advice to the clients to asset management, investment bank to portfolio management. Over the short-term, stocks and other securities can be decrepit or sustain by any number of fast market-changing events, making the stock market behavior difficult to predict. Emotions can drive prices up and down, people are generally not as rational as they think, and the reasons for buying and selling are generally obscure. Behaviorists argue that investors often
behave 'irrationally' when making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money. Increasing public confidence in the stock market through strengthening the regulatory mechanism and ensuring transparency and accountability in financial disclosure of companies are crucial. Government support is much needed to bring in profitable business and private sector enterprises in the capital market. A well developed securities market is also helpful to the central bank in the formulation of the monetary policy through which it can gain information about public perception (e.g. inflation expectations) and hence increase the efficacy of monetary policy using the stock market channel. Recommendations Here we have focussed on one part of the factor market, the market for securities and financial assets. This market determines the cost of capital. Common stock issued by digital Equipment Corporation. Stock options permit investors to mold the shape of return distribution to meet investment objective s better. The brokerage commission is the most objective type of trading cost and objective of competition among broker for both institutional and retail investors. The underlying stock market index may be a broad-based index or a narrow-based index. It should need to open more branches to reach to more customers. REFERENCES: 1) Manual of TESA for Member Server Application published Dhaka Stock Exchange. 2) Trading material for Central Depository Bangladesh Ltd. 3) Web Site of Securities Exchange Commission. URL: www.secbd.com 4) Web Site of Dhaka Stock Exchange. URL: www.dsebd.com 5) Web Site of Chittagong Stock Exchange. URL: www.csebd.com 6) Web Site of Central Depository Bangladesh Ltd. URL: www.cdblbd.com 7) Annual Report of Securities Exchange Commission 2004-2005. 8) Compliance & Surveillance Training Material published by Dhaka Stock Exchange & Chittagong Stock Exchange. 9) Annual Report of PFI Securities Ltd. 2006-2007. 10) Scott Besly, Eugene F. Brigham, “Essential of Managerial Finance”-(13 th Edition), the Dryden Press, a division of Harcort College Publishers. 11) Eugenc F. Brigham, Michale C. Ehrhardt, “International Finance Management”(10th Edition), Thomson south-westerr. 12) Krishna G. Palepu, Paul M. Healy, Victor L. Bernard “Business Analysis & Valuation”-(2nd Edition) 13) Charles P.Jones “Investment Analysis and Management”-(8th Edition) 14) Research Paricroma on Secondary Market of 2003 15) Financial Express (News-paper) 16) “Investment Corporation of Bangladesh”, (ICB Unit Fund), Annual Report 20042005 17) Annual Report of Securities and Exchange Commission 2004-2005
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