Bangladesh Capital Markets

Bangladesh Capital Markets History, Development and Present Condition Review April, 2012 1 P a g e

Capital Markets Capital market is a mechanism to flow fund from the hands of small savers (individuals and institutions) at low costs to those entrepreneurs who do need fund to start business or to business. In the other words, capital market mechanism gives a part ownership of big companies/corporations to small savers like you and me. In simple term, it is a globally accepted scheme to share ownership of economic development with general public. The first Capital market started in USA at Wall Street in 1653, when India, the commercial capital of India was established in around 1890. o Sub-Markets of Capital Market The Primary Market: The primary market deals with newly issued securities and is responsible for generating new long-term capital. The secondary: The secondary market handles the trading of previously-issued securities, and must remain highly liquid in nature because most of the securities are sold by investors. Bangladesh Capital Markets Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia region. It has two full-fledged automated stock exchanges namely Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) and an over-the counter exchange operated by CSE. It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC), since, it implements rules and regulations, monitors their implications to operate and develop the capital market. It consists of Central Depository Bangladesh Limited (CDBL), the only Central Depository in Bangladesh that provides facilities for the settlement of transactions of dematerialized securities in CSE and DSE. o Capital Market Products: Shares, Debentures, Mutual Funds, Bonds, Derivates, Future & Options o Capital Market Players: Investors, Private Limited Company, Stock Exchange (DSE & CSE), Brokers & Dealers, Merchant Banks, Securities and Exchange Commission (SEC), Central Depository Bangladesh Limited (CDBL) o Parameters used to measure the size of Capital Market are as follows: Number of listed companies, Number of securities, Size of market capitalization, Index, Daily trade volume, GSP ratio to market capitalization o Nature of stock Exchange: Public Market, Spot Market, Block, Odd Lot Market etc. 2 P a g e

History & Development Timeline of Capital Markets Components Securities and Exchange Commission To develop such a fair, efficient and transparent capital market, the Securities and Exchange Commission was established as a regulator through enactment of the Securities and Exchange Commission Act, 1993 in June 1993, with the following mission: Protecting the interest of investors in securities; Developing the capital and securities markets; and Framing of securities rules concerning above. The Commission frames rules and regulations under the relevant laws ensure control of the capital market through compliance of duties and responsibilities of the issuer, stock exchange and market intermediaries. Dhaka Stock Exchange 1952 : Necessity of establishing a SE in the East Pakistan was first decided 1953 : A decisive step was taken the second meeting of the organizing committee Purchase of membership cards at RS.2000 each The location was thought should be Dhaka, Narayanganj or Chittagong. 1954 : 8 promoters incorporated the formation as EPS Exchange Association Ltd. 1956 : formal trading was started at Narayanganj Authorized capital was RS. 300000 divided into 150 shares of RS. 2000 each 1957 : Purchase a land of 8.75 kattah for won establishment 1958 : Shifted to Dhaka & started at the Narayangonj Chamber Building in Motijheel 1959 : Shifted to its own location 1962 : As public company, name was revised to East Pakistan Stock Exchange Ltd. 1964 : Again the name was changed to "Dhaka Stock Exchange Ltd." 1971 : Trading Suspended under the new state policy 1976 : Trading Resumed in Bangladesh 1986 : Starting Of All Share price Index calculation 1993 : Share price Indices calculation on basis of IFC Designed formula 1998 : Starting of automated trading 2001 : Starting of DSE-20 Index calculation Starting of DSE General Index calculation 2004 : Start of CDS through CDBL 2005 : DSE all-share price Index (DSI) Re introduced Chittagong Stock Exchange 1995 : 12th Feb; received approval of Bangladesh Government 1st April; Incorporated as a limited company 10th October; Introduced Floor Trading 1996 : 1st January; became corresponding member of World Federation of Exchanges 1998 : 2nd June; Introduced Automated Trading on WAN 2000 : 16th January; Convened South Asian Federation of Exchange (SAFE) 2004 : 26th January; Central Depository Bangladesh Ltd. (CDBL) formed 30th May; Internet Trading Service launched (ITS) 4th July; introduced Over-the-Counter (OTC) market 3 P a g e

14th July; CSE initiates the idea of Securities Institute by raising formal proposal 2005 : 14th Dec; Organizes Capital Market Fair- First of its kind in the country 2007 : 10th March; Introduced Comprehensive Training Program on Stock Market for investors, professionals and others. First of its kind in the country 12th June; Submission to SEC of draft Regulatory Framework on Financial Derivatives 2008 : 18th October; CSE became a member of OIC Member States Stock Exchange Forum 2010 : 22nd Feb; Introduced Book Building Method in the country 2010 : 28th Nov; CSE signed a contract with Millennium IT Software Ltd. And Polaris Software Lab Ltd for Next Generation Trading System (NGTS) 2011 : 13th Jan; Execution of trade of Short Sell under the Regulations 11th Sep; signing of agreement for launching electronic fund transfer through Bangladesh Electronic Fund Transfer Network (BEFTN) 20th October; Introduced Next Generation Trading System (NGTS) & the new website Functions of DSE & CSE: The major functions are: o Listing of Companies (As per Listing Regulations). o Providing the screen based automated trading of listed Securities. o Settlement of trading (As per Settlement of Transaction Regulations). o Gifting of share / granting approval to the transaction/transfer of share outside the trading system of the exchange (As per Listing Regulations 42). o Market Administration & Control. o Market Surveillance. o Publication of Monthly Review. o Monitoring the activities of listed companies (As per Listing Regulations). o Investor s grievance Cell (Disposal of complaint bye laws 1997). o Investors Protection Fund (As per investor protection fund Regulations 1999). o Announcement of Price sensitive or other information about listed companies through online. Recent ICT Development: The robust structured LAN setup is distributed to the DSE building and its vicinity. Member houses, which are located in those buildings, are connected to the Trading Engine through this LAN setup. Approximately 2200 workstations along with 213 Members Servers are connected to DSE Central Network through DSE LAN & expanded WAN setup (using RADIOLINK / Fiber Optics / ADSL connectivity / Dialup) within Dhaka City. Among them minimum 160 Members are running their Branch from 650 locations of 17 districts. DSE is regularly holding investor awareness program in all the major cities. DSE held International Conferences/ Road shows DSE also holding various workshops, seminars, training program on different issues of securities market. DSE Training Academy is holding different types of programs for the interest of the stakeholders of Capital Market. DSE is regularly publishing Monthly Market review and Fortnightly to disseminate market information. DSE has a highly informative web site that disseminates online trading data and market information to the investors. 4 P a g e

OTC Market : Securities are traded without intermediaries through mutual understanding in the OTC market, which are outside the stock exchanges. In CSE stock exchange s OTC market, there are opportunities of securities trading. Under Securities and Exchange Commission (Over-the- Counter) Rules, 2001, OTC market was established in CSE. Securities de-listed from the exchanges and securities not listed with the exchanges but issued obtaining consent from the Commission can be traded in the OTC market. Dhaka Stock Exchanges Ltd started OTC market in line with the direction of the Commission on 6th September, 2009. Settlement procedure of the OTC market is like the public market. The list of the companies trading in DSE OTC market as on 30 June 2011 is furnished in ANNEX-8. Derivatives : At present there exists no rule for trading of derivative products and knowledge about derivatives are also limited among the intermediaries and investors. CSE is imparting training on derivative products. The Commission is now looking at the legal issues related to this matter so that it can frame necessary rules for introducing this instrument. Bond Market : The capital market of Bangladesh is predominantly an equity based securities market. Number of bonds and other debt instruments are insignificant. In order to popularize the government bond and to increase the depth of market, trading of government treasury bonds have been introduced in stock exchanges with effect from 1 January 2005. As on 30 June 2011, 212 government treasury bonds, 3 corporate bond, 8 debentures were listed in DSE whose market capitalization was Tk 39401.30 crore. But bonds are not yet popular. Finance Division-Ministry of Finance, Bangladesh Bank, Securities and Exchange Commission and National Board of Revenue are working together for development of the bond market. Investors Protection Fund : To protect the interest of the investors, Investors Protection Fund has been created in both the stock exchanges under Dhaka/Chittagong Stock Exchange Investors Protection Fund Regulations, 1999. If any stock broker is declared insolvent by the court or itself or if any 14 other reason causes stock broker business to be wound up resulting in failure to pay the clients money, related stock exchange takes initiative to compensate the investors from the fund. As on 30 June 2011 for the end of financial year deposited amount of money in the Investors Protection of DSE is Tk. 1, 50, 00,000. and CSE Tk. 53, 41,887.00. In the financial year 2010-2011 no claim was raised by the investors at DSE and CSE. Central Depository Bangladesh Ltd. (CDBL) : The only Central Depository in Bangladesh that provides facilities for the settlement of transactions of dematerialized securities in CSE and DSE. Functions of CDBL given below: Operate and maintain the Central Depository System (CDS) of Electronic Book Entry. Recording and maintaining securities accounts and registering transfer of securities. Changing the ownership without any physical movement or endorsement of certificates. Execution of transfer instruments, as well as various other investor services including providing a platform for the secondary market trading of Treasury Bills and Government Bonds issued by the Bangladesh Bank. Supervision of Depository Participant activities. 5 P a g e

Present Scenario Bangladesh capital market has seen a lot of activities within 2012. Market capitalization exceeding $27 billion (in 2009), daily turnover over $175 million and the number of beneficiary owners (BO) accounts reaching 2 million during this time. We found more asset management companies active in floating mutual funds and large companies like Grameenphone and Marico getting listed. Book building method was introduced and over the counter (OTC) market launched to trade in the junk shares. Many small investors saw their life savings dissipate due to a free fall in the price of the stocks that they had invested in. Present scenario will be covered in two phrases Dhaka Stock Exchange Recent Financial condition (Up to May 2012) Downfall of Overall Stock Exchange in 2010 and 2011 Dhaka Stock Exchange Recent Financial Condition o Number of Financial Features Number of Securities Total Number of Listed Securities 508 Total Number of Companies 235 Total Number of Mutual Funds 41 Total Number of Debentures 8 Total Number of Treasury Bonds 221 Total Number of Corporate Bonds 3 Number of Shares/Certificates: (No. in mn) Total Number of Shares & Securities*36,598 Total Number of Shares 32,842 Total Number of Certificates 3,744 Number of All Listed Debentures 409 Number of All Listed Gov. T-Bonds 5,485 Number of All Listed Corporate Bonds 6,802 ( 000) Total Market Capitalization of: (Figure Tk.in mn) (FigureUS$ in mn) All Listed Securities 2,496,520 30,490 All Listed Companies Shares 1,903,661 23,249 All Listed Mutual Funds 36,463 445 All Debentures 576 7 All Listed Govt. T-Bonds 549,381 6,710 All Listed Corporate Bonds 6,440 79 Conversion Rate: BDT against USD 81.88 6 P a g e

o All Graphs (Up to 2012) DSE Performance Movement of DSE Market Capitalization and Issued Capitalization Sectoral Market Capitalization in DSE (May 2012) 7 P a g e

Sectoral Turnover in DSE Category wise Share Turnover in DSE In case of DSE market capitalization, Banks sectors have the highest growth in DSE share of 148.23% from FY 1995-96. The second is Fuels sectors, have the growth of 71%. When the others sectors have down grade or low growth rate. The Telecom sectors and ceramics sectors have entered in the DSE with 5 years and day by day raising their share. The capitalization of market is declining over the period after it touched it highest in July, 2011. Now the companies are losing their share price day by day, when small investors in DSE is losing their capitals due to continuous fall in the market. 8 P a g e

o Downfall of Overall Stock Exchange in 2010 and 2011 The trend of general index of DSE during July 2009 to August 2010 shows that the general index of DSE has increased smoothly. In July 2009 the general index of DSE was 2914.53 while in April 2010 it increased to 5654.88. During this time period, there was an increasing trend of general index. In August 2010 the general index of DSE stood at 6657.97 and finally in November 2010, it reached the peak and became 8602.44. After this general index has started to fall down and in February 2011 it reached to 5203.08. Figure: The trend of general index of DSE during capital market downturn in 2011 Date Source: Dhaka Stock Exchange, 2011 Table No. 1: DSE General Index from November 2010 to May 2011 DSE General Index Change General In Index Date DSE General Index Change General In Index 29/11/10 8599.411 -- 20/02/11 6389.625 +810.120 05/12/10 8918.514 +319.103 28/02/11 5203.085-1186.540 19/12/11 7654.405-1264.110 10/03/11 6639.181 +1436.096 02/01/11 8304.589 +650.184 27/03/11 6094.639-544.542 05/01/11 7948.431-356.158 10/04/11 6556.520 +461.881 10/01/11 6499.436-1449.000 26/04/11 5806.309-750.211 12/01/11 7690.690 +1191.254 03/05/11 5865.709 +59.400 20/01/11 6326.345-1364.350 08/05/11 5611.471-254.238 30/01/11 7572.610 +1246.265 11/05/11 5482.874-128.597 07/02/11 6394.531-1178.080 12/05/11 5612.519 +129.645 Source: www.bloomberg.com (Access Date: 12-05-2011) 9 P a g e

Reasons of Recent Catastrophe in Stock Market: o Failure of role playing of the following authorities have responsible highly The Government, Bangladesh Bank, SEC, DSE and CSE o Failure of playing own role in the market own works to catastrophe Credit Rating Agencies, Syndicate, Brokerage Houses o The others are Education and Skill of Investors Trading Through omnibus account In a research, which is conducted through a survey among 323 people from different areas including 255 investors, 11 Financial Analysts, 6 of different regulatory bodies and 51 brokers, it is found that 173 (74+43+56) or 53.65% (17.34%+23%+13.31%) of the investors surveyed believe that the role of the regulatory bodies are the main reason behind the recent catastrophe in Stock Market. Again, 151 (46.75%) of the investors surveyed strongly agreed and 172 (53.25%) agreed that the role of the regulators of stock market (SEC, DSE, CSE) is the main cause of the recent catastrophe. Most importantly, none of the respondents opined neutrally or negatively in this regard Figure-2: Most serious cause of the recent catastrophe Lack of know ledge of investors 10.53% 17.34% Lack of Govt. control Syndicate 36.22% 23% Role of SEC 13.31% Role of Bangladesh Bank Source: Survey on Investors, Brokers and Regulators in Chittagong during March-May, 2011. Recommendation: based on recent research papers To introduce automated monitoring system that may control price manipulation, malpractices and inside trading. To force the listed companies to publish their annual reports with actual and proper information that can ensure the interests of investors. To control and abolish kerb market form premises of stock market, 10 P a g e

To take remedial action against the issues of fake certificates. The composite Quotation system (CQS) should be introduced and implemented that available the exchange specialist bid-ask quotes to the subscribers. To make arrangement to set-up merchant banks, investment banks and floatation of more mutual funds particularly in the private sectors. Banks, insurance companies and other financial institution should be encouraged deal in share business directly. The brokers should not be allowed to deal in the Scripps on their own accounts. The management of DSE and CSE should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms. All major infrastructure companies, especially those in power, telecommunication and energy sector are to be listed ensure to broaden the market. To strengthen merchant banks capacity to be more active. Ensuring speedy disposal of decisions for market operation. Ensuring greater degree of transparency in financial disclosure and management structure for better corporate governance. Conclusion: As an important part of the economy of the country, well-functioning of the capital market is a must for the industrialization process of a un-industrialized country like Bangladesh but un-stability in the same may negatively affect the total financial system. Therefore, all related corners including Government, Regulatory bodies, Listed Companies, Brokerage houses, institutional investors, and retail investors should act rationally to maintain the stability in the capital market for the greater interest of the country. For Further Reading Rahman, M.M (2009) Capital Markets Development in Bangladesh: The Status of Dhaka Stock Exchange, Retrieved from www.scribd.com Islam, A. (2012) An overview of Bangladesh Capital Market: Fraudulent Practice, Retrieved from www.scribd.com Bangladesh Economic Update: Capital Market, Unnayan Onneshan, Vol. 2, No.9, Oct. 2011 Ullah, A. (2011) Capital Market in Bangladesh, Retrieved from www.scribd.com Mukhajee A. (2008) CAPITAL MARKET IN BANGLADESH-TRENDS AND PRACTICES, Retrieved from www.google.com/search/capital_market_in_bangladesh/ Ullah, H. (2011) Catastrophe in Stock Market in Bangladesh, Retrieved from www.scribd.com Securities and Exchange Commission, Annual Report 2010-11 DSE, Annual Report 2010-11 The Daily Star, May 29, April 4 2012; April 14, 2011; January 5 2010. www.dsebd.org www.cse.bd 11 P a g e