Columns
8 years ago

The distant prerequisites

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The Financial Express in the first week of the current month ran a three-part  series on stock market revival. There was no attempt on the part of the reporter concerned to trace the causes of the latest stock market collapse. Rather he made interactions with a few stakeholders of the capital market, including small investors, bankers, experts at asset management companies (AMCs) and former and serving key officials of the securities regulator in his bid to know about the factors that could buoy up the market, now in a moribund state.
The stakeholders during interactions listed a few factors that, according to them, hold the key to reviving the market. The factors include institutional investment, largely meaning investment by banks up to the allowable limit, submission of credible financials by the listed companies, entry of quality issues and informed investment decisions.
Of these factors, investment by banks and other institutional ones like merchant banks, non-banking financial institutions and the like, appears to be most important to give the market the much-needed boost. As far as banks are concerned they are unlikely to venture into market right at the moment or in the near future, despite the fact they are sitting on tonnes of idle funds.
Banks had a bonanza in 2009 and 2010 during the market rally. A few of them, however, had also burnt fingers. But they have never made any public disclosure about the extent of financial damage they had suffered because of the stock market debacle.
No doubt, the country's financial sector has been in a bad patch for quite some time. Their financials, it is suspected, are not telling the whole truth. A few of them have been hiding the unsavoury statistics from their general shareholders and the regulator concerned.
And there comes the issue -- submission of credible financials -- that some of the stock market stakeholders referred to during their interactions with the FE reporter.
Questions about the quality of financials have been raised for long. The securities regulator itself also raised such a question in the recent past. Furthermore, the institution that had been responsible for ensuring the professional integrity of the audit firms could not dismiss all the allegations forthwith. Now the government has passed the financial reporting act (FRA) with the sole objective of raising the auditing quality up to the international standards.  
However, making a law does not mean that desirable changes would take place soon after its adoption. In fact, the country can boast of having a plenty of laws and rules designed to streamline almost everything. But the problem lies with their proper enforcement. The FRA is a new law and has not yet received any institutional shape de facto. Getting anything positive out of it would take some more time.
The market has been witnessing almost a regular flow of new issues. Soon after the collapse of the market in December 2010, the flow of initial public offerings (IPOs) almost dried up for understandable reasons. But thereafter new issues have been hitting the market almost regularly. In fact, the new issues have kept the market somehow going through the involvement of a section of small investors, notwithstanding the fact that the price behaviour of most issues has always been very erratic. Some small-scale manipulation is suspected to be in place in the initial trading of new issues.   
The Bangladesh Securities and Exchange Commission (BSEC) has, of late, become cautious about the entry of new issues, particularly those wanting to be floated with premium. It has made it mandatory for the premium-seeking companies to use the Book Building method. This is a good approach. The securities regulator will have to exercise far more caution while allowing new IPOs. It needs to find out the real motive behind the new companies seeking to float IPOs. As a regulator it cannot allow a company to cheat the investors.
The issue of a well-informed decision while making investment is very important when an investor is interested to make safe investment that would give him/her a reasonable return. This is, possibly, the most lacking feature of Bangladesh stock market. An informed and enlightened investor would never aspire to get rich overnight with his/her investments doubling with every passing day. He or she should first look into the fundamentals of the companies before putting his/her money in those.
Bangladesh stock market had a few such investors. They have withdrawn from the market after its collapse in 1996 and finally after 2010 scam. It may take a long time to create a new band of long-time investors, who are informed and enlightened by nature.
When the entire financial sector is in the midst of a sort of instability, it is hard to expect a stable stock market with investors behaving rationally and enthusiastically.
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