Capital market calls for massive reform

The importance of the capital market, which acts as a bridge between the savers and those looking for capital such as businesses as well as governments, cannot be overstated. In fact, it helps channel savings into productive investments.  Unfortunately, in Bangladesh, the general investors are yet to consider the stock market as a reliable place where they could get expected returns on their investments. A major failure of the country's stock markets is that they could not encourage most privately-owned companies with good fundamentals to participate for long-term financing. Many are of the view that the cumbersome listing process, conservative pricing mechanism for Initial Public Offerings (IPOs)  --- through which a privately-owned company offers its shares to the public for the first time- over-regulation, etc., are factors discouraging potential entrepreneurs. Also, a non-transparent secondary market, lack of action against market manipulators, high cost of compliance which is higher than the tax benefits offered against listing, etc., are among the major obstacles to the growth of the capital market. So, entrepreneurs prefer easily accessible bank loans for capital to going for the time-consuming IPOs. 

These issues of concern again came up at a recently held seminar styled, 'Expansion of the capital market: A framework for sustainable economic growth'. Speakers which included some leading business houses of the country, representative of the securities regulator and experts on the subject expressed their views on the prevailing conditions in the country's capital market and their concerns. Businesses do not join the stock market just for the fun of it or out of corporate social responsibility. They would look for any comparative advantage they might gain from joining the capital market. Managing director of the Apex Footwear Limited, a leading manufacturer, exporter and retailer of footwears in Bangladesh, for instance, dwelt at length on the stumbling blocks to the growth of the country's capital market. The existing capital market with a few scrip dividends on offer calls for urgently improving the market's depth. It must ensure adequate liquidity and foster ability to handle large transactions with minimum price fluctuations. An important point of disadvantage for the potential entrepreneurs is that here valuation of IPO is done on the basis of a company's net asset value (NAV). Actually, far from being dictated by the market, the securities regulator fixes the price of the primary shares. 

As a result of the NAV-based IPO valuation, which experts at the said seminar viewed as flawed, companies as large as the Uber will have zero value as they will have no assets, according to the definition of NAV. This is ridiculous. Notably, Uber is a global technology company providing services including app-based ride-sharing, cargo transportation, etc.  Another drawback of the local capital market is the lack of buyback provision through which a company may like to exit from the market. This is done by way of a listed company's purchase of its outstanding stocks thereby reducing the number of its shares in the open market. Through this measure,  companies control the supply of their shares in the market to increase their value. Since the practice of buyback is global, capital markets here needs to make allowance  for such facility for the participating companies.

Along with the fact that many well-meaning entrepreneurs are not joining the country's stock markets, the general investors, too, are not showing much interest in those, thanks to the manipulators' control over the capital market. Thus investors need to be educated about the basics of the secondary market so they might consider it a profit-only trade or be cheated by manipulators. Emphasis should be on establishing good governance, efficiency and transparency in the capital market. Only then can the hearts of both common investors and sound businesses can be won, a precondition for ensuring capital market's growth.