When oversight becomes ritual: Stock queries that change nothing

Junk stocks rally abnormally quite frequently and manipulation is what is suspected behind the rallies.

The bourses discharge their supervisory duties only by asking the relevant companies whether there was any undisclosed price-sensitive information (PSI) behind the price escalation. The respondents always provide a copycat response - "We don't have any PSI."

The repetitive, imprudent queries and the answers do nothing more than establish the futility of regulatory monitoring. So, manipulators feel confident and continue exploiting the market.

Besides, by the time the query is made and investors are warned, manipulators get ready to realise profits by selling highly inflated stocks.

When attention was drawn to market manipulation, KAM Mazedur Rahman, a member of the taskforce of the capital market, told The FE that the stock exchanges should investigate the trading pattern of a stock when it raises suspicion.

He, however, added that, "The exchanges neither have any intention nor sufficient manpower" to act promptly.

The Bangladesh Securities and Exchange Commission (BSEC) sometimes orders probes into unusual price movements and trade volumes on the bourses. It takes at least 16 months for the orders to be transformed into an announcement of punitive measures - imposition of financial penalties, for example.

For instance, the enforcement report published by the BSEC in April announced fines to be paid by individuals for manipulating the stock price of Sonali Paper in December 2021.

The securities regulator prefers imposing fines to filing cases against frauds to avoid legal hassles. Collecting fines entails another complex path to navigate, and in most incidents, the BSEC finds its hands tied when accused fraudsters do not pay the fines.

As part of this routine practice, the BSEC last week asked the Dhaka Stock Exchange (DSE) to investigate unusual movements in the shares of Fine Foods, GQ Ball Pen, Kay & Que Bangladesh, Orion Infusion, and Information Services Network and submit a report within 30 working days.

Fine Foods, a loss-making company, saw its share price jump more than 25 per cent between April 20 and July 2, closing at Tk 236.60. Without any immediate query or investigation, the stock gained another 20 per cent until Wednesday. The stock rose further by 0.21 per cent the next day.

GQ Ball Pen's share price surged 151 per cent in just two months, closing at Tk 400.70 each on Thursday. The company, despite incurring losses for the five years through FY24, declared nominal dividends to avoid junk status.

The question remains whether these probes will lead to any timely action and set deterrents for manipulators. Past experience suggests otherwise.

The BSEC's enforcement process is lengthy. Inquiry committees often seek extensions beyond the 30-day timeframe. Reports, once submitted, are passed through several departments before reaching enforcement. Hearings are delayed as manipulators either skip appearances or seek additional time. Even after hearings, enforcement reports take months to process, and decisions from the commission often come more than a year later.

In many cases, actions are taken after three to four years, and the measures usually amount to financial penalties, which experts say do little to deter manipulation.

Former BSEC chairman Faruq Ahmad Siddiqi noted that, "The problem lies in all sides of the capital market."

Mazedur Rahman of the taskforce said that many of the existing rules and regulations had been framed 30-40 years ago. "We need a change in the overall regulatory systems. The taskforce has mentioned it in its report."

From the DSE's perspective, shareholder director Minhaz Mannan Emon said their board is not kept informed about queries made by the exchange's regulatory division under the chief regulatory officer (CRO). "Even the exchange's managing director (MD) is not informed of the matter and that's why at least the MD should be informed of queries made by the CRO's department," he said.

Mazedur Rahman further suggested that the introduction of state-of-the-art surveillance software could reduce the risk of arbitrary queries based on a "choose and pick" approach.

BSEC spokesperson Md. Abul Kalam, however, said they cannot bypass established procedures for investigations and enforcement.

"That's why it takes time to reach the final stage of enforcement action," he said.

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