It is quite difficult to ignore some interesting developments on the capital market front. Instead of depending on the inherent strength of the listed stocks, the market, it seems, relies more on the relations between two key regulatory bodies---the Bangladesh Bank (BB) and the Bangladesh Securities and Exchange Commission (BSEC).
The discord between the two over transferring undistributed dividends of scheduled banks to the recently formed Capital Market Stabilisation Fund (CMSF) and the banks' exposure limit to the capital market are more or less known to all concerned.
The BB has objected to the transfer of undistributed dividends to the CMSF, much to the discomfort of the BSEC that had initiated the formation of the Fund. The BB said such transfer is contrary to the provisions of the Bank Company Act. Besides, the central bank in August this year asked the banks to submit daily reports on their transactions. The main reason for taking such a measure was the alleged over-exposure of some banks to the stock market and the diversion of a part of stimulus packages to unproductive activities.
The BB measures created a negative effect on the stock market and the merchant banks wanted discontinuation of the BB measures.
Since then, the relations between the BB and the BSEC turned a bit strained. The issue concerning the banks' dividend transfer to the CMSF soured the relations further.
Lately, a suggestion to exclude the banks' investment in perpetual banks from the estimate of their exposure to the capital market has been floated against the backdrop of a continuous slide in stock prices. The market was rather buoyant until October last when the main index of the Dhaka Stock Exchange (DSEX) reached 7,400 marks with the prices of both good and a few bad stocks going up. But as the dividend declarations by a few heavyweights were found not incommensurate with their prices, the market started sliding and shed several hundred points in consecutive trading sessions.
Against this backdrop, the BB and the BSEC held a meeting last week to discuss the issues of discord. Two sides, reportedly, agreed to take bourse-boosting measures. But some developments following the meeting did, however, expose a deep fissure in relations between the two entities.
At the end of the meeting held on November 30 last, a BSEC commissioner informed the media about the BB's consent to some of the BSEC's proposals such as the exclusion of banks' investment in bonds from the capital market exposure and consideration to the cost price instead of market prices of stocks while calculating the banks' exposure.
The next day, the market rebounded strongly, riding on the positive news about the BB-BSEC meeting. But the central bank poured cold water on the renewed enthusiasm of the 'investors' as it made it clear through a press statement that there had not been any decision at the meeting as reported in a section of the media.
But a positive piece of news that the BB and the BSEC will attend a 'coordination' meeting on December 07 next at the behest of the Ministry of Finance could, seemingly, avoid a negative impact of the BB statement on the market.
Despite the risk elements, banks have enough reasons to be interested in putting a sizeable volume of the fund in the stock market hoping to make a hefty profit. Banks' profitability has gone down in recent months notably because of the unabated increase in the volume of classified loans and cut in the lending rate.
But as the banking sector regulator, the central bank cannot allow the banks to go after a risk-ridden profit-earning mission. It has to keep an eye on the exposure limit fixed under the law. Nor can it ignore what has been said in the Bank Company Act about dividends and exposure to securities. It also needs to be seen whether the debt instruments, perpetual or otherwise, are part of securities as defined in the relevant laws and rules. Banks have reportedly invested more than Tk 50 billion in perpetual bonds so far.
The exposure of banks to the stock market is linked to their lending operations. Such increased exposure reduces the banks' lending to a certain degree.
The desperation on the part of some stakeholders, including the BSEC, to get funds from the banks is understandable as institutional investment matters in keeping the market buoyant. But the eagerness about engaging the banks in the stock market seems to be a bit more than usual.
The involvement of general investors remains the key to the success of any market. So, the BSEC and relevant others do need to see the level of participation of the general investors in the market.
Unfortunately, investors here are more interested in capital gain than dividend income at the end of the year. It is hard to blame the investors for that. A few companies that offer handsome dividends are over-priced. So, the propensity to make a hefty profit overnight through buy and sale of stocks is strong among a large section of investors.
It is widely suspected that manipulators, big and small, are at work in the stock market. The small-time manipulators are not very damaging for the market. But the bigger ones are, as they have the power and authority to decide or dictate many things. These manipulators, though invisible, are all-pervading.