Outwitting dirty players in stocks
Abu Ahmed | Published:
March 30, 2016 19:45:56
October 24, 2017 22:11:46
Investors, by and large, want a burgeoning stock market, but such a market also brings in more risks than a normal or submerged bourse. In a surging stock market, everyone, specially the regulator, wants to take credit, but a dull or depressed bourse is claimed by none. Behind every surge, there seems to be a hidden scandal. The scandal masters, for a while, disguise themselves under a cover but at their chosen time, they come out taking their grabs off and strike below the wrists of the exuberant investors. The regulator initially takes credit for a surge in stock prices, but when scamsters are through with their tricks, the regulator says it has been caught off-guard. It promises to catch the culprits behind the scam though at the end, it catches none.
In many cases, scamsters take the advantage of a sleeping regulator, or its ignorance, or holes in the existing regulations. Prices of stocks are pushed up to a sky-high level through a planned campaign of virtues of holding stocks by the investors. When irrational exuberance completes its full circle and when more and more investors get intoxicated by greed, the clever players taking the advantage of increasing demand for stocks by the new entrants sell out all their entire holdings and walk away from the scene with bagful of money.
Almost all the scams or scandals surrounding the stock markets around the world happened when markets were overheated and when stocks snapped relationship with their fundamentals while being priced. Everywhere, the aftermath scenarios were the same: the blame-game started and the regulator vowed to catch the scam masters or the players who caused market to fall, but the noise lasted only for a while. After a period, calmness came back, markets again started moving, investors forgot the past and they raised a demand for a normal market.
In Bangladesh, two scams, one in 1996 and the other in 2010, happened before the very eyes of the regulator Bangladesh Securities Exchange Commission (BSEC). On both the occasions, hundreds of thousands of investors, specially those who entered the market late, were rendered penniless. The dream of becoming rich overnight through stock market investment turned sour within a few days of their entrance to the market. On both the occasions, it was said stocks hold more future and the prices would go up far above. Financially illiterate investors believed what was said by stock punters. But when the market crashed, a new class of sharks appeared on the scene to explain why and who caused the crash.
After every crash, investors do not leave the market; they wait to see what the regulator and the government would do for them. Most of the investors believe, though naively, that the market will again rebound. But when that does not happen, they start getting rid of illusion and slowly they become inactive first. Then they leave the market in large numbers.
Stock market is meant for informed investors who can read financial statements in between the lines and also who can read market trends.
It is also said stock investment is only for the rich and men with marginal savings do not fit into such investments. But the Bangladesh case is different; here requirement of financial literacy takes a back seat and also the investors' capability of reading who says what is not there. The retail investors are targeted by the overvalued IPO (initial public offering) sellers and also by those sponsors who chose the path of getting rich by selling their so-called financial products like right offers or bonus stocks, no matter what their prices are.
Can cheating of investors happen in a low stock market like the one we have now? Yes, it can and the same is going on regularly though the regulator seldom finds time to understand how that has been happening. Some crooks among sponsors are using the route of merger of a listed company with a non-listed overvalued company to cheat the not-fully-informed investors. Through merger, these crooks overvalue the non-listed company where they hold most of shares or the whole of equity and through merger scheme they issue hundreds of thousands of extra shares of the listed company in their favour. The whole game is set to sell the extra shares received by the sponsors from the merger scheme to the investors. When the merger plan is announced, the investors are not even aware of what the financial variables of the to-be-merged company are.
Merger and thereafter sale of shares by the investors is nothing but selling the newly-merged company to the investors, but the fact remains that this merged company did not qualify to come to the market through IPO route. Our humble suggestion is that when a company asks for merger with another private limited or non-listed company, the regulator should ask for some basic facts about the to-be-merged company. Of the facts, the regulator should see whether the company was in a profit-making position or not, whether taxes were paid against the profits and whether the valuation of the to-be-merged company was right. In addition, to save the investors from the merging tricks, the BSEC (Bangladesh Securities and Exchange Commission) should impose a lock-in on sale of the sponsors' shares for at least three years. Also, the BSEC should outright refuse to approve a merger plan of a listed company with a non-listed one.
Low market is good in the sense that at least in such a market, the dirty players who include some sponsors also, cannot cheat the ordinary retail investors on a scale they want. Everyone is asking a question why the stock market is going down continuously. The simple reasoning of economics says, prices of stock can go down if more money goes out of the market than the amount of money entering. To prevent a further slide in the stock prices, the BSEC should see how money is going out of the market.
The writer is Professor of Economics University of Dhaka