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4 years ago

Rejuvenating stock market: PM's six-point directive

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In the backdrop of continuous fall in the country's stock market, Prime Minister Sheikh Hasina held a meeting with the chairman of the Bangladesh Securities and Exchange Commission (BSEC), market experts and other concerned high officials on January 16. Prior to that meeting, some lawmakers raised this issue in Parliament seeking  intervention of the Prime Minister (PM) to end the prolonged bearish trend in the stock market. The PM has given some directives and outlined an action programme that among others include: (i) easy credit facility for market operators, (ii) enhancing participation of banks in the capital market, (iii) boosting investment capacity of state-owned Investment Corporation of Bangladesh (ICB), (iv) attracting more foreign investments, (v) listing more multinational companies, and (vi) listing more profitable state-owned enterprises.

Out of the six-point directives, the first three seem to be short-term measures, while the rest three are long-term in nature. It is believed that such direct intervention with specific action plan will considerably restore the confidence of investors and the market players as well. 

INTERVENTION IN STOCK MARKET: Stock market is not a component of capital market that can be manoeuvred through direct intervention, though policy support in the form of both financial incentives as well as regulatory measures always play a very important role. Stock market has its own course of action which reflects the country's economic condition. In our country, however, stock market is a very unique bourse that does not move in line with the country's economic condition. The market falls when it is supposed to rise reflecting country's economic growth and inversely, it rises when it is supposed to fall. This unique feature of our stock market is rather perplexing and renders investors' analysis and forecast difficult. Consequently, the market still remains at a premature state where analysis, application of financial tools and even market recommendations do not always work. In this situation, investors mostly act based on their guess, hearsay and following market trend that eventually does not allow them to reap the benefit from the market and as such become losers. This type of market always remains highly exposed to unsystematic risks which cannot be remediated through any action plan because financial theories do not work in this type of immature market.

During the last thirty years, our stock market has experienced several crashes, many ups and downs and prolonged bearish situation. Every time, the situation was overcome through either special measures or direct intervention, of which strengthening BSEC, modernising Stock Exchange including demutualisation and widening the role of merchant banks were some of the special measures but most of them were taken in an isolated manner. The country's capital market has not grown on strong fundamentals.

IMPACT OF SHORT-TERM MEASURES: The proposed short-term measures may produce some instant positive results in the market but in the long run, the situation may go back to where it was. Injecting free money will not bring any long-term benefit in the market. As directed by PM, if capital market operators are provided with additional money, they will probably go for buying stocks and securities. Similarly, if the capacity of the ICB is raised with additional funding, they will go for massive buying in the market. Both actions will increase market demand which will eventually help the stock index rise. A positive trend and hope will be created among the general and small investors who will wait for some more days to watch the market condition. In the meantime, the market will start to rise and small investors will be tempted to buy which will lead further rise in the market alluring more small investors who will buy stock at high prices again. Because our investors hardly follow the commonly used maxim of stock market which states that always buy when market falls and sell when market rises.

On the other hand, other market players and ICB cannot continue to buy shares for an indefinite period and at a certain point, they will need to sell their shares too. Usually, they buy at lower price which small investors receive by selling at the bear market, and sells at higher price which small investors buy at the bull market. So, at the end, large market players including the ICB will be benefited and small investors will be losers at the cost of government's additional fund.

The government should therefore think twice to directly fund market operators and ICB. The government may, instead, provide bailout packages directly to the small investors who have lost their money in the name of margin account and allowing them to prudently invest in the market. Additionally, the government may spend this type of money as an incentive in the way of tax credit on dividend or capital gain, tax rebate to the listed companies who will consistently pay dividends. Further, prior to giving bailout funding to the small and  affected investors, they should be turned into real investors from day-traders and there should be strict restriction that bailout-receiving investors must invest their fund constituting portfolio that will consist of risk-free investment, moderately risky investment and some risky investment so that they don't lose at the end. 

ROLE OF MARKET PLAYERS & ICB: Other market players including the ICB do not require additional fund, rather they should be encouraged to offer financial wealth management services to the investors, particularly small investors. They should constitute different portfolios viz, defensive growth portfolio, balanced growth portfolio and advanced growth portfolio. These portfolios will be offered to the small investors who will select the appropriate portfolio based on their risk tolerance and financial strength. Interested investors will deposit fund with this market players and ICB who will buy and sell shares based on the parameters set for each category of portfolios.

Some may confuse this arrangement with mutual fund but actually it is not actually so. However, this type of investment opportunity is considered as a quasi-type of mutual fund as its operation has a proxy similarity with mutual fund. Investment, if made through constituting portfolio, will produce slow but steady growth and even if there is loss, it would remain at tolerable level. In order to ensure transparency of the market players, there should be a provision of making their own investment through portfolio so that any biased decision is not taken. When various risk-based portfolios will be offered to the investors, market players will make fair disclosure mentioning the percentage of their own investment in each type of portfolio.

COMMERCIAL BANK'S ROLE: Short-term recommendation includes enhancement of state-owned banks' participation in the country's stock market. This measure is needed as an immediate response to the market. However, there should be clear direction on how this capacity will be enhanced. Commercial banks must not be allowed to invest depositors' fund in the stock market because deployment of this fund makes the market more vulnerable as banks cannot continue to hold shares for long even in the adverse market condition because deposit is always a short-term fund.

Bank always maintain various forms of reserve funds to meet long-term or contingent obligations; they can use part of this fund for investing in the stock market. Even commercial banks may receive any special funding from the government for investing in the stock market but this fund should not be used for directly buying or selling shares in the market. They may be provided fund to extend margin or loan facility to the small investors who will be selected for investment through selection of portfolio constituted with their own initiative. 

These measures are required to ensure sustainable stock market in the country where there will not be undue competition between small investors and large market players. At the same time, fund received from the government as the last resort of finance must be properly utilised with some restrictive measures for greater interest of the market and the small investors. And the practice of receiving free money from the government as bailout package should be gradually phased out by strengthening market fundamentals. 

Nironjan Roy is a banker based in Toronto, Canada.

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