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The Demutalisation of the Dhaka Stock Exchange (DSE) is a seminal moment in the development in Bangladesh's capital markets. Two of the key components of this process are the sale of a 25 per cent stake to a strategic investor followed by an initial public offering (IPO) for a further 35 per cent of the shares. The culmination of a near 2-year process to find the right strategic partner for the Dhaka Stock Exchange (DSE) was the news last week that two international bids were submitted-one by the consortium of Shenzhen-Shanghai Consortium and the other one comprising the National Stock Exchange (NSE) of India, Nasdaq, and Brummer and Partners (a Swedish Private Equity firm). The Shenzhen-Shanghai Consortium had submitted the highest bid of BDT 22 per share for a 25 per cent stake in the DSE. This bid was substantially higher than the BDT 15 per share bid submitted by the consortium led by NSE. This higher bid reflects the optimism the China consortium has in the future potential growth of Bangladesh capital market, the economy and the untapped potential of deeper economic collaboration as part of the Chinese Belt and Road Initiative (BRI).
The Chinese bid reportedly also contained a technical package in the amount of more than $30 million of additional investment to overhaul the technology platform of the DSE, again believed to be substantially higher than the unspecified technical support to be offered by the NSE-led consortium. The Shenzhen exchange alone has more than 1000 people in its technology division. Shanghai Exchange also has a similar workforce working on technology development. Accordingly, the potential contribution from the Shenzhen-Shanghai bid appears to be transformational not only for the DSE but for the capital markets more broadly. Indeed, it may be argued that the longer-term technology collaboration from the Chinese consortium could be more valuable for the DSE than the financial offer of BDT 22 or around $120million for the 25 per cent stake.
In selecting strategic partners, it is always important to determine the financial strength of potential strategic partners. The combined Shenzhen-Shanghai consortium revenue in 2017 was $3.0 billion and the combined profit was $1.6 billion. These revenue and profit figures were almost ten times that of the NSE 2017 revenue ($360 million) and profits ($157 million). The market capitalisation of the Shenzhen-Shanghai consortium is currently about $8.0 trillion, compared with $1.6 trillion market capitalization of NSE. Based on the standard criteria for ranking bids offered by interested parties, SEC Board has rightly decided in favour of the Shenzhen-Shanghai consortium.
Against this background, it was widely reported in Bangladesh media that the Bangladesh Securities and Exchange Commission (BSEC) has instructed the DSE Board to reconsider its decision for selecting the Chinese consortium bid and somehow accommodate the NSE bid. While recognising the challenges and geopolitical balancing act of trying to accommodate both China and India, it is also important that the regulator or the government is not seen to be unduly favouring one bid over another and undermining fair and due process by trying to inappropriately influence what has been an open and transparent bidding process where in the end the Chinese consortium won with an offer 47 per cent above that of the NSE. Such intervention by the regulator would not only risk setting back China-Bangladesh economic relations at a critical time in our infrastructure development, but as importantly, it could jeopardise Bangladesh's justly won reputation as a neutral and non-aligned country that is open to doing business and take investment from all the major economic powers.
Coming back to the economic merits of the China bid, we believe Bangladesh capital markets and economy can benefit by much more than the initial $120mn investment. There is a major opportunity to use the strategic partnership/investment by the Shenzhen-Shanghai consortium to act as a catalyst to establish a China-Bangladesh financial corridor. Physical infrastructure is important but financial sector/capital markets infrastructure development is also important. In this context it is worth noting that China now has the second largest equity and third largest bond markets in the world. The Shanghai and Shenzhen stock exchanges have a combined market capitalization of around $8.0 trillion and almost 250 million retail investors.
The financial corridor concept can see Bangladesh move away from a traditional foreign direct investment (FDI) approach to infrastructure financing and foreign investment towards a new and more innovative model that will expand our capital markets. One of the major challenges for Bangladesh is to increase issuance. The DSE market capitalisation to gross domestic product (GDP) ratio is only 22 per cent, one of them lowest in the region. One way to increase issuance and broaden the number of issues in the stock market is to take a different approach to infrastructure finance. Chinese infrastructure companies can form joint ventures with Bangladeshi firms and access capital markets in China with dual listings in both Shenzhen-Shanghai exchanges and on the DSE. They can also issue RMB-denominated, also known as "Panda" bonds, to access the huge pool of liquidity available in China. These could be listed in Bangladesh to help our own bond market development.
There is also a significant scope for Chinese portfolio investment to come into the Bangladesh stock market. At the moment the capital account is not fully liberalised so retail investors cannot invest in Bangladesh directly. But there is scope through the Stock Connect link to Hong Kong-listed funds and thereby to the DSE via a Bangladesh Country Fund or ETF listed in Hong Kong. Another area where China is progressing rapidly is the issuance of Asset Backed Securities or ABS, which can also form a future important source for infrastructure financing.
Another major potential area for the China-Bangladesh financial corridor is in technology investment. The Government of Bangladesh has an export target of $5.0-billion ICT (Information and communication technology) sector within five years and the Shenzhen-Shanghai consortium collaboration with DSE can play an important role both in securing financing and forming joint ventures with leading Chinese technology companies. The Chinese exchanges have developed a unique " V-Next" platform or Venture capital (VC) ecosystem to encourage innovation and risk capital access to technology firms. They are then encouraged to IPO and list on the exchanges. This model could be introduced to Bangladesh and support the Bangladesh Government's export target of $5.0 billion. Note that in 2017 Chinese e-commerce firm Alibaba and social media/messaging giant Tencent were worth more than their US counterparts Amazon and Facebook.
A final area where China and Bangladesh have both faced major challenges and where the DSE-China Consortium partnership can play an important role is in the area of financial transparency and governance. They have developed the "5E" investor information service whereby company reporting, accounts and even shareholder voting are all done online and through mobile phones. The Shenzhen Stock Exchange (SZSE) took the lead in adopting XBRL (extensible business reporting language) to streamline information dissemination. The exchange also provides free trading data and information to investors and the SZSE organises regular investor relations events for investors to meet executives for face-to-face communication. A dedicated website provides all related information to investors free of charge and enables interactive communication between investors and listed companies.
The Chinese consortium has also proposed establishment of a joint China-Bangladesh Finance Institute both in both Dhaka and Shenzhen. This can play a key role in developing and implementing the China-Bangladesh financial corridor concept that can help Bangladesh in its next phase of financial sector development and growth.
China has already emerged as the second largest economy in the world and on its way to become the largest economy globally by 2030. India is also growing rapidly and likely to become a major economic power in the regional and global contexts. Bangladesh has to engage with both India and China quite extensively in the coming years in terms of trade and investment at the private sector levels and financial support for infrastructure investment at the government level. Given the geo-political rivalry between China and India, Bangladesh would need to walk a very balanced and fine line based on our national interest, objective and transparent decision-making process. India, China, Japan, and Western Powers like EU and the USA will be more interested in participating in business opportunities, projects, etc. in Bangladesh in greater numbers. Pressures will come from different world powers to tilt the decisions in their favour through exertion of political pressures. The only way Bangladesh can walk through these geo-political minefields is by making the bidding/selection processes objective, fair, and transparent. In the past the Government of Bangladesh has decided on many projects without following its own bidding/procurement process (like the Ruppur Nuclear Power project) or by accepting unsolicited bids without going through the competitive bidding process. This kind of non-transparent contracting has encouraged foreign companies or countries to lobby at the political level to get contracts which is against the national interest of Bangladesh and distorts the image of Bangladesh. The only way Bangladesh will be able to protect its national interest against these kinds of pressures is by upholding strongly transparency and following strictly its own national procurement policy.
I must congratulate DSE board for strictly following a transparent bidding process and be able to attract two good international bids from two good consortiums. Nobody should interfere with that open and transparent process. BSEC, as a regulator, should only ensure that in making its recommendation to BSEC the DSE Board has fully complied with the due process in a transparent manner and the most suitable consortium - based on criteria like price per share offered, financial strength of the consortium, capacity to provide technical support to strengthen DSE's technology platform, and the expressed offer to provide technical support in quantitative and quality terms - has been put forward as the recommended bidder. It is completely unacceptable for a regulator like BSEC to exert pressure the DSE with a view to forcing the latter to deviate from transparently announced criteria and processes. The illegal pressures exerted on the DSE by the regulator has already been widely reported in the domestic and international media thereby tarnishing Bangladesh's image to foreign investors at home and abroad. DSE Board members are rightly resisting the pressure and should stays on the right path upholding the due process and the interest of DSE and our stock market. I hope our political representatives responsible for handling economic issues will realise the importance of following the due process and step in to support the DSE to continue with its demutualisation agenda.
Ahsan H. Mansur is Executive Director, Policy research Institute of Bangladesh.