Restarting the stock market with improved confidence

Bangladesh capital market needs a re-start to get its normal behaviour. In fact, tradings on both the stock exchanges are set to resume from today (May 31, 2020) after a 66-day break, due to Covid-19 pandemic.

Despite our overall economy has been growing the capital market showed continuously nosedive posting a negative growth throughout the year 2019 while bourses in other neighbouring countries and emerging Asian countries posted growth in the period. In the year 2019, the return at Indian key index, SENSEX, was 14.70 per cent, followed by 10.70 per cent of Pakistani KSE100, 8.10 per cent of Vietnamese VNINDEX, 1.0 per cent of Thai SET and 2.30 per cent of Sir Lankan CSEALL. But Dhaka Stock Exchange (DSE) recorded negative index return of 17.30 per cent in last year among the Asian countries.

Capital market is a part of financial market and it brings buyers and sellers together to trade stocks, bonds and other financial assets, derivatives etc. Capital market helps people with ideas to become entrepreneurs and help small businesses grow into big companies raising fund by issuing shares, bonds etc. The market acts in linking investors and savers and facilitates the movement of capital to be used more profitability and productively to boost the national income.  Mobilisation of savings to finance long-term investment facilitates trading of securities.

Two bourses, Dhaka Stock Exchange Ltd (DSE) and Chittagong Stock Exchange Ltd (CSE), operate in the capital market of Bangladesh. According to DSE website, currently there are 22 industrial sectors  which accommodate 578 listed companies/securities on DSE.

This list included 221 Treasury Bonds which are listed but not in transaction in the market as the investors are not attracted to such bonds. People choose to invest in the share of listed companies.

Recently both the bourses DSE and CSE get new faces in their board with new chairmen. The Bangladesh Securities and Exchange Commission (BSEC) also gets three new commissioners. Prof Shibli Rubayat Ul Islam becomes the new chairman of the regulatory body in May 2020.  

Despite various support extended from the government following a big disaster in 2010 the capital market couldn't be stabled till the last trading date 23 March 2020. Rather it witnessed free fall due to spread of coronavirus, Covid-19 to be precise.

REGULATORY ENVIRONMENT: The regulatory environment is very important for the performance of the capital market.  Corporate Governance Code (CGC) issued by BSEC on June 3, 2018 became effective from January 1, 2019. Implementing CGC in the companies is mandatory to ensure ethical and transparent decision making process in the listed companies. Investors lost their capital on their investment due to continuous poor business performance of the banking, non-banking financial institutions and insurance companies. Many of these companies are not giving dividends and showed poor earnings per share (EPS). So it is imperative to activate the market intelligence activity to identify the corrupt actions of board of these companies in connection to granting loans for personal interest. It is urgently needed to take exemplary action against the corrupt people and companies and expose their misdeeds in the media.   

This is also the high time to bring more quality companies in the market and need to withdraw the waiver from compulsory listing given to the companies having paid-up capital exceeding Tk 500 million.

Extension of maturity tenure of the Mutual Fund was challenged by a foreign investor. High Court sought explanation from the BSEC for extending Mutual Fund tenure following a British investing firm's case against the stock market regulator for flouting mutual fund rules. The BSEC allowed close-end mutual fund extension through flouting rules.

A number of companies previously disappeared after raising fund from the stock market and appropriate disciplinary actions against such defaulters who simply cheated the innocent investors are also urgently needed.

Companies are not interested to be listed with the bourses due to unwanted interference on the routine affaires by the BSEC. Instead the BSEC should allow the market to operate normally. It is also needed to increase interaction with the professionals like company secretaries and head of internal auditors who are responsible to implement and ensure effectiveness of CGC in the listed companies.

Regulatory requirements need to be easier to comply with so that the entrepreneurs come to the stock market for raising capital through issuance of shares and convertible or non-convertible bonds.

DIGITAL INNOVATION AND WHISTLE BLOWING: Use of technology is a must to minimise dependency on the hard copy report of TREC (Trading Right Entitlement Certificate) and listed companies. To overcome the challenges posed by the Covid-19 pandemic the regulator introduced virtual meeting and also encouraged online reporting. Applying its intelligence on the share trading, Central Depository Bangladesh Ltd (CDBL) should prevent short selling of shares by any brokerage house, detect any attempt of short sale and stop before it happened. The intelligence team should constantly monitor the unusual share trading with ill intension from any brokerage house and immediately stop it before the fraudster could raise the price of the specific shares by fabricated transaction to sale the share at a high price and earn unethical profit through gambling.

Holding of fruitful training, seminar, workshop for creating awareness among the stakeholders are needed for building confidence of the investors. Interaction with all stakeholders will boost up the efforts of the regulator to brighten its image.

The traders from various TREC offices need training on the Code of Ethics. The regulator should meet with TREC holders so that they comply with compulsory regulation and law.

The regulator also needs to announce whistle blowing help line with a non-retaliation policy to protect the whistle blowers. In Europe and the US, the whistle blowers are awarded with a certain percentage of penalty money recovered from the companies at fault.

CORPORATE GOVERNANCE CODE: It is important to ensure that companies do comply with corporate governance code in their business  activities and decision making process. Intelligence team must identify the intentional misconduct of regulatory compliance requirements by the companies and bring them under punishment as per securities regulations.

The BSEC may encourage the Corporate Governance Excellence Award programme, launched by the Institute of Chartered Secretaries of Bangladesh (ICSB) and such events arranged by other professional institutions to recognise the company management who are committed to comply with the CGC requirement.

Companies are required to appoint certain number of sponsor directors in the board as per Insurance Act but when all sponsors expire or sell their entire shares, how the required number of sponsor directors be filled in the board? Such ambiguity and contradiction exist in the regulatory requirements in respect to timeline to complete audit of annual accounts, number of independent and sponsor directors in the board should be minimise through review of Companies Act, Insurance Act and CGC in cordination among the Bangladesh Bank, BSEC and Insurance Development & Regulatory Authority (IDRA).

Office of the Registrar of Joint Stock Companies & Firms receive and certify the returns, statements and reports of the companies as per Companies Act which may also be pre-authenticated by the professional chartered secretaries firm prior to submission of return to RJSC to ensure the companies' compliance with CGC and provisions of law.

The companies which disappeared after raising capital through floating IPO from the capital market and the listed companies failing to hold AGM should be brought under investigation and face the music for building trust of the stakeholders.

In 2018, the US Securities and Exchange Commission charged a Silicon Valley company Theranos and its CEO Elizabeth Holmes for deceiving investors by "massive fraud" through false or exaggerated claims about the accuracy of the company's blood-testing technology. Holmes paid US$0.5 million fine and returned shares to the company. Holmes was also barred from serving as an officer at a public company for a decade. Company's former president Ramesh Sunny Balwani was also charged.

According to the SEC, Theranos raised more than $700 million from investors through fraudulent claims, notably by saying its portable blood-testing machine could conduct complex blood tests through just a few drops of blood. Meanwhile, most tests were conducted on machines built by other companies. Theranos also falsely claimed that its technology was in use by the Department of Defense, according to the SEC. In 2014, as the company claimed it would generate $100 million in revenue, it ultimately earned nearer to $0.1 million only.

It is therefore, important to strengthen the corporate fraud preventing and monitoring activities. Fraud prevention unit in collaboration with Anti Corruption Commission (ACC) should work to prevent corporate corruption and impose penalty/punishment for proven cases and disclose the name of the corrupt individual and companies in newspapers.

All listed companies must maintain ethical culture in their organisations. To building and maintaining corporate ethical culture in organization, the company has to establish Compliance Programme in place. A corporate compliance programme should include necessary elements eg. Compliance officer with required knowledge and experience, policies and procedure in place like anti-bribery and corruption policy, conflict of interest policy, fraud management policy, third party management procedure, code of conduct (CoC), CSR/sponsorship/donation procedure, gift and entertainment procedure etc and training and attestation of CoC by the employees. Compliance auditor report should include information whether a company has an appropriate compliance programme in place or not.

It is expected that a restart of Bangladesh capital market on Sunday (May 31, 2020) will also start an era of improving and increasing confidence of the stakeholders.

 The writer is Secretary General, IIA Bangladesh and

Council Member, ICSB. [email protected]