RECENT TRENDS IN CAPITAL MARKET OF BANGLADESH: CRITICAL EVALUATION OF REGULATION Syed Golam Shahjarul Alam Examination Committee Dr. Sundar Venkatesh (Chairperson) Dr. Winai Wongsurawat (Co-chair) Dr. Yousre Badir (Member) 1
AGENDA � Objective of the study � Overview of Capital Market of Bangladesh � Summary of Ibrahim Khalid Committee report(2011) � Methodology � Empirical examination of three problems identified by Empirical examination of three problems identified by Ibrahim Khalid committee (2011) Stock price “Manipulation” � Stock split � Asset revaluation � � Conclusions and Recommendations 2
OBJECTIVES � To analyze and identify the reasons (Esp., regulatory rules.) for recent stock market volatility in Bangladesh. � To review the existing listing and trading rules in Stock Exchanges in Bangladesh. Stock Exchanges in Bangladesh. � To recommend some guidelines for better regulations to strengthen the capital market of Bangladesh. 3
Overview of Capital Market of Bangladesh Overview of Capital Market of Bangladesh 4
Capital Market Overview � Capital market of Bangladesh consists Securities Exchange Commission (SEC) as the Regulator, two stock exchanges (the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE)) which deal in the secondary capital market. DSE was established as a public Limited Company in April 1954 while CSE in April 1995. Company in April 1954 while CSE in April 1995. � The SEC has issued licenses to 27 institutions to act in the capital market. Of these, 19 institutions are Merchant Banker & Portfolio Manager while 7 are Issue Managers and 1(one) acts as Issue Manager and Underwriter. 5
Recent trends of DSE General Index 6
Volatility of DSE compared to other stock markets Name of the Index Index Return Std. Dev of index return (Dec’10-Jan’12) (Dec’10-Jan’12) DSE (Bangladesh) (50%) 11% BSE-30 (India) (14%) 7.8% SET (Thailand) 55.62% 5.84% FTSE Bursa Index 19.34% 4.38% (Malaysia) 7
HIGHEST AND LOWEST RECORDS OF DSE IN 2010 Lowest Values Highest Values Total Number of Trades 88288 389310 Total Trade Volume 24432104 242856735 Total Trad Value in Taka(mn) 6238.070 32495.756 Total Market Capital in Taka(bn) 1914.046 3680.714 DSI Index 3773.76 7383.93 DSE General Index 4568.40 8918.51 8
DSE Top 5 beneficiary Owner (BO) Account holders in 2010 Name Total Annual Turnover Eqv. USD (Tk. Billion ) (In Billion ) 9.67 Prime Bank Investment Ltd. 676.73 7.94 7.94 IDLC Finance Ltd. IDLC Finance Ltd. 555.58 555.58 7.50 LankaBanglaSecurities Ltd. 525.33 Trust Bank Ltd. 523.25 7.48 7.10 AB Investments Ltd. 497.33 9
NEW INVESTORS WITH INADEQUATE KNOWLEDGE Change in total Number of Beneficiary Owner(BO) Accounts in two Years Date Total No. of BO A/C Change (+/-) 01.01.2009 1,468,500 -- 30.06.2009 30.06.2009 1,419,019 1,419,019 (49481) (49481) 31.12.2009 1,920,602 5,01,583 30.06.2010 2,570,654 6,50,052 31.12.2010 3,379,719 8,09,065 10
NUMBER OF NEW INVESTORS � Dramatic increase in new investors indicates that the market might be overcrowded with naive and uninformed investors that might lead more speculation in the market. 11
IBRAHIM KHALID COMMITTEE REPORT (2011) Ibrahim Khalid share probe Committee Report (2011) identifies following broad factors behind recent capital market volatility in Bangladesh: � Primary Issue related Problems: � Faulty Methods of IPO � High premium for stock listing � Illegal Private placement market � Illegal Private placement market � Asset Revaluation of Companies before listing to charge higher premium. � Secondary market related problems: � Circular trading in Secondary market � Stock Split � Stock Price Manipulation through Omnibus Accounts 12
IBRAHIM KHALID COMMITTEE REPORT (2011) � Regulatory Failure � Inconsistency in regulatory activities � Supporting and legalization of unethical activities of Big Investors � Irresponsible Behavior/Weakness in many areas � Formulating policies to support market Players � Formulating policies to support market Players (Manipulators) � Lack of Due Diligence � Lack of Co-ordination between SEC and Stock exchanges � Allowing Financial Institutions to invest in capital market aggressively � SEC Failed to take measure against manipulation of Financial statements 13
IBRAHIM KHALID COMMITTEE REPORT (2011) � Stock Exchange Demutualization � Formulating policy for Capital Market financing by FI’s � Ensuring transparency in dealing with Omnibus Accounts � Prohibit share trading by some Government Officials (e.g., SEC, DSE, CSE, Bangladesh bank, Commercial bank officials) officials) � Asset Revaluation by companies should be reviewed by SEC � Review the Book-Building Method of IPO � Restructuring of SEC � Uniform face-value of all companies � Legal actions against market players/manipulators 14
Empirical examination of three problems identified by Ibrahim Khalid committee (2011) � Stock price “Manipulation” � Stock split � Stock split � Asset revaluation 15
METHODOLOGY � Data Sources � Primary (Dhaka Stock Exchange) � Secondary Sources (Publications and websites) � Analysis Technique/method Analysis Technique/method � Qualitative analysis � Quantitative Analysis 16
TOP 10 GAINERS OF DSE IN 2010 Top 10 Gainers of DSE in 2010 Market Adjusted Company name-Category Price (TK) Price(TK) Change Return (%) (01/01/10) 30/12/10) (%) 4076.99 Ctg. Vegetables-Z 119.75 5099.50 4158.46 710.54 Safco Spinning-Z 84.50 753.75 792.01 362.7 362.7 Tallu Spinning-Z Tallu Spinning-Z 156.00 156.00 848.75 848.75 444.17 444.17 238.35 Rahima Food-B 165.25 693.75 319.82 217.48 BD welding-A 66.80 266.50 298.95 175.34 Prime Insurance-A 444.00 1584.25 256.81 162.66 Monno Staffler-A 987.25 3360.50 244.13 157.48 Sonargoan Textile-A 380.00 1288.00 238.95 144.35 Dhaka Insurance-A 812.25 2646.50 225.82 135.61 City Gen Insurance-A 474.25 1503.75 217.08 Market Return (2010) 81.47% 17
STOCK PRICE “MANIPULATION” (CHITTAGONG VEGETABLE) Stock Price of Chittagong Vegetable oil Industries Ltd. Date Price (Tk.) Change in each 6 Month P/E Ratio (%) 30-Jan-09 41.25 - 30-Jun-09 59.25 43.64 Nil 30-Dec-09 110.75 86.92 Nil 31-Jan-10 31-Jan-10 214.00 214.00 93.23 93.23 10.19 10.19 30-Jun-10 1590.00 642.99 75.72 30-Dec-10 5099.50 220.72 242.80 31-Jan-11 4328.75 -15.11 206.10 18
Market adjusted return of Chittagong vegetable oil Industries Ltd Monthly excess stock return, α 1 Month Monthly price of stock Month end Index stock Return Index Return 31/1/2009 4.13 2,649.49 32% -5% 37% 1/28/2009 4.20 2,570.96 2% -3% 5% 26/2/2009 3.40 2,446.92 -19% -5% -14% 30/4/2009 3.50 2,554.36 3% 4% -1% 29/5/2009 3.85 2,572.18 10% 1% 9% 6/30/2009 5.93 3,010.26 54% 17% 37% 30/7/2009 5.80 2,914.53 -2% -3% 1% 31/8/2009 8.53 2,941.28 47% 1% 46% 30/9/2009 13.50 3,083.89 58% 5% 54% 29/10/2009 10.75 3,364.26 -20% 9% -29% 26/11/2009 26/11/2009 10.53 10.53 4,380.95 4,380.95 -2% -2% 30% 30% -32% -32% 12/30/2009 11.08 4,535.53 5% 4% 2% 31/1/2010 21.40 5,367.11 93% 18% 75% 28/2/2010 29.98 5,560.56 40% 4% 36% 31/3/2010 99.43 5,582.33 232% 0% 231% 29/4/2010 169.00 5,654.88 70% 1% 69% 31/5/2010 153.55 6,107.81 -9% 8% -17% 30/6/2010 159.00 6,153.68 4% 1% 3% 29/7/2010 156.95 6,342.76 -1% 3% -4% 31/8/2010 140.00 6,657.97 -11% 5% -16% 30/9/2010 148.88 7,097.38 6% 7% 0% 31/10/2010 249.03 7,957.12 67% 12% 55% 30/11/2010 353.95 8,602.44 42% 8% 34% 19 30/12/2010 509.95 8,290.41 44% -4% 48%
HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF CHITTAGONG VEGETABLES OIL LTD. CHITTAGONG VEGETABLES OIL LTD. CHITTAGONG VEGETABLES OIL LTD. CHITTAGONG VEGETABLES OIL LTD. Paired Differences Degrees Pair t- p-value of Statistic (2-tailed) freedom Std. Std. Error Mean Deviation Mean Lower Upper Stock Return – Stock Return – .2499 .526 .026 .033 .467 2.373 24 .026 index Ret urn As the t-statistic is 2.73 and the p-value is 0.026 that is below 0.05, the null hypothesis is rejected and there is excess market return for the stock. Conclusion: Statistically Significant 20
CAN IT BE FIXED BY REGULATIONS? Actions taken by the regulator to alert the investors � Query to the Company � Investigation of business activities � Investors awareness messages � Investors awareness messages � Repeat of company Fundamentals to DSE Screen � Legal actions against company Directors 21
WHY DIDN’T INVESTORS RESPOND? Possible reasons behind this � Investors confidence � Market inefficiency � Irrational market behavior Irrational market behavior 22
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