Jahangirnagar University Faculty of Business Studies Department of Accounting and Information Systems, 10th Batch Assignment on A Brief overview of Capital Market in Bangladesh Course code: 3202 Course title: Corporate Finance Submitted to Mariom Akter Shela Roll No: 1795 Department of Accounting and Information Systems – 10th Batch, Ju Date of submission: 29 -08- 2023 Submitted by Prodip Chandra Bishwas Lecturer Department of Finance & Banking Jahangirnagar university Contents Introduction ---------------------------------------------------------------------------------------------------------Capital market in Bangladesh -----------------------------------------------------------------------------------Function of capital market in BD -------------------------------------------------------------------------------Types of capital markets------------------------------------------------------------------------------------- -----Primary market -------------------------------------------------------------------------------------------------Secondary market ----------------------------------------------------------------------------------------------Basic instruments of capital market------------------------------------------------------------------------------Equity Share---------------------------------------------------------------------------------------------------Preference Share---------------------------------------------------------------------------------------------Debenture-----------------------------------------------------------------------------------------------------Bonds -------------------------------------------------------------------------------------------------------Components of capital market in Bangladesh ----------------------------------------------------------------Stock Exchange in Bangladesh ----------------------------------------------------------------------------Dhaka stock Exchange ---------------------------------------------------------------------------------------Chittagong stock Exchange ----------------------------------------------------------------------------------Regulatory body ------------------------------------------------------------------------------------------------(BSEC) ---------------------------------------------------------------------------------------------------------------Challenges of capital market in Bangladesh--------------------------------------------------------------------progress of capital market in Bangladesh ----------------------------------------------------------------------Conclusion -------------------------------------------------------------------------------------------------------------- Introduction: The capital market is a vital component of a country’s financial system and plays a crucial role in fostering economic growth and development. It is a platform where individuals, businesses, and governments can raise long -term funds by issuing and trading various financial Instruments. These instruments represent ownership or dept -based interests in companies or governments entities. It serves as a crucial avenue for the exchange of financial assets and resources between individuals, institutions, and governments. This market primarily facilitates the buying and selling of securities, such as stocks, bonds, and other investment instruments. It plays a pivotal role in channeling funds from those who have surplus capital to those who require it for productive ventures and long-term investments. It enables companies to raise funds for expansion, innovation, and strategic development by issuing shares or bonds to investors. Simultaneously, it provides investors with opportunities to diversify their portfolios and potentially earn returns on their investments. Capital market in Bangladesh: The capital market in Bangladesh is relatively smaller compared to other Asian markets but holds the position of being the third largest in the South Asian region. Within this context, the country features two comprehensive automated stock exchanges, Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE), as well as an over-the-counter exchange managed by CSE. In addition, there exists a dedicated regulatory body known as the Securities and Exchange Commission (SEC). This regulatory entity is responsible for enforcing rules and regulations, closely monitoring their impact to facilitate the effective functioning and advancement of the capital market. An integral component of the market is Central Depository Bangladesh Limited (CDBL), the sole central depository in the country. CDBL plays a crucial role by providing the necessary infrastructure for the settlement of transactions involving dematerialized securities within both CSE and DSE. Features of capital market: 1. Bridge between Savers and Investment Opportunities: The capital market plays a vital role in connecting savings with investment opportunities, transferring funds from savers to entrepreneurial borrowers. 2. Focus on Long-Term Investment: The capital market serves as a source of funds for long and medium-term investments, not catering to savings with durations of less than one year. 3. Involvement of Intermediaries: The capital market employs various intermediaries like brokers, underwriters, and depositories. These intermediaries function as active components of the capital market and hold significant importance. 4. Influence on Capital Formation: The activities within the capital market have a direct impact on the pace of capital formation in an economy. By presenting appealing prospects to those with surplus funds, the capital market contributes to this process. Types of capital market in Bangladesh: Two types of capital markets exist: the primary market and the secondary market 1. Primary market 2. Secondary market Primary Market: In the primary market, newly issued securities are sold to the public for the first time. This process is known as an initial public offering (IPO) for stocks or a bond issuance for debt instruments. - In this market, shares, debentures, and other securities are initially sold to gather long-term capital. - It deals with new issues and is often termed the "New Issue Market." - Key features include its connection to new issues, its lack of a specific location, and various methods for capital raising such as public issue, offer for sale, private placement, right issue, and electronic-initial public offer. Secondary Market: Secondary Market: The secondary market is where previously issued securities are bought and sold among investors. The most well-known secondary market is the stock exchange, where shares of publicly listed companies are traded. - The secondary market involves trading of previously issued securities. - Transactions in the secondary market typically take place through stock exchanges. - The primary purpose of the secondary market is to provide liquidity to securities. - It follows the primary market, has a specific location, and encourages new investments. Basic Instrument of the capital market: Equity Share Preference Share Debenture Bonds Equity Shares: - These are part of a company's share capital, offering easy liquidity and marketability. - They don't have a fixed dividend rate. - They provide a permanent source of finance to the company but don't guarantee returns to shareholders. - Ownership of equity shares don’t ensure managerial control. Preference Shares: - Also known as preferred stock. - Preference shares have priority in capital repayment and dividend payment. - They often lack voting rights. Debentures: - Corporations issue debentures to raise funds alongside share capital. - Debenture holders receive fixed interest. - Debentures help reduce the company's tax burden. Bonds: - Issued by public authorities, credit institutions, companies, and supranational institutions in the primary market. - A bond is a negotiable certificate entitling the holder to principal repayment along with interest. - Common issuance method is through underwriting. Various types of bonds include bearer bonds, registered bonds, callable bonds, convertible bonds, zero-coupon bonds, and fixed-rate bonds. Components of Capital Market in Bangladesh 1. Stock Exchange 2. Regulatory Bodies 3. Others Dhaka Stock Exchange: Dhaka Stock Exchange (DSE) operates as a publicly traded limited company, established and governed by the Company Act 1994, Security and Exchange Commission Act 1993, Security and Exchange Commission Regulation 1994, and Security Exchange (Inside Trading) regulation 1994. The optimistic market sentiment shifted to a pessimistic one in November 2010, leading to a bearish trend. Between December 2010 and January 2011, the exchange experienced a drop of 1,800 points. The market crash had severe consequences, leaving numerous investors in bankruptcy. It is suspected that the crash was engineered to favor a small group of participants while adversely impacting larger players. Functioning of Dhaka Stock Exchange: • Facilitating the listing of companies • Enabling screen-based automated trading of listed securities • Managing settlement of trades • Approving transactions • Overseeing and controlling the market • Conducting market surveillance • Encouraging more banks, insurance companies, and financial institutions to directly participate in share trading • Separating DSE management from ownership, ensuring professional management • Providing investor education on share transactions • Implementing penalties for member brokers violating contracts Chittagong Stock Exchange: Established on February 12, 1995, as the second stock exchange in Bangladesh's capital market, the Chittagong Stock Exchange (CSE) has played a vital role in energizing the capital markets for many years. Guided by the Demutualization of Exchanges Act 2013, CSE is overseen by a 12member Board of Directors. This board includes 4 elected members from exchange track holders, 7 independent members approved by the commission, and 1 managing director. The Board operates under various regulations, such as the Security Act 1920, Security Ordinance 1969, Security and Exchange Commission Act 1993, CSE Automatic Transaction Regulation 1999, Chittagong Stock Exchange Investors Protection Fund Regulation 1999, Margins Rules 1999, Stock Exchange Transaction Resolution Provision 1998, and Demutualization of Exchanges Act 2013. Notably, CSE introduced a fully automated transaction program in June 1998. The Chittagong Stock Exchange (CSE) has a pivotal role in advancing Bangladesh's capital market. Its key functions include: Enabling Trading of Securities: The CSE facilitates transparent buying and selling of securities, like stocks and bonds Listing and Removal: The CSE sets criteria for listed companies and approves or removes securities from the exchange. Indices: Various indices like CSE30, CSCX, CASPI, CSI, and CSE50 serve as benchmarks to track stock groups. Encouraging Investment: The CSE attracts local and foreign investments by creating an investor-friendly space. It aids firms in capital raising and individuals in securities investment. Regulation: The CSE ensures adherence to securities laws, monitors trade, investigates irregularities, and safeguards market integrity. Technology and Automation: Renowned for its advanced trading system, the CSE utilizes technology for transparent, efficient trading. Bangladesh Securities and Exchange Commission (BSEC) The Bangladesh Securities and Exchange Commission (BSEC) serves as the regulatory authority for Bangladesh's capital market, encompassing the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Established on June 8, 1993, under the Securities and Exchange Commission Act of 1993, the BSEC replaced the previous regulation by the Capital Issues Act of 1947. The commission, attached to the Ministry of Finance, is responsible for overseeing securities legislation and is composed of government-appointed members, including the chairman. It collaborates closely with the Central Depository Bangladesh Limited. The name of the commission was initially "Securities and Exchange Commission" and was officially changed to "Bangladesh Securities and Exchange Commission" on December 10, 2012. The functions of the Bangladesh Securities and Exchange Commission (BSEC) encompass several key areas: Regulation of Stock Exchanges and Securities Markets: BSEC oversees and regulates the operations of stock exchanges and other securities markets. Registration and Regulation of Intermediaries: BSEC registers and regulates various market participants such as stockbrokers, sub-brokers, share transfer agents, merchant bankers, issue managers, trustees, registrars, underwriters, portfolio managers, investment advisers, and other intermediaries within the securities market. Oversight of Collective Investment Schemes: BSEC monitors and regulates collective investment schemes, including different types of mutual funds. Prevention of Fraudulent Practices: BSEC prohibits and takes measures against fraudulent and unfair trade practices related to securities trading in any securities market. Regulation of Share Acquisition and Takeovers: BSEC regulates the significant acquisition of shares and the takeover of companies. Investigation and Inspection: BSEC conducts investigations, inspections, inquiries, and audits of issuers, dealers of securities, stock exchanges, intermediaries, and self-regulatory organizations in the securities market. Research and Information Dissemination: BSEC conducts research and publishes information relevant to the securities market. Challenges of capital market in Bangladesh Limited Depth: The capital market of Bangladesh often suffers from shallow trading options, resulting in reduced liquidity and less interest from investors. Price Volatility: Price fluctuations are a common occurrence in the market due to factors like economic instability, investor sentiment, and changes in regulations. Low Awareness: Many potential investors are not well-informed about how the capital market operates, leading to hesitancy in their involvement. Weak Regulatory Structure: Despite attempts at regulation, enforcement gaps and shortcomings in the regulatory framework can lead to concerns regarding transparency and safeguarding investor interests. Inadequate Market Research: Insufficient coverage and analysis of companies make it difficult for investors to make well-founded decisions. Infrastructure Limitations: Technological and infrastructural constraints can affect trading efficiency and delay settlement processes. Progress of capital market in BD Over the span of fifty years, Bangladesh has achieved notable milestones. The country's economy crossed the $400 billion mark in 2021, demonstrating significant progress. Moreover, the per capita income surged to $2,554 during FY21, surpassing neighboring nations, including India. Impressively, foreign reserves reached an all-time high of $48 billion, while exports surged by 30 percent, imports by 51 percent, and revenue collection by 26 percent year-onyear in 2021. The International Monetary Fund's projection estimates a 6.6 percent growth in Bangladesh's economy for FY2022. This growth could potentially accelerate further if vaccination rates increase and pandemic impacts are well controlled, especially in light of emerging new variants. Looking ahead, the Centre for Economics and Business Research predicts Bangladesh to rank as the 24th largest economy among 191 countries by 2036.The capital market experienced a remarkable year in 2021 as well. The Dhaka Stock Exchange (DSE) achieved a return of over 20 percent for two consecutive years. In fact, the DSE's 2021 return of 25.1 percent was among the best globally. Conclusion In conclusion, the capital market serves as a crucial pillar of any economy, providing the necessary infrastructure for raising funds, investing, and contributing to economic growth and development. Through its primary and secondary markets, it enables businesses to secure longterm financing for expansion and innovation, while offering a diverse range of investment opportunities for individuals and institution.
