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
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.
To recommend some guidelines for better
regulations to strengthen the capital market of
Bangladesh.
3
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.
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
Total Number of Trades
Highest Values
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 )
Prime Bank Investment Ltd.
676.73
9.67
IDLC Finance Ltd.
555.58
7.94
LankaBanglaSecurities Ltd.
525.33
7.50
Trust Bank Ltd.
523.25
7.48
AB Investments Ltd.
497.33
7.10
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
1,419,019
(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
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
(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)
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
Asset revaluation
15
METHODOLOGY
Data Sources
Primary (Dhaka Stock Exchange)
Secondary Sources (Publications and websites)
Analysis Technique/method
Qualitative analysis
Quantitative Analysis
16
TOP 10 GAINERS OF DSE IN 2010
Top 10 Gainers of DSE in 2010
Company name-Category
Price (TK)
(01/01/10)
Price(TK)
30/12/10)
Change
(%)
Market Adjusted
Return (%)
Ctg. Vegetables-Z
119.75
5099.50
4158.46
4076.99
Safco Spinning-Z
84.50
753.75
792.01
710.54
Tallu Spinning-Z
156.00
848.75
444.17
362.7
Rahima Food-B
165.25
693.75
319.82
238.35
BD welding-A
66.80
266.50
298.95
217.48
Prime Insurance-A
444.00
1584.25
256.81
175.34
Monno Staffler-A
987.25
3360.50
244.13
162.66
Sonargoan Textile-A
380.00
1288.00
238.95
157.48
Dhaka Insurance-A
812.25
2646.50
225.82
144.35
City Gen Insurance-A
474.25
1503.75
217.08
135.61
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
214.00
93.23
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
Month
Monthly price of stock
Month end Index
stock Return
Index Return
return, α1
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
10.53
4,380.95
-2%
30%
-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%
30/12/2010
509.95
8,290.41
44%
-4%
48%
19
HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF
CHITTAGONG VEGETABLES OIL LTD.
Paired Differences
Pair
Degrees p-value
tof
Statistic
(2-tailed)
freedom
Std. Error
Std.
Mean Deviation
Mean
Lower Upper
Stock Return – .2499
index Ret urn
.526
.026
.033
.467
2.373
24
.026
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
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
22
STOCK SPLIT AND STOCK PRICE
Aduda and Caroline (2010); the most common reasons of stock
split are to achieve an optimal price range for liquidity, to achieve
an optimal tick size and to signal the confidence of managements’
in the future stock price.
Various studies on stock split and market behavior shows that
there are stock price might lead increase in stock price and trade
volume in the short term
Copeland (1979) ; A stock split changes stock prices to a more
optimal price, which in turn increased demand for the stock.
Baker and Powell (1993) ; The main motivation for the executives
to split stock was toward improved liquidity. High-priced stocks
found to be illiquid due to the psychological reasons and
transaction costs.
23
List of sample of companies did stock split during 2009-2010
Name of the Company
NBL
Market Capitalization
(as on 02.07.2009)
17093.45
Market Capitalization
(as on 05.12.2010)
77256.42
Change
(%)
351.9651
Market adjusted
return (%)
2.5
Pubali Bank
16979.24
57735.13
240.0337
(30)
UCBL
9544.65
765099.54
7916.004
---
Eastern Bank
2475.00
39460.16
1494.35
4
Uttara Finance
2475.00
21859.2
783.2
240
Al-Arafah Islami Bank
6687.61
32413.54
384.6805
101
Prime Bank
15747.27
57186.03
263.1489
(30)
Southeast Bank
10584.51
45708.89
331.847
(77)
NCCBL
7511.61
37404.66
397.958
(54)
MIDAS Finance
1560.80
12483.34
699.8039
228
Shahjalal Islami Bank
7583.21
3976.335
45
BD Finance
2039.68
20200.75
890.3882
273
Phoeninx Finance
1059.30
12199.52
1051.659
225
First Security Bank Ltd.
2768.41
12963.72
368.2731
(65)
Aftab Automobile
2768.41
24360.48
779.9448
70
309117.03
24
PRICE CHANGE OF COMPANIES SPLIT STOCKS DURING
2009-2010
NBL
Change in stock
price (%)
SAFCO Spinning
Change in stock
price (%)
Phoenix Finance
Change in stock
price (%)
Stock price at the
Stock Price
date of
stock price after
before One week announcement
One week
533.75
626
654.75
17.28
4.59
702.00
723.00
2.99
753.75
4.25
1,827.25
1,987.25
2,079.75
8.76
4.65
25
CAN IT BE FIXED BY REGULATIONS?
Market response toward stock split was consistent
with the results found in the prior studies.
Regulator cannot restrict companies from stock
split.
Market might be overreacted but it does not
indicate any regulatory failure.
26
ASSET REVALUATION AND STOCK PRICE MOVEMENT
Chainirun and Narktabtee (2008) argued that firms
revalue their assets to signal the firms’ growth
prospect and liquidity improvement in order to
decrease information asymmetry.
Sharpe and Walker (2007) revealed that
announcements of asset revaluation were associated
with substantial upward movement in stock price and
these shift in stock price generally sustains in later
months.
27
ASSET REVALUATION AND STOCK PRICE MOVEMENT
Name of the
Company
NAV per Share(Tk.)
NAV
Change
(%)
Stock Price
Change
during
Jan’2009Dec’2010 (%)
Change in
DGEN
Jan’2009Dec’2010(%)
Market
Adjusted
return
(%)
Before Asset
Revaluation
After Asset
Revaluation
Libra Infusions
Ltd.
Sonali Ansh Ltd.
438
15,667
3472
355
143
297
2,157
626
767
555
Rahim Textile
Ltd.
BD Thai
Aluminum Ltd.
Orion Infusions
Ltd.
Ocean Containers
127
785
518
641
142
566
298
185
(27)
20
101
413
357
145
13
50
296
----
12
26
120
21
---(191)
300
633
110
572
Shinepukur
ceramics
Prime Textile
212%
429
360
28
ASSET REVALUATION
Disclosure of asset
revaluation surpluses
decreased information asymmetry in the market.
Leads to increase in stock price that are very
consistent with other markets.
Regulators cannot stop asset revaluation and had
very few things to do with this.
29
CONCLUSION AND RECOMMENDATIONS
Market behavior in the Dhaka stock exchange
was consistent with that of other markets.
various studies supports the rationality of this
behavior and study does not support any
regulatory failure.
Most of the factors identified as problem
(Liquidity, new investors, Banks investment etc.)
seems beneficial for the long-term development
of the market.
30
CONCLUSION AND RECOMMENDATIONS
Coordinated actions to restore Investor’s Confidence
Capacity building of SEC
Structural development of the capital market
Increase supply of stocks
Educating Investors
Conclusions of Ibrahim Khalid Committee need to be
reviewed in line of other markets before implementation.
Further research in this field might help us to draw
better conclusion.
31
Thank You
32
Q&A?
33