Truths about our stock market

by Md. Rezaya Rabbi
March 30, 2011

http://www.weeklyblitz.net/1361/truths-about-our-stock-market

There is an old saying "Joto Dosh Nondo Gosh" (Blame Nondo Gosh for all ills) and the same is the fate of the Securities and Exchange Commission (SEC) and the government. Many stock market critics/analysts and even the investors are blaming the SEC and the government for the market debacle. People say that the SEC did nothing substantial, but only tinkered with margin loan facilities when the market was running like a mad bull. That is stated to be the reason of the failure of our wishy-washy regulator.

Frankly speaking, Bangladesh capital market is a person- or institution-driven one to a large extent. There are always some big guns playing their roles behind the screen. These people, who are playing with peoples' money, can be severely punished, if the government wishes.

Recently, the regulator has stopped book-building method because of overpricing flaws. Not only the issuers who are accused of manipulation of price determination, are liable, but also the lead issue-managers are also responsible. In connivance with lead issue managers', the indicative price is determined and road-shows are arranged to present the company and to offer the rationale for pricing. Institutional investors take part in the road-shows and find the opportunity to invest and determine the price. We believe that our merchant bankers and other participants have some knowledgeable personnel to understand the kritty-gritty about price determination mechanism. Today, when those companies are accused of manipulating the price determination process, what kind of information we get about our institutional investors? Is it their lack of knowledge or their concern for their own benefits? That needs to be found out.

Empirical studies show that our market is inefficient. Under the book- building system, issuers have been using only the relative valuation method to determine prices. But this always leads to overpricing in this weak market. Absolute valuation method should also be used for price determination and the SEC should amend certain laws. Another point is that SEC, as an institution, has some structural problems. It has too a limited work-force to keep control over the market. Market research on the part of the SEC is almost absent. If we look at SEBI of India - the market regulator there -- or at other countries' websites, we find many quality research papers on market and as investors' behaviour. Yet, there is no formal research on investors' behaviour in our capital market.

Market surveillance teams and market research teams in Bangladesh should be strengthened. The SEC should have quarterly or six-monthly reports like those of the Bangladesh Bank. It can also adopt a flexible circuit breaker system, depending on the market situation. The settlement period for A, B & N category companies should not be identical as their fundamentals are not the same.

Presently, all beneficiary owner (BO) accounts should be scrutinised and a new BO account opening system should be standardised to ensure equitable distribution of primary shares. The time for IPO processing and the period for refund should be lowered to help increase liquidity support.

Lastly, in case of IPO application, OMR form can be introduced on a trial basis to help shorten the application processing time.

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