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)

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

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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.

Overview of Capital Market of Bangladesh

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.

Recent trends of DSE General Index

Volatility of DSE compared to other stock markets

Name of the Index Index Return (Dec10-Jan12) DSE (Bangladesh) BSE-30 (India) SET (Thailand) FTSE Bursa Index (Malaysia)
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Std. Dev of index return (Dec10-Jan12) 11% 7.8% 5.84% 4.38%

(50%) (14%) 55.62% 19.34%

HIGHEST AND LOWEST RECORDS OF DSE IN 2010

Lowest Values Highest Values

Total Number of Trades Total Trade Volume Total Trad Value in Taka(mn) Total Market Capital in Taka(bn) DSI Index DSE General Index

88288 24432104 6238.070 1914.046 3773.76 4568.40

389310 242856735 32495.756 3680.714 7383.93 8918.51

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DSE Top 5 beneficiary Owner (BO) Account holders in 2010 Name Total Annual Turnover (Tk. Billion ) Prime Bank Investment Ltd. IDLC Finance Ltd. LankaBanglaSecurities Ltd. Trust Bank Ltd. AB Investments Ltd. 676.73 555.58 525.33 523.25 497.33 Eqv. USD (In Billion ) 9.67 7.94 7.50 7.48 7.10
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NEW INVESTORS WITH INADEQUATE KNOWLEDGE

Change in total Number of Beneficiary Owner(BO) Accounts in two Years

Date 01.01.2009 30.06.2009 31.12.2009 30.06.2010 31.12.2010

Total No. of BO A/C 1,468,500 1,419,019 1,920,602 2,570,654 3,379,719

Change (+/-) -(49481) 5,01,583 6,50,052 8,09,065

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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.

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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
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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
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IBRAHIM KHALID COMMITTEE REPORT (2011)

Stock Exchange Demutualization Formulating policy for Capital Market financing by FIs 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
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Empirical examination of three problems identified by Ibrahim Khalid committee (2011) Stock price Manipulation Stock split Asset revaluation

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METHODOLOGY
Data Sources Primary (Dhaka Stock Exchange) Secondary Sources (Publications and websites) Analysis Technique/method Qualitative analysis Quantitative Analysis

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TOP 10 GAINERS OF DSE IN 2010 Top 10 Gainers of DSE in 2010

Company name-Category Price (TK) (01/01/10) 119.75 84.50 156.00 165.25 66.80 444.00 987.25 380.00 812.25 474.25 Price(TK) 30/12/10) 5099.50 753.75 848.75 693.75 266.50 1584.25 3360.50 1288.00 2646.50 1503.75 Change (%) 4158.46 792.01 444.17 319.82 298.95 256.81 244.13 238.95 225.82 217.08 81.47% Market Adjusted Return (%) 4076.99 710.54 362.7 238.35 217.48 175.34 162.66 157.48 144.35 135.61
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Ctg. Vegetables-Z Safco Spinning-Z Tallu Spinning-Z Rahima Food-B BD welding-A Prime Insurance-A Monno Staffler-A Sonargoan Textile-A Dhaka Insurance-A City Gen Insurance-A Market Return (2010)

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

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Market adjusted return of Chittagong vegetable oil Industries Ltd

Monthly excess stock Month 31/1/2009 1/28/2009 26/2/2009 30/4/2009 29/5/2009 6/30/2009 30/7/2009 31/8/2009 30/9/2009 29/10/2009 26/11/2009 12/30/2009 31/1/2010 28/2/2010 31/3/2010 29/4/2010 31/5/2010 30/6/2010 29/7/2010 31/8/2010 30/9/2010 31/10/2010 30/11/2010 30/12/2010 Monthly price of stock 4.13 4.20 3.40 3.50 3.85 5.93 5.80 8.53 13.50 10.75 10.53 11.08 21.40 29.98 99.43 169.00 153.55 159.00 156.95 140.00 148.88 249.03 353.95 509.95 Month end Index 2,649.49 2,570.96 2,446.92 2,554.36 2,572.18 3,010.26 2,914.53 2,941.28 3,083.89 3,364.26 4,380.95 4,535.53 5,367.11 5,560.56 5,582.33 5,654.88 6,107.81 6,153.68 6,342.76 6,657.97 7,097.38 7,957.12 8,602.44 8,290.41 stock Return 32% 2% -19% 3% 10% 54% -2% 47% 58% -20% -2% 5% 93% 40% 232% 70% -9% 4% -1% -11% 6% 67% 42% 44% Index Return -5% -3% -5% 4% 1% 17% -3% 1% 5% 9% 30% 4% 18% 4% 0% 1% 8% 1% 3% 5% 7% 12% 8% -4%

return, 1
37% 5% -14% -1% 9% 37% 1% 46% 54% -29% -32% 2% 75% 36% 231% 69% -17% 3% -4% -16% 0% 55% 34% 48%

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HYPOTHESIS TESTING OF MARKET ADJUSTED RETURN OF CHITTAGONG VEGETABLES OIL LTD.

Pair Paired Differences Degrees p-value tof Statistic (2-tailed) freedom

Std. Mean Deviation Std. Error 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

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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

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WHY DIDNT INVESTORS RESPOND?

Possible reasons behind this Investors confidence Market inefficiency Irrational market behavior

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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.
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List of sample of companies did stock split during 2009-2010 Name of the Company NBL Pubali Bank UCBL Eastern Bank Uttara Finance Al-Arafah Islami Bank Prime Bank Southeast Bank NCCBL MIDAS Finance Shahjalal Islami Bank BD Finance Phoeninx Finance First Security Bank Ltd. Aftab Automobile Market Capitalization (as on 02.07.2009) 17093.45 16979.24 9544.65 2475.00 2475.00 6687.61 15747.27 10584.51 7511.61 1560.80 7583.21 2039.68 1059.30 2768.41 2768.41 Market Capitalization (as on 05.12.2010) 77256.42 57735.13 765099.54 39460.16 21859.2 32413.54 57186.03 45708.89 37404.66 12483.34 309117.03 20200.75 12199.52 12963.72 24360.48 Change (%) 351.9651 240.0337 7916.004 1494.35 783.2 384.6805 263.1489 331.847 397.958 699.8039 3976.335 890.3882 1051.659 368.2731 779.9448 Market adjusted return (%) 2.5 (30) --4 240 101 (30) (77) (54) 228 45 273 225 (65) 70
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PRICE CHANGE OF COMPANIES SPLIT STOCKS DURING 2009-2010 Stock price at the Stock Price date of stock price after before One week announcement One week 533.75 626 654.75 17.28 702.00 723.00 2.99 1,987.25 8.76 4.59 753.75 4.25 2,079.75 4.65

NBL Change in stock price (%) SAFCO Spinning Change in stock price (%) Phoenix Finance Change in stock price (%)

1,827.25

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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.

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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.
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ASSET REVALUATION AND STOCK PRICE MOVEMENT

Name of the Company NAV per Share(Tk.) Before Asset Revaluation After Asset Revaluation NAV Change (%) Stock Price Change during Jan2009Dec2010 (%) 355 767 641 185 357 ---21 572 Change in DGEN Jan2009Dec2010(%) Market Adjusted return (%)

Libra Infusions Ltd. Sonali Ansh Ltd. Rahim Textile Ltd. BD Thai Aluminum Ltd. Orion Infusions Ltd. Ocean Containers Shinepukur ceramics Prime Textile

438 297 127 142 20 13 12 300

15,667 2,157 785 566 101 50 26 633

3472 626 518 298 413 296 120 110

143 555

212%

429 (27) 145 ---(191) 360

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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.

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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.
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CONCLUSION AND RECOMMENDATIONS

Coordinated actions to restore Investors 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.

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Thank You

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Q&A?

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