Escolar Documentos
Profissional Documentos
Cultura Documentos
Prepared by
Roll: 18 Roll: 36
MBA 45E INSTITUTE OF BUSINESS ADMINISTRATION University of Dhaka Date: January 07, 2012
i
January 07, 2012 Barrister M. Zillur Rahman Lecturer Institute of Business Administration University of Dhaka Dear Sir:
Subject: Submission of the term paper An overview of Bangladesh Capital Market: Fraudulent Practice.
We are pleased to present you our term paper An overview of Bangladesh Capital Market: Fraudulent Practice. We have extensively enjoyed working on this topic. It has been a very interesting and informative experience for us. While working on this report we have learnt about capital market in Bangladesh. Due to the fraudulence practice in Bangladesh capital market several people has suffered a great loss. We believe this through study on the capital market of Bangladesh will help us immensely in our future life when we will involved more with our capital market. We hope our effort will meet the level of your expectations. Your guidelines and advice have been very effective and helped us a lot to complete our report. In case of any further query, please feel free to contact us. We will be available anytime at your convenience.
Sincerely,
ii
Table of Contents
Table of Contents.....................................................................................................................iii Executive Summary..................................................................................................................v 1 Introduction ........................................................................................................................1 1.1 Origin of the Report...........................................................................................................1 1.2 Purpose of the Review......................................................................................................1 1.3 Scope of the Review..........................................................................................................1 1.4 Limitation of the Review....................................................................................................2 2 Capital Market.........................................................................................................................3 2.1 History of Capital Market:...................................................................................................3 2.2 Product of Capital Market:..................................................................................................4 2.3 Parameters used to measure the size of Capital Market:...................................................4 3 Bangladesh Capital Market: Overview and Comparison ...................................................5 3.1 Dhaka Stock Exchange (DSE)...........................................................................................5 3.1.1 Organizational Structure.............................................................................................5 3.1.2 Regulatory authority.....................................................................................................6 3.2 The London Stock Exchange (LSE)..................................................................................6 3.2.1 Organizational Structure.............................................................................................7 3.2.2 Regulatory authority.....................................................................................................7 3.3 Stockholm Stock Exchange (OMX Nordic Exchange Stockholm)......................................7 iii
3.3.1 Organizational Structure.............................................................................................8 3.3.2 Regulatory authority.....................................................................................................8 3.4 The Karachi Stock Exchange (KSE)..................................................................................8 3.4.1 Organizational Structure.............................................................................................8 3.3.3 Regulatory authority.....................................................................................................9 4 Fraudulent Practice in Bangladesh Capital market with Case Study ..............................10 4.1 Scope of Fraudulent Practice:.........................................................................................10 4.2 Case Study-1: C M C Kamal Textile Mills Ltd..................................................................11 4.3 Case Study-2: Malek Spinning Mills Limited....................................................................12 4.4 Case Study-3: Active Fine Chemical Limited...................................................................15 3.1 Total ........................................................................................................18
3.2 Particulars........................................................................................................................18 5 Recommendations for improvement of Bangladesh Capital Market ...............................18 5.1 Immediate suggested actions:.........................................................................................19 5.2 Future Programs for future development.........................................................................19 6 Bibliography..........................................................................................................................20 7 Annexure ..............................................................................................................................21 Annexure-A........................................................................................................................21 Calculation for Net Asset Value.........................................................................................21 3.3 Fixed Assets less depreciations.......................................................................................22
iv
Executive Summary
In recent time the talk of the town is the capital market in Bangladesh. The importance of understanding the capital market of Bangladesh has received great attention due to the recent fraudulence practice that has caused great loss to some of the investors. The way Bangladeshi capital market is influenced internally and externally has significant affect over its growth and revenue generation. The investors for this reason must understand what the capital market means and also the structure of our capital market This report provides an overview general concept of capital market worldwide. Even though different countries have different structures of their capital market, the influencing factors on the capital market is nearly similar. Every capital market has adopted the most possible efficient way to keep their capital market less influenced by the fraudulence practice. But still one will find some effect of fraudulence practice in capital market of all the countries. In this report we have focused on the impact of the fraudulence practice in Bangladesh. Based on some case studies we have suggested some recommendations to the investor who wants to invest in Bangladeshi capital market. These recommendations are mainly based on the steps taken to avoid fraudulence practice in some other countries and also based on some basic concepts provided to us by some of the experts in Bangladeshi capital market arena.
1 Introduction
In the present corporate culture joint stock companies are the most common form of business organizations in which management works on behalf of stockholders and maximization of firm's profit as well as value is the fundamental goal for the management to achieve. Stock market is the devise, uses to obtain the firm's value by getting its share price. So it is essential for every business student and manager of a firm to develop high level of understanding about stock market and its trading process and functions and also keep himself updated with the current developments in stock market, not only at local level but also internationally.
1.2
The primary objective of this report is to fulfill the course requirement of Legal Environment of Business. The secondary objective is to analyze the capital market of Bangladesh and the fraudulence practice that has taken place in recent time.
1.3
The review is based on the structure of capital market of Bangladesh and its comparison with some other capital markets so that we can get some idea on what steps we can take to strengthen our capital market to keep it protected from fraudulence practice. Based on some case studies we have tried to provide some suggestions to the investors which may be helpful for them to be less effected by the fraudulence practice that may occur later on.
1.4
The report is an analytic overview and do not conclude recommendations from any primary data. There was no survey conducted on the parameters of Bangladesh capital market. The recommendations are made mainly based on the capital market structures of some other countries and also from thought of some experts which might not be very much effective in practical practice.
2 Capital Market
Capital market is a mechanism to flow fund from the hands of small savers (individuals and institutions) at low costs to those entrepreneurs who do need fund to start business or to business. In the other words, capital market mechanism gives a part ownership of big companies/corporations to small savers like you and me. In simple term, it is a globally accepted scheme to share ownership of economic development with general public.
Trading remained suspended during the Liberation War in 1971. The Dhaka Stock Exchange resumed operation in 1976 with nine listed companies as against 452 today. Capital market in Bangladesh got momentum with the establishment of Securities and Exchange Commission in 1994. A big wing was added to the capital market with the incorporation of Chittagong Stock Exchange on April 1, 1995. Operation of CSE started on October 10, 1995. However, there was a market crash in November 1996. Thousands of investors lost their capital and ran away from the capital market. At that time there was trading floor at both the stock exchanges.
Trades were conducted through cry-out system. A high powered enquiry committee was constituted to investigate the cause of the market crash, to suggest remedial actions to avoid such crash in future. Cry-out system of trading was replaced by automated trading system under LAN. Virtually capital market facilities are now expandable to all big cities. The CSE has offered internet trading facility to get excess even from outside the country. The 3
DSE will operate the service soon. The Asian Development Bank granted aid to strength the SEC capacity to become a pro-active regulator and facilitator. Now, we are institutionally better equipped to become a vibrant capital market.
Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia region. It has two full-fledged automated stock exchanges namely (DSE) CSE. It also consists of a dedicated regulator, of Dhaka Stock Exchange and Exchange Bangladesh and Chittagong Stock Exchange (CSE) and an over-the counter exchange operated by the Securities Central (SEC), since, it implements rules and regulations, monitors their implications to consists Depository
Commission
Limited (CDBL), the only Central Depository in Bangladesh that provides facilities for the settlement of transactions of dematerialized securities in CSE and DSE.
3.1.1
Organizational Structure
The management and operation of Dhaka Stock Exchange is entrusted on a 25 members Board of Director. Among them 12 are elected from DSE members, another 12 are selected from different trade bodies and relevant organizations. The CEO is the 25th ex-officio member of the board. The following organizations are currently holding positions in DSE Board: Bangladesh Bank ICB 5
3.1.2
President of Institute of Chartered Accountants of Bangladesh President of Federation of Bangladesh Chambers of Commerce and Industries President of Metropolitan Chambers of Commerce and Industries Professor of Finance Department of Dhaka University President of DCCI (Dhaka Chamber of Commerce and Industry). Regulatory authority
The Securities and Exchange Commission (SEC) exercises powers under the Securities and Exchange Commission Act 1993. It regulates institutions engaged in capital market activities. Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions engaged in financing activities including leasing companies and venture capital companies. SEC controls and regulates the capital market in Dhaka by following procedure. Registering and regulating the business of stock exchanges, managers and stock-brokers, merchant portfolio bankers and managers of issues, trustee of trust deeds, underwriters, other intermediaries in the securities market.
Promoting investors education and providing training for intermediaries of the Prohibiting fraudulent and unfair trade practices relating to securities trading in
3.2.1 Organizational Structure In 1986, LSE was converted in to a private limited company under the Companies Act of 1985 and its member broker firms became shareholders. But under the company's articles of incorporation, these shareholders were not entitled to obtain any profits earned by the company but all profits were allowed to utilize for infrastructure and other development costs of the exchange. On October 27, 1986, the LSE moved toward more revolutionary transformations which are known as the "Big Bang". That day deregulation of the market occurred and several changes were applied in LSE's operations. In 1991 the Governing Council of the Exchange was replaced with a Board of Directors and directors not only selected for the executives of exchange but also from the customer. In 2000 LSE transferred its role as the UK Listing Authority to the Financial Services Authority (FSA) and with the votes of their shareholders became a public limited company. 3.2.2 Regulatory authority FSA is the regulatory body in the UK which looks after the financial sector including stock markets. In May 1997, banking supervision and investment services regulation was merged into the Securities and Investments Board (SIB) and in October 1997 the SIB formally changed its name in the Financial Services Authority. In May 2000 the FSA took over the role of UK Listing Authority from the London Stock Exchange. 'Under the Financial Services and Markets Act, FSA have four statutory objectives: Market confidence: maintaining confidence in the financial system. Public awareness: promoting public understanding of the financial system. Consumer protection: securing the appropriate degree of protection for The reduction of financial crime: reducing the extent to which it is possible for a
Exchange Stockholm. OMX Nordic Exchange has over 850 listed companies and as on May 12, 2008, 268 companies are listed on the index of OMX Nordic Exchange Stockholm. 3.3.1 Organizational Structure Thought the Stockholm Stock Exchange has converted in to the OMX Nordic Exchange Stockholm AB, a wholly-owned subsidiary of the OMX Nordic Exchange Group but it has a separate board of directors to run and manage its business. Stockholm exchange is authorized to run its business as a securities exchange and offer securities trading , fixed income products and derivatives instruments as well as clearing, listing and information services. The Swedish Financial Supervisory Authority (Finansinspektionen) is the supervisory authority of the Swedish financial market including the exchange markets. 3.3.2 Regulatory authority In 1991, after the merger of the Private Insurance Supervisory Service and the Bank Inspection Board, a single integrated regulator body, the Swedish Financial Supervisory Authority (Finansinspektionen) was established to cover the banking, securities and insurance sector of Sweden. Finansinspektionen is responsible to monitors and analyses the trends in the financial market. It also examines the risks and controls the financial companies and supervises compliance with statutes, ordinances and other regulations. Around 3,700 companies are in the supervision of it, including stock exchanges, authorized marketplaces and clearing houses.
KSE and remaining 4 non-member directors are nominated and appointed by the Securities and Exchange Commission of Pakistan from among the professionals belong to various trades and professions. The Chairman is also elected by the Board from 4 non-member directors. The Managing Director, who is the full time Chief Executive of the exchange, is responsible for all the operational and administrative activities of KSE. 3.3.3 Regulatory authority The Securities and Exchange Commission of Pakistan (SECP) is a regulatory authority for the securities markets and corporate sector in Pakistan. The SECP was established on January 01, 1999 by dissolving the Corporate Law Authority (CLA) which was formed in 1981 under a Special Law. The commission administrates the compliances of the corporate laws in the country. Conversion of CLA into the Securities and Exchange Commission of Pakistan as an autonomous regulatory authority was envisaged under the Capital Market Development Program of the Asian Development Bank.
10
Some members being the directors of listed companies of DSE, CSE look for their own interest using their internal information of share market. Improper financial statement: Many companies do not focus real position of the company as some audit firms involve in corruption while preparing financial statements. As a result the shareholders as well as investors do not have any idea about position of that company. Other: The concept of centralization of the securities market has not been implemented that can arise technical problems and political infighting. The intrinsic values for securities traded are sometimes estimated without considering the current market prices of the securities. The absence of comprehensive legal and supervisory framework. Lack of skilled manpower as well as financial and non-financial institutions involved in the securities market. The lack of proper policy framework that provides incentives and protection to investors. The dominance of bigger public sector and borrowing of public sector as well as government form the institutional sources rather than the market.
Announcing conversion of face value of the shares held by the Board of Directors from Tk. 100/- to Tk. 10/-. Companys status was lifted from category Z to A by August,2010 as a result of providing 10% stock dividend. In the meantime (September, 2010) the company proposed to provide right shares in the ratio of 2 to 1 for increasing companys paid up capital. The proposed price of each right share was Tk. 17.50 including a premium of Tk. 7.50.
Besides, the company proposed to increase their authorized capital from 50 crore to 200 crore. The company took decision for revaluation of its land and factory building on 28th September, 2010. Revaluation works had to be completed within October, 2010. M/s. Commodity Inspection Service was assigned to complete this work.
Land value leap from 1.55 crore to 35 crore and factory building from 6.13 crore to 20 crore because of revaluation process. As a result companys Net Asset Value per share increased significantly.
The company announced for Net Profit after Tax Tk. 3.10 crore up to September, 2010 In the meantime, market price of the shares increased excessively and Directors of the company personally profited a lot by selling a lot of shares.
12
more than its total net asset value. Further in the course of revaluation this Company has inflated its total assets by an amount of Tk. 1,104,037,855.
Particulars
Property, plant and equipment Investment in subsidiary company Share money deposit to subsidiary company Current assets
Total assets
3,847,538,809
Current liabilities Deferred tax liability Long term loan Total liabilities Net asset after revaluation No. of ordinary share Net asset per ordinary share after revaluation
1,104,037,855 13
Net asset before revaluation No. of ordinary share Net asset per ordinary share before revaluation
Issue price per share Raised more than its net asset value per share No. of issued shares Raised more than its tool net asset value 3. Understatement of financial expenses Particulars September 2009 (Taka) September 2008 (Taka) Financia1 expenses 17,715,399 30,073,343 Amount (Taka) (12,357,944)
Growth Percentage
-41%
We note that in 2009 the financial expense has decreased by 41 % compared to the same period of the previous year. It is presumed that there is an understatement of financial expenses during 2009 which may result in overstatement of profit, since there is no sufficient information in this regard. 4. Advance to subsidiary company Particulars September 2009 (Taka) Advance to Salek 202.620.464 Textile Ltd. (subsidiary company) June 2009 (Taka) 144,576.864 Amount (Taka) 58,043,600 40% Growth Percentage
14
Ordinary share 1,000,000,000 capital raising IPO (40,000,000.25) % of advance to 20.26% subsidiary company of ordinary share capitol raised by IPO
It is noted that the company has provided substantial advance amounting to Tk. 202,620,464 to one of its subsidiary company named Salek Textile Lid. The advance was Tk. 58.043.600 as at 30 June 2009 and within three months the balance. The amount of outstanding balance at 30 September 2009 reflects more than 20% of the proposed proceeds from the IPO. The economic substance of this related party transaction is not clearly identifiable and therefore appears to be prima-facie non-arms length basis.
Details are in the attached calculation sheet - Annexure A The company has revalued some of its assets even before the completion of one year and some other assets, the market value of which generally reduces due to the usage Particulars Building Plant and machinery Furniture and fixtures This type of valuation may lead to the window dressing of the financial position of the company, which in turn misleads the stakeholders of the company. Annexure title Schedule of fixed assets Annexure ref. A
2. Understated Expenses It is mandatory to start charging depreciation after commencing the intended use of the assets. We however note that the depreciation charges are not calculated properly as shown below:
Particulars
Months
Depreciation for Annexure the year ended 31 December 2009 Amount (Taka)
16
land
3 and 3 3
and
Office equipment Motor vehicle Gas line installation and other cons. Total Less: Active Fine Chemical Ltd. charged depreciation For the year ended 31 December 2009 Depreciation understated
3 12 12
473,097
Details are in the Attached calculation sheet - Annexure-B 3. Interest on loan: Active Fine Chemical Ltd. purchase 342 decimal land at Mokterpur in Munshigonj district by taking loan from Janata Bank amounting Tk. 81,085,969. But the relayed interest against this loan is not charged in the profit and loss account rather kept it under the head Unallocated revenue expenditure in the balance sheet.
17
Particular
2009 (Taka)
Interest rate
Interest Interest for for 3 1 year months (Taka) (Taka) 2,350,914 81,665 2,432,579 9,403,657 396.660 9,730,317
From the above table we found that the interest expense is understated by Taka 2.432,579 if those are charged for three months and Taka 9730317 for one (01). So. the net profit is inflated and the earnings per share also do not reflect the true picture.
4. Preliminary end unearned revenue expenditure is not amortized: The company does not amortize their preliminary and unearned revenue expend;1ure shown below: 3.2 Particulars 2009 Amount (Taka) Unearned revenue expenditure Preliminary expenses Total 31,392,448 48,200 31,440,648
For this reason the results of the company do not reject the true position and simultaneously the earnings per share are also inflated.
for
improvement
of
Bangladesh
It is encouraging to see that the capital market of Bangladesh is rebuilding, albeit at a slower pace than many would like, with market development still at a nascent stage. The market has seen a lot of developments since the inception of the Securities and Exchange Commission (SEC) in 1993. After the bubble burst in recent time, the capital market has attracted a lot more attention, importance and awareness that have led to the infrastructure we have in the market
18
today. But still we firmly believe that the following steps should be taken to improve the current condition of Bangladesh capital market and protect it from further fraudulent practices.
To strengthen merchant banks capacity to be more active. Ensuring speedy disposal of decisions for market operation. Ensuring greater degree of transparency in financial disclosure and management structure for better corporate governance.
6 Bibliography
http://www.businessdictionary.com/ www.secbd.org/
http://www.dsebd.org/
20
http://www.british-encyclopedia.com/importance-of-stock-exchange-information.html http://www.tazakhobor.com/
7 Annexure
Annexure-A Calculation for Net Asset Value
Particulars
Month
21
3.3
Fixed
Assets
less
depreciations Add: current Asset Total Asset Less: Total liability Current liability Non-Current Liability Less: Total liability Net asset No of share Depreciation understated
Annexure-B Active Fine Chemical Ltd. Calculation Schedule of Fixed Assets As at 31 December 2009
Particulars
Months
and 3 and 3 12
Office equipment Motor vehicle 12 Gas line installation and other cons. Total Less: Active Fine Chemical Ltd. charged depreciation For the year ended 31 December 2009 Depreciation understated
473,097
23