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Investment Fundamentals in Bangladesh                      By             Jahangir Alam             BBA (Pursuing)        ...
Jahangir AlamBBA (pursuing)University of Rajshahi.                          Table of Contents                             ...
Jahangir AlamBBA (pursuing)University of Rajshahi.What is stock?Stock or Share is the smallest part of ownership of an ass...
Jahangir AlamBBA (pursuing)University of Rajshahi.Can you buy stock/share of unlisted companies?Definitely you can. But in...
Jahangir AlamBBA (pursuing)University of Rajshahi.share of GQ company is (100million tk / 10 million shares = 10tk.) 10tk....
Jahangir AlamBBA (pursuing)University of Rajshahi.bought the stock for 230tk your return is not 23% rather your return is ...
Jahangir AlamBBA (pursuing)University of Rajshahi.are called Public Offering.Private PlacementWhen a company sells its sha...
Jahangir AlamBBA (pursuing)University of Rajshahi.About SecThe Securities and Exchange Commission (SEC) was established on...
Jahangir AlamBBA (pursuing)University of Rajshahi.                         Prohibiting fraudulent and unfair trade practi...
Jahangir AlamBBA (pursuing)University of Rajshahi.Dhaka Stock ExchangeDhaka Stock Exchange (Generally known as DSE) is the...
Jahangir AlamBBA (pursuing)University of Rajshahi.Chittagong Stock ExchangeBACKGROUNDThe Chittagong Stock Exchange (CSE) b...
Jahangir Alam      BBA (pursuing)      University of Rajshahi.           DIAGRAM OF FINANCIAL MARKET                      ...
Jahangir AlamBBA (pursuing)University of Rajshahi.The Potential of the Bangladesh Capital MarketThe capital market is the ...
Jahangir AlamBBA (pursuing)University of Rajshahi.offerings in the bourses. The market has to reach such a stage of develo...
Jahangir AlamBBA (pursuing)University of Rajshahi.particulars are all recorded and can be retrieved for future reference. ...
Jahangir AlamBBA (pursuing)University of Rajshahi.OpportunitiesThe capital markets in Asia are getting more and more focus...
Jahangir AlamBBA (pursuing)University of Rajshahi.Price manipulationIt has been observed that the share values of some pro...
Jahangir AlamBBA (pursuing)University of Rajshahi.       The dominance of bigger public sector and borrowing of public se...
Jahangir AlamBBA (pursuing)University of Rajshahi.    Textile sector as backward linkage to thriving export oriented garm...
Jahangir Alam   BBA (pursuing)   University of Rajshahi.   Corporatisation of SOEs will bring in transparency as well as c...
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Bangladesh stock market

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Jahangir Alam
University of Rajshahi.
Bangladesh.

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Transcript of "Bangladesh stock market"

  1. 1. Investment Fundamentals in Bangladesh By Jahangir Alam BBA (Pursuing) Department of Management University of Rajshahi. Rajshahi.
  2. 2. Jahangir AlamBBA (pursuing)University of Rajshahi. Table of Contents What is Stock 3 How it can be traded 3 What is stock exchange 3 What is broker 3 What is listed and unlisted company 3 What is SEC 4 Face Value, Market Value 4 Market Lot 4 EPS 4 Price Earning Ratio 5 Dividend, Stock Dividend 5 Right Issue 5 Dividend Yield 5 Circuit Breaker, LTP 6 Volume 6 High price, Low price 6 Trade 6 52 weeks range 6 IPO 6 Private Placement 7 Technical Analysis 7 Fundamental Analysis 7 Comparative Valuation 7 Intrinsic Value 7 SEC 8 Mission of SEC 8 Main Functions 8-9 Dhaka Stock Exchange 10 Chittagong Stock Exchange 11 Diagram of Financial Marktet 12 The Potential of the Bangladesh Capital Market 13 Problems of Stock Market 16 Suggestion to Improve the activities of stock market 18 Major future prospects that will change the Stock Market 18 Future programs for further developement 19 Conclusion 19 Reference 20 2
  3. 3. Jahangir AlamBBA (pursuing)University of Rajshahi.What is stock?Stock or Share is the smallest part of ownership of an asset/company/firm. For example you havea shop worth of Tk.10,000/= Now if you divide the ownership of the shop in 100 parts thenevery part will be worth of 100tk. Now each of the part is called a share/stock. Now if you buy10 part/share from that 100part then you are partially an owner of the shop/firm/company.How it can be traded?For example if you want to transfer your part of ownership of the firm to other then you shouldsale the deed of ownership to someone else. In that case you have to maintain some papers. Forexample a sale deed will be signed and the deed will be registered in government registry office.In case of stock when you buy stock/share of a certain company you will be given a sharecertificate. This certificate certifies that you own that much part of the company. And you haveto register your ownership certificate with companys register. But due to some problems withpaper certificate - (such as copied certificate, maintenance of huge paper certificates) a newsystem of electronic stock is made. In this system your stock is preserved in an electronic systemrather delivering you the paper shares. And you dont need to register your ownership. Theownership is automatically transfered to you and preserved in an automatic system. This systemis called Central Depository Bangladesh Limited (CDBL). I will describe this CDBL system indetails later.What is stock exchange?Stock exchange is a organized place or arrangement where the buyer and seller is broughttogether so they can buy sale their stocks/share. For example Dhaka Stock Exchange has aelectronic trading system called TESA and Chittagong Stock Exchange has an electronic tradingsystem called VECTOR. These two system work as an arrangement to help buy/sale of listedsecurities.What is broker?A broker is an intermediary who works as an media to bring together buyer and seller. And ittakes commission form the buy/sales made. A broker must be listed member of any stockexchange (i.e- DSE, CSE).What is a listed company or unlisted company?Companies or firms which are listed with stock exchanges are called listed public limitedcompany. On the other hand firms/companies those are not listed with any of the stock excangesare un-listed companies. 3
  4. 4. Jahangir AlamBBA (pursuing)University of Rajshahi.Can you buy stock/share of unlisted companies?Definitely you can. But in that case you have to go the traditional method of buying or sellingprocess. For example at present if you want to buy sahre of Grameen phone you have ot go toTelinor who is the major 62% share owner of Grameen phone or to the Grameen telecome whichis a subsidiary of Grameen bank who owns 38% of the Grameen phone shares and negotiate withthem so that they sale their shares to you. If they agree to sale any share/stock to you then youcan buy it and you have to go to register of joint stock companies and register your ownershipthere. But the whole system will work avoiding the stock exchange as still it is an unlistedcompany.What is Securities and Exchange Commission (SEC)?It is the regulatory body of Bangladesh capital market. For your information stock exchanges arecalled capital market as companies raise capital from here. SEC defines working process andrules and policies under which the stock exchanges will operate.What is the face value (FV) of a stock?This is the value assigned to a smallest part of ownership of a company. For example in case ofthe previous example i gave the Face Value of a share of that shop is 100tk.What is the market value (MV) of a stock?When someone sees a good business prospect of a company then he may be will to buy it otherthan the face value. It may be a higher price. For example at present SALAM still mills stock istrading around 190tk. So its market value (MV) is 190tk now.What is market lot (ML)?Every firm has millions of stock in the market. If every piece of stock is traded separately it willgenerate tedious clerical job and the system wont support so many trades per day. Moreover thetrading cost per trade will be intolerable. To face such problem stocks of different companies aretraded in bunches. Then every bunch is traded in the market. Every bunch is called a lot (marketlot). For example you have to buy at least 50 stocks at a time in a bunch if you want to buy GQball pens stock. So the market lot (ML) gor GQ ball pens stock is 50.What is Earning Per Share (EPS)?Earning per share indicates how much profit is earned per share. For example if GQ ball pen isdivided in 10 million stock and GQ ball pen makes a profit of 100million tk then earning per 4
  5. 5. Jahangir AlamBBA (pursuing)University of Rajshahi.share of GQ company is (100million tk / 10 million shares = 10tk.) 10tk. EPS is calculatedthrough dividing the total profit buy total number of securities/stock.What is Price Earning Ratio (PER)?It indicates that what is the price of a stock in relation to EPS. Say GQ ball pens price is now 140tk in the market and its EPS is 10tk. Then its price earning ratio (PER) is (140tk/10tk) 14 times.It also indicates that if someone buy a GQ ball pen stock for 140tk today the company will earnthe same amount of earning for that stock in 14years.What is dividend?Its the portion of profit given to the shareholders. Dividend is usually expressed in percentagebasis or per share basis. For example now if GQ company declares a 80% dividend to theshareholders it indicates that every shareholder will get 8tk per share. Dividend is calculated onFace Value not on the market value. The dividend declaration depends on the profit earned bythe company, companies pay out ratio, investing policy etc.What is Stock dividend?In some cases company may earn some profit. But it may need some extra money for furthergrowth of the company. In that case the company may retain the profit earned. It wont declarecash dividend. Rather it will declare stock dividend. In that case an investor will get a few morestock of that company for free. For example if GQ declares a 80% stock dividend it means if youhold 100stock of GQ ball pen you will get 80stock for free. This is a very nice system forcompany growth. In this system company can retain its needed cash for further investment andstock holders also get some benefit.What is Right issue?In some cases business may need immediate money in the middle of the year or for any reason.May be it need some more cash for business growth. In that case the company can issue freshshare in the market. But according to regulation the existing shareholders have the priority to buythe shares. So when the company decides to issue new shares in the market at first it offers theshares to existing shareholders of the company. As existing shareholders get the shares accordingto their right it is called right issue. But if the existing shareholders decline to buy the new sharesthe company can issue the shares to general public as fresh IPO.Dividend yieldDividend yield is the return calculated on your buying price resulting from declared dividend. IfACI company declares a 23% dividend and you buy ACI stock for 230tk. In that case you willreceive 2.3tk as dividend (Face value of ACI stock is 10tk so 23% on 10tk. is 2.3tk). But as you 5
  6. 6. Jahangir AlamBBA (pursuing)University of Rajshahi.bought the stock for 230tk your return is not 23% rather your return is 2.3/230=1% only. This iscalled dividend yield.Circuit BreakerThis is an automated system introduced by both DSE and CSE. In this system a specific stockcan not increase or decrease more than a specific percentage point. For example say previousdays close price of Power Grid company was 710tk. and the circuit breaker is 10%. It meansPower Grid will not rise more than 10% today even it wont fall more than 10% today. So in asingle day its highest price can be 710+710*10%=781tk and the lowest price will be 639tk. Thissystem is introduced to tackle unusual volatility in the stock market.LTPLast Trade Price of a specific company in a day. The latest trade took place in this price.VolumeVolume indicates how many stock of a specific company is traded in a single trading day.High PriceThis is the highest price of a stock in a single trading day.Low PriceThis is the lowest trade price in a single trading day.TradeIt indicates how many transaction of a single stock took place in a day.52 Weeks RangeIt means that what was the highest and lowest price of a stock in last 52 weeks. For example iftoday (28/03/2008) ACIs 52 weeks range shows 62-235 it means that ACI stock was tradedlowest at 62 tk in last 52weeks and highest 235tk in last 52weeks. Usually it is updated everymonth on DSE website.IPOInitial Public Offering. When any company offers their stock to general public for the first time itis called Initial Public Offering. A company can offer stock to the public again and again. Those 6
  7. 7. Jahangir AlamBBA (pursuing)University of Rajshahi.are called Public Offering.Private PlacementWhen a company sells its shares to institutional or individual investors through privatenegotiation rather offering their shares to the public it is called private placement.Technical AnalysisTechnical analysis means analyzing a stocks price trend based on its recent past trade pattern(investigating volume, price trend, high, low, close etc). People try to identify near-future-up-trend of any stock and invest in it so that when the price will go up he can make profit.Fundamental AnalysisThis sort of analysis is done based on the company fundamentals- (EPS, Dividend, NAV etc.) Inthis case peoples try to identify the true value of a stock rather the price trend. When someoneidentifies a stock is undervalued s/he consider that market will recognize the value shortly andthe price will go up. And s/he invests in that particular stock in advance to reap profit fromincreased value when the market will recognize the value.Comparative ValuationI wrote on it earlier. Just read that. If you cant find that post just type the topic- "ComparativeValuation" in the search box and search it. Youll get it.Intrinsic ValueThis means that what is the true value of a stock. Fundamental analysts try to identify this value. 7
  8. 8. Jahangir AlamBBA (pursuing)University of Rajshahi.About SecThe Securities and Exchange Commission (SEC) was established on 8th June, 1993 under theSecurities and Exchange Commission Act, 1993. The Chairman and Members of theCommission are appointed by the government and have overall responsibility to administersecurities legislation. The Commission is a statutory body and attached to the Ministry ofFinance.Members perform the following functions: a. Serve as the members of the Commission and supervise its management. b. Provide policy direction to industry and staff and promulgate legally binding rules. c. Act as an administrative tribunal for decisions on the capital market.Mission of the SEC:  Protect the interests of securities investors.  Develop and maintain fair, transparent and efficient securities markets.  Ensure proper issuance of securities and compliance with securities laws.Commissions’ main Functions  Regulating the business of the Stock Exchanges or any other securities market.  Registering and regulating the business of stock-brokers, sub-brokers, share transfer agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of an issue, underwriters, portfolio managers, investment advisers and other intermediaries in the securities market  Registering, monitoring and regulating of collective investment scheme including all  forms of mutual funds.  Monitoring and regulating all authorized self regulatory organizations in the securities market. 8
  9. 9. Jahangir AlamBBA (pursuing)University of Rajshahi.  Prohibiting fraudulent and unfair trade practices relating to securities trading in any  securities market.  Promoting investors’ education and providing training for intermediaries of the  securities market.  Prohibiting insider trading in securities.  Regulating the substantial acquisition of shares and take-over of companies.  Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of  securities, the Stock Exchanges and intermediaries and any self regulatory  organization in the securities market.  Conducting research and publishing information. 9
  10. 10. Jahangir AlamBBA (pursuing)University of Rajshahi.Dhaka Stock ExchangeDhaka Stock Exchange (Generally known as DSE) is the main stock exchange of Bangladesh. It islocated in Motijheel at the heart of the Dhaka city. It was incorporated in 1954. Dhaka stock exchange isthe first stock exchange of the country. As of 31 December 2007, the Dhaka Stock Exchange had 350listed companies with a combined market capitalization of $26.1 billion.HistoryIt first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 andstarted formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June1962. Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh. In 16September 1986 DSE All Share Price Index was started. The formula for calculating DSE allshare price index was changed according to IFC in 1 November 1993. The automated tradingwas initiated in 10 August 1998. In 1 January 2001 DSE 20 Index was started. CentralDepository System was initiated in 24 January 2004. As of November 16 2009, the benchmarkindex of the Dhaka Stock Exchange (DSE) crossed 4000 points for the first time, setting anothernew high at 4148 points.ManagementThe management and operation of Dhaka Stock Exchange is entrusted on a 25 members Boardof Director. Among them 12 are elected from DSE members, another 12 are selected fromdifferent trade bodies and relevant organizations. The CEO is the 25th ex-officio member of theboard. The following organizations are currently holding positions in DSE Board: • Bangladesh Bank • ICB • 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) 10
  11. 11. Jahangir AlamBBA (pursuing)University of Rajshahi.Chittagong Stock ExchangeBACKGROUNDThe Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 fromChittagong City through the cry-out trading system with the promise to create a state-of-the artbourse in the country.Founder members of the proposed Chittagong Stock Exchange approached the BangladeshGovernment in January 1995 and obtained the permission of the Securities and ExchangeCommission on February 12, 1995 for establishing the countrys second stock exchange. TheExchange comprised of twelve Board members, presided by Mr. Amir Khosru MahmudChowdhury (MP) and run by an independent secretariat from the very first day of its inception.CSE was formally opened by then Honble Prime Minister of Bangladesh on November 4, 1995.MISSIONThe Chittagong Stock Exchange believes that a dynamic, automated, transparent stock exchangeis needed in Bangladesh. It works towards an effective, efficient and transparent market ofinternational standard to serve and invest in Bangladesh in order to facilitate the competententrepreneurs to raise capital and accelerate industrial growth for overall benefit of the economyand keep pace with the global advancements.OBJECTIVES • Develop a strong platform for entrepreneurs raising capital; • Provide a fully automated trading system with most modern amenities to ensure: quick, easy, accurate transactions and easily accessible to all; • Undertake any business relating to the Stock Exchange, such as a clearing house, securities depository center or similar activities; • Develop a professional service culture through mandatory corporate membership; • Provide an investment opportunity for small and large investors; • Attract non-resident Bangladeshis to invest in Bangladesh stock market; • Collect preserve and disseminate data and information on stock exchange; • Develop a research cell for analyzing status of the market and economy. 11
  12. 12. Jahangir Alam BBA (pursuing) University of Rajshahi. DIAGRAM OF FINANCIAL MARKET Financial Market Money Market Capital Market Commerci Insurance Non-security Security al Banks Companies Segment Segment Primary Secondary BSB BSRS ICB Market (IPO) Market Commercial Banks (sometimes) CSE DSEBSB - Bangladesh Shilpa BankBSRS - Bangladesh Shilpa Rin ShashtaICB - Investment Corporation of BangladeshCSE - Chittagong Stock ExchangeDSE - Dhaka Stock Exchange 12
  13. 13. Jahangir AlamBBA (pursuing)University of Rajshahi.The Potential of the Bangladesh Capital MarketThe capital market is the engine of growth for an economy, and performs a critical role in actingas an intermediary between savers and companies seeking additional financing for businessexpansion. Vibrant capital is likely to support a robust economy. While lending by commercialbanks provides valuable initial support for corporate growth, a developed stock-market is animportant pre-requisite for moving into a more mature growth phase with more sophisticatedconglomerates. Today, with a $67 billion economy and per capita income of roughly $500,Bangladesh should really focus on improving governance and developing advanced marketproducts, such as derivatives, swaps etc.Despite a challenging political environment and widespread poverty, Bangladesh has achievedsignificant milestones on the social development side. With growth reaching 7 percent in 2006,the economy has accelerated to an impressive level. It isnoteworthy that the leading global investment banks, Citi,Goldman Sachs, JP Morgan and Merrill Lynch have allidentified Bangladesh as a key investment opportunity. TheDhaka Stock Exchange Index is at a 10-year high, however,the capital market in Bangladesh is still underdeveloped, andits development is imperative for full realisation of thecountrys development potential.It is encouraging to see that the capital market of Bangladeshis growing, albeit at a slower pace than many would like, withmarket development still at a nascent stage. The market hasseen a lot of developments since the inception of the Securitiesand Exchange Commission (SEC) in 1993. After the bubbleburst of 1996, the capital market has attracted a lot moreattention, importance and awareness, that has led to theinfrastructure we have in the market today. Craig BrewerReasons behind the underdevelopmentAccess to high quality and credible corporate information remains a major problem in themarket. While a handful of institutional investors may enjoy certain benefits since they have aninvestment unit manned with qualified officers, nothing exists for retail investors. And, in theabsence of independent research houses, retail investors primarily focus on advice given by theirbrokers, which often consists of market rumours. This is not acceptable, and it often leads toenormous losses for small investors who are vital for a low-income and emerging market likeBangladesh. Filtering of information among different types of investors may leave scope formanipulation; this assumption had been proved right in the 1996 market meltdown at the cost ofmany individuals and households.The market does not have an adequate number of fundamentally sound scrips. The authoritiesshould not force major corporations to come into the market, without creating an enablingenvironment. The focus should be on the privatisation of state owned enterprises through public 13
  14. 14. Jahangir AlamBBA (pursuing)University of Rajshahi.offerings in the bourses. The market has to reach such a stage of development that companieswill take it as a serious alternative to bank financing.The government has reduced the interest rates on savings instru-ments, however this particularmarket is still limited to the commercial banks, and individual investors do not have access tothese instruments. These savings instruments are considered risk-free, and since they are notpresent in the capital market, the overall risk of investment for an investor remains very high. Aportfolio investor does not have the option of reducing his average portfolio risk by adding theserisk-free opportunities.An estimate suggests that the ratio of institutional-to-retail investors is still low in Bangladesh,even relative to other emerging markets. Institutional investors bring long-term commitment anda greater focus on fundamentals and, hence, stability in the market. The presence of institutionalinvestors is also expected to ensure better valuation levels due to their specialised analyticalskills. While we do have public sector as well as private sector institutional investors in theeconomy, proprietary investment from these institutions is not significant -- other than theInvestment Corporation of Bangladesh that was created in 1976 and currently manages severalmutual funds.Corporate governance of international standard is still lacking. Multinational corporations andinstitutions operating in Bangladesh often adhere to a very high international standardcompliance regime. Parent companies of most of these corporations and institutions have theirscrips listed in developed markets. Unless the local market adheres to, and effectively enforces, astandard corporate governance system, there will not be a level-playing ground for internationalbusiness houses vis-a-vis local operators.An important aspect for capital market is reflection of fair value of scrips. This is not adequatelypresent in the current scenario, and due to this reason the market is not receiving the attention ofan important segment of investors, both foreign and local. Investors are perhaps depending moreon speculative analysis, resulting in volatility in the market, as opposed to fundamental analysis,which could attract more stable long-term investors who are sure about their investment tenureand expectations.1996 and nowThe bull-run that took place in 1996 has left a number of positives for the market. A lot ofinvestment-friendly regulatory reforms have been implemented by the SEC. We now havestronger surveillance and improved rules relating to public issue, rights issue, acquisition,mergers and so on. All these fundamental developments, which were well overdue, followed the1996 bull-run. It was a learning experience for Bangladesh, and the desired level of changes wasinitiated by the market watchdog subsequently.In the secondary market, surveillance is more active and particular than before. Thesedevelopments, that are widely appreciated, are actually the fundamental requirements that are inplace today resulting from the continuous efforts of the government and multilateral agencies.Trading has now become automated, led by the Chittagong Stock Exchange through the centraldepository. In the present automated trading environment, bids/offers, depth, and required broker 14
  15. 15. Jahangir AlamBBA (pursuing)University of Rajshahi.particulars are all recorded and can be retrieved for future reference. The Central DepositoryBangladesh Limited (CDBL) was created in August 2000 to operate and maintain the CentralDepository System (CDS) of Electronic Book Entry, recording and maintaining securitiesaccounts and registering transfers of securities; changing the ownership without any physicalmovement or endorsement of certificates and execution of transfer instruments, as well asvarious other investor services including providing a platform for the secondary market tradingof Treasury Bills and Government Bonds issued by the Bangladesh Bank.The stock market surveillance mechanics in place at present has no resemblance to that of 1996.There are strict rules and guidelines, trading circuit breakers and international standardsurveillance to protect investor rights and ensure fair play. The disclosure requirements and itstiming for both listed scrips and IPOs as devised by the SEC are now more reflective ofinternational practices. The SEC is also adopting new valuation methods that result in fairpricing of new issues. While there is still a lack of credible research organisations, a few firmslike Asset and Investment Management Services of Bangladesh Ltd. (Aims) have come up, andthey are investing in research and building up stock market related credentials.The recent surge in the stock marketThe Dhaka Stock Exchange Index was at a 10-year high in the 2007 year end (up 66 percent),which made it Asias top performer after China. The steady investment atmosphere prevailingthroughout 2007 is considered to be one of the main reasons behind this surge. Good returnprospects, stable market growth, and uninterrupted trading as a result of political stabilityattracted foreign investors to local securities. In 2007, foreign investors bought shares worth$205.7 million, while the amount of selling was $78.6 million, according to a DSE statistic.According to the DSE, in 2007, net foreign or portfolio investment on the Dhaka StockExchange surged 8.3x to $129 million. The banking sector, followed by the power,pharmaceutical and cement sectors, received the most foreign investment.The caretaker government has also attracted investors by pledging to sell state enterprises. Thestate-owned companies -- Jamuna Oil Company Ltd. and Meghna Petroleum Ltd. -- debuted inthe bourses early this month. Some analysts think that the market had been undervalued beforethe surge, and the uphill trend, therefore, played the role of an upward correction of the market.The P/E ratio now stands at 20x as compared to 14.1x for emerging markets. It seems sustainableif the planned big IPOs of a few SOEs and the top telecom companies take place. More suchlarge issues are required, which can emerge out of the energy, infrastructure and public sectors. 15
  16. 16. Jahangir AlamBBA (pursuing)University of Rajshahi.OpportunitiesThe capital markets in Asia are getting more and more focus with the growing corporatisation ofthe Asian economies. Eastern Asia has progressed a lot with respect to attracting westerncompanies to get listed in Asian bourses as well as supporting innovative instruments, andSoutheast Asia is also coming up with India leading the way. Comparing the local marketscenario with that of the rest of the region, Bangladesh is in pretty good shape as we have mostof the infrastructure in place. Our market capitalisation is relatively smaller and it currentlystands at $9.3 billion, which is just over 13 percent of GDP. Higher liquidity is skewed towards ahandful of scrips, while a stagnant situation exists for few less profitable issuers.At present, the government is heavily focusing on developing a debt capital market. Suchmeasures are certainly welcome as Bangladesh lacks a proper secondary market for bonds. Themarket is yet to support short-term capital requirements of corporations. Commercial Paper (CP)has not yet been tried primarily due to interest rate volatility and illiquid risk-free instrumentsthat can be used as benchmark neither for short-term and hardly for long-term financing. It can,therefore, be said that we have a somewhat flat yield curve in Bangladesh at the moment.Debut trading of state-owned oil companies like Jamuna Oil Company Ltd and MeghnaPetroleum Limited on the local bourses in January 2008 has spurred a lot of encouragementamong investors. This initiative taken by the government to list SOEs will increase marketcapitalisation and improved liquidity.SEC is also contemplating the introduction of the book-building method in the valuation of IPOsin order to ensure a fair price within this year. This will encourage companies with soundfinancial health to come into the market.Regulatory pressures are mounting on telecom companies to get listed. It is estimated that thelisting of the top telecom companies will attract more foreign investment, increase the marketcapitalisation by few folds, and bring about higher standards of corporate governance.There is still huge potential in the market for securitisation and other debt instruments likecommercial papers and corporate bonds, and derivatives, which will help foreign investors hedgetheir exposure.Problems of Stock Markets in Bangladesh:The unexpected rise and fall in share prices mostly followed from the general confidence of theinvestors about political stability, euphoria of investment in shares, prospect of quick capitalgains, a vacuum in respect of institutional presence in the share market, monopolistic dominanceof member brokers, inefficiency of the SECS to cape with the developments, existence to Kerbmarket , absence of proper application of circuit breaker etc. Delivery versus paymentmechanism was used as one of the main vehicles of manipulation. Kerb market gave birth fakeand forged share certificates. Although there are increasing trends in all the indicators, DSE,CSE are not free from problems, The problems of DSE, CSE may be summarized as under: 16
  17. 17. Jahangir AlamBBA (pursuing)University of Rajshahi.Price manipulationIt has been observed that the share values of some profitable companies has been increasedfictitiously some items that hampers the smooth operation of Stock market.Delays in Settlement:Financing procedures and delivery of securities sometimes take an unusual long time for whichthe money is blocked from nothing.Irregulations in Dividends:Some companies do not hold Annual General Meeting(AGM) and eventually declare dividendsthat confused the shareholders about the financial positions of the companySelection of Membership:Some members being the directors of listed companies of DSE, CSE look for their own interestusing their internal information of share market.Improper financial statement:Many companies do not focus real position of the company as some audit firms involve incorruption while preparing financial statements. As a result the shareholders as well as investorsdo not have any idea about position of that company.OTHER  The concept of centralization of the securities market has not been implemented that areise 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. 17
  18. 18. Jahangir AlamBBA (pursuing)University of Rajshahi.  The dominance of bigger public sector and borrowing of public sector as well as government form the institutional sources rather than the market.Suggestions to improve the activities of Stock Market o To introduce automated monitoring system that may control price manipulation, malpractice’s and inside trading. o To introduce full computerized system for settlement of transactions. o To force the listed companies to publish their annual reports with actual and proper information that can ensure the interests of investors. o To control and abolish kerb market form premises of stock market. o To take remedial action against the issues of fake certificates. o The composite Quotation system(CQS) should be introduced and implemented that available the exchange specialist bid-ask quotes to the subscribers. o To make arrangement to set-up merchant banks, investment banks and floatation of more mutual funds particularly in the private sectors. o Banks, insurance companies and other financial institution should be encouraged deal in share business directly. o The brokers should not be allowed to deal in the Scripps on their own accounts. o The management of DSE and CSE should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms.Major future prospects that will change the Stock Market:Within 3 to 6 months 8 large profitable government enterprises are going to be listed underDirect Listing Method adding value worth another 1 billion Dollar.  The Telecom Giants in Bangladesh are finalizing their offers for IPO in the market.  Power and energy sectors demand for capital is 5 to 10 billion dollar within short time to meet the immediate needs of 5000 MW power demand.  A deep sea port requiring 1 billion dollar is going to start with a policy decision that it will also be listed.  The Pharmaceutical sector and API enjoying WTO benefit is growing sharply. 18
  19. 19. Jahangir AlamBBA (pursuing)University of Rajshahi.  Textile sector as backward linkage to thriving export oriented garments industries is booming.  Export oriented food processing industry needs huge capital and technical capacity to meet the growing standards in global market for marine food, fruits and poultry.  IT sector with our talented developers, yet to demonstrate the massive potentials of software industry of the country.Future Programs for Further Development 1. Active market of government, municipal and corporate bonds beside the corporate bonds to create alternative investment. 2. All securities to be brought under CDS within 2 years. 3. All major infrastructure companies, specially those in power, telecommunication and energy sector are to be listed ensure to broaden the market depth with at least US$ 15 billion market cap by 2012 having daily average turnover from current level of average of 10 to 15 million dollar to a level of 70 to 100 million dollar 2 years. 4. To strengthen merchant banks’ capacity to be more active. 5. Ensuring speedy disposal of decisions for market operation. 6. Ensuring greater degree of transparency in financial disclosure and management structure for better corporate governance.Conclusion:To expedite the market development process, it may be a good idea to decide on certainmilestones and link them to the disbursement of Development Credit Support of the World Bank.The government is making good progress in other sectors, including monetary management,corporatisation of public-sector banks and others through this linkage.The missing link between the SEC, Bangladesh Bank, Bangladesh Telecom RegulatoryCommission and other regulatory bodies is now getting established. Individually, they were notserving each others interests, and there was no effective coordination among them, hence thecountry was deprived of great initiatives. A dedicated financial market cell at the Ministry ofFinance could be formed to coordinate with these regulators as well as other ministries.In terms of creating market depth, more profitable state-owned-enterprises should be listed. Thesupply of securities can be increased if the SOEs are allowed to operate through the stockexchanges. Floatation of SOE scrips is expected to expand the market by couple of times. 19
  20. 20. Jahangir Alam BBA (pursuing) University of Rajshahi. Corporatisation of SOEs will bring in transparency as well as confidence on the government financial system. The Bangladesh capital market still has a long way to go. The recent measures taken by the transitional government have already begun to positively impact the markets. If more investor- friendly policy reforms were to be implemented, the capital market will undoubtedly play a critical role in leading Bangladesh towards being the next Asian tiger with growth comparable to India, Vietnam and the other most dynamic economies in the region. References Website www.msn.com www.google.com www.wikipedia.com www.scribd.com www.globaloneness.com www.cse.com.bd www.dsebd.org www.secbd.org Book Fundamentals of Investments (Charls J. Corrado)This Handout Is Prepared Only for Investors in Bangladesh. Jahangir Alam 20

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