Dhaka, Bangladesh (BBN)-The Unnayan Onneshan, an independent multidisciplinary think-tank, has observed that the capital market of Bangladesh has been witnessing continuous fall due to erosion of confidence amongst investors.
“The absence of confidence has persisted as the government has failed to bring the perpetrators of two crushes to book and the regulatory regime is yet to enforce zero-tolerance on the activities of the cartels,” the non-governmental organization said in its latest issue of the Bangladesh Economic Update, released on Saturday.
The research organization also said that the regulatory regime is fraught with mechanisms that allow, amongst others, activities such as over-valuations of stocks, non-compliance of the listed companies with the mandatory disclosure requirements, defective audit opinions.
Referring to the shortages in supply of liquidity into the market, the rganization finds faults with the contractionary monetary policy and observes that: “the prevailing contractionary monetary policy through high rate of interest along with government’s greater than before dependency on loans from the banking sector for financing public deficit have also weakened supply of liquidity into the capital market.”
Suggesting a multi-pronged approach for the revival of lost confidence in investors, the Unnayan Onneshan called for actions against the cartels, observance of zero-tolerance by the regulatory regime on corporate governance, increased supply of liquidity to the general investors and full implementation of measures announced by the government.
In January 2013 total market capitalization of DSE was BDT 1845.45 billion, a less of 4.5 percent than that of previous fiscal year of 2011-12.
In FY 2010-11, the market capitalization was BDT 2327.016 billion. The market capitalization and investment ratio witnessed a downward trend, reaching at 83.01 percent in FY 2011-12. This indicates the descent in ratio between capitalization and investments, revealing a continuous fall in the capital market. In FY 2011-12, the turnover sunk to 64 percent than that of FY 2010-11.
The research organization found that high volatility, unaccompanied by any change in the real economy, may lead to a general erosion in the confidence of investors and redirect the flow of capital away from the stock market.
The sector-wise contribution of financial institutions, which have occupied the major share of the market capitalization, fell down to 8.0 percent in January, 2013 from 12 percent in FY 2010-11. Moreover, continuous drop in the contribution of banking sector is observable, with 27 percent in January 2013 from 29 percent in FY 2010-11, the report adds.
The Unnayan Onneshan said existence of a significant level of volatility in case of listed companies in DSE as there is high level of standard deviation 44.32 with the number of DSE listed company growing to 286 in the current fiscal year from 149 in FY 1990-91.
Debunking the crash of capital market, the Unnayan Onneshan has shown that most of the IPOs and rights issues in the pre-crisis period were also overvalued several times over their fundamental values. “So after crash of the market, the value of these kinds of shares devalued significantly which is responsible for loss in confidence amongst the investors,” the Update said.
The collapse of capital market in 1996 had been created by a fake demand mechanism in the short-run. In FY 2010-11, the ‘game plan’ was different from 1996 and the index was kept on a high for a longer period of about a year before the cartel withdrew their cash from the market. “The two stock market crashes resulted in losses of billions of Takas of the millions of small investors.”
While the Securities and Exchange Commission (SEC) suffers from skilled human capital, overpricing through overstating EPS (earning per share) and NAV (net asset value) remain one of the major constraints due to inadequacies in oversight. “Both the SEC and the stock exchanges are still struggling to monitor the issue of IPOs and rights shares,” it noted.
BBN/SSR/AD-30mar13-2:50 pm (BST)
