Capital Market of Bangladesh

Investment Management: Capital Market of Bangladesh | 1
An Assignment on
CAPITAL MARKET OF
BANGLADESH
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TABLE OF CONTENTS
CAPITAL MARKET OF BANGLADESH
1.
2.
3.
INTRODUCTION
THE PRIMARY MARKET
THE SECONDARY MARKET
4.
03
BANGLADESH STOCK EXCHANGES
5.
04
THE ROLE OF CAPITAL MARKETS IN AN ECONOMY
6.
06
BANGLADESH CAPITAL MARKET OUTLOOK
7.
07
BANGLADESH: THE PROSPECTS, POSSIBILITIES & CHALLENGES
8.
09
THE POTENTIAL OF THE BANGLADESH CAPITAL MARKET
9.
12
REASONS BEHIND THE UNDERDEVELOPMENT
10.
13
OPPORTUNITIES OF BANGLADESH CAPITAL MARKET
11.
16
RECOMMENDATIONS & CONCLUSION
18
REFERENCES
CAPITAL MARKET OF BANGLADESH
01
02
1.
INTRODUCTION
A capital market is a market for securities (debt or equity), where business
enterprises (companies) and governments can raise long-term funds. It is defined as
a market in which money is provided for periods longer than a year, as the raising of
short-term funds takes place on other markets (e.g., the money market). The capital
market includes the stock market (equity securities) and the bond market (debt).
Financial regulators, such as the Bangladesh Financial Services Authority or the
Bangladesh Securities and Exchange Commission (SEC), oversee the capital
markets in their designated jurisdictions to ensure that investors are protected
against fraud, among other duties.
Capital markets may be classified as primary markets and secondary markets. In
primary markets, new stock or bond issues are sold to investors via a mechanism
known as underwriting. In the secondary markets, existing securities are sold and
bought among investors or traders, usually on a securities exchange, over-thecounter, or elsewhere.
The Capital market, an important ingredient of the financial system, plays a
significant role in the economy of the country.
The capital market is the market for securities, where companies and governments
can raise long term funds. The capital market includes the stock market and the
bond market. Capital markets promote and keep capitalism alive. The markets are a
critical piece to may countrys economies and the bigger the markets the more
potential for economic growth. It allows for consumers and businesses to have a
share in the nations wealth. The availability of several ways to raise money needed
is attractive because they can continue to strike into new sources of money over
time. The goal of the markets is to increase investor confidence by more active
participation. The markets require a free flow of information to run smoothly and
efficiently and the internet can be used for up-to-the minute trade information.
2.
THE PRIMARY MARKET

The primary market is that part of the capital markets that deals with the issue of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done through
a syndicate of securities dealers. The process of selling new issues to investors is
called underwriting. In the case of a new stock issue, this sale is an initial public
offering (IPO). Dealers earn a commission that is built into the price of the security
offering, though it can be found in the prospectus. Primary markets creates long
term instruments through which corporate entities borrow from capital market.
Features of primary markets are this is the market for new long term equity capital.
The primary market is the market where the securities are sold for the first time.
Therefore it is also called the new issue market (NIM).
In a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the
investors.
Primary issues are used by companies for the purpose of setting up new business or
for expanding or modernizing the existing business. The primary market performs
the crucial function of facilitating capital formation in the economy.
The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new
issue market may be raising capital for converting private capital into public capital;
this is known as "going public."
The financial assets sold can only be redeemed by the original holder.
Methods of issuing securities in the primary market are:
Initial public offering;

Rights issue (for existing companies);
Preferential issue.
3.
THE SECONDARY MARKET

The secondary market, also known as the aftermarket, is the financial market where
previously issued securities and financial instruments such as stock, bonds, options,
and futures are bought and sold.[1]. The term "secondary market" is also used to
refer to the market for any used goods or assets, or an alternative use for an
existing product or asset where the customer base is the second market (for
example, corn has been traditionally used primarily for food production and
feedstock, but a "second" or "third" market has developed for use in ethanol
production). Another commonly referred to usage of secondary market term is to
refer to loans which are sold by a mortgage bank to investors such as Fannie Mae
and Freddie Mac.
With primary issuances of securities or financial instruments, or the primary market,

investors purchase these securities directly from issuers such as corporations
issuing shares in an IPO or private placement, or directly from the federal
government in the case of treasuries. After the initial issuance, investors can
purchase from other investors in the secondary market.
The secondary market for a variety of assets can vary from loans to stocks, from
fragmented to centralized, and from illiquid to very liquid. The major stock
exchanges are the most visible example of liquid secondary markets - in this case,
for stocks of publicly traded companies. Exchanges such as the Dhaka Stock
Exchange and Chittagong Stock Exchange provide a centralized, liquid secondary
market for the investors who own stocks that trade on those exchanges. Most bonds
and structured products trade over the counter, or by phoning the bond desk of
ones broker-dealer. Loans sometimes trade online using a Loan Exchange.
4.
BANGLADESH STOCK EXCHANGES
The Securities and Exchange Commission 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. The SEC has issued licences 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.There are two stock exchanges ( the Dhaka Stock
Exchange (DSE) and the Chittagong Stock Exchange (CSE) ) which deal in the
secondary capital market.
A stock exchange is an entity that provides "trading" facilities for stock brokers and
traders, to trade stocks, bonds, and other securities. Stock exchanges also provide
facilities for issue and redemption of securities and other financial instruments, and
capital events including the payment of income and dividends. Securities traded on
a stock exchange include shares issued by companies, unit trusts, derivatives,
pooled investment products and bonds.
To be able to trade a security on a certain stock exchange, it must be listed there.
Usually, there is a central location at least for record keeping, but trade is
increasingly less linked to such a physical place, as modern markets are electronic
networks, which gives them advantages of increased speed and reduced cost of
transactions. Trade on an exchange is by members only.
The initial offering of stocks and bonds to investors is by definition done in the
primary market and subsequent trading is done in the secondary market. A stock
exchange is often the most important component of a stock market. Supply and
demand in stock markets is driven by various factors that, as in all free markets,
affect the price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to be off
exchange or over-the-counter. This is the usual way that derivatives and bonds are
traded. Increasingly, stock exchanges are part of a global market for securities.
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 Dhaka Stock Exchange
(DSE) and Chittagong Stock Exchange (CSE) and an over-the counter exchange
operated by CSE. It also consists of a dedicated regulator, the Securities and

Exchange commission (SEC), since, it implements rules and regulations, monitors
their implications to operate and develop the capital market. It consists of Central
Depository Bangladesh Limited (CDBL), the only Central Depository in
Bangladesh that provides facilities for the settlement of transactions of
dematerialized securities in CSE and DSE.
DHAKA STOCK EXCHANGE

Dhaka Stock Exchange (Generally known as DSE) is the main stock exchange of
Bangladesh. It is located in Motijheel at the heart of the Dhaka city. It was
incorporated in 1954. Dhaka stock exchange is the first stock exchange of the
country. As of 18 August 2010, the Dhaka Stock Exchange had over 750 listed
companies with a combined market capitalization of $50.28 billion.
History
It first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April
1954 and started formal trading in 1956. It was renamed as East Pakistan Stock
Exchange Ltd in 23 June 1962. Again renamed as Dacca Stock Exchange Ltd in 13
May 1964. After the liberation war in 1971 the trading was discontinued for five
years. In 1976 trading restarted in Bangladesh. In 16 September 1986 was started.
The formula for calculating DSE all share price index was changed according to IFC
in 1 November 1993. The automated trading was initiated in 10 August 1998. In 1
January 2001 was started. Central Depository System was initiated in 24 January
2004. As of November 16, 2009, the benchmark index of the Dhaka Stock Exchange
(DSE) crossed 4000 points for the first time, setting another new high at 4148
points.
Formation
Dhaka Stock Exchange (DSE) is a public limited company. It is formed and managed
under Company Act 1994, Security and Exchange Commission Act 1993, Security
and Exchange Commission Regulation 1994, and Security Exchange (Inside Trading)
regulation 1994. The issued capital of this company is Tk. 500,000 which is divided
up to 250 shares each pricing Tk. 2000. No individual or firm can buy more than one
share. According to stock market rule only members can participate in the floor and
can buy shares for himself or his clients. At present it has 230 members. Market
capitalization of the Dhaka Stock Exchange reached nearly $9 billion in September
2007 and $27.4 billion in Dec 9, 2009.
CHITTAGONG STOCK EXCHANGE

Chittagong Stock Exchange is a stock exchange located in the port city of
Chittagong in southeastern Bangladesh. It was established in 1995 as the second
stock exchange of the country. The exchange is located in the Agrabad commercial
area of the city.
Timeline
1 April 1995 CSE incorporated as a company.

10 Octabar Floor trading started in cri out system.
4 November 1995 formally opened by then former Prime Minister Begum
Khaleda Zia.
30 May 2004 Internet based Trading system opened.
5.
THE ROLE OF CAPITAL MARKETS IN AN ECONOMY
Provides an important alternative source of long-term finance for long-term

productive investments. This helps in diffusing stresses on the banking
system by matching long-term investments with long-term capital.

Provides equity capital and infrastructure development capital that has strong
socio-economic benefits - roads, water and sewer systems, housing, energy,
telecommunications, public transport, etc. - ideal for financing through capital
markets via long dated bonds and asset backed securities.

Provides avenues for investment opportunities that encourage a thrift culture
critical in increasing domestic savings and investment ratios that are
essential for rapid industrialization. The Savings and investment ratios are
too low, below 10% of GDP.

Encourages broader ownership of productive assets by small savers to enable
them benefit from Bangladeshs economic growth and wealth distribution.
Equitable distribution of wealth is a key indicator of poverty reduction.

Promotes public-private sector partnerships to encourage participation of
private sector in productive investments. Pursuit of economic efficiency
shifting driving force of economic development from public to private sector

to enhance economic productivity has become inevitable as resources
continue to diminish.
Assists the Government to close resource gap, and complement its effort in
financing essential socio-economic development, through raising long-term
project based capital.

Improves the efficiency of capital allocation through competitive pricing
mechanism for better utilization of scarce resources for increased economic
growth.
Provides a gateway to Bangladesh for global and foreign portfolio investors,
which is critical in supplementing the low domestic saving ratio.
6.
BANGLADESH CAPITAL MARKET OUTLOOK
Capital markets continue strong performance
Subprime crisis has left little impact on Bangladesh markets
Market capitalization is above US$20bn in 2009 from US$10bn in 2007
Average daily turnover is approximately US$75mm in 2009 from US$24mm in

2007
Opportunities and Challenges
Key opportunities for future growth
Institutionalization of market brings greater liquidity and lower volatility
Attracting large corporate for listing provides investors with viable investment
options
Challenges ahead
Retail dominated market resulting in higher volatility from speculation

Large, well reputed companies prefer to source funds from traditional bank
finance against capital markets
Remittance inflow has been resilient to global turmoil
Bangladeshis abroad sent home US$887.9mm in September09
Inflation continues to decline
Fell to 6.04% in July09, from 6.66% in June09 and 8.90% in December08
GDP growth forecast has been revised downwards to 5.88%,

compared to 6.19% in the previous fiscal year
Exports have been relatively sheltered due to low cost nature of

Bangladeshi products
Recovery in the US and Europe, the major buyers, expected to boost export
earnings
Key Commentary
Local market has been relatively sheltered from the recent global
meltdown in 2008
Market was volatile in early 2009 but has stabilized with high turnover and
market capitalization
FII interest to explore new front
Impressive growth in liquidity in recent years
Average Daily Turnover increased from US$24mm in 2007 to US$ 75mm in

2009
Highest recorded liquidity of US$166mm on July 2, 2009
Market Capitalization of DSE in 2009 has been around US$20 bn, up

from about US$10 bn in 2007
15 new issues in 2008 with 3 direct listings
7 new issues completed in 2009
Recently completed largest IPO in Bangladesh history.
7.
BANGLADESH CAPITAL MARKET : THE PROSPECTS,

POSSIBILITIES AND CHALLENGES
THE recent growth of capital market of Bangladesh was behind time. We have
witnessed the money market grow stable in this country over the last decade; our
economy was starving for a matured and stable capital market. The stability came
through a variety of sources namely, educated retail investors, institutional
investors and last but not least the capital market regulators.
As it is a market that involves both the sponsors and investors, the need for a
healthy and stable market became necessary. Through various forms of reforms and
automation the capital market of Bangladesh won the confidence of investors from
all walks of life. It is a fact that capital market outperformed money market by far in
the last couple of years but that was only possible due to the uniform and state of
the are technology that has been used as the platform of our capital market. In
addition to that, the government facilitated our capital market by structuring its
monetary and fiscal policies in a pro-capital market manner.
The central bank (CB) played a thoughtful part in developing our capital market. It
brought transparency to the banking sector, which actually welcomed the retail
investors to join the capital market with high confidence. The performance and
healthy return of the banking sector worked as a crucial component to bring in
institutions and foreign investors. Power and pharmaceutical sector also
outperformed the expectations of general investors; resulting fresh fund injection
into our capital market.
Our emerging economy mostly invited the funds from all over the globe. Market
capital has shown amazing growth. Although current market price earning ratio is
higher than that of the neighbouring country but it is my belief that considering the
demand for lack of avenue to invest, the capital market of our country has a bright
and attractive future and untapped sector.
Addressing the issue regarding our capital market, 'liquidity' and lack of
"instrument" would top the list of challenges that we have right now. The major
reason for the existence of the stock market is to provide liquidity of shares and
diversified instruments which helps increase market capitalisation. It also helps

investors to gain more confidence and positively impact Gross Domestic Product
(GDP) of our country. Neighbouring countries such as India and Pakistan have
market capitalisation of more than 75% of their GDP. Comparatively, the Bangladesh
capital market accounts for a far lesser share of its GDP indicating ample scope for
future intensification in this sector. Hence, we should address the above to issues
with utmost seriousness and with a future vision.
As we know, our economy is an emerging one; there is ample scope of growth of our
capital market. Our market cap, accounts for a lower share of our GDP in a
comparative regional perspective. With the help of upcoming issues (IPO) we are
very optimistic that the market capitalisation is reach a higher level within a short
span of time. Automation and introduction of Central Depository helped our capital
market to grow considerably. The regulatory body, namely Securities and Exchange
Commission, is continuously facilitating our capital market with its international
standard surveillance and monitoring. The continuous endeavour of the SEC has
resulted in our capital market to be free from fraudulent and manipulative activities.
Thus presence of the SEC has impacted significantly in the development of the
market. However, considering our market size, the SEC should employ more
professionals from private sector. Would bring more dynamism to the market.
The major drawbacks of our capital market are lack of instruments and liquidity. We
can address these two issues by attracting more companies to the market. In order
to make the market more attractive, the corporate tax bracket can be lowered in
order to encourage sponsors to list their companies in the exchanges. We can also
introduce Future and Option Market and help our already existing bond market to be
more vibrant leaving the investors with more instruments. Although we have some
mutual funds (MF) currently trading in the secondary market, yet we believe there is
higher demand for such products, since MF provides the clients the opportunity to
reduce investment risk. With the help of the bourse, we should welcome hedge
funds from different parts of world to invest in our capital market. Cash
management can also play a significant role in overcoming the drawbacks of our
capital market. With the help of efficient and online cash management our
cumbersome settlement procedure could be stream lined. There are other
numerous ways we can reduce the drawbacks of our capital market. Last but not
least, international auditing standard has to be adopted, resulting in more
transparency in the financial activities and reporting. This would draw the attention
of general investors and gain then confidence to invest in every sector. More
importantly, in the context of online central depository system, guaranteed clearing
agent for settlement is obvious for market development.
Absence of capital gain tax is the most attractive reason for foreign investors (FI) to
invest in Bangladesh capital market, which is not very common in emerging
economies such as Bangladesh. In addition to high return and significant dividend

yield, FIs should be attracted to our capital market because of the easy and hassle
free repatriation of funds.
From the present point of time the future seems bright, not only because of our
vibrant capital market but also of our room for new products. With the introduction
of direct listing and possible book building method, our primary market is improving
in line with the secondary market. The market cap will grow significantly within next
few years and turnover shall reach an international level. Moreover, institutional
clients, namely banks are entering the market with their huge liquid fund causing
the capital market to grow very rapidly. Domestic and international banks have
started not only to invest in the capital market but also to operate brokerage and
merchant banking wing. Cross border trading and index trading are ideas we might
adopt in future, which will result in liquidity and new avenues for investment and
minimise our cash market risk.
The Bangladeshi and foreign investors are experiencing the scarcity of diversified
products in Bangladesh. The platform of this market is supply and demand. Due to
the absence of diversified products, the liquidity of market is declining.
Introducing option and future market to our capital market can be a solution to the
above issue. Turnover and market capital of India grew substantially after
introducing the option and future market. However, the investors have to be
educated properly to reduce speculation. Derivatives and option market is
unavailable only due to our lack of professionals and technical weakness and also
there are no specific regulations relating to these products. However, in a very short
span of time capital market intermediaries are bringing in infrastructure changes
such as book building, derivative and option market to our market. Introduction of
these products will further broaden investment horizon and bring enhanced depth
and liquidity to our market and attract global customers.
Although we have a bond market but compared to other countries it is very weak.
We have to attract private and public sector companies to issue more bonds and
thus increase liquidity in our bond market.
The need for cooperation among the stock exchanges in this region has to be
emphasised her in order reap tremendous benefits. At present, the level of such
cooperations remains at a very low level. The experience we have had in our
respective markets can be valuable to each other and ought to be exchanged, even
though the sizes and specifications of our markets may vary. Regionwise, we are
bound by commonalities in culture, environment, tradition. The same Socio-political
factors affect us rather similarly. Hence, the knowledge gathered in our respective
countries can be valuable to us, who belong to the same region. Through a friendly

dissemination of knowledge and experience, we can revitalise and energise our
economies. Shared knowledge can fuel the growth of a stronger and more vibrant
capital market.
8.
THE POTENTIAL OF THE BANGLADESH CAPITAL
MARKET
The capital market is the engine of growth for an economy, and performs a critical
role in acting as an intermediary between savers and companies seeking additional
financing for business expansion. Vibrant capital is likely to support a robust
economy. While lending by commercial banks provides valuable initial support for
corporate growth, a developed stock-market is an important pre-requisite for
moving into a more mature growth phase with more sophisticated conglomerates.
Today, with a $67 billion economy and per capita income of roughly $500,
Bangladesh should really focus on improving governance and developing advanced
market products, such as derivatives, swaps etc.
Despite a challenging political environment and widespread poverty, Bangladesh

has achieved significant milestones on the social development side. With growth
reaching 7 percent in 2006, the economy has accelerated to an impressive level. It
is noteworthy that the leading global investment banks, Citi, Goldman Sachs, JP
Morgan and Merrill Lynch have all identified Bangladesh as a key investment
opportunity. The Dhaka Stock Exchange Index is at a 10-year high, however, the
capital market in Bangladesh is still underdeveloped, and its development is
imperative for full realisation of the country's development potential.
Craig Brewer
It is encouraging to see that the capital market of Bangladesh is growing, 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 of 1996,
the capital market has attracted a lot more attention, importance and awareness,
that has led to the infrastructure we have in the market today.
9.
REASONS BEHIND THE UNDERDEVELOPMENT
Access to high quality and credible corporate information remains a major problem
in the market. While a handful of institutional investors may enjoy certain benefits
since they have an investment unit manned with qualified officers, nothing exists
for retail investors. And, in the absence of independent research houses, retail
investors primarily focus on advice given by their brokers, which often consists of
market rumours. This is not acceptable, and it often leads to enormous losses for
small investors who are vital for a low-income and emerging market like
Bangladesh. Filtering of information among different types of investors may leave
scope for manipulation; this assumption had been proved right in the 1996 market
meltdown at the cost of many individuals and households.
The market does not have an adequate number of fundamentally sound scrips. The
authorities should not force major corporations to come into the market, without
creating an enabling environment. The focus should be on the privatisation of state
owned enterprises through public offerings in the bourses. The market has to reach
such a stage of development that companies will take it as a serious alternative to
bank financing.
The government has reduced the interest rates on savings instru-ments, however
this particular market is still limited to the commercial banks, and individual
investors do not have access to these instruments. These savings instruments are
considered risk-free, and since they are not present in the capital market, the
overall risk of investment for an investor remains very high. A portfolio investor
does not have the option of reducing his average portfolio risk by adding these riskfree 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 and a greater focus on fundamentals and, hence, stability in
the market. The presence of institutional investors is also expected to ensure better
valuation levels due to their specialised analytical skills. While we do have public
sector as well as private sector institutional investors in the economy, proprietary
investment from these institutions is not significant -- other than the Investment
Corporation of Bangladesh that was created in 1976 and currently manages several
mutual funds.
Corporate governance of international standard is still lacking. Multinational

corporations and institutions operating in Bangladesh often adhere to a very high
international standard compliance regime. Parent companies of most of these
corporations and institutions have their scrips listed in developed markets. Unless
the local market adheres to, and effectively enforces, a standard corporate
governance system, there will not be a level-playing ground for international
business houses vis-a-vis local operators.
An important aspect for capital market is reflection of fair value of scrips. This is not
adequately present in the current scenario, and due to this reason the market is not
receiving the attention of an important segment of investors, both foreign and local.
Investors are perhaps depending more on 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 tenure and expectations.
The bull-run that took place in 1996 has left a number of positives for the market. A
lot of investment-friendly regulatory reforms have been implemented by the SEC.
We now have stronger surveillance and improved rules relating to public issue,
rights issue, acquisition, mergers and so on. All these fundamental developments,
which were well overdue, followed the 1996 bull-run. It was a learning experience
for Bangladesh, and the desired level of changes was initiated by the market
watchdog subsequently.
In the secondary market, surveillance is more active and particular than before.
These developments, that are widely appreciated, are actually the fundamental
requirements that are in place 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 central depository. In the present automated trading environment, bids/offers,
depth, and required broker particulars are all recorded and can be retrieved for
future reference. The Central Depository Bangladesh Limited (CDBL) was created in
August 2000 to operate and maintain the Central Depository System (CDS) of
Electronic Book Entry, recording and maintaining securities accounts and registering
transfers of securities; changing the ownership without any physical movement or
endorsement of certificates and execution of transfer instruments, as well as
various other investor services including providing a platform for the secondary
market trading of 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 standard surveillance to protect investor rights and ensure fair play.
The disclosure requirements and its timing for both listed scrips and IPOs as devised
by the SEC are now more reflective of international practices. The SEC is also
adopting new valuation methods that result in fair pricing of new issues. While there
is still a lack of credible research organisations, a few firms like Asset and
Investment Management Services of Bangladesh Ltd. (Aims) have come up, and
they are investing in research and building up stock market related credentials.
THE RECENT SURGE IN THE STOCK MARKET

The Dhaka Stock Exchange Index was at a 10-year high in the 2007 year end (up 66
percent), which made it Asia's top performer after China. The steady investment
atmosphere prevailing throughout 2007 is considered to be one of the main reasons
behind this surge. Good return prospects, stable market growth, and uninterrupted
trading as a result of political stability attracted 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 Stock Exchange 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. The state-owned companies -- Jamuna Oil Company Ltd. and Meghna
Petroleum Ltd. -- debuted in the bourses early this month. Some analysts think that

the market had been undervalued before the 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 sustainable if the planned big IPOs of a few SOEs and the top telecom
companies take place. More such large issues are required, which can emerge out of
the energy, infrastructure and public sectors.
10.
OPPORTUNITIES OF BANGLADESH CAPITAL MARKET
The capital markets in Asia are getting more and more focus with the growing
corporatisation of the Asian economies. Eastern Asia has progressed a lot with
respect to attracting western companies to get listed in Asian bourses as well as
supporting innovative instruments, and Southeast Asia is also coming up with India
leading the way. Comparing the local market scenario with that of the rest of the
region, Bangladesh is in pretty good shape as we have most of the infrastructure in
place. Our market capitalisation is relatively smaller and it currently stands at $9.3
billion, which is just over 13 percent of GDP. Higher liquidity is skewed towards a
handful 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.

Such measures are certainly welcome as Bangladesh lacks a proper secondary
market for bonds. The market 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 instruments that 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
Meghna Petroleum Limited on the local bourses in January 2008 has spurred a lot of
encouragement among investors. This initiative taken by the government to list
SOEs will increase market capitalisation and improved liquidity.
SEC is also contemplating the introduction of the book-building method in the

valuation of IPOs in order to ensure a fair price within this year. This will encourage
companies with sound financial health to come into the market.
Regulatory pressures are mounting on telecom companies to get listed. It is

estimated that the listing of the top telecom companies will attract more foreign
investment, increase the market capitalisation 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 like commercial papers and corporate bonds, and derivatives, which
will help foreign investors hedge their exposure.
11.
RECOMMENDATIONS & CONCLUSION
The market needs more and more good scrips. The process would be easier if we
could draw attention of good issuers by improving the market governance system
and eliminating scope for manipulation. There are only limited instances, such as in
commercial banks/leasing companies, where regulators can impose guidelines
relating to capital structure. Hence, it may be difficult to force a corporate house to
list unless it agrees at the time of licensing or registration. Inadequate disclosure
requirement, and a culture of family-owned conglomerates deter the expansion of
corporate governance into the local industry. The regulators need to play an active
role in removing the bureaucratic bottlenecks, and promote rules that provide
incentives to these groups of companies to list.
To expedite the market development process, it may be a good idea to decide on

certain milestones 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
Regulatory Commission and other regulatory bodies is now getting established.
Individually, they were not serving each others' interests, and there was no effective
coordination among them, hence the country was deprived of great initiatives. A
dedicated financial market cell at the Ministry of Finance 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. The supply of securities can be increased if the SOEs are allowed to
operate through the stock exchanges. Floatation of SOE scrips is expected to
expand the market by couple of times. Corporatisation of SOEs will bring in
transparency as well as confidence on the government financial system.
Incentive for private sector entrepreneurs to access the capital market should be
more noticeable. Tax gap between listed and non-listed companies could be
increased. Infrastructure projects should access capital market to raise financing
through bonds and corporations should raise short term financing through
commercial papers. Securitizations should be encouraged. We need to be proactive
and take initiatives to promote new products in the market.
In a more developed market, institutional investors such as merchant banks,

commercial banks, insurance companies, are major traders of securities. We need
enforceable and more effective laws and rules to attract foreign institutional
investors.
Equity research is not yet very popular in Bangladesh, quality of brokerages houses
should be assessed by the quality of research produced by their independent
research departments. SEC is expected to take an educational role in the process by
bringing in international resources and creating investors awareness through
television and other media. Local TV channels focus on business but we also need
education for the young generation financial education for the college and
university students, irrespective of their discipline, should be promoted. Young
people have every right to learn the mechanisms of saving, investing and the
importance of personal financial management.
Quality analysis needs to address this valuation issue in a more pro-active manner.
The independent analysts should raise the flag when a scrip is overvalued or
undervalued, the intrinsic value of a traded security should be covered in the
research paper. Investors are perhaps depending much on speculative analysis
resulting into volatility in the market as opposed to fundamental analysis, which
could attract more stable long-term investors who are sure about their investment
tenure and expectations. It is observed that whenever there is a downturn in the
market, individual investors go on rampage. However, these investors should
understand that downturns, bearish trends and market corrections are an integral
part of stock markets.
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
Books:
Corporate Finance, Stephen A Ross, 13th edition. McGraw Hill Inc.
News Papers:
The Daily Star Forum 2008 May
The Financial Express, Thursday, December 20, 2007
Websites:
http://www.thedailystar.net/forum/2008/may/potential.htm
http://www.bangladesh-bank.org/research/policynote/pn0708.pdf
http://www.thefinancialexpress-bd.com/search_index.php?
news_id=20305&page=detail_news
http://en.wikipedia.org/wiki/Stock_market
http://en.wikipedia.org/wiki/Primary_market

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Investment Management: Capital Market of Bangladesh | 1

Investment Management: Capital Market of Bangladesh | 2

Subject: Submission of the Assignment on Capital Market of Bangladesh.

Investment Management: Capital Market of Bangladesh | 3

One of the most pleasant parts of writing this report

establishment, the list of expression of thanks- no

thanks our course instructor without whom we must

Investment Management: Capital Market of Bangladesh | 4

CAPITAL MARKET OF BANGLADESH

Investment Management: Capital Market of Bangladesh | 5

Investment Management: Capital Market of Bangladesh | 6

Initial public offering;

Investment Management: Capital Market of Bangladesh | 7

With primary issuances of securities or financial instruments, or the primary market,

Investment Management: Capital Market of Bangladesh | 8

BANGLADESH STOCK EXCHANGES

Investment Management: Capital Market of Bangladesh | 9

DHAKA STOCK EXCHANGE

CHITTAGONG STOCK EXCHANGE

Investment Management: Capital Market of Bangladesh | 10

1 April 1995 CSE incorporated as a company.

Provides an important alternative source of long-term finance for long-term

system by matching long-term investments with long-term capital.

markets via long dated bonds and asset backed securities.

too low, below 10% of GDP.

Equitable distribution of wealth is a key indicator of poverty reduction.

Investment Management: Capital Market of Bangladesh | 11

project based capital.

Capital markets continue strong performance

Subprime crisis has left little impact on Bangladesh markets

Market capitalization is above US$20bn in 2009 from US$10bn in 2007

Average daily turnover is approximately US$75mm in 2009 from US$24mm in

Opportunities and Challenges

Key opportunities for future growth

Institutionalization of market brings greater liquidity and lower volatility

Retail dominated market resulting in higher volatility from speculation

Investment Management: Capital Market of Bangladesh | 12

Remittance inflow has been resilient to global turmoil

Bangladeshis abroad sent home US$887.9mm in September09

Inflation continues to decline

Fell to 6.04% in July09, from 6.66% in June09 and 8.90% in December08

GDP growth forecast has been revised downwards to 5.88%,

Exports have been relatively sheltered due to low cost nature of

FII interest to explore new front

Impressive growth in liquidity in recent years

Average Daily Turnover increased from US$24mm in 2007 to US$ 75mm in

Highest recorded liquidity of US$166mm on July 2, 2009

Market Capitalization of DSE in 2009 has been around US$20 bn, up

15 new issues in 2008 with 3 direct listings

7 new issues completed in 2009

Recently completed largest IPO in Bangladesh history.

Investment Management: Capital Market of Bangladesh | 13

BANGLADESH CAPITAL MARKET : THE PROSPECTS,

Investment Management: Capital Market of Bangladesh | 14

Investment Management: Capital Market of Bangladesh | 15

Investment Management: Capital Market of Bangladesh | 16

Investment Management: Capital Market of Bangladesh | 17

Despite a challenging political environment and widespread poverty, Bangladesh

Investment Management: Capital Market of Bangladesh | 18

Investment Management: Capital Market of Bangladesh | 19

Corporate governance of international standard is still lacking. Multinational

Investment Management: Capital Market of Bangladesh | 20

The stock market surveillance mechanics in place at present has no resemblance to