Bus-498

Course title:
Project
Project title: A
Qualitative
Analysis on Capital
Market crash of
Bangladesh (2010-
2011)

Submitted to:
Mr. Nafish Sarwar
Islam
Senior Lecturer
Dept. of Business
Administration
East West
University

Submitted by:
Md. Ashraful Mumin
ID: 2010-1-10-021
Student of the Dept.
of Business
Submission date: 26th August 2013 Administration
Semester: Summer-2013 Major in Finance &
Accounting
East West
University
 Letter of Transmittal
26th August, 2013
Mr. Nafish Sarwar Islam
Senior Lecturer
Department of Business Administration
East West University

Subject: Submission of Research Report

Dear Sir,

I am very much pleased to submit my research report on A Qualitative Analysis on Capital

Market crash of Bangladesh (2010-2011) with your kind supervision and continuous guideline
throughout the period. To prepare this report I have collected the information from the
Investigation Report of Khondokar Ibrahim Khaled (2011), survey, text book, newspaper,
journal, internet sources, DSE&CSEs official websites. During preparing this report paper I
have enforced my best effort to prepare this report to be as informative and relative as possible.
Certainly it is enriches my knowledge and promotes my study.

I believe that this research program has enriched both my knowledge and experience. If you
further queries regarding this report, please let me know. I tried my best to gather reliable
information as possible and I hope that you will be satisfied to accept my report. I sincerely hope
this report will be up your expectation.

Sincerely,

---------------------------

Md. Ashraful Mumin

ID: 2010-1-10-021
Department of Business Administration
East West University

2
 Table of Content:

Chapter No. Contents Page No.

Chapter-1: 1. Origin of the 5
Report
Introduction 2. Background 5
3. Objectives of the 6
Study
4. Approach of the
7
Study
5. Research
7
Methodology
6. Scopes
7. Limitations 9
10

3
Chapter-2: 1. What is Capital 11
Market?
Some Important Concepts 2. What is Stock 12
Regarding Capital Market Exchange?
3. What is Kerb 12
market?
4. What is Omnibus
12
Account?
5. What is Book
12
Building?
6. What is direct
listing? 12
7. What is Brokerage
Firm? 12
8. What is stock
market crash? 13
9. What is stock
market bubble? 13

Chapter No. Contents Page No.

Chapter-3: History of
Bangladesh
Capital Markets in Bangladesh Capital Markets
1. Dhaka Stock 15
Exchange (DSE)
2. Chittagong Stock 16
Exchange (CSE)
3. Structure of the 17
Capital Markets in
Bangladesh
4. Securities and
18
Exchange
Commission (SEC)
5. Central

4
 Depository 19
Bangladesh
Limited (CDBL)

Chapter-4: 1. Reasons for 20

Market Upsurge
Capital Market Crash of 2. A Brief Account of 21
(2010 2011) the Timeline of the
Historic Fall
3. Roles of Different 26
Market
Participants
during the Market
Crash
4. Reasons behind
31
the crash
5. Survey Report
6. Recommendations 38
7. Conclusion 43
8. References 45
46

Chapter-1
Introduction
1. Origin of the Report
The report has been prepared as a requirement for the completion of BBA Degree and course
BUS -498, Project Work as Mr. Nafish Sarwar Islam, course instructor, assigned to do an
analytical report on A Qualitative Analysis on Capital Market crash of Bangladesh (2010-

5
2011). For this purpose I, Md. Ashraful Mumin, ID# 2010-1-10-021 choose to prepare this
report on finding the root causes of the capital market crash in 2010-2011.

2. Background
One of the most important financial institutions within an economy is the capital market. Capital
market opens door for companies to raise huge amount of capital form a lot of individual and
institutional investors inside & outside of a country. Here investors participate voluntarily to buy
ownership of a company in the public market. It is said that stock market is an intermediary
institution to adjust the gap between surplus units and deficit units of an economy. In these days
for millions of middle class people in Bangladesh investing in stocks is more popular than
investing in any other investment sectors. For an investor, stocks are more liquid than any other
investment sources as it gives ability to sell and buy ownership anytime without any hassle.

Over the years many have characterized stock market or capital market as a Speculative
Market, which means market participants can earn a return from their investment from the
differential of prices. Although this price differential are supposed to be out of participants
control, in reality participants can control this price differential through insider trading. As a
result, the market turns to a Manipulative Market. In the event of such illegitimate trading, the
market collapses and wrongdoer earns a huge profit in the expense of the loss of majority
investors. Investors in Bangladesh experienced such an event in 2010-2011.

Since 2007 share prices of Bangladesh capital market have been increasing steadily over the past
four years and it outperformed almost all the world markets. For instance, it performed as 2nd
best in the world after Srilanka in 2010 gaining nearly 83%. The financial year 2008-09 is known
for the global financial and economic crisis. Many developed and developing countries fall into
recession. However, it could not affect Bangladesh economy greatly. So, the stock market of the
country did not see any significant changes or fall. As CPD (2011) reported, financial year 2008-
2009 was a volatile year but during this year Bangladesh economy benefited from low prices of
importable goods and was able to avoid negative pressure on its export of goods and services.

The consecutive outstanding performance of Bangladesh stock market in recent years before the
crash lured millions of investors to the stock market to invest their little savings. Before the stock
market crash the market had become a route of easy money for too many new individual
investors. That is why millions of fresh investors invest their small saving in the market during
this period. For these fresh investors investing in this market provided a way to avoid working a
job. Even some BO account holders worked as intermediaries of friends, relatives to invest their
money in the stock market.

6
On January 9, 2011 the benchmark index of the Dhaka Stock Exchange (DSE) suffered the
steepest ever single-day fall in the bourse's 55-year history. The DSE General Index (DGEN)
plunged by 600 points, and all indices fell nearly 8 percent in the wake of panic-sales. Breaking
the previous day's record, on January 10, DGEN shed 660 points or 9.25 percent between 11 am
and 11:50 am. The capital market was shut; small investors turned vandalistic; and the business
district of Motijheel was transformed into a battlefield between protesters and law-enforcers.
Despite the measures taken by the regulatory commissions people suffered major financial loss
and worse than that, many lost confidence in the stock market.

3. Objectives of the Study

The topic of this study is very significant for the understating problems and prospects in
emerging capital markets like Bangladesh. Identification of the root causes the 2010-2011 can
improve stakeholders awareness regarding capital market manipulation. Yet, very little research
has been done to provide knowledge about the crash. So, the study tries to examine the reasons
that leaded the Bull Run for dramatic increase of different instruments in Bangladesh stock
market and the fundamental factors of the collapse. It also analyzes the role of DSE, CSE, and
SEC as market regulators during the bubble formation and burst. Besides, the study tries to
provide knowledge for the stakeholders related to this stock market. So that investors and other
stakeholders in Bangladesh stock market and emerging stock markets can be aware of similar
kind of collapse.

4. Approach of the Study

Because of nature of the research, a qualitative research method has been used. Finding reasons
of the crash and role of the regulators and the government is the aim of the re-search. The
required information itself asks for a qualitative research approach.

5. Research Methodology
The aim of this section is to show how the data was collected, by which method and source
and the process of analyzing the data.

7
5.1 Source of Data and Method
The data used for this research were obtained and used from both primary and secondary
sources. Moreover, a self-administered questionnaire has been used to collect primary data.

5.1.1 Primary Source

For the primary data, self-administered questionnaires will be sent to 10 employees and 20
general investors. The questionnaire consists of 10 questions.

Self-Administered Questionnaire
The self-administered questionnaire fashioned on the basis of the Investigation Report of
Khondokar Ibrahim Khaled (2011). Although the primary reasons behind the crash have been
provided in the report, the self-administered questionnaire will help to find out other causes, if
there is any that did not appear in the investigation report. It asks about the role of regulators and
government that has played to improve market conditions since the crash. Besides, the self-
administered questionnaire finds to recommend some steps that regulators and government can
adopt to protect investors or this kind of collapse in future. The self-administered questionnaire
enables the writer to gather information to solve the re-search questions and make
recommendations.

Expected result would carry:

New ideas includes causes of the stock market crash that were not in the
investigation report
Suggestions for development of the market by the regulators and government
after the crash
Recommendations for the regulators and government to prevent this kind of crash
Answers in details and according to respondents feelings

Questionnaire
The questions for the questionnaire were selected logically to match the expected result. There
were 10 questions in the questionnaire which were in English version. The questionnaire consists
of 3 closed questions and 7 open questions. The questionnaire is attached in the appendices of the
thesis.

How the Respondents Were Selected

8
 For this research selecting respondent is a very hard job as it involves conflict of interest of
opinions among the stakeholders. Respondents were chosen on the author`s judgment. Different
market analysts and economist pointed that there are so many investors in this stock market who
dont have enough knowledge about investment in the capital market. The aim of the writer is to
ignore this sample of investors too. To select the respondent author used following criteria:

Does the respondent have the corrected as well as accurate information about the
crash?
Is the respondent adequately experienced and educated about the subject to opine?
Does the respondent have information about market conditions even after the
crash?

Keeping all these questions in mind, the author selected two different sample groups of
respondents which are employees of brokerage houses and general investors. The employees of
the brokerage houses have daily updates information about the market and regular relationship
with different stake holders of the market and good educational background that help them to
obtain a job in broker house. The respondents of three brokerage houses were from different
departments including research and sales. Moreover, the author personally knows that most of
the employees of brokerage houses invest in the stock market. So, many of these respondents
have experience of investing in the market with working experience. So, it would be possible to
obtain information from employee and investor point of view. Though there are so many
brokerage houses in Bangladesh, the author selected three broker houses as it was easy for the
author to get information from these houses.

To select investors for the self-administered the author took suggestion from the employees of
brokerage houses. Investors were selected on the basis of their educational background,
knowledge about the market and investment in it, regular updated information of the market and
experience of the stock market crash of 2010-11.

5.1.2 Secondary Source

The used secondary sources for the study are Books, investigation report, past researches,
newspaper, journal, electronic publications and indices data of DSE and CSE.

Books
Although books were not the major secondary source for the study, some text books have been
used too.

9
 Investigation Report
For this research, Investigation Report of Khondkar Ibrahim Khaled (2011) is used as the main
resource for theoretical part. The report was collected from bdnews24.com. The full report
consists of 300 pages. The report is very useful for the research as it gives complete idea about
the context of the problem with case studies and serves to solve the research questions. It also
helps to estimate the role of regulators and government in the capital market of Bangladesh
during and before the crash.

Data of Indices
Indices data of DSE was collected from DSE website and indices data of CSE from Chittagong
stock Exchange website. These data was used to examine significant fall and rise of share prices
in both exchanges and to draw graphs of indices for different time periods.

Newspaper, Journal and Other Sources

Newspaper, Journal and other electronic sources are the most important and more used sources
than other sources used for the study. Important daily news and other information were collected
from the newspaper which is crucial for this kind of research. The used journals for the study
were both recent and archives. Different articles were collected from these sources. The
resources of these sources are downloaded via internet.

6. Scopes
The scope of this paper is limited to only the causes capital market crash in Bangladesh during
2010-2011. The mechanism of stock exchanges, scientific methods of investing in the securities,
the mechanism of brokerage firms and commercial banks and stock market crash in other parts
of the world are beyond the scope of this paper.

7. Limitations
Followings are the perceived limitation of this paper:

Identifying the detailed causes of the market crash requires enormous time and
resources. Thats why the paper should not be viewed as an entire pool of reasons
for the capital market crash rather it only entails the most important ones.

10
 The author could not approach all stakeholders related to the stock market of
Bangladesh to conduct self-administered questionnaire. So, getting different
views of different stakeholders was not possible. Thats why there might be
conflict of interest among the stakeholders.

Chapter-2

Some Important Concepts Regarding

Capital Market

1. What is Capital Market?

11
According to Dr. Guruasamy, Capital market is the market where long term funds are borrowed
and lent. The primary purpose of capital market is to direct the flow of savings into long term
investments (mostly for period of one year and above)

Capital Markets usually demonstrates following features:

1. Demand for funds: Demand for long term funds arise from institutions, government
and the private corporate sector.
2. Instruments: Funds are raised through issue of financial instruments such as shares,
debentures and bonds.
3. Supply of funds: Individuals (household sectors), institutions, banks and industrial
financial institutions are the main source of supply of long term funds.
4. Ideal conduit: The capital market acts as an ideal conduit for the transmission of
savings of surplus units to deficit units which demand long term funds.
5. Economic growth: Capital market plays a significant role in the financial system by
prompting savings and investments, which are vital for the development and growth
of an economy. It accelerates the pace of economic development.
6. Price Mechanism: The price mechanism prevalent in active capital markets ensures
optimal allocation of scarce financial resources to the most productive sectors of the
economy. The system of allocation of funds works through incentives and penalties.
Accordingly, companies that operate efficiently can sell securities at premium
(incentives). Conversely, companies with poor performance face problems in selling
their securities and may have to issue securities at a discount to raise addition funds
or offers higher rates of interest.

2. What is Stock Exchange?

Stock exchange is an organized place or arrangement where the buyer and seller is brought
together so that they can buy or sale their stocks/shares. For example Dhaka Stock Exchange has
an electronic trading system called TESA and Chittagong Stock Exchange has an electronic
trading system called VECTOR. These two systems work as an arrangement to help buy/sale of
listed securities.

3. What is Kerb market?

Kerb market is an unofficial name for an unofficial activity - the trading of securities outside a
recognized stock exchange. The name derives from the historical practice of dealers continuing
to trade on the pavement after the exchange's hours of business.

12
 4. What is Omnibus Account?
An account between two futures merchants (brokers). It involves the transaction of individual
accounts which are combined in this type of account, allowing for easier management by the
futures merchant.

5. What is Book Building?

The process by which an underwriter attempts to determine at what price to offer an IPO based
on demand from institutional investors.

6. What is direct listing?

In currency trading: price quote for a currency in which one unit (or 100 units) of a foreign
currency are expressed in units of the domestic currency.

7. What is Brokerage Firm?

A broker is an intermediary who works as an agent to bring together buyer and seller and it takes
commission from the successful buy/sales. A broker must be a listed member of any stock
exchange (i.e. DSE, CSE).

8. What is stock market crash?

In general, a stock market crash is a sudden dramatic decline of stock prices across a significant
cross-section (i.e. different industry) of a stock market.

Amadeo (n.d.) defined stock market crash as more than 10% loss within few days in a stock
market. But stock market crash has differentiated from stock market correction where the loss is
10% or less.

9. What is stock market bubble?

We can define an Economic Bubble as a surge in the market caused by speculation regarding a
commodity which results in an explosion of activity in that market segment causing vastly

13
overinflated prices. The prices are not sustainable and the bubble is usually followed by a crash
in prices in the affected sector. An economic bubble taking place in the stock market where
market participants drive stock prices above their value in relation to some system of stock
valuation (e.g. dividend model) is called a Stock Market Bubble.

Chapter-3

Capital Markets in Bangladesh

In Bangladesh there are two Capital markets, (1) Dhaka Stock Exchange (DSE) and (2)
Chittagong Stock Exchange (CSE).

The following sections describe the history of capital markets in Bangladesh, its structure and the
import institutions related with it.

14
 History of Bangladesh Capital Markets
First capital market of Bangladesh was established in the Pakistani period on April 28, 1954 as
East Pakistan Stock Exchange Association Ltd. With a total paid up capital of Tk. 4 billion and
196 securities, the market started its trading activities from 1956.

On June 23, 1962, the market was renamed as Dhaka Stock Exchange (DSE). Trading on Dhaka

Stock Exchange was suspended from 1971 to 1976 because of liberation war and its post-
independence weak economy. Then the trading was resumed in 1976 with 9 listed securities
having a total paid up capital of Taka 137.52 million. (Hassan, Islam & Basher, 2000)

By 1987, the number of listed companies in DSE increased up to 92. But high development of
the market is noticeable in the 1990s comparing with any other time since its establishment.
(Economy watch, 2010)

1. Dhaka Stock Exchange (DSE)

The operation of Dhaka Stock Exchange started on May 14, 1964 after renaming East Pakistan
Stock Exchange Limited.

Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities are
regulated by its Articles of Association rules & regulations and by-laws along with the Securities
and Exchange Ordinance - 1969, Companies Act - 1994 & Securities & Exchange Commission
Act - 1993.

In the beginning DSE was a physical stock exchange and used to trade in the open outcry system.

After that to secure smooth, timeliness & effective operation on the market, DSE uses automated
trading system. The system was installed on 10th August, 1998 and was upgraded time to time.
The latest upgrading was done on 21st December, 2008.

There are 238 members and total 507 listed securities in Dhaka Stock Exchange. The working
days of DSE is 5 days in a week without Saturday, Sunday public holidays & other government
holidays. The trading time is from 11:00 am to 3:00 pm (local time). Investment options for an
investor in this market are ordinary share, Debenture, Bond & Mutual funds.

As mentioned by Fellowes (2008), Every stock market has its indices to show movements in the
market as a whole. In the beginning DSE had only one index. However, now there are three
different indices which are DSI (All share), DGEN (A, B, G & N) and DSE 20.

15
(Source: www.dsebd.org)

The major functions of DSE are:

Listing of Companies (As per Listing Regulations).

Providing the screen based automated trading of listed Securities.
Settlement of trading (As per Settlement of Transaction Regulations).
Gifting of share / granting approval to the transaction/transfer of share outside the
trading system of the exchange (As per Listing Regulations 42).
Market Administration & Control.
Market Surveillance.
Publication of Monthly Review.
Monitoring the activities of listed companies (As per Listing Regulations).
Investors grievance Cell (Disposal of complaint by laws 1997).
Investors Protection Fund (As per investor protection fund Regulations 1999).
Announcement of Price sensitive or other information about listed companies through
online.

2. Chittagong Stock Exchange (CSE)

Chittagong Stock Exchange is the 2nd stock exchange of Bangladesh. It is said that CSE is the
pioneer of the modern capital market of the country as it introduces modern technology &
sophisticated logistic support. It was incorporated as a self-regulated non-profit organization on
1st April, 1995 and formally opened on November 4, 1995. It started its trading through cry-out
system. Then Chittagong Stock Exchange started first automated trading bourse of the country.
CSE started its automated trading on 2nd June, 1998 and internet trading service on 30th May,
2004.

The trading time of CSE is between 11:00 am to 3:00 pm. The working days & holidays of CSE
are same as like as DSE. CSE consists of 25 members of whom 12 are elected through election
of CSE members, 12 members are elected from different major economic & social arena of
Bangladesh and CEO is nominated and appointed by its own board but the approval of SEC
mandatory.

Now CSE has 147 members and 238 of listed securities. There are four different markets in CSE
too which are public, Spot, Block & Odd Lot market. Trading is done through all these four
markets. A, B, N, G and Z these are the 5 categories of company listed in CSE and it is
mentionable that in G category there is not any company.

16
Chittagong Stock Exchange has its own indices to calculate movements of its total market value.
CSE maintained only one index that was All Share Price Index until 10th October, 1995. Now
CSE has 3 indices in the stock exchange. Indices are All Share Price Index (CASPI), CSE
Selective Index (CSE30) and CSE Selective Categories Index (CSCX).

(Source: www.cse.com.bd)

3. Structure of the Capital Markets in Bangladesh

Capital markets in Bangladesh are the other part of the countrys financial markets which is
again can be divided into two broad segments: (a) Non-security segment and (b) security
segment. Both of them together determine the atmosphere of the capital market.

Primary market: Primary market is the market for securities which come first time in
the market through Initial Public Offerings (IPOs. Companies can issue new securities
after getting permission from the market regulators.

17
 Secondary market: A market where investors purchase securities or assets from other
investors, rather than from issuing companies them. Securities can be sold or bought
from this market. In a stock exchange most of the trading figures comes from the
secondary market. This market is also divided according to its different trading
characteristics.

Financial
Markets

Money Capital
Markets Markets

Non-
Commerci Security Security
NBFIs
al Banks Segments
Segments

BSB Bangladesh Shilpa Bank

Primary Seconday
BSB
BSRS Bangladesh BSRS
Shilpa Rin ICB
Market Market
Shanghastha

ICB Investment Corporation of

Bangladesh
DSE CSE

Figure 1: Structure of the financial market in Bangladesh

Within the secondary markets there are again four divisions:

Public Market: Instruments are traded on this market in normal volume which is called
lot share.
Spot Market: Trading is done in normal volume under corporate actions and must be
settled in 24 hours.

18
 Public
Market

Seconda
Odd lot Spot
ry
Market Market
market

Block
Market

Figure 2: Types of secondary markets

Block Market: In this market bulk volume of instruments are trades through pick & fill
basis.
Odd Lot Market: Odd lot refers to a quantity of shares that is less than market lot. Odd
lots of all instruments are traded through pick & fills in this market. Basically odd lots
generated from bonus and rights issues.

4. Securities and Exchange Commission (SEC)

The Security and Exchange Commission (SEC) was formed on 8th June, 1993 under the
Securities and Exchange Commission Act, 1993 with a view to protect investors interest,
improvement of securities markets, appropriate issuance of securities and proper guiding of
securities laws. The most important organizations and intermediaries under supervision of SEC
are DSE, CSE, CDBL, stock brokers, merchant banks and asset management companies. Khaled
(2011) .

The commission is consists of a chairman and four members. The Chairman & members of
security exchange commission are appointed by the government of Bangladesh. SEC is directly
connected with the ministry of Finance and has rights to supervise all of securities laws &

19
regulations. According to Securities and Exchange Ordinance, 1969 SEC has been empowered to
control even self-regulatory institutions for instance Stock Exchanges.

The main functions of SEC are following:

Registering and regulating the business operation of DSE, CSE, stock brokers, merchant
banks, underwriters, share transfer agents, portfolio managers and other intermediaries.
Developing investor`s education, providing training for intermediaries, executing market
research and publishing those.
Controlling every authorized self-regulatory organizations too
Inspecting and controlling fraudulent and unfair trading in security markets
Auditing and investigating of any intermediaries or stock exchanges
Collective investment scheme registering & controlling.

5. Central Depository Bangladesh Limited (CDBL)

CDBL was incorporated as a public limited company on 20th August, 2000. Before the
establishment of CDBL process of transferring and delivering ownership was too lengthy and
risky. The establishment of CDBL added value to the stock market of Bangladesh and attracted
more investors especially foreigners. After implementing automated trading system in DSE &
CSE and introducing central depository system, the stock market of Bangladesh became more
effective and credible to the investors. (Bepari & Mollik, n.d.)

The owners of CDBL are DSE, CSE, banks, Investment Corporation of Bangladesh and some
other financial institution. The participants of CDBL are called Depository Participant (DP).
CDBL charges fees from its participants for different services provided by CDBL.

The functions of CDBL are given below:

Operate and maintain the Central Depository System (CDS) of Electronic Book.
Recording and maintaining securities accounts and registering transfer of securities
Changing the ownership without any physical movement or endorsement of certificates
Supervision of Depository participant activities
Providing different investor services including providing a platform for the secondary
market trading of Treasury Bills and Government Bonds issued by the BangladeshBank.

Chapter-4
Capital Market Crash of 2010 2011
20
 1. Reasons for Market Upsurge
Several factors contributed to the creation of the bubble after the election of 2007. They are
listed below.

In, 2007, State of emergency was declared by a military backed regime in Bangladesh
owing to the political upheaval. During military-backed regime investment in real sectors
as well as FDI decreased but the inflow of foreign remittance increased. Investors tried to
find alternative investment sectors to invest their savings and found stock market as an
attractive alternative. (Khaled, 2011)

According to CPD (2011), the total number of BO Account holders on 20th December,
2010 reached to 3.21 million though the number was 1.25 million in December 2009.
Most of these new investors dont have enough knowledge about the stock market but
invested their most or all savings in the market. During that period, 238 brokerage houses
opened 590 branches at 32 districts. As CPD (2011) found, internet-based trading
operation, opening branches of brokerage houses across the country, easy access to the
market information, arranging a countrywide 'Share Mela (fair)' are the factors for
increasing investors. But supplies of new securities through IPOs were not enough to
chase huge capital of too many investors in the market.

Moreover, in the recession period of 2009-10, Banks & other financial institutions had lot
of surplus liquidity thanks to less business opportunities. Consequently, theses financial
institutions & its officials as well as other people took loan and invest in the capital
market to minimize the cost of bearing excess liquidity and to capitalize on this great
opportunity. This made a huge influx of liquidity in the share market. It was seen that the
daily transaction in the share market was on an average from TK. 20,000 to 30,000
million in 2010 and the figure was double comparing to 2009. (Raisa, 2011)

During that period, Bangladesh bank adopted expansionary monetary policy to allow the
budgetary target of 7-8% of GDP growth and to support investment in the high inflation
period. Bangladesh Bank pegged Taka against dollar to support exports. As Taka had
been undervalued it made excess growth in money supply. A big portion of this excess
liquidity had gone to the stock market but there were very few shares in the market. The
policy that was adopted by BB to grow economy by increased exports & investment
eventually misguided and ended up forming the mother of all bubbles. Then government
again fuelled the bubble after permitting to whiten black money through tax breaks and

21
 schemes. (Rahman, 2011)

The inability of SEC to monitor the market conditions properly also fueled the enormous
bubble. Due to the poor monitoring & market surveillance, share prices of Z Category
Companies and small companies increased dramatically. Moreover, some initiatives taken
by SEC were not effective and changed directives frequently such as; it changed
directives of margin loan ratio 19 times. (Raisa, 2011)

2. A Brief Account of the Timeline of the Historic Fall

Timeline of historical fall of the crash has been divided into two sections which are December
2010 and January 2011.

December 2010

The last glorious day for the investors of capital market in 2010 was 5th December. On that day
DSE General Index (DGEN) gained its all-time highest 8918.51 point & broke all old records of
DSE turnover by Taka 32.50 billion.

In 2010, both SEC and Bangladesh Bank took a number of initiatives to keep the market under
control. But in December both BB & SEC changed many of their previous directives and applied
new ones. On 6th December, 2010 SEC introduced a directive saying that buy orders will be
performed after encashment of Investor`s cheques. On the following day another directive called
netting facilities was applied. This indicates that no investor will be able to purchase securities
against the sale proceedings of any other securities during the settlement & clearance period. But
both directives of 6th & 7th December were cancelled on 8th December. The reason of
cancelling these directives was a significant fall of share prices on 8th December. (Bhuiyan,
2011)

SEC changed directive of margin loan ratio by increasing it from 1:0.5 to 1:1 on 13th December
and later it was again hiked to 1:1.5 & 1:2 because of free fall of share prices. (Bhuiyan, 2011)

Bangladesh Bank got a complain that Banks are investing money in the stock market from their
reserve. On the 1st day of December, BB sent 50 teams in different banks of Dhaka &

22
Chittagong to investigate and found some banks in such irregularities. Again on December 2010,
BB issued directives to withdraw the illegally invested industrial loans and to increase Statutory
liquidity Ratio (SLR) & Cash Reserve Ratio (CRR). On 15th December, BB increased CRR and
SLR by 0.5 percent and increased to 19 & 6 percent. Another important directive initiated by BB
was the withdrawal of illegally invested industrial loans by December 31, 2010. As a lot of the
reserved money was invested in capital market, banks started selling shares and withdrawing that
money from the market. By the time investors became panicked. To handle the disastrous
situation & assure the panicked investors BB extended its deadline for submitting and adjusting
loans. For the merchant banks the deadline was January 15, 2011 and for the commercial bank
February 15, 2011. (Raisa, 2011)

As December is the closing period for many organizations, Institutional investors including
financial institutions started selling shares from the beginning of December to show high return
on investment at their balance sheet. As the institutions & bank started selling their shares from
the beginning of December the turnover of DSE was the highest ever in its history on 5th
December. (Raisa, 2011)

Figure 3: DSE Daily Index of December, 2010

19th December was a historical day of the financial year 2010-11 in Bangladesh stock market.
On this day DSE witnessed its biggest one day fall in 55 years history until the date with losing

23
551.76 points or 6.71 percent. The losing index was even higher than 284.78 points or 3.32
percent of 12th December. Prices started to nosedive in an hour after the trading started and
about 200 points were wiped off. In the middle of the session it recovered little bit and ended up
the session at 7654 points.

Figure 4: CSE Daily Index of December, 2010

In the mid December, to meet CRR & SLR requirements of BB by the deadline created liquidity
crisis in banking sector and call money rate made a new record of 180%. Investment Corporation
of Bangladesh (ICB), state-owned commercial banks (SCBs), regulators and government brought
some kind of stability in the market after the big fall of 19th December & liquidity crisis. As a
result, share prices increased from 20th to until 30th December and index stood at 8290 point at
the end of the financial year 2010-11.

January 2011

From 3rd January, 2011, Stock prices started to fall as investors had the information of ongoing
liquidity crisis in the financial & non-financial institutions that limiting the margin loan. On 9th
January DSE General (DGEN) Index declined by 600 points and all indices declined nearly 7.75
percent. On 10th January Dhaka Stock Exchange General (DGEN) Index lost by 660 points or 9
percent & Chittagong Stock Exchange Selective (CSE) Index declined by 914 points or 6.8
percent within 50 minutes of trading. CSE All Share Price Index (CASPI) stood at 19212.34
losing by 1396.21point, which is 6.77 percent. CSE Selective Categories Index (CSCX) lost 914
points or 6.87 percent and CSE-30 Index also lost 1490.83 or 8.28 percent. It had broken all

24
previous records of decreasing index. After that Security & Exchange Commissions called for an
emergency meeting with BB and stop trading at both Dhaka & Chittagong Stock Exchanges
Investors came out in the street with processions and demonstrated against free fall of Share
index in both bourses as well as suspension of trading.

Figure 5: DSE Daily Index of January, 2011

The Government, Central Bank & SEC took immediate actions following the two days
consecutive historical fall of stock prices to soothe the market. As a result, recovery was initiated
with institutional buyers i.e. merchant banks, state-owned banks & non-financial institutions.
Institutional buyers were asked not to sell shares rather to buy. Bangladesh Bank pushed money
into the market as liquidity support and repo. DGEN made the largest gain in the history of
Bangladesh on 11th January by recovering 15.6%. (Chowdhury, 2011)

25
 Figure 6: CSE Daily Index of January, 2011

However, on 18th January, the index started to decline and the market hit the lowest turnover in
nine months which is TK. 8.49 billion. Thus, investors came out in the street once again and
started protesting against free fall of share prices. SEC asked DSE & CSE to halt trading for the
2nd time within 8 days. DSE General Index (DGEN) declined by 243 points or 3.29 percent and
CSE Selective Category Index 298 points after a trading of around 2.4 hours.

Though steps were taken and applied by the government, BB and regulators to improve the
market conditions and bring the investors confidence, market index declined heavily on 20th
January as DGEN slipped by 599.77 points or 8.68 percent. From 26th of January there was an
increase trend of index. But finally Index stood at the lowest point which is 5579 from 7th to
14th February. (Khalid, 2011)

3. Roles of Different Market Participants during the Market Crash

Investigators, analysts and economists have questioned the roles of different market participants
in the forming and diffusing stock price bubble. In the following sections, the roles of different
market participants during the market crash are discussed.

26
 Role of Bangladesh Bank in Capital Market Crash

As the monetary authority of the country, Bangladesh Bank plays significant contribution in
channeling funds in the various sectors of the economy. Therefore the role of central bank in
stock market is obvious.

In the recent stock market crash, BB was at the center point of all debate. The reasons of recent
crash may lies in the question of whether the monetary policy response was appropriate during
the period of stock market rise as well as during the time of subsequent crash.

At time of market upswing, commercial banks invested heavily in the capital market to capitalize
on the opportunity. This has been going on for a while over last few years mostly form 2007
when the military backed civilian caretaker government took power in Bangladesh. Moreover,
during the same time merchant bankers became the key player in the stock market. Undoubtedly,
any policies to control commercial banks exposure to the stock market will result significant
impact on the stock market.

Deregulations during the last three to four years from 2007 as indicated by a more than 22
percent rise in money supply during the period, surely have helped stock market to remain
floating during these days. Surprisingly, perhaps, Bangladesh Bank (BB) was not much aware
about banks' exposure to the stock market, probably because banks profit from stock market
investment as shown in their balance sheet seemed to be negligible to Bangladesh Bank. But
with the daily follow up of a rigorous operating procedure by the central banks about the
activities of commercial banks make this explanation very naive. In fact there was a widely held
public perception that banks were making handsome profits from stock market investment.
Correct information of banking industrys exposure to the stock market remained unknown for
unexplained reasons, which has been a total governance failure on the part of the central bank as
a supervisory authority.

Bangladesh Bank began to control commercial banks exposure in the second-half of 2010; when
the ASPI of DSE had reached to an alarming level crossing all time highest limits of 8000 points.

However, most of the policies taken by BB seemed misappropriate and mistimed. For instance,

27
Bangladesh Bank all on a sudden issued a proclamation that calls for all banks to maintain their
investment in the stock market equivalent to 10 percent of their total deposit and to conform to
such directives by December, 2010 with less than a months remaining, when in reality, the ratio
was much higher than 10%. Some banks even had almost 60% of their deposits invested in stock
markets.

Additionally, Bangladesh Bank suddenly increased CRR from 5.5% to 6% and SLR from 18.5%
to 19% and call for an increase of paid up capital created an extra pressure for commercial banks
to raise their liquidity. It prompted a sales pressure. Moreover this mistimed monetary policy
announcement also cast doubt on the previously reported amount of excess liquidity in the
banking sector in BB. Thus withdrawal of banks' large investments from the stock market
appeared to be the main reason for the recent crash in the stock market in Bangladesh.

Bangladesh Bank might have some additional reasons behind those decisions, such as to hold
inflation, to channel more credit to the real sector, and to protect the interest of the bank
depositors by limiting them from risky investments. But surely there was the problem of timing.

Role of Institutional Investors in the Capital Market Crash

A significant portion of investors in terms of investment volume are institutional investors in

Bangladeshs capital markets. These institutional investors are consisting of commercial banks,
insurance companies, mutual fund companies, merchant banks, finance and investment
corporations etc. However, commercial banks are the biggest among the institutional investors in
DSE & CSE. In maximum cases December is the accounts closing month for all of these various
type financial institutions. As mentioned earlier, due to serious supervisory lacking form BB
most of these financial institutions especially scheduled commercial banks have overinvested in
stock market beyond their legal boundaries of stock market exposure limit. Latter on as the
closing days for financial accounts loomed nearer most of these institutional investors tried to
close out their position to realize the capital gain and to fulfill the regulatory guidelines regarding
the maximum limit of stock market exposure which is 10% of the deposits. Thus commercial
banks have taken the role of sellers rather than buyers to dry up liquidity from the market leading
to market crash.

Merchant banks are another large portion of institutional investors in the capital market. Similar
to commercial banks, merchant banks also participated in the stock market to realize capital gain
on their investment and they also sold their shares at the end of year, which had further escalated

28
the crisis. For example, in DSE most of the time clients took loan from merchant banks against
their equity in order to average their cost of investment. Since market was continuously falling
for last few months and those investors who already took loan from merchant bank were in
problem with their debt to equity position as shown in their respective BO accounts. As price
continued to fall merchant banks were forced to forced sale to save their own investment and
interest income in their clients accounts. Thus a change in margin requirement continuously
forced merchant banks to take different positions which forced the market to become even more
volatile. Apart from the commercial banks and a big number of active merchant banks, insurance
companies and mutual funds have also played their part primarily in formulating and then
diffusing the bubble realizing their share of the cake.

Role of Securities and Exchange Commission in the Capital Market Crash

In the capital market crash, Securities and Exchange Commission (SEC) as a supervisory
authority has failed the market by frequently changing rules and regulations, imposing new
policies related to margin trading, interest on margin.

Years of researches have shown that, margin requirement is one of the most important tools for
manipulating, maintaining the outcome in the stock market. While, during the entire life of New
York Stock Exchange (NYSE), the margin requirements has been changed only 22 times. In
Bangladesh, during the period of stock market crash (Dec10 Jan11), SEC changed the margin
requirements 19 times. Apart from the frequency of change, Schwert (1989) showed based on
empirical studies that margin requirements changes tend to precede volatility. With this empirical
reference from developed markets across the world, a closer study of the SECs role in recent
stock market crisis in Bangladesh suggests that SEC as a regulatory body has shown a total
incompetency in stabilizing the market by undertaking different faulty measures including using
its margin requirement tools.

SEC began their experiment on margin loan ratio from the commencing of 2010 crisis. On 1st
February, 2010, SEC changed the margin loan ratio from 1:1 to 1:1.5 which created more
leveraged trading opportunities. Consequently, investors began to take margin loan recklessly.

29
 Figure 7: Changes in DGEN with Changes in Marin Ratio

On 3rd February, SEC restored margin ratio to 1:1. Again on 15th March, 2012, SEC increased
the margin loan ratio to 1:1.5 and then again reduced it to 1:1 in July and 1:0.5 in October.
However, SEC failed to provide explanation for such recurrent revisions.

The above graph shows the relationship between margin ratio and index volatility. The positive
quadrant shows the increase in margin ratio while the negative quadrant shows the decrease in
margin ratio. From the above graph, we can see that every time SEC changed margin loan ration
there has been a considerable decline in the index. It is clear that SEC was totally incompetent in
exercising its authority to guide the market in a proper direction using margin loan ratio tool.

Role of Brokerage Firms in the Capital Market Crash

There are certain rules and compliance guidelines for brokerage firms set by SEC to ensure
market stability and to help the trading procedure for investors. During the period of market
crisis, many brokerage houses violated those rules and guidelines.

Under the securities and exchange laws, brokerage firms and merchant banks cannot grant loans
to their clients for purchasing shares of companies under Z category which groups low profile
shares. But SEC found that the share prices of Z category companies rose abnormally in recent

30
times as investors bought shares of the low profile companies with the loans provided by the
stockbrokers. The price of Z category shares had become overpriced as the brokerage houses
continued providing margin loans to their clients to buy shares of the issues under the category.
Upon the intervention of the SEC, the market reacted with increased sell pressure leading to
further aggravating of the situations.

Moreover, experts questioned the timing of the SECs decision to take action against 23
brokerage firms for violating the guideline concerning granting loans for purchasing Z category
shares.

4. Reasons behind the crash

After the historic capital market manipulation, Government of Bangladesh formed a four-
member probe committee led by Mr. Khondokar Ibrahim Khaled to find out the individuals and
institutions responsible for the market scam. The committee submitted a report consisting of the
reasons for the crash and recommendations with couple of case studies on 7th April, 2011. The
report has identified a group of manipulators including key officials, auditors, issuers, issue-
managers, brokers, individual investors and some other stakeholders. Moreover, some
independent researchers, analysts and economists have also published some articles and given
interview in a view to discuss the reasons of the crash.

In the following sections, the factors contributed to the market crash are discussed.

Incompetency of and Exploitation by the Market Regulators

In the previous section, the in competencies of the market regulators have been broadly
discussed. Here a summary of the findings by Ibrahim Khaled has been presented. In the probe
report, the role of SEC to control & monitor capital market, working in favor of manipulators,
approving unethical proposals and issuing wrong directives which lead to unexpected market
conditions have been indicated. Some corrupt employees of SEC who were directly or indirectly
participated in the market manipulation have been identified by the probe committee.
Manipulation in the listing process of new companies and placement of mutual funds & IPO at a
price lower than the market value were the few examples of their deeds. The following table
summarizes the wrong actions taken by regulators and subsequent market reaction.

31
Date Regulations Authority Index %
Change
10-Jan- Bangladesh Bank (BB) extended the deadline BB 6499.43 1.58
11 on banks in recovering industrial credit1 that
was diverted into the stock market
10-Jan- Transferred 14 companies share trade to SEC Do Do
11 public market2 instead of spot market3
10-Jan- Al lowed netting or financial adjustment4 SEC Do Do
11 facilities for non-marginable stocks5
10-Jan- Withdrew restrictions on merchant banks' SEC Do Do
11 exposure6 to the stock market
10-Jan- All listed7 companies would change face SEC Do Do
11 value8 to BDT. 10 from BDT. 100 or BDT.
1,000
18-Jan- Rectification of Margin Loan9 - increasing SEC 7140.24 -.03
11 margin loan ratio to 1:1, to 1:1:5 and 1:2
18-Jan- Revised the members' margin rule, increasing SEC Do Do
11 the
free limit of stockbrokers' and dealers'
exposure to the market

19-Jan- Introduction of circuit breaker10 on share SEC 6913.39 -8.49

11 index to protect against a big rise or fall
27-Jan- Cancelation of Book Building method SEC 7385.91 1.45
11
28-Feb- Sanctioned fund amounting to BDT. 600 BB, SEC, --
11 crore for Other 5203.08
the Investment Corporation of Bangladesh to Regulator
buy s
shares, also sanctioned fund Sonali Bank
Limited,
Agrani Bank Limited, Rupali Bank Limited
and
Janata Bank Limited in two phases to buy
shares Regulators from the stock market
18-Apr- Approval of BDT. 5,000 crore Bangladesh SEC 5601.60 7.66
11 Fund, an open-ended mutual fund
09-June- Undisclosed money can no longer be Finance 6250.00 -1.08
11 invested into Finance the share market in a Minister
process for whitening
15-Sep- Ordered al companies and funds listed in the SEC 5960.74 -.01

32
11 stock market to change their face value to
BDT. 10
19-Sep- Reduction of Single Party Exposure limit BB 5966.51 --
11 of Banking Institutions
20-Nov- Undeclared money would not be questioned NRB 5800.42 -2.78
11 if it is
invested in the capital market
21-Nov- Regulator made it compulsory for sponsors, SEC 5322.68 0.18
11 directors and promoters of a listed firm to
jointly hold at least 30 percent stake in the
firm.
21-Nov- Set the new rule to stop sales of shares by the SEC 5596.96 5.15
11 sponsors and directors within their
companies.
21-Nov- Sponsors and directors of a company will SEC 5372.66 -4.01
11 only be able to sell their shares in 'block
market' instead of public market.
24-Nov- 11 A circular on four issues in the newly BB 5373.30 0.01
11 unveiled incentives package had been issued.
26-Nov- 138 companies and mutual funds cannot be SEC 5065.15 -5.73
11 traded on Dec 1 on account of record date for
changing the face value of shares.

1
Banking institution invested portion of industrial loan in stock market, as a result BB ordered
banks to recover those investment.
2
A stock market or equity market
3
The spot market is a public financial market, in which financial instruments or commodities are
traded for immediate delivery. It contrasts with a futures market in which delivery is due at a
later date.
4
Netting or financial adjustment means no investor will be al owed to buy shares against the sale
proceedings of other securities within the existing settlement period.
5
Securities that cannot be purchased on margin at a particular brokerage.
6
SEC withdrawn Merchant Banks restriction on stock market investment.
7
A company is said to be listed, quoted or have a listing if its shares can be traded on a
stock exchange.

33
8
Al companies issue shares with a fixed denomination called the face value (or par value) of the
share. This face value is indicated on the share certificate.
9
Margin loans are loans taken to finance the purchase of securities, usual y the purchase of stock
(also known as equity).
10
Circuit Breaker is the maximum permissible deviation of the price (specified as percentage) of
the incoming order from the Circuit Breaker Base Price for that instrument. Orders violating
circuit breaker will result rejection of the order.

Demutualization of Exchanges
The executive board of both DSE and CSE is formed with members both elected and nominated.

The elected members mostly come from a pool of big investors. Due to the less interest and
relation of nominated members, these elected members run the administration. Consequently, the
players of the capital market act as controller. It has been found that, during the period of market
manipulation, controllers are inactive because of conflicting interest. In the investigation report it
has been pointed out that, different stakeholders of capital market support demutualization of
exchanges which is the process of converting exchanges from non-profit, member owned
organization to for-profit, investor owned corporation.

Illegal Investment of Banks in the Capital Market

During the booming period of 2009-2010, many banks invested heavily in the capital market
crossing the limit of using deposit money. As a result, this enlarged supply of capital increased
the stock prices. However, when Bangladesh bank imposed restriction to invest maximum of
10% deposit money in stock market, banks began to sell their investments which caused
downward pressure in stock price. As a result, market suffered enormously and banks also
couldnt regain lost capital.

Fraudulent Pre-IPO & IPO Process

Investigators found that, underwriters in connection with some dishonest operatives of regulators
manipulated share prices in the Pre-IPO and IPO process. In the Pre-IPO stage, they illegally
created a kerb market through which they place shares to investors bypassing the legal
procedures. Moreover, SEC approved the applications for IPO without recommendation of the
listing committee of DSE & CSE. Due to SECs insignificant surveillance, underwriters fixed
abnormal indicative price and asset value. As a result of all these, in the Pre-IPO and IPO stage,
Kerb market overvalued share prices which eventually created liquidity crisis in the market.

34
 Uniform Face Value of Shares
In 2009 & 2010, 62 listed companies spilt their shares to make a uniform face value of share at
Tk. 10. In theory, splitting shares doesnt intend to change revenue or asset and thus should not
affect share prices. However, as splitting shares make it possible for small investors to buy those
shares which were previously expensive, small investors showed a lot of enthusiasm to buy split
shares and consequently pushed the price up. This began to transform market capitalization; for
instance, companies which had split their shares witnessed 655% increased market capitalization.
On the contrary, companies which did not split their shares noticed only 46% rise in market
capitalization. From July 2009 to December 2010 the role of total MC were 81.5% of companies
which adopted share uniform and only18.5% those that did not adopt. (Khaled, 2011)

Trade in Pre-IPO Placement

Private placement or Pre-IPO placement is the process by which Issuer Company sells shares to
a selected number of investors without having to register with SEC. In such kind of placement, a
company doesnt require to disclose detailed financial information. Although in Europe and
America, there are certain guidelines for private placement, in Bangladesh SEC didnt have such
regulations. Consequently, underwriters used it as device of manipulation. In the most of the
cases the placement was offered at less than IPO price. According to Khaled (2011), eight
companies issued convertible preference shares in 2009 & 10 in which average 69% went for
placement. So, participation of the public was hindered and that created placement trade or Kerb
market. Some companies distributed 50-90 percent of their paid up capital in private placement.
As a result, the number of free floating shares decreased as companies went for more private
placement of shares. Accordingly, difference between demand & supply push share prices up. As
private placement doesnt require any registration with SEC; many non-listed companies drain
off huge investment from capital market.

Misuse of Omnibus Accounts

An omnibus account is a stock holding account that involves more than 10,000 investors.
Although actual shareholders and individual investors don't have the accounts in their names,
omnibus accounts were another major device of manipulation. In Bangladesh, ICB has 9
omnibus accounts and each merchant bank have only one omnibus account. According to Khaled
(2011), at least Tk 2.5 billion has been traded from hidden or omnibus accounts used as a major
tool of stock market manipulation. The syndicate players of the Investment Corporation of
Bangladesh (ICB) traded Tk 2.3 billion from nine omnibus accounts of the ICB alone. The probe
report published the name of 30 big players including ICB for a lot of suspicious transactions and
says most manipulators traded from the omnibus accounts. Most big players chose omnibus

35
accounts to gamble in the market, as it's not possible to find out issue-wise or client-wise
transactions of actual number of shares from omnibus accounts.

Faulty Asset Revaluation

The revaluations of a companys assets to take account of inflation or changes in value since the
assets were acquired. The change in value is credited to the revaluation reserve account. With the
collaboration of dishonest auditors, companies generated artificial audit reports in which assets
were shown overvalued. As a result, when calculating Net Asset Value (NAV) based on this
overvalued asset, it provided wrong signal about the companys true financial capabilities.
Moreover, those companies issued bonus shares showing unrealized gain of revalued asset price
which is a faulty accounting practice. Although, companies are required to maintain provision
against deferred tax during asset revaluation to pay tax in future, companies did not follow it.
Investigation reports pointed some companies which got NAV more than 100% to 3,472% after
asset revaluation.

Irregularities in Book Building Method

Book building method is the globally recognized technique of determining the offer price of IPO.
In this process, the fair price is obtained from the demand of a security from institution investors
and their indicative price through road shows. The motivation for introducing this method in
Bangladesh stock market was to attract more firms for enlisting in the stock exchanges through
fair share pricing. However, it was found as an instrument of manipulating market prices,
Investors obtained too high price for the security through the price discovery stage and offloaded
those stocks after the lock in period. As a result they pulled out a lot of profit within a short
period and after that the share price did not increase. In this process corrupted Issuer and issue
manager manipulated the price.

Lack of knowledge of small investor

Most of the investor of our capital market are small investor. And we have seen many of them
have lack of proper knowledge about the market. They just buy a share to get profit after 3 days
when the shares got matured. But how and why they are supposed to get a profit they dint know
well. So when market goes decline the investors are supposed to wait and not to sell in loss. But
they got panicked and sold off their share in loss even. So this attitude prolonged the market to
go in bearish situation.

December Closing of Financial Institutions

36
The market crash happened at the end of November and December. It was the time closing for
many of the financial institution. So institutions, who had investments in the market, started to
pack their profit into their bag. So lots of profit taking took place in that time. It influenced the
market to go in the bearish too.

Serial and Artificial Trading

Some manipulators created artificial active trading environment among themselves through bulk
transaction and increased share prices. Moreover serial trading and price manipulation by many
buy-sell orders through different accounts and broker houses which overheated the market.

Issue of Right and Preference Shares

Right share indicates issuing new shares to the existing shareholders at a discount price. The
issuance of right share increase number of share which should decrease share price but it did not
happen. Mysteriously, it took SEC five months to come to a decision regarding right issue
proposal. Preference share are the share which contain fixed percentage of dividend at cost of
voting right. Issuer companies provide an option to convert into general shares to make it more
attractive and it is called Convertible Preference Share. However, in Bangladesh, companies
issue preference share for only 1-3 moths which is very unusual. SEC also didnt have proper
guidelines for Preference Share issuance.

Suspicious Transaction of Top Players

During the time of unusual ups and downs in the index, some individual and institutional
investors did many suspicious trading revealed by probe report. These investors are main reasons
for the capital market crash; they with collaboration with government high-ups and regulators
manipulated stock prices.

Block Placement
There was a lot of suspicious block trading of mutual funds. Some investors got enormous
amount of placement time to time.

Direct Listing

37
With the approval of SEC few companies have been directly listed in the stock exchange. These
companies come to the market with inflated share prices. Investigation report mentioned that
indicative prices of these companies were determined even 58 times more than EPS and 9 times
of NAV. Though share prices of these types of directly listed companies have been artificially
determined, but SEC or exchanges did not investigate the reason of abnormal price.

Survey Report
This section of the study presents results of the self-administered questionnaires. Out of 15
employees 12 and out of 10 investors 6 returned the questionnaires. In case of this study, it is
believed to be a merit to present the result of every question separately. The result is analyzed
and summarized according to the objectives of the study. Here, the author represents reasons of
the stock market crash, the role of regulators and government.

Relation of Respondents with Bangladesh Capital Market

There was a closed question to the respondents regarding their relationship with capital market
with 3 different possible answers which are Employee, Investor and Both. In the first group of
sample, out 12 employees of broker houses 5 were found as Employee and 7 were Both
(employee and investor). On the other hand, in the second group of sample all 6 respondents
were General Investors who invest in the market. So, the result of the question number 1 fits with
the expected sample of the author for the Self-administered questionnaire.

Agreeing with Major Causes of Investigation Report of Khondkar Ibrahim

Khaled (2011)

None of the respondent from both employee and investor group who agreed with all the causes
given in the questionnaire. Every respondent selected few causes as major reasons behind the
crash. The following table provides information about number of respondents agreed with
different causes:

38
 Reasons No of Respondents
Book Building method 4
Direct listing 6
Placement share 2
Audit report 3
Corrupted employees of regulators 11
Split share 1
Serial trading 2
Block trading 0
Insider trading 8
Over exposure of banks & financial 13
institutions
Omnibus account 5
Poor monitoring or regulators 12
Margin loan 9
Kerb market 1
Issue of right & preferences shares 1

As the result shows, over exposure of banks & financial institutions is the most important reason
behind the crash where 13 respondents selected the cause. Then poor monitoring of regulators
was found 2nd important reason for the crash chosen by 12 respondents. Corrupted employees of
regulators, Margin loan were chosen by 11 respondents and direct listing & insider trading was
selected by 8 respondents. Other causes were selected by different number of respondents.
Though anyone did not chose Block trading as a reason for the crash but it was mentioned by the
respondents in other questions.

Any Other Reasons that were Liable for the Capital Market Crash
The aim of asking this question was to find out if there is any other reason that caused the stock
market crash but did not appear in the investigation report of Ibrahim Khaled. Therefore, the
answer of the question serves to generate new ideas about major causes of capital market crash
and it was successful to do so. Most of the respondents answer the question with following
causes:

39
 Imbalance of demand and supply of shares in DSE & CSE
Investors didnt have idea about financial report of listed securities / unfair audit report
Buying shares based on rumor & without study
Majority of general investors dont have knowledge about capital market
Intervention of Bangladesh Bank (central bank)
Over expectation of general investor
Liquidity crisis

The question number 2 and 3 was structured to find result of research question one and two.
Poor knowledge of general investor about the stock market was the most common reason
mentioned by the respondents of broker houses which was not in the investigation report. They
mentioned that many of general investors dont have enough knowledge about the stock market.
They buy shares without studying companies, on rumors and they have over expectations.
However, most of the general investors did not mention it. Intervention of Bangladesh Bank,
imbalance of demand & supply of shares and liquidity crisis were other reasons mentioned by
the respondents of both groups.

Do the Investigation Report Leads to any Market Improvements

The question was another closed question with Yes and No two different possible answers
where 9 respondents answered Yes and 9 answered No. Publishing investigation report was a
decision of high court. So, the regulators and government will work according to the report and
its recommendations were a great expectation of all stake-holders of the market. There was
another investigation report in stock market crash of Bangladesh in 1996. But it was blamed that
steps were not taken according to the report. So, the answer of this question reveals usefulness of
the report and effectiveness of it by the regulators and government. Most of the general investors
believe that investigation report didnt lead to any market improvements. However, most of the
employees of broker houses agreed that it leads to market improvements and some mentioned it
as slowly effective.

Development of Rules & Regulations by Regulators that were Blamed for the
Crash

40
Respondents answered the question providing brief idea about the improvement of rules and
regulations since the crash. 12 respondents of employee of broker houses & general investor
agreed that regulators developed their many rules and regulations which were blamed as the
causes of the crash. According to the respondents developed rules and regulations are following:

Margin loan decision would be taken by broker houses and merchant banks not SEC
Sponsor director mandatory holds individually 2% and all together 30% shares
Book building method in IPO has been developed
Bangladesh Bank imposed limitations on Bank & financial institutions about their
exposure in the market.

Should here be More Development of Market Regulations, Directives or

Surveillance by the Regulators
Respondents mentioned that there should be more development of rules and regulations in
following ways:

Adoption of Software (surveillance) and surveillance team to monitor overall trading

activities
Trustworthy IPO approval process
Actual book building process should be introduced
Offloading government shares
Margin loan decision should be taken by broker houses and merchant banks not SEC
Insider trading would be strictly prohibited

Suggesting Tools That Should Regulators Adopt to Prevent This Kind of Crash in
Future
Every respondent makes recommendation regarding how regulators can protect this kind of crash
in future by answering the question. The expected answer for the question will contain different
tools that can or should adopt by the regulators. Most of the respondents of both sample groups
provided accurate and clear answer for the question. They made following recommendations for
SEC and stock exchanges. Provided recommendations are:

Regulators should perform their job honestly and sincerely

SEC needs honest officials
Insider trading should be prohibited
Omnibus account should be converted to BO account

41
 Effective Steps That Government Took To Improve the Market Condition after the
Crash ll
Respondents answered that the government of Bangladesh took initiatives to improve the stock
market situation mentioning different strategies, tools, policies and rules-regulations taken by
Bangladesh government. The effective steps taken by the government to improve the market
condition are following:

Opportunity to whiten the black money by investing in stock market

Appointing new chairman and members in SEC
Establishment of law division

Actions Taken by the Government Were Sufficient to Handle the Situation or

Not With Suggestion

16 respondents of the general investor and employee group agreed that actions taken by
Bangladesh government are sufficient to tackle the condition of the stock market after the crash.
In addition, some respondents also suggest implementing the actions taken by the government.
Only two respondents did not agree with them and recommended following actions that should
the government take to handle the situation:

Government should announces incentives through SEC to attract companies to the

capital market
Government should take long term actions for the market.

Role of Government to Prevent This Kind of Crash in Future

The answer of the question contains recommendations of steps or actions for government that
should adapt to prevent or avoid and tackle same kind of crashes in future. Recommendations are
given following:

Actions should be taken against those who were involved in this recent stock market
crash
Improving security laws and penalty for breaking those
Balancing of demand and supply of shares
Follow-up the market and protect against any kind of manipulation

The question number 5, 6, 7, 8, 9 & 10 were designed to serve the research question three and
four. The result of these questions describe that the regulators and the government of

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Bangladesh has contributed in the development of stock market after the crash. However, more
developments are necessary.

Recommendations

By now, the major factors that contributed to capital market debacle have been discussed. Here
some recommendations have been prepared for the various stakeholders of the capital market:

SEC should coordinate its surveillance activities with other regulators like DSE &
CSE. Moreover, SEC needs to make long term decisions for capital market, and avoid
making short term confusing directives.

Manipulation in Pre-IPO and IPO process must be checked. SEC should frame new
sets of effective regulation relating to book building method and private placement.
These two tools were mostly used by manipulators in 2010-11 market scam.

Moreover, SEC needs to monitor unusual trading pattern to identify insider trading
and serial trading.

All omnibus accounts of ICB and merchant banks must be converted into general BO
accounts, no more secretive trading.

A new act regarding more comprehensive financial disclosure of companies must be

enacted. Such act will prevent the auditors from making faulty audit reports.

More Comprehensive guidelines for corporate governance in the listed companies

mast be formulated. Such acts will prevent the sponsor and directors of different
listed companies to manipulate companys financial statements for their own interest.

An act regarding the protection of small investors must be enacted. Small investors
are most vulnerable in market manipulation, so there must be some legal avenues for
them to protect themselves.

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 DSE and CSE must be demutualized that is it must be transformed into an investors
owned organization from current member owned organization.

As currently majority investors lost their confidence on SEC, a total reform of SEC is
required. SEC must be reorganized with qualified financial analyst.

Bangladesh Bank requires to be more careful in taking monetary policies. They must
analyze the potential impact of monetary policies in the capital market.

Government must ensure the punishment of culprits this time. It has been found in the
investigation report that many masterminds of this market scam were also responsible
of 1996 crash. So unless government take legal action against them, investors will not
be able to regain their confidence on capital market.

Government can also offload the shares of many state-owned organizations to bring a
balance between supply and demand for the stocks in the capital market. A balanced
supply and demand for the stocks can ensure fair price.

Finally small investors are the most important decisive force in determining market
behavior. It has been found that, most the small investors in Bangladeshs capital
market are illiterate of investing. They gamble on their life savings without knowing
the true condition of the company they are investing. They take their investment
dictions based on rumors. In this circumstance, educating small investors are top most
priority. An educated pool of investors is most strong shield against the exploitations
of manipulators.

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 Conclusion

In conclusion, the current stock market crisis has highlighted numerous vulnerabilities in the
financial system which has been build up on with excessive leverage, serious mispricing of the
securities, misguided reliance on institutional investors and finally a pathetic response of out of
shorts regulators especially the SEC and BB.

After the crash, the regulators took several polices to address the issues that cause this historical
misfortune for the countrys economy. However, the question is whether these policy measures
of the regulators will be able to calm & stabilize the market? The answer is obviously not very
encouraging since most of the reasons behind the downfall of the market involve policy blunder
by regulators which has not been addressed long term programs. The experiences of developed
markets like New York Stock Exchange, London Stock Exchange and Tokyo Stock Exchange
cast shadows on the success of government to punish the real culprits and prevent the repetition
of such financial disaster.

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