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VOL 18 NO -186 REGD NO DA 1589 | Dhaka, Saturday May 14 2011

Share market bubble: Who is not responsible?

M S Siddiqui concluding his two-part article

The recent debacle in the stock market is an issue of debate. All the stakeholders and
particularly the small investors want to know the true story behind the incident.
Government also wants to know the reason and wants to address the issue to avoid
further debacle in future.

There is a major difference between two debacles of share market in 2006 and 2011. The
former happened in secondary market but this time the manipulation happened during
valuation and fixation of offered price of share and in side trading by different stake
holders. It happened behind the screen. Even Investment Corporation of Bangladesh
(ICB) also played in the game. They have purchased share of Tk 8.0 billion through 15
Omnibus accounts in October and November, 2010. They of course played the game for
some influential officials in the government.

The problem was created for a simple reason that there is a gap between demand and
supply of stocks in the market. The primary reason is that the regulator could not stop
manipulation rather the officials of SEC were involved in trading and other unfair
practices. The other agencies and institutions having stakes in the share market possibly
failed to perform the need of oversight functions.

The share market experienced bullish trend in most part of the last year because of the
overexposure of some commercial banks and other financial institutions. They had
invested beyond the limit of 10 per cent of their deposit. This is also unethical to invest
depositor's money risking the investment and even without their benefit.

Commercial banks have been involved heavily in the stock market business during the
last few years. Bangladesh Bank has found involvement of eleven banks over investment
in the share market. One of the commercial banks made profit of Tk 10.40 billion last
year. Of this amount of profit, Tk 4.40 billion came during the last month by investing in
share market. Bangladesh Bank has set capital market exposure limit of 10 percent of the
deposit for the commercial banks after their involvement in the market with deposit of
clients.

The country's common people and hundreds of thousands of unemployed youths have
entered into the overheated market as a record 1.57 million Beneficiary Owners (BO)
accounts, more than half of the total investors, entered into the market in 2010.
The relatively heavy investment has an impact in massive surge in share prices besides
other reasons. They were advised to conduct merchant banking or brokerage house
business without formation of subsidiary companies for the purpose. Allegations have
been found that bank officials provided false loan to fake clients for investment in the
share markets. The Bangladesh Bank also investigated allocation of Tk 24 billion
industrial loans by a bank to its clients last year.

Bangladesh Bank was not much aware about banks' exposure to the stock market.
Because, surprisingly, banks profit from share business seemed to be negligible
according to their income statement or balance sheet although there is a wide perception
that banks are making handsome profits from investing in shares and debentures. Proper
data on their exposure to thecapital market remained unknown, which is a failure from
the part of the central bank as a supervisory agency. The internal and external auditors
help out the manipulation.

Moreover, almost all policies to minimise the exposure of banks were taken in the
second-half of 2010, when the stock index had reached an alarming level. For example,
the situation worsened when it was made mandatory for all banks to maintain their
investment inthe stock market equivalent to 10 percent of their total deposit and to
comply by December, 2010, when in reality, the ratio was much higher than this level.
Bangladesh Bank had a policy to contain inflation and channel credit to other real sector
and may be to safeguard the interest of invest of depositors.

Bangladesh Bank has taken some steps to reduce inflation and also reduce risk of
financial institutions. The steps included statutory cash ration reserve of schedule banks
from 5 per cent to 6 per cent. This also has a small impact on cash flow in thecapital
market.

The central bank decided to deal with only the banks, not subsidiary companies as per the
new provisions and SEC will look into the functions of the subsidiary banking
companies. This transition of authority over the merchant banks overburdened the SEC
while they were unable to perform some other responsibilities. Allowing business by
some merchant banks has exaggerated the situation. They became the key player inthe
stock market . In the recent stock plunge some merchant banks deliberately sold off
shares of the investors at a throw-away price without even taking consent of the affected
clients. The omnibus account with haze background players is a matter of investigation to
know the source of money and impact of this money inthe stock market and economy.

SEC has taken some decisions regarding these merchant banks and also changed those
within very short time. They allowed loan against stock use to be fixed by SEC and they
have changed the margin ratio on many occasions. They issued rule of loan margin of 1:1
and cancelled the order. Again they withdrew the embargo within 6 weeks.

The management of listed companies was busy to make easy money. The listed
companies have withdrawn about Tk 170 billion from the market through private
placement, issue of preference share and direct listing at the initial stage of listing with
stock market. The private placement could reason unfair transaction. Companies sold
their share to civil, military bureaucrats and also to other influential persons. Directors of
Companies also benefited from direct listing.

Another manner of manipulation was revaluation of assets and issue of bonus share
which has a link to manipulation of market. It happened in many cases in Z category
companies who either do not pay dividend to shareholder, or, do not meet at Annual
General Meeting, or are unable to comply with other rules of SEC. Those Z category
companies issued right share to the members and again sold those shares in the peak
market. SEC did not give attention to Z category companies for preventing increase
ofprice of share and find out the reason, stopping them to issue right share to the
members. No proper vigilance and enforcement function was visible.

It is found that the directors of some listed companies sold their share amounting Tk 60
billion. Most of those companies are banks, insurance companies and some
manufacturers. These Directors are awarded bonus shares through revaluation, and also
there was no ground to selling out the controlling share of own companies and banks. The
auditors and issue managers, and valuation companies also manipulate the information
and SEC approved the reports in opaque manner.

In 2010 SEC issued 81 orders but could not regulate the market. Its officials were also
involved in corruption and manipulation. This may be a surprise action of a regulator to
act in such a manner in a period of one year. There activities were very opaque and some
time in collaboration with manipulators.

There was a huge in flow of capital and the shares were not sufficient and government
could not enlist 26 state companies to float shares as committed.

Most of the stocks listed for the last few years offered initial public offerings IPO at
unbelievable high price and the SEC approved premium price without any valid ground.

There was a serious malpractice during change of face value of share from Tk 100 to Tk
10. There was no dissemination of information and rather artificial maneuver to
manipulate the fixation of newprice of share. This malpractice accelerated through two
prices of shares of different companies in the market.

There is haze area in transaction of omnibus accounts. The name of persons behind the
account shall be known to authority. Thirty six merchant banks maintain omnibus
account. One Omnibus account may include 3,000 to 12,000 account holders. This is a
channel for investment of black money in the market for profit and safe investment.

The management of 2 stock markets should be separated from ownership to stop inside
trading and manipulation. All the stakeholders must be transparent in future to avoid such
debacle in future.
The writer is a part time teacher of Leading University, and pursuing PhD in Open
University, Malaysia. He can be reached at E-mail: shah@banglachemical.com