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VOL 18 NO -185 REGD NO DA 1589 | Dhaka, Friday May 13 2011

Share market: Transparency needed

M S Siddiqui in the first of his two-part article

A share market is a market place for trading of company shares under certain conditions.
These are shares of listed companies. It is also named capital market which is a market
for long term debt and equity securities, where business enterprises and governments can
raise funds for long term investment. It is normally divided into two broad categories -
the stock market and the bond market.

The buyers are generally individual investors but the market has some artificial persons
or legal entities e.g., pension funds, insurance companies, mutual funds, index funds,
exchange-traded funds, hedge funds, investor groups, banks and various other financial
institutions.

Bangladesh share market started in 1976 with the formation of the Dhaka Stock
Exchange (DSE). Later on Security Exchange Commission (CSE) was established in
1993 as regulator of stock market. By this time it underwent changes during the last few
years. The Chittagongstock Exchange (CSE) started its journey in 1995. Both the markets
have 230 members each. Both the markets have trade on Equity Shares, Debentures and
Mutual Funds. The listed companies of DSE are 243, and CSE has 201 by December
2010.

The market was concentrated in two cities -Dhaka and Chittagong. There is a recent
dramatic change in the market. Brokerage houses (members of stock exchanges)
numbering 238 have opened 590 branches in 32 districts. Individual investors opened 3.0
million Beneficiary Owner Accounts (BO) throughout the country through these
brokerage houses. According to a study there are many sources of these BO from range
of broad money, remittance from expatriates, black money, diverted industrial and
commercial loans etc. The trend was reportedly visible during the past caretaker
government due to the interference of civil and military bureaucrats.

SEC was established by an act in 1993 for regulating the stock markets. All companies
that sell stock must be registered with the SEC in order to dobusiness with the public.
They disclose all relevant information for evaluation and assessment. The purpose for
registration is to make certain information related to the company available to the public
for evaluation whether or not a company is worth for invests. While the SEC requires that
the information provided be accurate, it does not guarantee it. Investors who purchase
securities and suffer losses have important recovery rights if they can prove that there
was incomplete or inaccurate disclosure of important information.
The listed companies must disclose all price sensitive information to all concerned, and
also SEC must ensure disseminate the information through their own channel preferably
through web site to the members of the public.

In stock markets, transparency is very important. It is a key feature of market design as

well as a key aspect of market performance as this information could be divided into pre-
and post-trade information.

The market has buyers and sellers and the demand and supply matter like any other
market. On the other hand, the demand should be backed by liquidity available in the
money market. Money market consists of all the institutions which are engaged in the
borrowing and lending of short term funds. The members of money market are (1) central
bank at the top, (2) commercial banks, (3) co-operative banks, (4) saving banks, (5)
specialised financial institutions, (6) discount houses and (7) other sources.

Money market may other way be distinguished from capital market. Capital market is a
collection of specialised institutions engaged in the employment of medium and long
term funds primarily for the raising of new capital.

In a developed country, the money market is highly organised and diversified, whereas in
a developing country there are a few organised institutions which trade in the borrowing
and lending of short term debts.

In a developing country, the commercial banks, cooperative banks, saving banks and
other financial institutions do exist but they are relatively few and are usually
concentrated in big city areas.

Stock markets react promptly and uncharacteristically to rumours of instability in politics,

business and environment, change in regulatory business environment and interest rate
variation etc. The share prices on the stock market are affected either positively or
negatively by a number of factors occurring within and without the economic system.

Interest rates play a major role in determining stock market trends since small investors
decide to put their money in bank or invent in stock. There are instances of investment in
share market out of bank loan for different other purposes. The investors in relatively
new market like Bangladesh are inexperienced and sensitive to fluctuation of prices.

Dividend is an issue for investment in share. Companies doing well in their business
activities and offering dividend are likely to attract more investors, thereby resulting in
high demand of their shares. Unfortunately the profit of companies do not reflect in the
Bangladesh stock market since investors are looking at short term investment due to rapid
upward change in share index for re-sell in the market again in short period of time.

Monetary policy of Central Bank affects the capital market, in particular the stock price
change. Therefore, the central bank in formulating monetary policy, in the performance
of the economy and monetary demand of the entity making the correct analysis,
judgment, is also concerned about the financial markets.

There are some issues related to operation and management of market which has impact
on the capital market. The management of the Security Exchange commission,
management ofstock exchange , officials of regulatory body of government employees
who learned of such information because of their employment by the government, can
take advantage of information placed to these organisations for personal gain.

On the other hand the directors and management of listed companies as well as lawyers,
accountants, and similar fiduciaries - routinely possess information that is unavailable to
the general public. As because some of the information will affect the prices of the
registered securities when it becomes public; insiders can profit by buying or selling in
advance. Trades made by these types of insiders in the company's own stock, based on
non-public information, are considered to be fraudulent since the insiders are violating
the fiduciary duty that they owe to the shareholders.

These insiders have undertaken a legal obligation to the shareholders to put the
shareholders' interests before their own, in matters related to the company. When the
insiders buy or sell based upon company owned information, he is violating his
obligation to the shareholders. Even friends,business associates, family members of such
officers, directors, and employees, employees of lawyer, banking, brokerage firms who
were given such information to provide services are obliged to maintain professional
ethics not to deal in stock trade.

USA Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases
and sales within any six month period) made by corporate directors, officers, or
stockholders owning more than 10 per cent of a firm's shares. In the UK, the relevant
laws are the Criminal Justice Act 1993 and the Financial Services and Markets Act 2000,
which defines an offence of market abuse.

The common investors in USA receive financial and other significant information
concerning securities being offered for public sale; and prohibit deceit,
misrepresentations, and other fraud in the sale of securities under Securities Act of 1933
which is often referred to as the 'truth in securities' law.

The SEC must govern the disclosure in materials used to solicit shareholders' votes in
annual or special meetings held for the election of directors and the approval of other
corporate action. This information, contained in proxy materials, must be filed with the
Commission in advance of any solicitation to ensure compliance with the disclosure
rules. Solicitations, whether by management or shareholder groups, must disclose all
important facts concerning the issues on which holders are asked to vote.

The SEC act has such mandatory provision in USA. Their Securities Exchange Act
requires disclosure of important information by anyone seeking to acquire more than 5
percent of a company's securities by direct purchase or tender offer. Such an offer often is
extended in an effort to gain control of the company.

The land mark Sarbanes-Oxley Act of 2002 is the most far reaching reforms of American
business practices through enhance corporate responsibility, enhance financial
disclosures and combat corporate and accounting fraud. It created the "Public Company
Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the
auditing profession.

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