Assignment on Stock Market of Bangladesh

Submitted to: Mr. Ishtiak Uddin Course Instructor (FRL 409) Department of Business Administration University of Asia Pacific

Submitted By: Imroz Mahmud Reg. #08102069 Department of Business Administration University of Asia Pacific

Date of Submission: 29 December 2011

Letter of Transmittal
July 26, 2011 To Mr. Md. Ishtaik Uddin Course Instructor (FRL 409) The Department of Business Administration The University of Asia Pacific Subject: Prayer for acceptance of the assignment on stock market of Bangladesh.

Dear Sir, We had a great experience while doing this assignment. We tried our level best to prepare this assignment on stock market of Bangladesh. But our assignment was not very accurate because of our limited knowledge. Our hard work will result in success if our assignment is able to clarify and satisfy the requirements that were assigned to us. We give a sincere thanks to you for providing your generous help, wherever we felt the needs. Thank you, Sincerely yours, Imroz Mahmud Regi. No #08102069 On behalf of the members of my group Dept. of Business Administration The University of Asia Pacific

Acknowledgement
We owe the depth of thanks to UAP administration for providing us with internet and library facility. This helped us for completing our assignment successfully. We want to thank Mr. Md. Ishtaik Uddin, our course instructor, for assigning us such a useful assignment and providing us with various information, experiences and knowledge while carrying out the work on the assignment.

Table of Contents
Serial No 1 2 2.1 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6 2.1.7 2.1.8 2.2 3 3.1 4 Topic Overview of Bangladesh Stock Market Dated Situation Indicators of Stock Market Growth and Trend of Market Performance Stock market size Liquidity Total value traded/GDP Turnover Volatility Concentration Foreign portfolio investment An Index of Stock Market Development Year 1996 to 2007: Current Situation (2007 to now): Year 2011 Bangladesh share market scam Page No 5-6 6 6 6 9 9 9 11 12 14 16 17 19-23 24 26

Problems of Stock Markets in Bangladesh:

Suggestions to improve the activities of Stock Market Role of securities market in Economic Development

27

29

Conclusion: Bibliography

30 31

1. Overview of Bangladesh Stock Market

The stock market history of Bangladesh refers back to 28 April, 1954 when the East Pakistan Stock Exchange Association Ltd. was established. Formal trading began on the bourse in 1956. The trading was suspended during the liberation war of Bangladesh in 1971. Operation resumed again in the 1976 with the change in government policy. During 1976, there were only 9 listed companies with total paid up capital of Tk.0 .138 billion and market capitalization of Tk. 0 .147 billion which was 0.138 % of GDP (Khan, 1992). Since then the stock exchange continued its journey of growth. The second stock exchange of the country, the Chittagong Stock Exchange(CSE) was established in December 1995.In order to control operation of the stock exchanges and trading of stocks of listed companies, the government of Bangladesh established the Securities and Exchange Commission of Bangladesh on 8th June, 1993 under the Securities and Exchange Commission Act, 1993 .The mission of the SEC is to protect the interests of securities investors, develop and maintain fair, transparent and efficient securities markets, ensure proper issuance of securities and compliance with securities laws. From the inception the stock market of the country was growing in a slow pace. There was a large surge in the stock market in the summer and fall of 1996 evidenced by a 197.43%, 372.30% and 370.51% increase in the market capitalization, total annual turnover and daily average turnover respectively in DSE and 506.63%, 210.2% and 615.15% increase in the market capitalization, total annual turnover and daily average turnover in CSE. DSE general index grew from 832 in January 1 1996 to 3567 in November 14, 1996 while that of CSE grew from 409.4 in 1995 to 1157.9 in 1996. The market, however, crashed in December of 1996 and the index started to decline significantly since then with the index assuming a value of 507.33 as of November of 1999, a cumulative decline of 83.44% from 1996 to 1999 with the annual rate of 27.82%, and has yet to fully recover. Investors confidence was significantly damaged because of excessive speculations, allegedly aggravated by widespread irregular activities. The government of Bangladesh undertook the Capital Market Development Program (CMDP) supported by the ADB on 20 November 1997. The CMDP aimed at (i) strengthening market regulation and supervision, (ii) developing the stock market infrastructure, (iii) modernizing stock market support facilities, (iv)increasing the limited supply of securities in the market, (v) developing institutional sources of demand for securities in the market, and (vi) improving policy coordination. The policy matrix of the CMDP included 95 program measures. Central Depository Bangladesh Limited (CDBL) was incorporated as a public limited company on 20th August 2000 to operate and maintain the Central Depository System (CDS) of Electronic Book Entry, recording and maintaining securities accounts and registering transfer of securities; changing the ownership without any physical movement or endorsement of certificates and execution of transfer instruments, as well as various other investor services including providing a platform for the secondary market trading of Treasury Bills and Government Bonds issued by the Bangladesh Bank. CDBL went live with the Electronic Treasury Bills registry of Bangladesh Bank on 20th October, 2003 and thereafter started equity market operations on 24th January, 2004. It was set up to facilitate the computerized delivery and settlement of securities and eliminate to the extent possible, the paper work involved in handling the transactions and that would ensure risk-free and cost-effective settlement. Before establishment of CDBL, the delivery, settlement and transfer procedures were handled manually and were plagued by lengthy delays, risks of damage, loss, forgeries, duplication and considerable investment in time and capital. Besides, both the CSE (July 1998) and the DSE (August 1998) have automatic trading services. By having automated trading system and a central depository in place, the credibility of the country's Stock Exchanges in the eyes of the prospective foreign investors are expected to grow stronger and boost investment activities in the country's stock 5

markets. Contrastingly, foreign portfolio investment, never more than $200 million, has virtually disappeared from the stock market of Bangladesh.

2. Dated Situation:
2.1Indicators of Stock Market Growth and Trend of Market Performance
Literatures provide no unique measure of indicators of stock market development. However it is evident from the literatures (see for instance, Naceuret et. al. 2007; Yartey, 2005; Demirguc-Kunt, and Ross. Levine, 1996; ) that the broadly used indicators of stock market growth are market size in terms of market capitalization, liquidity of the market, market concentration, degree of listing, volatility in the market, foreign portfolio investment and integration of the market. In this study we examine all these indicators (excepting integration variable) to evaluate the growth pattern of Bangladesh stock market.

2.1.1 Stock market size: Market capitalization ratio equals the value of listed shares divided by GDP. Analysts frequently use the ratio as a measure of stock market size. In terms of economic significance, the assumption behind market capitalization is that market size is positively correlated with the ability to mobilize capital and diversify risk on an economy wide basis (Agarwal 2001). La Porter et al. (1997, 1998) and Levine and Zervos (1998) used the market capitalization to GDP ratio as an indicator of market development. Table 1 and figure A. show the size of Bangladesh stock market. Market capitalization ratio has increased from 1.4 % in 1990-91 to 10.2 % in 2005-06 with a sudden increase to 29.0 % in 200607 .Total market capitalization reached to Tk. 1366.53 billion in 2006-07 from Tk. 11.485 billion in 1990-91.This shows a remarkable cumulative increase of 117.98 times . Mean market capitalization ratio of 0.077 with a standard deviation of 0.073 points to high level of volatility in market capitalization. Linear trend line shows an upward trend in market capitalization to GDP ratio though R2 value of 0.3821 indicates a poor model fit.

Table1. Stock market size of Bangladesh, 1990-91 to2006-07

Year

GDP(billio n Taka)

Market capitalizatio n (billion Taka) 11.485

Market capitalizatio n to GDP 0.014

Year

GDP(billio n Taka)

Market capitalization(billio n Taka) 120.69

Market capitalization to GDP 0.051

199091

834.39

1999-00

2370.86

199192 199293 199394 199495 199596 199697 199798 199899

906.5 948.07 1354.12 1525.18 1663.24 1807.01 2001.77 2196.97

10.397 12.29 18.098 80.657 315.149 124.134 91.637 81.324 Mean 0.077

0.011 0.013 0.018 0.051 0.189 0.069 0.046 0.037 Standard deviation 0.073

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

2535.46 2732.01 3005.80 3329.73 3707.07 4157.28 4674.97

121.586 131.73 182.899 439.934 453.018 420.850 1366.53

0.048 0.048 0.061 0.132 0.122 0.102 0.290

Descriptive statistics of Market capitalization to GDP ratio

Kurtosis Skewness 3.745 1.864

Minimum 0.011

Maximum 0.290

Data source: Authors calculation from various issues of Bangladesh Economic Review, Statistical Year Book of Bangladesh, Dhaka stock exchange (main board) and Securities and exchange commission (Annual report and quarterly review).

The second indicator of market size is the number of listed companies. The rationale of including this measure is that as the number of listed company increases, available securities and trading volume also increases. Table 2 shows that during the period under study, number of listed company has grown from 149 to 273 with an average annual growth rate of 4.421% and a standard deviation of 39.006. The upward trend line (figure B) with R2 value of .9589 points to stable growth in the number of listing.

Figure A Stock market size of Bangladesh, market capitalization to GDP ratio, 1990-91 to2006-07 with 4 years forecast

Table 2 Number of listed companies in Dhaka Stock Exchange

Year

Number of listed companies

Growth in %

Year

Number of listed companies

Growth in %

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Descriptive statistics of number of listed companies

149 153 166 201 192 192 203 213 219 Mean 2.685 8.497 21.084 -4.478 6.771 5.729 4.926 2.817 Standard deviation 39.006

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

229 234 248 251 259 251 269 273

4.566 2.183 5.983 1.210 3.187 -3.089 7.171 1.487

Minimum

Maximum

Average growth rate 4.421%

217.765

149.000

273.000

Data source: Compiled from different issues of monthly review, DSE.

Figure B

Number of listed companies

2.1.2 Liquidity Analysts generally use the term "liquidity" to refer to the ability to easily buy and sell securities. A comprehensive measure of liquidity would include all the costs associated with trading, including the time costs and uncertainty of finding a counterpart and settling the trade. As the direct measure of liquidity is beset with complexity, analysts typically use proxy measures of liquidity.

2.1.3 Total value traded/GDP equals total value of shares traded on the stock market divided by GDP. The total value traded ratio measures the organized trading of equities as a share of national output .The total value traded/GDP ratio complements the market capitalization ratio. Together, market capitalization and total value traded/GDP inform us about market size and liquidity. Table 3 shows the liquidity situation of Bangladesh stock market in terms of total value traded to GDP ratio. The ratio has increased form an insignificant number (0.000228) in 1990-91 to 4.05 % in 2006-07. Mean value of 0.015 with a standard deviation of 0.011 for the ratio imply that the increase is not even smooth; there is a marked fluctuation in the value traded to GDP ratio over the years.

2.1.4 Turnover equals the value of total shares traded divided by market capitalization. High turnover is often used as an indicator of high level of liquidity. Turnover also complements total value traded ratio. While total value traded /GDP captures trading compared with the size of the economy, turnover measures trading relative to the size of the stock market. Put it differently, a small, liquid market will have a high turnover ratio but a small total value traded/GDP ratio.

Figure 3 depicts the turnover ratio of the stock market of Bangladesh.. During the study period it increased form 1.1% to 17.5%. The turnover ratio peaked at 62.1% during the year 1998-99 showing a declining trend afterwards. Minimum and maximum ratio of 0.012 and 0.621 during the study period with a mean ratio of 0.215 and standard deviation of 0.192 (table 3) indicate marked

fluctuations in the turnover ratio. The linear trend line (figure C) of turnover ratio shows an upward trend though the R2 of 0.093 indicates a poor model fit.

Table 3: Liquidity measure- total value traded to GDP, 1990-91 to 2006-07 Year GDP(billio n Taka) 834.39 906.5 948.07 1030.36 1589.76 1663.24 1807.07 2001.76 2196.95 Total value traded(billio n Taka) 0.19 0.12 0.44 0.58 6.3997 36.222 25.9485 48.4044 50.5023 Mean Value traded / GDP 0.000 0.000 0.001 0.001 0.004 0.022 0.014 0.024 0.023 Standard deviatio n 0.011 0.192 Kurtosi s 0.024 -0.384 Skewness Minimum Maximu m 0.041 0.621 Year GDP(billio n Taka) 2370.85 2535.46 2732.01 3005.8 3329.73 3707.07 4157.28 4674.97 Total value traded(billio n Taka) 53.2986 54.6645 48.571 25.8407 70.7324 78.8775 57.4001 189.7104 Value traded /GDP 0.022 0.022 0.018 0.009 0.021 0.021 0.014 0.041

199091 199192 199293 199394 199495 199596 199697 199798 199899

199900 200001 200102 200203 200304 200405 200506 200607

Descriptive statistics

Value traded to GDP ratio Turnover ratio

0.015 0.215

0.264 0.923

0.000 0.012

Source: Computed from data of various issues of Bangladesh statistical year book, SEC quarterly review and DSE monthly review Figure C.

10

Liquidity measure-turnover ratio, 1990-91 to 2006-07

2.1.5 Volatility Indicators of stock market volatility are a twelve month standard deviation and coefficient of variation (CV) estimates based on market index. We include a second measure of volatility i.e. the difference between the highest and lowest stock market index of the year. We term it as range (this measures of volatility comes from Agarwal, R.N. , 2000 ).Then we calculate a composite index (rank) of volatility taking the simple average of mean- removed value of standard deviation, CV and range for different year. In our analysis lower rank for volatility means high level of volatility than higher rank for the variable volatility. Thus volatility rank of 1 for a year means the market index was the most volatile during the year. Table 4 depicts the volatility in the Dhaka stock exchange. The range, standard deviation, coefficient of variation and composite volatility ranking for each year during the study period indicate that the market was highly volatile during the study period. Table 4 also shows that the market was the most volatile during the period 1995-96 (rank 1) and 1996-97 (rank 2) which is congruent with the fact that during the year 1996 the capital of Bangladesh experienced a sudden on set of boom and a subsequent burst. However, the decreasing volatility ranks (with volatility index increasing) over the years may be interpreted to mean increasing volatility in stock markets.

Table4.

Volatility in the stock market: range and standard deviation and coefficient of variation.

Year 199091

Standard Range deviation 25.383 60.9

CV 0.068

Volatility Volatility Year index ranking -0.740

Standard Range deviation 176.4 9

CV 0.115

Volatility Volatility index ranking -0.453 9

15 1999- 66.557 00

11

199192 199293 199394 199495 199596 199697 199798 199899

37.628 24.849 103.587 48.571 860.964 377.758 58.270 21.980

100.95 76.61 346.28 185.03

0.111 0.063 0.14 5 0.06

-0.582 -0.741 -0.175 -0.615 3.986 1.540 -0.504 -0.802

12 2000- 73.273 01 16 2001- 49.392 02 5 2002- 61.364 03 13 2003- 360.654 04 1 2004- 122.742 05 2 2005- 98.097 06 10 2006- 180.645 07 17

222.18 0.108 125.46 0.061 217.04 0.075 1017.5 0.262 409.1 4 254.3 4 0.072 0.083

-0.421 -0.655 -0.528 1.165 -0.257 -0.400 0.181

8 14 11 3 6 7 4

2289.34 0.592 1212.47 0.34 4 201.61 66.24 0.093 0.04 3

649.21 0.128

Data source: Computed form month end index of DSE from 1990-91 to 2006-07 (DSE main board Monthly review and Graphs)

2.1.6 Concentration Market concentration can be measured by looking at the share of market capitalization accounted for by the large stocks or large sectors. These large stocks are seen as the leading 3 to 5 firms in the market (Maunder et al. 1991). In many economies only a few companies dominate the stock market (Bundoo 1999). High concentration is not desirable as it can adversely affect liquidity, and it is common to find a negative correlation between concentration and liquidity. To measure the degree of market concentration, we compute the share of market capitalization accounted for by the ten largest stocks and five largest stocks and call this measure concentration. We also include market capitalization by largest 4 sectors and by the largest sectors, turnover by the largest 4 sectors and by the largest sector.

Figure D. indicates increasing market concentration by largest five sectors in Bangladesh stock market. Market capitalization for largest five sectors during the period 1995-96 was 57.50 % which increased to 87.41 % by 2006-07. Figure E points to rather more sectoral concentration in the banking sector market capitalization which rose to 56.16% by 2006-07 from 10.72 % in 1995-96 with an average banking sector concentration growth rate of 16.74% per annum. Figure D. Market capitalization by largest five sectors 12

Figure E. Increasing Market capitalization by banking sector

Data source: Authors calculations from various issues of Bangladesh Bank Quarterly and Monthly Economic Trends

Figure F shows that capitalization by largest 10 companies during August, 2004 was 45.74% which has decreased to 38.02 % during August, 2007. Market capitalization by the largest 5 companies during the same period has decreased from 34.12 % to 22.37 %.

Figure F

Market Concentration-Market capitalization by large 10 and large 5 companies in DSE

13

50 Market capitlization 40 30 20 10 0 2004 2005 Year Market capit alizat by large 10 com ion panies (% ) Market capit alizat by large 5 com ion panies (% ) 2006 2007

Source: Authors calculation from Dhaka Stock Exchange Main board. Table 5 Market Concentration: Turnover by largest 4 sectors and largest sectors in the DSE. Concentration measures 2004 2005 2006 2007 Turn over by the largest 4 sectors (%) 77.82 75.88 74.55 81.36 Turnover by the largest sectors (% ) 49.73 40.4 38.67 48.45 (Banks) Source: Authors calculation from Dhaka Stock Exchange Main board

Turnover by the largest 4 sectors (table 5) increased from 77.82 % in 2004 to 81.36 % in 2007 whereas, the turnover by the banking sector decreased from 49.73 % in 2004 to 48.45% in 2007. Overall, the Bangladesh stock market remains highly concentrated to the banking sector in terms of market capitalization and turnover.

2.1.7 Foreign portfolio investment Foreign portfolio investment in equity and debt securities indicates the level of integration of a stock market with stock market of other countries. It also indicates growth level of a stock market. Bangladesh stock market is showing declining trend in terms of foreign portfolio investment in equity and debt securities. Figure G. depicts the foreign portfolio investment situation in Bangladesh stock market for the period of 1992 -93 to 2005-06. From 1992 to 1994-95 purchase of shares by foreign investors exceeded the amount of share sale and repatriation. After 1995-96 the trend reversed and share sale and repatriation exceeded that share purchase for most of the years. During the period of 1995-96 and 1996-97 Bangladesh experienced a massive outflow of foreign investment evidenced by Tk .6.332 billion repatriation and Tk. 6.187 billion sales as against Tk. 0.518 billion share purchases by foreign investors in 1996-97. The declining trend of portfolio investment, evidenced by average annual sales and repatriation of portfolio investment amounting to Tk. 0.995 billion and 1.036 billion per year with standard deviation of 1.603 and 1.636 exceeding the average annual purchase by portfolio investors of Tk. 0.718 billion with a standard deviation of 1.106 during the study period , may be interpreted to mean that Bangladesh stock markets remain nonattractive to foreign portfolio investors.

14

Figure Portfolio Investment : 1992-93 to 2005-06 (in billion Tk.)

Source: SEC Bangladesh Annual Report 2005-06

Statistical Properties of Key Indicators of Stock Market Development Table6 reports correlation matrix among key development indicators of Bangladesh stock market. Market capitalization ratio is significantly correlated to value traded to GDP, number of listed companies and volatility index which may be interpreted to mean that market grows in terms of capitalization as the trading in the market increases, the number of listed companies goes up and market index rise. Value traded to GDP significantly correlated to number of listed companies may be interpreted to mean that market growth in terms of liquidity depends upon market depth in terms of number of listed companies. Table 6 Correlation matrix among key indicators of stock market development *Correlation is significant at 1 % level; **Correlation is significant at 5% level Market capitalization to GDP 1 .746* -.109 .560** .546** Value traded to GDP .749* 1 .566** .705* .276 Turnover ratio -.109 .566** 1 .343 -.181 Number of listed companies .560** .705* .343 1 .002 Volatility index .546** .276 -.181 .002 1

Market capitalization to GDP Value traded to GDP Turnover ratio Number of listed companies Volatility index

2.1.8 An Index of Stock Market Development An index of stock market growth is computed based on the method constructed by Dermirgu Kunt and Levine (1996), taking into account key market growth indicators viz. market size, liquidity , turnover ratio and volatility, To compute conglomerate indexes of stock market development, we average the mean -removed values of particular stock market growth indicators. Specifically, when we construct INDEX-1 - which aggregates information on market capitalization, total value traded/GDP, and turnover ratio, we follow a two-step procedure. First, for each year t we compute the 15

mean-removed market capitalization, total value traded/GDP, and turnover ratio. We define the means-removed value of variable X for year t as:

X(t)m = [X(t) - mean(X)] / [ABS( mean(X))], where ABS refers to the absolute value. For mean (X), we use the average value of X over the study period.

Second to compute index1, a simple average of mean removed value of market capitalization to GDP, turnover ratio and value traded to GDP is taken. Based on index 1, the stock market is developing over the years. During the periods under study, the stock market was the most developed during 200607 and ranked 1. The periods of 1998-99, 1997-98, 1995-96, and 1999-00 ranked second, third, fourth and fifth respectively.

Table 7: Index of stock market development, 1989-90 to 2006-07

Year 199091 199192 199293 199394 199495 199596 199697 199798 199899

Index Rank1 Index2 Rank2 Year 1 -0.914 16 -0.870 17 199900 -0.934 17 -0.846 15 200001 -0.888 15 -0.851 16 200102 -0.850 14 -0.681 14 200203 -0.567 13 -0.579 13 200304 0.487 4 1.362 1 200405 -0.066 11 0.335 4 200506 0.549 3 0.286 5 200607 0.632 2 0.273 6 Figure H.

Index Rank1 Index2 Rank2 1 0.393 5 0.181 8 0.392 0.178 -0.316 0.288 0.265 -0.035 1.385 6 9 12 7 8 10 1 0.189 -0.030 -0.369 0.508 0.135 -0.126 1.084 7 10 12 3 9 11 2

Index of stock market growth1990-91 to 2006-07

16

To compute index 2, we include the indicators of market capitalization to GDP, turnover ratio, value traded to GDP and volatility. According to index 2, stock market was the most developed during 1995-96. The periods of 2006-07, 2003-04, 1996-97 and 1997-98 ranked second, third, fourth and fifth respectively. The upward trend line (figure H.) for both index 1 and index 2 may points to the growth of Bangladesh stock market over time, while R 2 value of 0.5094 (index 1) and 0.2993 (index 2) may mean poor fit in the trend line and unstable growth pattern .

2.2 Year 1996 to 2007: The bull-run that took place in 1996 has left a number of positives for the market. A lot of investmentfriendly regulatory reforms have been implemented by the SEC. We now have stronger surveillance and improved rules relating to public issue, rights issue, acquisition, mergers and so on. All these fundamental developments, which were well overdue, followed the 1996 bull-run. It was a learning experience for Bangladesh, and the desired level of changes was initiated by the market watchdog subsequently. In the secondary market, surveillance is more active and particular than before. These developments, that are widely appreciated, are actually the fundamental requirements that are in place today resulting from the continuous efforts of the government and multilateral agencies. Trading has now become automated, led by the Chittagong Stock Exchange through the central depository. In the present automated trading environment, bids/offers, depth, and required broker particulars are all recorded and can be retrieved for future reference. The Central Depository Bangladesh Limited (CDBL) was created in August 2000 to operate and maintain the Central Depository System (CDS) of Electronic Book Entry, recording and maintaining securities accounts and registering transfers of securities; changing the ownership without any physical movement or endorsement of certificates and execution of transfer instruments, as well as various other investor services including providing a platform for the secondary market trading of Treasury Bills and Government Bonds issued by the Bangladesh Bank. 17

The stock market surveillance mechanics in place at present has no resemblance to that of 1996. There are strict rules and guidelines, trading circuit breakers and international standard surveillance to protect investor rights and ensure fair play. The disclosure requirements and its timing for both listed scrips and IPOs as devised by the SEC are now more reflective of international practices. The SEC is also adopting new valuation methods that result in fair pricing of new issues. While there is still a lack of credible research organisations, a few firms like Asset and Investment Management Services of Bangladesh Ltd. (Aims) have come up, and they are investing in research and building up stock market related credentials.

The recent surge in the stock market The Dhaka Stock Exchange Index was at a 10-year high in the 2007 year end (up 66 percent), which made it Asia's top performer after China. The steady investment atmosphere prevailing throughout 2007 is considered to be one of the main reasons behind this surge. Good return prospects, stable market growth, and uninterrupted trading as a result of political stability attracted foreign investors to local securities. In 2007, foreign investors bought shares worth $205.7 million, while the amount of selling was $78.6 million, according to a DSE statistic. According to the DSE, in 2007, net foreign or portfolio investment on the Dhaka Stock Exchange surged 8.3x to $129 million. The banking sector, followed by the power, pharmaceutical and cement sectors, received the most foreign investment. The caretaker government has also attracted investors by pledging to sell state enterprises. The stateowned companies -- Jamuna Oil Company Ltd. and Meghna Petroleum Ltd. -- debuted in the bourses early this month. Some analysts think that the market had been undervalued before the surge, and the uphill trend, therefore, played the role of an upward correction of the market. The P/E ratio now stands at 20x as compared to 14.1x for emerging markets. It seems sustainable if the planned big IPOs of a few SOEs and the top telecom companies take place. More such large issues are required, which can emerge out of the energy, infrastructure and public sectors.

3. Current Situation (2007 to now): YEAR 2007

18

YEAR 2008

19

YEAR 2009 20

YEAR 2010 21

YEAR 2011 22

23

3.1 Year 2011 Bangladesh share market scam The 2010-11 Bangladesh share market scam is an ongoing share market-turmoil in the two Bangladeshi stock exchanges, DSE and CSE. Millions of small investors have lost all their investments due to the market crash. The crash is deemed to be a scam and exacerbating due to government failure. Background The stock market was in turbulence throughout much of 2009, with the long bullish trend starting to turn grim. The bullish trend was initiated by the end of the two-year political crisis and re-emergence of democracy via the December 2008 polls, and was largely unaffected by the BDR Mutiny. The market was heavily aided by the entrance of Grameenphone into the capital market, when the index rose by 22% over a single day on November 16, 2009.Share prices continued to fluctuate, reaching the annual high in mid-2009 before plummeting by the end of 2009, with retail investors threatening a hunger strike. The market continued to be turbulent throughout 2010, with the DSE hitting its all-time high revenue and the largest fall in a single day since the 1996 market crash, within the space of a month. The slump By the end of 2010, it was well known that the capital markets of Bangladesh well overvalued and overheated .The central bank had taken measures to cool the market down and control inflation by putting a leash on the liquidity. The conservative monetary measures adversely affected the capital market, with the market falling once on December 13 by 285 points over 3% of the DGEN Index which stood at around 8,500 points. The capital markets suffered a second fall on December 19, with the index falling a further 551 points, or about 7%. This 7% fall in the Dhaka Stock Exchange's index on a single day was the largest fall in the 55 year history of the Exchange, surpassing the fall of the 1996 market crash. This fall was deemed 'normal' by analysts, who believed the market, was overvalued. Investors took to the streets with protests. Random objects like wood and papers were set on fire in front of the DSE office in Motijheel.

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Immediate measures were taken by the regulatory body Securities and Exchange Commission, which, together with the Bangladesh Bank, laxed its earlier conservative measures to pacify the fall. As a result, the market ameliorated the next day by 1.9%. Within December 2010 and January 2011, the DGEN index fell from 8,500 by 1,800 points, a total 21% fall, with masterminds of the crash making about BDT 5,000 crore ($ 667 million) out of the scam. The market fell by 5% on June 12, before taking a 4% plunge on October 11, sending the market into further turmoil. The fall finally triggered small investors to go on a fast-unto-death on October 16 after forming the Bangladesh Capital Market Investors' Council .Opposition politicians declared their solidarity with the protesters. The market stood at around 5,500 index points in October 2011 from 8,900 only a year ago. Protests continued throughout the months, the most recent ones taking place in front of the DSE office in November 2011, with protesters sitting in throughout nights. Protests Protests on the streets started becoming a common scene contiguous to the DSE office. The protests continued for days in January and February, often resulting in clashes between the police and the protesters. After the market fell further subsequently, small investors started going on hunger strikes separately, before forming the Bangladesh Capital Market Investors' Council on October 16 and going on a fastunto-death. Opposition politicians declared their solidarity with the protesters. Protesters stayed overnight by the DSE office starting October 1and were dispersed on day two by the baton-charging police. Protesters, including the head of the Council, were arrested, although the police denied arresting any protester Protesters also demanded complete trade suspension at the DSE until the Prime Minister intervened to fix the market. Finance Minister Muhith faced staunch criticism for the handling of the market crash; he admitted his failure in attending the debacle. He also attracted criticism for refusing to disclose the names of those accused of chicanery by the probe committee in April 2011. Protests were also fueled by the Finance Minister's comments on the secondary markets in October 2011, when he said, "I don't know how it will get right."Opposition and protesting investors had called for his resignation. Probe A probe committee was formed to investigate the stock market crash on 24 January 2011,with former Bangladesh Bank Governor Ibrahim Khaled heading the four-man high-powered committee. The committee provided their findings after three months, on April 7. It identified an array of chicanery performed by some 60 influential individuals that resulted in the recent market crash. The committee interviewed all members of both the DSE and CSE, and consulted journalists and analysts before presenting their report. The committee found various irregularities, including the existence of omnibus accounts, which allowed some market players to make exorbitant profits at the expense of the retail investors. Among the 60 identified primarily included chairman of Beximco and the mastermind of the 1996 market crash Salman F Rahman, former DSE president Rakibur Rahman, SEC chairman Ziaul Khandaker, SEC member Mansur Alam and BNP politician Mosaddek Ali Falu .The report mentioned that pro-government business tycoons, including Salman and Rakibur, exerted influence within the SEC by influencing the appointment of its members. The report ended with 25

recommendations to reform the SEC drastically and asked the government to publish the names of the influential players and to remain cognizant in countering their influences. The report resulted in the dismissal of SEC chairman Ziaul along with other SEC members accused. However, the Finance Minister AMA Muhith stated that the State would neither disclose the names of the accused officially nor take punitive measures without further investigation, although no dates for fresh probes have been declared. Bailout The market stabilization fund (MSF) was conceived by the Bangladesh Association of Banks (BAB) in late October 2011 as a method to increase liquidity in the market and increase share prices, worth BDT 50 billion ($ 667 million).Banks have reportedly kept buying shares despite suffering from liquidity crises themselves, and not selling any shares. However, share indices kept plummeting throughout the time period. However, prices rose by 7% ahead of the Prime Minister's emergency meeting about the market.

4. Problems of Stock Markets in Bangladesh: The unexpected rise and fall in share prices mostly followed from the general confidence of the investors about political stability, euphoria of investment in shares, prospect of quick capital gains, a vacuum in respect of institutional presence in the share market, monopolistic dominance of member brokers, inefficiency of the SECS to cape with the developments, existence to Kerb market , absence of proper application of circuit breaker etc. Delivery versus payment mechanism was used as one of the main vehicles of manipulation. Kerb market gave birth to fake and forged share certificates. Although there are increasing trends in all the indicators, DSE, CSE are not free from problems, The problems of DSE, CSE may be summarized as under: Price manipulation It has been observed that the share values of some profitable companies has been increased fictitiously some items that hampers the smooth operation of Stock market. Delays in Settlement: Financing procedures and delivery of securities sometimes take an unusual long time for which the money is blocked from nothing. Irregulations in Dividends: Some companies do not hold Annual General Meeting (AGM) and eventually declare dividends that confused the shareholders about the financial positions of the company Selection of Membership: Some members being the directors of listed companies of DSE, CSE look for their own interest using their internal information of share market. Improper financial statement:

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Many companies do not focus real position of the company as some audit firms involve in corruption while preparing financial statements. As a result the shareholders as well as investors do not have any idea about position of that company.

OTHER The concept of centralization of the securities market has not been implemented that areise technical problems and political infighting. The intrinsic values for securities traded are sometimes estimated without considering the current market prices of the securities. The absence of comprehensive legal and supervisory framework. Lack of skilled manpower as well as financial and non-financial institutions involved in the securities market. The lack of proper policy framework that provides incentives and protection to investors. The dominance of bigger public sector and borrowing of public sector as well as government form the institutional sources rather than the market.

5. Suggestions to improve the activities of Stock Market To make arrangement to set-up merchant banks, investment banks and floatation of more mutual funds particularly in the private sectors. To introduce automated monitoring system that may control price manipulation, malpractices and inside trading. To introduce full computerized system for settlement of transactions. To force the listed companies to publish their annual reports with actual and proper information that can ensure the interests of investors. Person being the director of listed companies should not be allowed to be the member of DSE or CSE. To force the listed companies to declare and play regular dividends through conducting Annual General Meetings. To control and abolish kerb market form premises of stock market. To take remedial action against the issues of fake certificates. The composite Quotation System (CQS) should be introduced and implemented that available the exchange specialist bid-ask quotes to the subscribers. To introduce Central Depository System (CDS) to curb the scope of manipulation by the brokers.

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Banks, insurance companies and other financial institution should be encouraged deal in share business directly. The brokers should not be allowed to deal in the Scripps on their own accounts; there should be complete transparency in their transactions with the client so that one is favored against another. There should be a system to penalize defaults to fulfill contracts regulating share dealings Certified Accountants Firm should be allowed to certify the accounts. The management of DSE and CSE should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms. To publicize and educate the investors about fundamentals to deal in share transactions. To punish the member brokers for breaching of contract.

The above suggestions are recommended as major to improve the overall performance of DSE and CSE to play an important role in the securities market development in Bangladesh.

Major future prospects that will change the Stock Market: Within 3 to 6 months 8 large profitable government enterprises are going to be listed under Direct Listing Method adding value worth another 1billion Dollar. The Telecom Giants in Bangladesh are finalizing their offers for IPO in the market. Power and energy sectors demand for capital is 5 to 10 billion dollar within short time to meet the immediate needs of 5000 MW power demand. A deep sea port requiring 1 billion dollar is going to start with a policy decision that it will also be listed. The Pharmaceutical sector and API enjoying WTO benefit is growing sharply. Textile sector as backward linkage to thriving export oriented garments industries is booming. Export oriented food processing industry needs huge capital and technical capacity to meet the growing standards in global market for marine food, fruits and poultry. IT sector with our talented developers, yet to demonstrate the massive potentials of software industry of the country. Future Programs for Further Development 1. Active market of government, municipal and corporate bonds beside the corporate bonds to create alternative investment. 2. All securities to be brought under CDS within 2 years. 3. All major infrastructure companies, specially those in power, telecommunication and energy sector are to be listed ensure to broaden the market depth with at least US$ 15 billion market cap by 2012 having daily average turnover from current level of average of 10 to 15 million dollar to a level of 70 to 100 million dollar 2 years. 28

4. To strengthen merchant banks capacity to be more active. 5. Ensuring speedy disposal of decisions for market operation. 6. Ensuring greater degree of transparency in financial disclosure and management structure for better corporate governance.

6. Role of securities market in Economic Development The increasing stringency of terms can both domestic and international loans, the urgency of mobilizing domestic resources by means other than debt finance has been greatly identified. The principal alternative to debt finance, of course in equity market. Capital market refers to the market for long and medium term funds for the business enterprises. It can be divided into securities and nonsecurities market. Securities market can in term may be divided into the markets for primary issues and markets for secondary trading of the issued securities. In the secondary market, the existing securities change from the investor to another. There is no additional flow of funds for investment purposes in the secondary market; it only provides liquidity and marketability of the existing securities. A secondary market is very essential for a new issue market to develop. The secondary market can play most crucial functions in the pace of economic development by the promotions of savings and investment and efficient allocation of funds among the users. The securities market offers both investors and issues a bond spectrum of investment alternatives, which can help increase the level of both savings and investment. An efficient capital market can play the crucial role in mobilizing domestic savings for the purpose of investment.

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Conclusion:
To expedite the market development process, it may be a good idea to decide on certain milestones and link them to the disbursement of Development Credit Support of the World Bank. The government is making good progress in other sectors, including monetary management, corporatization of public-sector banks and others through this linkage. The missing link between the SEC, Bangladesh Bank, Bangladesh Telecom Regulatory Commission and other regulatory bodies is now getting established. Individually, they were not serving each others' interests, and there was no effective coordination among them, hence the country was deprived of great initiatives. A dedicated financial market cell at the Ministry of Finance could be formed to coordinate with these regulators as well as other ministries. In terms of creating market depth, more profitable state-owned-enterprises should be listed. The supply of securities can be increased if the SOEs are allowed to operate through the stock exchanges. Floatation of SOE scrips is expected to expand the market by couple of times. Corporatization of SOEs will bring in transparency as well as confidence on the government financial system.

The Bangladesh capital market still has a long way to go. The recent measures taken by the transitional government have already begun to positively impact the markets. If more investorfriendly policy reforms were to be implemented, the capital market will undoubtedly play a critical role in leading Bangladesh towards being the next Asian tiger with growth comparable to India, Vietnam and the other most dynamic economies in the region.

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Bibliography

Website
http://www.dsebd.org/ http://www.cse.com.bd http://www.scribd.com/doc/17320938/

Book Fundamentals of Investments (Charls J. Corrado)

Journal
POTENTIAL GAINS FROM EMERGING STOCK MARKET OF BANGLADESH: FACTS & FIGURES FOR FOREIGN INVESTORS Mazhar M. Islam, Texas A&M International University

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