The Performance Of Capital

Market And Its Impact On The Economy Of Bangladesh.

(Based On Recent Unstable Capital Market Situation.)

Assignment on #

Macro-Economices
(Course Code: FIN-2209)

14th February, 2011

Prepared by,

Anik Ahmed
BBA, 3rd Batch, Department Of Finance Jagannath University, Dhaka.

Capital Market Overview

A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year. The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the Bangladesh Bank (BB), and Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.

Capital Market

Primary Market

Secondary Market

In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. In Bangladesh there are two capital markets in our country. One is Dhaka Stock Exchange (DSE), and another is Chittagong Stock Exchange (CSE).

History of capital market in Bangladesh:

The Dhaka Stock Exchange (DSE) was setup on 28th April, 1954 that started formal trading on early 1956. Post independence government did not promote a capital market during the first five years, and it was activated again in 1976 with 9 issues on board. The Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 from Chittagong City through the cry-out trading system with the promise to create a state-

of-the art bourse in the country. CSE was formally opened by then Hon'ble Prime Minister of Bangladesh on November 4, 1995.

Performance of capital market:

DSE and SEC were established with a view to collecting capitals for companies who need this. It facilitates to raise capital which makes broaden our overall economy. It also accelerates our economy to drive us to be a developed country from under developing situation. After a great crash in 1996 in capital market of Bangladesh our regulatories tried their best to rebuild the market and take it to a stable situation. For doing this they implemented few rules and regulations for the market. Such as 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) Publication of Monthly Review. Announcement of Price sensitive or other information about listed companies through online. Monitoring the activities of listed companies. (As per Listing Regulations). Though implementing all these steps, index of our capital market again has started rising beyond control. For the first time in 2009 our capital market exceeds trading of 1000 crore tk. With approximate 423 companies. Economists told it an abnormal situation for the capital market of Bangladesh.

Our analysis revealed few core reasons of unexpected rising of capital market.
These reasons are given below: 1. 2. 3. 4. There are anti relation between supply and demand of stock. Entrance of a lot of new companies into the market like, Grameen Phone. Opening a great number of BO accounts which is more around three million. When the price was rising the regulatories had not taken any proper actions or implemented any strong regulations to control the capital market. 5. Tendency of holding the stocks to make more profits. 6. Banks have invested more in capital market than 10% of their liabilities which is unlawful as per act of Bangladesh Bank. 7. Many industrialists taken loans from banks to invest in authorized productive sectors but they invested that loan amount in capital market. 8. Price hike in Z category shares which is abnormal as per categorization. 9. Tendency of mass people to get quick and huge profits from the capital market. 10. Mass people preferred investing in capital market more than saving in bank to get more returns.

These reasons and some other reasons influenced our investors to invest more in the market and thus our market became a bullish market. So economists and researchers expected a big crash in the market. Recently we have seen that expected situations in our market that is a big fall in 10th January 2011. The reasons of falling the index of capital market are given below. 1. Syndicates are working behind this recent plunge. These syndicates have a huge investment in Stock Market and they take control of the price of the shares. They are united and buys a share simultaneously so a want is created in the whole market. So the prices of share become higher and general investors suffer with it. 2. Most of investors in share market is either newbie or have no analysis power. They are just trading on the basis of seeing what other peoples are trading. So without seeing a companys saturation point; the invest money and loose money. 3. Government has changed lots of rules of local stock market and applied lots of limited on Debt and other facilities. And this is another reason of this recent Bangladeshi share market plunge. Regulator restricted the money supply and it is also a result of the interest hike by the central bank. 4. Stock brokers said the recent rise in the Statutory Liquidity Reserve (SLR) and Cash Reserve Ratio (CRR) because the plunge in the stocks as the increase prompted banks and financial institutions to pull out substantial investment from the bourse. The central bank from December 15, 2010 also increased the SLR and CRR by 0.5 percent to 18.5 and 6 percent respectively inflating the call money rate to a blasting trajectory and alerted all banks to bring down excess over limit exposure in stock market by the end of January 10, 2011. Circuit breaker should be raised immediately. 5. Bank other investment organization have stopped opening new stocks. Here is the scenario of fall of general index of DSE.

However, this is a situation which has caused basically for these reasons. The basic and foremost reason is the SLR and CRR factor. Actually after implementing that restriction bank has come to market to gain more and create an imbalanced situation.

Impact
The benchmark index had climbed by 80% in 2010 but has lost more than 27% since early December. This is the most drastic situation our country has ever seen. This causes a huge impact on our overall economy which has given below. Impact when price index is high is given below. 1. The year also witnessed the approval of the largest Initial Public Offering (IPO) in the history of the premier bourse of the country in terms of money. The amount of turnover in the year was Tk 4,009 billion which is 171.8 per cent higher on the level of the previous year. 2. The amount of total market capitalization also reached to a new high to Tk 3508 billion which is 83 per cent more than that of the previous year. The government collected a total of Tk 3.16 billion as tax as source from the DSE while the amount was a nominal Tk 624 million in the previous year. Impact of stock price index after great depression of capital market. 3. It is estimated that at least 10% of our total population is directly or indirectly related with capital market. Simply by loosing more than of there capital they find themselves less capable of earning, in less than one hour. 4. To get the desired level of money Bank invested more money than they are authorized which causes lack of liquidity in their hand when market goes down. 5. Even though sister banking is not possible cause no bank has enough money to lend. (Sister banking means taking loan from another bank.) 6. The price of share has decreased means the listed companies have lost their values as per the percentage of their stock has fallen. It means industrialist has lost their money to invest to productive sectors, financial institutions has lost their money to give loan even though manufacturer has lost their value to produce product with the pace of demand. Which cause a price hike of almost every consumer product. 7. At the time of price hike there were huge injections of money but when the price gets fall, the money did not come out to the investors. Money manipulated by some syndicates and it goes to them it means money goes to a single hand. So, it is clear that some people are getting rich but the ordinary people getting poorer than they were. 8. It creates a bad impact of our country throughout the world which may cause effect on coming foreign investment.

However, to get the real pace of capital market we have to let it go with it own style. Now the question is what its own style is. Neither the over pricing period nor the less pricing period is called the normal position. The normal position is related with price earning, and face value of share. The valuation of share is

concerned here more than the restriction given by the regulators. Regulators have imposed restriction in a very incentive place where restriction will cause meltdown in capital market. So they should lift the restriction from the way capital market run. They should impose it where it is needed.

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