INTRODUCTION Capital market plays an important role in economy from long term perspective.

Generally, capital market refers to securities market, although banking system is considered to be the prime source of the long term finance. Capital market is comprised of bond market and stock market. Again, stock market is classified into primary and secondary markets. Primary market facilitates the trading of new issuance of shares, whereas capital market facilitates the exchange of existing shares. Its to be noted that lions share of trading takes place in the secondary market. Volatility in stock market is a common phenomenon in the conduction of stock trading throughout the world. It can be said in one sense that volatility actually saves the market from stagnation and it cannot be predicted by any existing theory. Thats why critics describe the stock market as speculative.

BANGLADESH CAPITAL MARKET Stock market is mainly the capital market of Bangladesh. To effective bond market in the capital market, Bangladesh Bank, SEC and other relevant bodies are working together. There are many entities in the stock market namely investors, issuers, instruments (shares, bonds), middle-parties (issue manager, auditor, credit rating agency, underwriter, stockbroker, asset manager) etc. The key role players along with their functions are listed below: Securities and exchange commission (SEC)

This commission consists of a Chairman and 4 other members. They are appointed by the government. All policies, regulations and relevant decisions regarding capital market of Bangladesh. In addition, implementation and monitoring of capital market are carried out by SEC. Stock exchanges, CDBL, broker houses, merchant banks and asset management companies operate under supervision of SEC. According to securities and exchange ordinance 1969 SECs functions are: 1. Ensuring proper issuance of securities 2. Fostering investors interests in the capital market 3. Developing and controlling the capital market

It also embodies performance of stock exchanges like Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) and the apparently conspicuous lack of coordination among SEC, the Bangladesh Bank (BB) and stock exchanges.

Dhaka Stock Exchange (DSE)

DSE is the prime stock exchange in the capital market of Bangladesh. Currently, it is a public limited company. There are 238 shareholders in DSE and all the members in DSE are licensed brokers.DSE facilitates enlistment for issuers, monitors the fulfillment of conditions of listing and provides the members with trading and settlement facilities. There are more than 200 companies with 450 securities that are listed with DSE. Chittagong Stock Exchange (CSE)

It is the first automated trading bourse in Bangladesh. It started operation in 1995 as a nonprofitable company. It has more than 140 members. Its management is like the one of DSEs. There are more than 200 companies listed with CSE. Central Depository Bangladesh Ltd. (CDBL)

The main function of CDBL is to record the transaction of shares, mutual fund and debentures electronically along the ownership data. To coordinate the transfer of ownership of instruments through exchange is the main day-to-day function of CDBL. Since it records the transfer in digitized system, companies listed in CDBL have to dematerialize the shares. These companies are referred to as Depository Participant (DP). CDBL receives government determined fees on share dematerialization, IPO, transaction, BO accounts.

STATEMENT OF THE PROBLEM As a regulatory body, one mentionable part of SEC activities includes surveillance and enforcement of market so as to check whether any unscrupulous activity is going on with listed companies. From the data available in the DSE website (www.dsebd.org) , it can be observed that in the last quarter of 2010 investors experienced a boom in the general index of DSE but subsequently which turned out to be gigantic downfall in the first quarter of 2011. Apparently, this is the highest downfall ever in the stock market.

This downfall which almost snatched the total investments of many investments cannot be portrayed in the graph. It almost collapsed the stock market and the country economy to some extent became injured. But the relevant regulatory bodies such as SEC could not take proper steps timely which amplified the total disaster. There were many rumors based on the stock market crash which were spreading throughout the market but SEC overlooked them. Moreover, SEC frequently issued many different directives for the stock market most of which proved to be useless. The actual reasons behind the stock market crash could have been identified and attempted to be resolved by SEC.

Year 2011
Average DSE Gen Index 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 10-Jan 8326.34 8304.59 7948.43 7572.61 7434.59 7280.98 6949.44 6719.04

7280.01 6527.19 5926.35

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Despite mentions of market manipulation in media, there was lack of stern actions on the part of SEC as well as DSE and CSE. SEC did not venture to stymie the placement trade which had proved fatal for inexperienced investors. It also failed to check overvaluation of shares of some companies. It is observed from above sources of information derived from market report that unusual price movements of shares of companies listed under DSE took place throughout the period concerned in this analysis, and also from review of concerned SEC actions that the SEC failed to perform surveillance and enforcement functions. Thus this report aims to analyze SECs steps towards share scam in the market and recommend specific actions to be taken therein.

LIMITATIONS OF THE STUDY Time period concerned here is two consecutive years i.e. 2009 and 2010. Data from the DSE has been used, thereby leaving out the CSE. Monthly data has been used instead of day-to-day data, as the former does not reflect real picture. Only average of general index data has been considered leaving out some key parameters like turnover, market capitalization.

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STOCK MARKET AT A GLANCE (2009-10) From study of monthly reports published by the Dhaka Stock Exchange (DSE) , some points surfaced as below : a) In 2009, shortly before the takeover by a democratic government, the index was around 2706 and later rose to 2796. b) In September, it rose to 2994, but slid down to 2800 in October. c) Its however mentionable that in December 2009, price index touched at 4,415. From January 2009 to October, throughout this period, such steep rise is an unusual incident.

Year 2009
Average DSE Gen index 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

4415.35 3339.9 2799.15

2706.42 2581

2238.66 2155.73

2535.63

2795.93

2994.21 2498.44 2559.52

Year 2010
Average DSE Gen Index 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 8500.45 8308.46 7954.864 5612.95 5527.41 5574.67 5819.69 6634.05 6897.63 6207.81 6354.68

4941.32

d) From February 2010 to September 2010, index was rising without any downfall. e) In the period September-November there was a steep rise from 6897 to 8308 which was persistent in December 2010.

STEPS TAKEN BY SEC 1. In the last quarter of 2007, SEC set the margin loan ratio to 1:1 and later cancelled margin loan. However, this injunction was withdrawn within six weeks of the cancellation. 2. In February 2008, margin loan ratio was kept 1:1 and new directives for mutual funds and disclosure of financial statements were issued. Minimum paid up capital of merchant banks performing, underwriting, issue management and portfolio management was amended. Moreover, local brokerage houses were allowed to set up new branches upon fulfillment of specific conditions. 3. Book building method was introduced and revised directives for merchant banks and brokerage houses were issued. In September, de-listed companies were transferred to OTC (Over-The-Counter) market and Credit Rating Company Act ,1996 was revised. In October, six margin loan directives were introduced based on share category, but later on margin loan was stayed for shares with P/E ratio more than 75:1 and mutual fund which are being exchanged at a price 7.5% higher than its NAV .

4. In earlier 2011, several directives relating similar issues have issued consecutively. Margin loan ratio has been stated several times. Book building system has been cancelled and lock in provision for mutual funds was set up to 2 years.

APPLICATION OF METHODOLOGY To assess the decision making and management effectiveness of the SEC in regulating the stock market, standard methodological approach has been adopted with a focus on applicability. As a tool to carry out the analysis, the point stressed upon is research or supportive data along with creative problem solving techniques. The available methodologies are listed below with checking of applicability:

Methodologies WOTS-UP Analysis Company Capability Profile Environmental Scan Social Responsibility Matrix Stakeholder analysis Financial Ratio analysis PIMS Analysis Boston Consulting Group Methodology Decision Style Analysis Organizational Life Cycle

Appropriateness NA NA NA NA NA NA NA NA Applicable NA

Reason Since, SEC is a regulatory authority only decision style analysis except other methodologies is applicable here. ** NA= not applicable

ANALYSIS OF THE DATA In 2007, investors confidence declined and FDI as well due to takeover by military backed caretaker government. Simultaneously, there was a rise in remittance inflow and idle money in banks. Moreover adverse situation in real estate market, investors found the stock market appropriate regarding safety of investments and so did the commercial banks with their idle money. In 2008, there was a slight rise in FDI and investors confidence in the market had been low until 2008 elections. In this year, for the first time in the history of share market, three government corporations along with two other companies got enlisted through direct listing. Banks and NBFIs started investing.

In 2009, investors confidence increased to takeover by a democratic government. Bangladesh Bank exerted pressure on commercial banks to lower interest rates on commercial loans. As a result, banks were forced to reduce interest rates on deposits. Thats why depositors started investing in the stock market since return from the market seemed higher .Banks and NBFIs continued their investments with an increasing flow. In addition, market capitalization increased significantly owing to the Grameenphone. In 2010, Bangladesh Bank increased CRR (Capital Reserve Ratio) from 5.5% to 6% and put a limit on banks investment up to 10% and 25% of owners equity for NBFIs, in an attempt to minimize risks attributed to rising inflation and investments by banks and NBFIs. These directives from Bangladesh Bank along with some other from SEC increased the volatility of the market.

Analysis of Decision Effectiveness Demand Supply Mismatch

In past few years, three million new BO accounts were opened and in 32 districts 590 brokerage house branches came into being. There was increased inflow of money into the stock market out of remittance inflow, black money and commercial loans, whereas new share issue was very limited. This resulted in demand-supply mismatch. SEC overlooked such incident. Direct listing

As a general rule of direct listing, the benefit accrues to the directors of companies rather than companies themselves. As a result, it contributes to the manipulation by directors in the share market. The SEC should have taken it soberly. Book building and Private Placement

The book building system measures the value of newly issued shares and the procedures therein are in question. Moreover, companies with large capital drew a lot of money from the stock market as premium through private placement, which resulted in liquidity crisis with increased share price. The SEC should revise the relevant matters. Overvaluation of shares

Companies listed under the Z category in the stock market showed unusual hike in share prices. The SEC should take steps upon obtaining from the CDBL. Surveillance and corporate Governance

The surveillance section of the SEC is not capable enough. It should be monitored whether the tenets of corporate governance are being practiced. Financial Analyst and Manipulation

There is a need for increasing the number of financial analysts and the formation of financial reporting council as well. Investors consciousness should be raised and moreover, BO accounts of government, SEC and intelligence officials should be monitored. Reevaluation of accounts should be ensured. Internal drawbacks of the SEC weakness in supervisory capacity insufficient human resource Frequent changes in decision as well as overlapping decisions Insufficient account disclosure policies Lack of transparency in determining index price No explanation for rules of public issue valuation Infrequent meeting with other regulatory bodies like Bangladesh Bank and DSE

RECOMMENDATION In previous sections, ineffectiveness of the SEC in handling the stock market has been identified and some actions have been suggested. In addition to those, following actions could be taken: Market oriented actions : 1. Companies should be allowed to repurchase their shares so that they can control the unusual price movement of shares. Strict regulations can be followed in this regard in order to fight embezzlement. 2. Tougher guidelines should be laid out in order to monitor insider trading and price sensitive information. Any deviation from the standards should not be shown any mercy. 3. In order to increase awareness among investors, sufficient and relevant information should flow to them after scrutiny by financial analysts. Moreover, more deliberations between the Bangladesh Bank, SEC and DSE should be held. 4. The sole responsibility of broker houses is to facilitate the trading of shares among investors rather than spreading misleading information .The SEC should revise relevant policies. In addition, owners equity of mutual funds should better be increased in order to ensure efficient fund management invested by them. 5. The SEC should control the role of issuer, Valuation Company, CA firm, issue manager and every other entity related to asset revaluation, private placement. 6. The banks which violated the laws regarding the investment in capital market in Bangladesh should be identified and thus monitored accordingly in near future. 7. Share trading of officials of SEC, DSE, CSE, Bangladesh Bank, CDBL should be given a stop. They cannot trade shares in their family members name.

Management oriented actions: 1. SEC should enact and implement policies regarding BO accounts opening and thus ensuring that demand of shares in the market does not go up drastically. 2. The authority of surveillance could be delegated to the stock exchanges i.e. DSE and CSE, while the task of frequent inspection could be adopted by the SEC to facilitate efficient management. 3. Efficient search committee can be formed to ensure fair recruitment, which would follow hire and fire policy .Lucrative salary structure should be introduced to entice eligible human resources. 4. An advisory committee compromising of renowned academics, economists and representatives of civil society should be formed in order to bring all directives in alignment. 5. The SEC should not bow to any pressure exerted by any influential quarter.

CONLCUSION Stock market in Bangladesh has experienced the biggest crash in the history and behind this, several reasons are present as observed in this study. There have been several instances of mishandling of market by concerned regulatory bodies as well as lack of confidence on the part of investors. Data from several sources has been analyzed and recommendations have been presented accordingly. Its obvious that stricter regulations need to be adopted by the government as well as regulatory bodies in order to stem any future recurrence of such scam.

REFERENCES 1. www.dsebd.org 2. www.secbd.org 3.