Stock market suffers from wrong treatment

If the stock market were a person, it would have been declared critically ill or dead by the doctors. Much like a dead person, it has stopped reacting to external stimuli, and is rapidly losing its body mass in the form of the market index which has dipped to the lowest point in a decade. The current condition of the stock market, like the death of a real person, has resulted in a sense of heartbreak, loss, and despair in people who wanted it to do well.

What caused this unfortunate demise? The answer, simply put, indicates to wrong treatment by the doctors - in this case, the regulators. The symptoms of the issues faced by the stock market were clear ever since the market crashes of 1999 and 2011. But the regulators ignored the real issues such as the listing of low-quality companies, weak law enforcement, and widespread manipulation of the market by powerful players - phenomena which are just as prevalent today. Probe committee had identified the problems immediately after the crashes, but recommendations made in the reports were largely ignored. 

With the main reasons for past market crashes unaddressed, the government and regulators have taken several steps which triggered a widespread lack of confidence among foreign investors. For instance, on October 2, 2018, the Bangladesh Securities and Exchange Commission (BSEC) issued an order generally allowing listed Closed-end Mutual Funds, having fixed tenures, to extend their tenures for another 10 years (the "BSEC Order"). 

The BSEC Order also states that if any listed fund is not desirous of extending its tenure, the option of its liquidation shall also continue to be in existence, in which case the fund can distribute the proceeds to unit-holders upon expiry of its existing tenure. 

Despite the seemingly innocuous terms of BSEC's order, greedy and unscrupulous Asset Managers used the BSEC's order to circumvent legal requirements to obtain the consent of the unit-holders for extension of the tenure of the funds and directly made announcements extending the tenure of the funds. 

The unit-holders made repeated intimations to BSEC and other regulators regarding these transgressions by the Asset Managers but to no avail. As a result, the tenures of several funds were extended illegally by the Asset Managers without the consent of the unit-holders. One of the foreign investors challenged the validity of an extension before the High Court Division. The Appellate Division has since ordered expedited hearing of the matter by the High Court Division. 

Another widely publicized step which affected the stock market was Bangladesh Telecommunication Regulatory Commissions' (BTRC) claim made on Grameenphone. This claim has prompted the overall market index to take a turn for the worse due to the size of Grameenphone's stock. 

External economic factors also affected the stock markets- the liquidity crisis in banks, a by-product of soaring non-performing loans in the banking sector, poor government revenue collection and increased government borrowing, have further exacerbated the crisis in the stock markets. These, coupled with other factors such as global economic slowdown, a downward trend in exports and devaluation of Taka (Bangladeshi currency unit) has caused a major downturn in the stock prices. 

To make matter worse, there have been many news reports of tussles between the Dhaka Stock Exchange and the BSEC about many issues including regarding financial viability of the companies which are being permitted to list in the stock-exchanges. Anti-corruption Commission has started an inquiry against BSEC's chairman who, for some mysterious reason, continues to hold his position. 

The regulators and the government were rather lackluster in their responses to the burgeoning crisis. Much like their earlier responses to non-performing loans in the banking sector, the government's knee-jerk reaction has been to address the liquidity crisis in the market by forming a Tk 10,000 crore fund which would be injected into the ailing market as loans to the banks for six months at 6 percent interest. One can only wonder why the government is ever eager to adopt spendthrift policies using public funds in response to any financial crisis which has been caused by weak enforcement of the law by increasingly failing institutions. 

Unsurprisingly, Bangladesh Bank's stimulus package for the stock market has not been availed by banks who have mostly passed on the offer. This indicates that the stimuli package does not address the real issues faced by the stock markets. The main reasons for stock market crashes have been weak regulatory framework, market manipulation, arbitrary policy changes and the resulting lack of confidence of the foreign investors. None of these have been addressed by the regulators. 

Government and regulators must also remain mindful of promoting regulatory and legal certainty by framing long-term policies. Making outlandish demands based on audit dating as back as a decade and arbitrary trapping of foreign investors' capital for a term beyond what was represented to them by the prospectus, trust instruments, and by the law creates uncertainty and panic among investors. These whimsical steps cannot conceivably serve the long-term interest of the market. 

Regulators would be too optimistic to presume that news of arbitrary policy changes would remain confined to the affected foreign investors only. Foreign investors who make portfolio investments in emerging markets are a closely-knit community where news of arbitrary steps spread quickly. BSEC should carefully assess the next steps regarding these sensitive issues.

What have the regulators and the government done to address these issues? Unfortunately, not much. Apart from some pre-conceived general statements from the chairman of the BSEC, not much was said regarding the crisis or its causes. The only positive development is that the prime minister has taken notice of the dire situation in the market and has held a meeting with all the regulators last week. 

The meeting has concluded that various short and long-term steps would be taken to address the issues faced by the stock market.  In order to avoid the fate suffered previous attempts at reform of the system which have ran out of steam, it would be prudent to hold periodic follow-up meetings to check on progress of the various measures addressing the real problems faced by the stock market. 

Some immediate steps could be taken to address the issues and restore investor confidence. Leadership changes in both BSEC and DSE should be considered to include individuals who have unblemished record of promoting good governance. Political interference should be stopped at all levels in important regulators like the BSEC, Bangladesh Bank and DSE. The BSEC and DSE should allow the listing of companies with better fundamentals so that investors have option to invest in companies which have a long-term prospect of success. Government and regulators should formulate long-term laws and ensure strict enforcement of them on the market players even if there is a small downturn in the market in short-term. 

Consistent long-term law and policies promote certainty and bolster the confidence in all investors including the foreign players who would like to have the protection of the law from arbitrary transgressions as in the case of the BSEC Order. Until these steps are taken, no amount of spendthrift measures using public funds will bring the investors back to the market.

Ahmed Zaker Chowdhury is a lawyer specialising in commercial law, corporate transactions and Mergers and Acquisition.