How much have fall restrictions helped investors?

The question regarding the effectiveness of unconventional fall restrictions in the stock market is being voiced louder as many investors are finding the system to cause more harm than offering protection.

This rings true especially in regards to the withdrawal of the floor price from 168 scrips and imposing an extremely narrow lower limit to fall in a day.

The Bangladesh Securities and Exchange Commission (BSEC) withdrew the floor from 168 of the 400 scrips, which represented a small portion of total market capitalisation.

To avert a free fall, the regulator imposed another controversial restriction in the daily limit for fall – maximum 1% a day, which is usually up to 10% a day.

Investors who were holding the declining scrips are now questioning how much the downside restriction helped them, as a large number of the scrips barely found bidders.

A study of the stocks revealed that some have fallen by 1% almost every day since the floor was withdrawn and their market value eroded around one-third over the last two months.

For instance, Rahim Textile, Shyampur Sugar, Usmania Glass Sheet Factory, Imam Button, Sonargaon Textile, Meghna Insurance, Legacy Footwear, Intech Ltd, Meghna Condensed Milk and Meghna PET fell the most – over 30% – from the floor.

"I have lost in three days what I would have normally lost in two months," Maksud Ur Rahman, a middle aged retail investor, told this reporter at a Motijheel trading floor on Thursday.

The restriction proved worse for him as two of his portfolio stocks never found a bidder since the floor was withdrawn.

"I could not sell the two falling stocks only because of the 1% bottom circuit and my capital is eroding by 1% every day," he said, adding, "If there had been no such restriction, I could have sold the stocks much earlier, before it was too late."

Ashraf, another retail investor, was regretting his previous sense of relief when the regulator imposed the fall restriction.

Most of his portfolio stocks were stuck on the floor, some were inching down stubbornly over weeks, and only two managed to go above floor after some declines.

"The worst suffering is, I feel handicapped while in need to come out of a declining stock because of the worthless restriction," he said in frustration.

The momentum trader cuts his loss in any trade before it surpasses 10% and two of his held stocks — Rahim Textile and Shyampur Sugar – already fell by more than 30% from the floor.

Another stock investor seeking anonymity said he bought Saiham Textile shares in a margin account in August seeing a decent dividend yield from the stock trading much lower than its net asset value. The stock stuck on the floor in the middle of September, but he was not worried as the regulator assured investors of not withdrawing the protection before significant improvement in the market situation.

Since the floor was withdrawn, the share fell by more than 26% without giving the investor any exit opportunity.

Now he is sleepless due to the risk of margin calls.

"I would cut the losses sooner if there had been spontaneous bidders," he regrets.

Of the 168 scrips under the 1% lower limit restriction, one mutual fund has been delisted after tenure expiration as a closed-end fund.

As of Thursday, 103 were below the floor price level with 69 falling by 10%-33% from the floor.

Thirty-three, trading below Tk10, were stuck flat as their prices need to fall by more than 1% to reach the next lower tick while the DSE does not allow prices to change by less than Tk0.1.

A total of 29 scrips were trading higher than the floor prices despite the floor removal.

During the closing bell on Thursday, 151 of the 167 under 1% restriction had no bidder, while of the 232 still having the floor price restriction, 181 had no bidder.

Of the 399 of the DSE shares, mutual funds and corporate bonds, only 67 had active bidders above floor or the bottom circuit.

The Bangladesh capital market has been treated as a special case by Morgan Stanley Capital International since 6 February as the global index provider conveyed the market liquidity problem here that deprives investors of exit opportunities.

BSEC imposed floor prices at the end of July last year so that stock prices cannot fall regardless of their fundamentals.