Why Dhaka bourse yet to get eligibility in global index

Infographics: TBS

FTSE Russell, a subsidiary of the London Stock Exchange Group, has maintained the rating for the Bangladesh capital market as "Not Met" in the criterion of efficient trading mechanisms as the bourse has yet to fully lift the floor price restrictions.

FTSE Russell is a leading global provider of index and benchmark solutions, spanning diverse asset classes and investment objectives.

In a report titled "FTSE Equity Country Classification Interim Announcement March 2024," published on 27 March, FTSE Russell stated that on 28 February 2023, it had announced the freezing of index changes for Bangladesh constituents of FTSE Russell equity indices. The decision was due to the ongoing imposition of a "floor price" on the Dhaka Stock Exchange, which hampers the ability of international institutional investors to replicate benchmark changes, it said.

Consequently, the "Efficient Trading Mechanism" criterion for Bangladesh has been downgraded from "Restricted" to a "Not Met" rating.

FTSE Russell has noted that following the recent announcements by the Bangladesh Securities and Exchange Commission (BSEC) to lift the floor price restriction on all but six listed securities, it continues to engage with the BSEC to confirm when the final restrictions will be lifted.

The managing director of a brokerage firm seeking anonymity said foreign institutional investors are taking investment decisions following the FTSE Russell Index. But the FTSE removed the Bangladesh capital market from its index, which discouraged the foreign investors to invest in the country.

Foreign investment in the country's stock market almost halved over the last five years due to a confidence crisis, currency depreciation, and the introduction of the floor price, he added.

The regulator, on 28 July 2022, imposed the floor price restriction when the benchmark index of the Dhaka bourse, DSEX, was at 6,000 mark and investors were intimidated by the rising inflation, interest rates and declining corporate earnings.

Due to the imposition of floor price, DSE turnover squeezed by 40% as large cap scrips were mostly out of trading and the major index was almost flat in 2023.

On January 18, 2024, the BSEC lifted the floor price on all but 35 stocks in the first phase. Following that, on January 22, the securities regulator removed the floor price for an additional 23 stocks after observing a tolerable negative impact from the first-stage floor withdrawals. Subsequently, it removed the floor from 6 additional stocks. As of now, the floor is active on six stocks.

During the 19 January–4 April period, DSEX nosedived by 9%, or 540 points, to 5,796, resulting in Tk1 lakh crore being wiped out of the country's premier bourse in value. Currently, the market capitalisation stands at Tk6.77 lakh crore.

EBL Securities said the market extended its freefall throughout the month as panic-driven selling pressure continued to dominate the market.

The relentless bearish spell has been prolonged for continuous sessions as wary investors kept on their selling spree to protect their funds from the ailing market, it added.

Meanwhile, market participation also remained stagnant since investors have been shying away from taking positions in equities amidst an uncertain market outlook, as evident from the average daily turnover dwindling by 52.9% in March compared to the previous month, the report said.

According to the Central Depository Bangladesh Limited (CDBL), the number of BO accounts with zero share balance on 18 January was 2.98 lakh. The figure rose to 3.53 lakh at the end of the trading session on 4 April.

When the total number of BO accounts in CDBL is 17.87 lakh, 20% of the accounts are inactive.

Due to massive selloffs, the number of BO accounts with a share balance fell by 43,344 to 13.58 lakh.

DSE underperforms compared to regional peers

DSEX, the key index of the Dhaka Stock Exchange (DSE), experienced a significant drop of 6.79% in March, marking the worst performance among its peers. This decline can be attributed to the enduring pessimism prevailing on the trading floor, characterised by subdued market sentiment and escalating tensions regarding the market outlook.

Market capitalisation to GDP ratio also declined to 13.7% at the end of March, down from 16% in March last year.

During the month, Sri Lanka's capital market's main index returned 7.04%, which was the highest return among the countries. Pakistan's capital market's index return was 2.71% during the period while it was 0.47% in China and 0.21% negative in India.

The index returns of Vietnam's main bourse were 2.35%, followed by Indonesia 0.68% negative and Philippines 0.23% negative, according to the monthly report of EBL Securities Limited.

Investor confidence remains subdued

Despite several policy changes, investor confidence in the country's capital market remains subdued, as reported by the World Bank in its "Bangladesh Development Update" released on 2 April.

In its report, the World Bank mentioned that the BSEC withdrew floor prices on equities on 18 January, a move deemed to have alleviated a major market distortion.

Through the floor price, which was imposed in July 2022 to prevent the fall of the stock market, the regulatory body artificially kept the market within a limit for more than one and a half years, said the global lender. But after the floor price restrictions were lifted, the market could no longer be tied, it said.