The DSE letter to brokers that created panic in the stock market

Following lax years, the Bangladesh Securities and Exchange Commission (BSEC) has once again imposed a ban on the purchase of stocks by brokers before a client's money is deposited into the broker's bank account.

Knowing the regulatory environment evolving over the last one week, investors drew parallels of the development with a similar circular on 6 December 2010 when the notorious market crash kicked off, and they desperately sold off stocks on Monday that pushed the broad indices down 1.8%.

In December 2010, though the BSEC revoked its circular in two days, it did not help the market avert the crash and the stubborn, longstanding bear market.

Upon the regulator's instruction on 2 October this year, the Dhaka Stock Exchange (DSE) on Tuesday, wrote to all its brokers not to allow any client buy securities before a client's money is deposited, confirmed DSE Acting Managing Director M Shaifur Rahman Mazumdar.

The instruction had immediate effect on Wednesday.

Creating purchasing power against a cheque from a client is a good faith practice in the brokerage industry, that the cheque will be honoured in one or two days, despite the fact that letting anyone buy securities without money in their accounts was and still is prohibited in securities law, he said.

A senior BSEC official told The Business Standard, "Inspection teams in the last few months found deficits in consolidated customer accounts of around 36 brokerage firms. Most blamed a few of their clients who bought shares against cheques that were ultimately dishonoured."

To ensure there are no loopholes in brokerage firm accounts, the BSEC went strict to stop the practice that was also creating some false purchasing power every day, mostly in favour of some brokerage clients who were in connivance with the broker concerned.

Some abusers repeatedly issue cheques to their broker, buy trendy stocks and their cheques are never honoured.  

A stockbroker, seeking anonymity said, having knowledge of the regulatory developments, abusers go for instant and massive selloffs to adjust their dues to brokers, and that was the main reason behind the recent sharp selloff of trendy stocks, where false purchasing power tends to be used.

The Chittagong Stock Exchange (CSE) also received the BSEC instruction to ban the practice within its member brokerage firms, and the bourse is going to soon issue a letter to the same effect, said its Acting Managing Director Md Ghulam Faruque.

Average investors and stockbrokers, who do not know how much of the daily stock transactions involve false purchasing power, are panicked about the consequences of the ban.

DSE Brokers' Association (DBA) of Bangladesh, President Richard D Rozario, is worried for another reason.

"A broker-client relationship is deep enough to let one buy before a cheque is encashed today or tomorrow," he said.

"In good faith, brokers also give a helping hand to a tested client in exceptional cases of a bounced cheque. But we do not have confidence in cheques given by an untested client or those who have previously created trouble for their broker."

Accepting the allegations of abuse of lax enforcement by a few brokers and investors, the brokerage community leader suggested the regulator should go tough on willful abusers instead of making the life of all brokers tougher.

BSEC Chairman, Professor Shibli Rubayat Ul Islam, told TBS, "The securities law clause was there for the protection of investors and some complaints of abusing the relaxation pushed the stock exchange to be strict in monitoring the everyday practices of brokerage firms."

He does not believe the compliance has any huge cost, as perceived by some market people, that some movers and shakers of the market might have been depending on the fake purchasing power created through empty bank cheques.

"The number of abusers is always very small compared to their compliant counterparts, and the majority should not fear," he said.

A massive stock market selloff on Monday, steadied on Tuesday and advanced on Wednesday, as bargain hunters placed more buy orders to bag some stocks at lower prices.

The DSEX closed 0.8% higher at 6,500 points on Wednesday.

Turnover at the DSE slightly declined to Tk994 crore on Wednesday from Tk1,010 crore in the previous session.