Once there was a stock market

Maksud Ahmed (not his real name), a 55-year-old car dealer, is an MBA. He took to the stock market when a team of sophisticated investment managers convinced him to invest in stocks six years ago.

He slopped a few crore taka onto the market and that money has now lost half its worth as prices collapsed.

That account is for until the day the stock market closed for an indefinite period after March 25 this year because of the novel coronavirus and the ensuing shutdown.

Since then, Maksud has simply forgotten about the market as he is engaged in other businesses – real things that can be seen and touched, such as real estate and apparel manufacturing.

"I hate the stock market now. Not because of my losses, it is because of the way investors are treated," he said when he was reminded about his stock adventures.

Hundreds and thousands of investors like Maksud have also forgotten that once there were bourses in Dhaka and Chattogram as the markets closed unprecedentedly for an indefinite period. 

No other market has taken the course of these two exchanges. Not even the stock exchange in New York where Covid-19 is taking its toll in the cruelest manner.

On March 23, the iconic New York Stock Exchange trading floors closed after two of its employees had tested positive for Covid-19. But electronic trading continued. By then, New York had already witnessed over 150 deaths from the coronavirus.

Indian markets never closed. Sri Lanka and Jordan had a pause but then restarted after seven weeks.

But, here in Bangladesh, no one knows when the markets will reopen.

While countries like The Philippines, Sri Lanka and Jordan had halted trading in March to avoid a free fall, the BSEC have come up with a floor pricing mechanism which locked the downside price movement and eroded liquidity – less buy and sell.

Unlike the other markets, the Bangladesh capital market is yet to achieve the meaningful automation benchmarks. Accessibility to those could have allowed the two exchanges to run seamlessly during the lockdown.

In one of its recent public statements, European investor firm Aberdeen has criticised the Bangladesh regulators for controlling prices, and not reopening the markets, which is a must for the investors interested to liquidate.

Viewed from another perspective, Covid-19 has offered the Dhaka and Chittagong bourses an opportunity to save their face. 

Following a more than 25 percent fall in the last two years, DSEX – the broad-based index at the capital city bourse – entered a free fall phase as soon as the Covid-19 pandemic had broken out.

The coronavirus shutdown, therefore, came as a kind of relief to everyone in the stock business because the market was already on a tailspin for quite some time and nobody knew how to salvage it without addressing the deeper malaise.

Even Finance Minister AHM Mustafa Kamal threw up his hands and declared at one point, "I don't know why it happens (the continuous slide)."

But his helplessness may hold the answer to his own question. One only  has to look for it.

The question why Bangladesh failed to continue the stock market trading during the pandemic, or resume trading before others, has two reasons. First, the level of automation of the entire trading ecosystem is yet to be adequate to offer work and trade from home.

And, secondly, but more importantly, the government has not included the capital market as an essential service like banking that could have run amid the shutdown.

Amid criticisms from home and abroad, the Dhaka Stock Exchange (DSE) had applied to the Bangladesh Securities and Exchange Commission (BSEC) seeking waivers from some rules to resume trading in the second week of this month. The securities regulator, however, was unable to take any decision because of a quorum crisis as it was running with the majority of its top posts vacant.

The BSEC, therefore, passed the matter on to the finance ministry for its opinion. But, are you ready for this?The finance ministry was not sure if the market was essential one or not so it sought opinion from the public administration ministry.

The regulator has got its top officials now, but they have to wait for the Eid vacation to be over to come to a decision.  

From shadow to limelight to shadow again

Stock market was mostly unfamiliar to most citizens for quite a long time although the Dhaka Stock Exchange came into being in the mid-1950s. It was a common perception among the people that those investing in stocks were either high-level investors with some esoteric knowledge about the economy and companies or people who had nothing better to do.

The situation started to change in the mid 1990s. By 1996, almost everybody knew about the market; they knew which shares to buy and which to sell. 

Previously, there was one bourse – the DSE. And then, the Chattogram Stock Exchange was established.

Then the inevitable happened – prices soared beyond any logical imagination, the classic story of pump and dump played out here as well and then the bubble popped.

Thousands, probably hundreds of thousands of investors were left standing holding scrips that were not worth the paper it was printed on. Only a handful of people who had played the market well went to the bank laughing all the way.

An investigation was launched to probe the scam and a report was prepared. Suspected manipulators were named and cases went to the court. But that was the end of it. Finally, the cases were dismissed because no one was interested to really pursue the legal process.

However, investors forgot the pains in less than a decade and returned to the street.

The 2007-2010 bull market became another story of regulatory failure, especially from the money market perspective.

The central bank knowingly allowed a number of banks to overinvest in stocks and look for benefits from inflated stock prices.

The party was over after the banks' hard landing at the end of 2010.

The market crashed from an abnormally record height; enquiry and investigation went on; market manipulators, company insiders, some regulatory officials were found guilty; and massive reforms were suggested.  

The securities regulator itself underwent reforms and the new regulator came up with hundreds of regulatory changes.

But nothing worked, literally. Neither those reforms revived the investors' confidence, nor did the market offer sufficient investable securities.

What is more, the market turned into a horrible example of a dumping station of too many would-be junk securities. Public issues had never faced so much controversy before.

Here, most stable investments, like state-owned utility companies, are also victims of unnecessary policy disruption that punishes investors, Maksud says citing his bitter experience with Titas Gas Transmission and Distribution Company shares.

A decade ago, the state-run company had attracted stable investments in the secondary market because of its fixed-margin business model and stable dividends. But the energy regulator, a few years ago, surprisingly cut the company's profit margin. Passionate investors like Maksud, including local and foreign institutional funds, saw the move as an injustice to them.

"It is merely an example of how investors are treated unfairly. We can name Grameenphone, closed-ended mutual funds and many more," said the frustrated high net worth individual.

Grameenphone, the largest company in the market in terms of market capitalisation, has been suddenly pushed into a series of wars against its primary regulator – Bangladesh Telecom Regulatory Commission (BTRC). Decades-old audit claims of more than Tk12,000 crore, competition regulation – everything has taken a toll on the company's shareholders.    

Meanwhile, mutual fund investors even sued the securities regulator because of its complete U-turn regarding mutual fund rules that had left investors with massive losses while allegedly benefitting some selective asset managers.  

Maksud also hates the reality of how the majority of issuers act against their public shareholders to benefit company insiders but the regulators cannot or would not do anything to stop this.

Despite the fact that market regulators are better equipped with automated surveillance software now, investors are not assured that insider and circular trading or manipulative disclosures would not hurt them.

Think tanks like the Centre for Policy Dialogue (CPD) have long been pointing at a lack of good governance as the major problem in the stock market.

Investors fizzle out

Maksud's brokerage manager, who is a CFA Charterholder, talked to The Business Standard on condition of anonymity as he was not allowed to talk about clients.

The investment expert with his global professional charter had been very creative to make wealthy Bangladeshis turn to the capital market after the 2010-11 crash.

He collected dozens of directories of elite clubs and business associations to study and knock potential clients like Maksud.

Some had been responding until 2017-18. But now, no one appears interested as Maksud's bitter experience has become a bugbear to the community.

"We feel too uncomfortable before them when they question our strategies that keep failing to please them in terms of return on investment. We cannot make them rely on our global standard education and skills." 

"A decade of experience has now pushed me to feel that all government offices may turn into black swan agents any day, while in structured markets, events like Covid-19 or a sudden war or natural disasters are the sources of unmanageable uncertainty," he says.

On the other hand, Maksud is determined to leave the market. "I know if I can hold tight, I would get back my capital once in my life, perhaps with an irrational profit added to it. But I told my broker to call me on the first day of break-even point. I would dump the pains," he says.

Like Maksud, the country's institutional investors are also found reluctant to get burnt in the stock market. In recent months, the Bangladesh Bank offered easy money to the commercial banks for investing in stocks. Yet, they needed a series of requests from policymakers to opt in.   

A bottomless basket?

Henry Kissinger made a mistake when he termed Bangladesh a bottomless basket soon after its independence.

But had he made this remark about the country's stock market, history would have treated him differently.

Dhaka got its stock exchange company in 1954, not later than Seoul, Kuala Lumpur or Bangkok.

Except for in the five years of post-independence socialism, the stock market has always been active. However, it failed to keep pace with the country's economy, let alone the peer stock markets.

Bangladesh as one of the fastest growing economies, with the help of a revolution in agricultural yield and the edge from cheap-labour at home and abroad, has already ranked 39th in terms of nominal GDP and 29th based on GDP by purchasing power parity.

On the other hand, its stock market is left far behind with a market capitalisation equal to 10-20 percent of the nominal GDP, while it is nearly 90 percent of GDP in South Korea, and over 100 percent in Thailand and Malaysia.

The Bangladesh securities market is still struggling with only equities and no initiative to build an effective bond market, let alone derivatives, has worked here.

Only four companies listed with the two bourses in the country are found to make the MSCI index for Bangladeshi shares, while South Korea has 110, and both Malaysia and Thailand see at least 40 of their listed companies in the watch list of international investors.

Such indices are followed by international investors and help constituent companies attract funds.

Stock market expert Professor Abu Ahmed believes the biggest weak point of the Bangladesh capital market is companies that are good for investors tend to avoid it, while poor-performing or non-compliant businesses keep queuing for getting enlisted.

The economics professor of Dhaka University is frustrated at the fact that no multinational or industry leader filed for an initial public offering in a decade.

The market is in a vicious cycle here. Scarcity of investable listed companies alongside a lack of alternative asset classes did not let the market secure an effective pool of institutional investors, he observes.

On the other hand, skill or integrity gap within investment institutions have been adding to asset erosion over years, he added.

Lack of coordination is the evil

Mostaque Ahmed Sadeque, former president of the DSE Brokers Association and managing director of brokerage firm Investment Promotion Services Limited, believes the biggest problem for the stock market is a lack of coordination among different regulators and government offices.

"No government office, including the Bangladesh Bank and the National Board of Revenue, seems to care about the consequences of their action or inaction on the stock market," he continues "Bangladesh must ensure a congenial environment for investors so that they can have a pleasant experience investing in the stock market. At least, they must be reassured that things would be handled with care."

The central banks' initial inaction created an extreme bubble in 2010 and its hard lending triggered the bust then. Later, extremely tight policies adopted by the same regulator to keep banks away from the stock market proved detrimental to the market.

Over the last one decade, letters from neither market stakeholders nor the finance minister could persuade the Bangladesh Bank to change its stance.

Sadeque mentions two latest moves of the central bank as a reflection of the regulator's anti-shareholder stance. One of the moves is the order for banks not to charge interests for two months of shutdown though their deposit costs are not waived. And the other one is the capping and deferral of dividends.

"I am not debating the merit of pandemic time steps. I am just afraid that they might have forgotten the capital market and its investors," said the brokerage veteran.

Investment bankers have been requesting for a tax environment where no entity can hide sales and profits. The opportunity to dodge taxes is a big reason why companies prefer remaining private, while listed companies need to report sales and profits more precisely alongside too many regulations and scrutinies.  

In many industries, a few listed companies together are paying way more taxes than their larger non-listed peer group.

Listing of profitable state-owned companies is another example of a lack of coordinated efforts. A decade has passed, but the finance ministry is still only pledging to float some.

Stamp duty on trust deed registration for bonds has been rationalised this year after a prolonged period of discussion, which should have been done way before.

Investors and capital market stakeholders are open to thank the other offices beyond the capital market if they give the market a hand.