FMI Assignment

8/3/2019 FMI Assignment

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Share Market Scam: Status, Causes & Recommendations Page | 1

1.1 Statement of the problem

The capital market is the engine of growth for an economy. It is market for securities, wherecompanies and Governments can raise long-term funds. The capital market includes the stockmarket and the bond market. Bangladesh has a capital market which is one of the smallest inAsia but the third largest in the south Asia region. At present Bangladesh have two stockexchanges:

1. Dhaka Stock Exchange.(Number of Registered Trading Members/Brokers is 195)2. Chittagong Stock Exchange.(Number of Registered Trading Members/Brokers is 124)

It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC), since;it implements rules and regulations, monitors their implications to operate and develop thecapital market and motivates the enterprises to come in the capital market. Capital market is thegroup of interrelated markets, in which capital in financial form is, lend or borrowed for mediumand long term and, in cases such as equities, for unspecified periods. It performs a critical role asan intermediary between savers and companies seeking additional financing for business

expansion as far as playing a vital role in the countrys development. At previous session inBangladesh the capital market was passing excellent time but recently it is facing a crisismoment for a long time. There are some reasons behind this scenario.

1.2 Objective of the study

The following objectives are behind this study-

To classify the recent crisis of the stock market and find out causes. To identify the scenario of the stock market at encumber time. To identify and summaries the functions of Dhaka Stock Exchange, Merchant Banks,

Brokerage Houses at the up time and down time in the stock market.

Identify the loss from the capital market at scam faced by the small investor. Formulate recommendations to overcome the capital market crisis.

1.3 Methodology

This report is focus on the reasons of recent scam in the capital market. To find out this scam andthe solution of it, the devote methods are-

Review the Stock Market Probe Report published by the Finance Ministry At March 31, 2011. At May 01, 2011

Review the reports of the Daily Newspapers View the web sites of Security and Exchange Commission (SEC), Dhaka Stock

Exchange (DSE) and analysis the necessary information.


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1.4 Scope and Limitations of the Study

Everyday different reports are published on news papers and websites on recent scam along withview of professional personnel. The Stock Scam Probe also helps to collect recent informationregarding capital market is the scope of this study.

Though the probe committee's report on capital market scam also did not make any detailedanalysis about how the small investors were affected after they had invested their money in theinitial public offerings (IPOs), as it was assigned under its ToR, according to the ministry.

The limitations of this study are limited time had given for writing the report and sometime

different statistics had found on similar issues, which were crucial to analyze the accurate data.

The report has not made any comparison of the rates of return on profits arising out ofinvestment in savings instruments and banks and gains on long-term investment in the capitalmarket in 2010. This study only helps to understand more on the capital market of Bangladesh.


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2.1 Capital Market of Bangladesh

Capital market is a mechanism to flow fund from the hands of small savers (individuals andinstitutions) at low costs to those entrepreneurs who do need fund to start business or to business.Capital market came to South Asia in 1890.Bangladesh capital market consists of both debt and equity, where the private and governmentbusiness enterprises can raise long term funds. Capital market may be classified as primarymarket and secondary market.In primary market the newly issued stock and bonds are sold to investors and secondary marketthe existing shares are sold and bought among investors or traders. The security and exchangecommission is regulator of this market and oversee the capital markets in their designatedjurisdictions to ensure that investors are protected against fraud, among other duties.

The capital market players:

a) Investors,b) PLCs,

c) Stock Exchanges,d) Brokers and Dealers,e) Merchant banks,f) Securities and Exchange Commission,g) CDBL.

2.2 Security and Exchange Commission

The Securities and Exchange Commission (SEC) was established on 8th June, 1993 under theSecurities and Exchange Commission Act, 1993. The Chairman and Members of theCommission are appointed by the government and have overall responsibility to administer

securities legislation. The Commission is a statutory body and attached to the Ministry ofFinance.

Mission of the SEC:

Protect the interests of securities investors. Develop and maintain fair, transparent and efficient securities markets. Ensure proper issuance of securities and compliance with securities laws.The Commission's main functions are:

Regulating the business of the Stock Exchanges or any other securities market. Registering and regulating the business of stock-brokers, sub-brokers, share transfer agents,

merchant bankers and managers of issues, trustee of trust deeds, registrar of an issue,underwriters, portfolio managers, investment advisers and other intermediaries in thesecurities market

Registering, monitoring and regulating of collective investment scheme including all formsofmutual funds.

Monitoring and regulating all authorized self regulatory organizations in the securitiesmarket.
http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/Securities_markethttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Securities_markethttp://en.wikipedia.org/wiki/Financial_regulationhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission


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Prohibiting fraudulent and unfair trade practices relating to securities trading in any securitiesmarket.

Promoting investors education and providing training for intermediaries of the securitiesmarket.

Prohibiting insider trading in securities.

Regulating the substantial acquisition of shares and take-over of companies. Undertaking investigation and inspection, inquiries and audit of any issuer or dealer ofsecurities, the Stock Exchanges and intermediaries and any self regulatory organization inthe securities market.

Conducting research and publishing information.2.3 Dhaka Stock Exchange

Dhaka Stock Exchange (DSE) is the major and earliest stock exchange of Bangladesh, which issituated at the main area of the Dhaka city. Founded on 28th April 1954, DSE formerly known asEast Pakistan Stock Exchange Ltd. Which began its formal trading in 1956 and on 23rd June

1962 it was called as East Pakistan Stock Exchange. On 13th May 1964, its name was changedagain and it became known as Dacca Stock Exchange Ltd. In 1971- post the Liberation War, thetrading was stopped temporarily for five years which started again in 1976. DSE All Share PriceIndex was begun on 16th September 1986 and on 1st November 1993, accordant with IFC theformula of calculating DSE All Share Price Index was changed. On 10th August 1998, theautomatic trading was launched in DSE. On 1st January 2001, DSE 20 Index and on 24thJanuary 2004 Central Depository System were initiated.The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activitiesare regulated by its Articles of Association rules & regulations and bye-laws along with theSecurities and Exchange Ordinance, 1969, Companies Act 1994 & Securities & ExchangeCommission Act, 1993. As of 18 August 2010, the Dhaka Stock Exchange had over 750 listedcompanies with a combined market capitalization of $50.28 billion.

Nature of Dhaka Stock Exchange

There are four markets in the system -1. Public Market- Only trading of market lot share is done here through automatic

matching.2. Spot Market-Spot transactions are done here through automatic matching which must

be settled within 24 hours.3. Block Market- A place where bulk quantities of shares are traded through pick and fill

basis.4. Odd Lot Market- Odd lot scripts are traded here based on picks and fill basis.

Policies of DSE

1. DSE can introduce automate monitoring systems that may control price manipulation,malpractices and inside trading.

2. It can make sure all the listed companies publish their annual reports with actual andproper information that can ensure the interest of the investors.
http://en.wikipedia.org/wiki/Securities_markethttp://en.wikipedia.org/wiki/Securities_markethttp://en.wikipedia.org/wiki/Self-regulatory_organizationhttp://en.wikipedia.org/wiki/Self-regulatory_organizationhttp://en.wikipedia.org/wiki/Securities_markethttp://en.wikipedia.org/wiki/Securities_market


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3. To force the listed companies to declare and pay regular dividends through conductingAnnual General Meeting.

4. To make arrangement to set up merchant banks, investment banks and floatation of moremutual funds particularly in the private sectors.

5. More banks, insurance companies and other financial institutions should be encouragedto deal in share business directly6. The management of DSE should be vested with professionals and should not in any waybe linked with the ownership of stock exchange and other firms.

7. To train the investors about fundamentals to deal in share transactions.8. To punish the member brokers for breaching of contract.

Function of DSE

Listing of Companies Providing the screen based automated trading of listed Securities Settlement of trading Granting approval to the transaction Market Administration & Control Market Surveillance Publication of Monthly Review Monitoring the activities of listed companies Investors grievance Cell Investors Protection Fund Announcement of Price sensitive or other information about listed companies through

online.

2.4 Chittagong Stock Exchange:

Chittagong Stock Exchange is a stock exchange located in the port city of Chittagong. It wasestablished in 10th October of 1995 as the second stock exchange of the country. The exchange islocated in the Agrabad commercial area of the city.

2.5 Central Depository Bangladesh Limited

Central Depository Bangladesh Limited (CDBL) was incorporated as a public limited companyon August 2000 to operate and maintain the Central Depository System (CDS) of ElectronicBook Entry, recording and maintaining securities accounts and registering transfer of securities;changing the ownership without any physical movement or endorsement of certificates andexecution of transfer instruments. Securities and Exchange Commission has issued a Certificateto CDBL on December 23, 2003 for starting depository business as a depository.

A depository is like a bank for shares instead of money. Instead of holding shares in the form ofcertificates, investors have accounts in the depository and are able to move securities and settlestock exchange transactions by an electronic update of their accounts.
http://en.wikipedia.org/wiki/Agrabadhttp://en.wikipedia.org/wiki/Agrabad


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2.6 Investment Corporation of Bangladesh

Investment Corporation of Bangladesh has established under the rules and regulation of theInvestment Corporation of Bangladesh Ordinance, 1976. It provides organizational helps to

overcome the capital shortage of companies.

Basic Functions of ICB

Underwriting of initial public offering of shares, right issue of shares and debentures Direct purchase of shares and debentures including Pre-IPO placement and equity

participation Providing lease finance to industrial machinery and other equipments singly or by

forming syndicate Managing investors' Accounts Managing Open End and Closed End Mutual Funds Operating on the Stock Exchanges Providing investment counsel to issuers and investors

Participating in Government divestment Program Participating in and financing of, joint-venture projects Dealing in other matters related to capital market operations Trusty, Custodian, Bank Guarantee, Consumer Credit

2.7 Merchant Banks:

A merchant bank is a financial institution which is primarily engaged in offering financialservices and provides advice to corporations and to wealthy individuals. The term can also beused to describe the private equity activities of banking.In Bangladesh, a merchant bank can perform multiple operations including underwriting, issuemanagement, portfolio management, merger & acquisition etc. The merchant banking activities

were largely fostered by two distinct developments: Merger & acquisition activities andincreased demand for venture capital.

2.8 Broker & Brokerage House

Broker is a person or firm that conducts transactions on behalf of a client. Some brokers onlyconduct transactions while others also offer different types of investment advisory services.Brokers derive their profit from commissions on orders given. That is, they usually collect apercentage of the value of each transaction, though some charge flat fees. Brokers handle twomain types of brokerage accounts: advisory accounts and discretionary accounts. Brokers areonly allowed to conduct transactions on advisory accounts on the specific orders of the account

holder, or under very specific instructions.

The brokerage house is a place where a broker conducts his business. A brokerage house, alsocalled a brokerage firm, is a company licensed to buy and sell stocks or securities. Acting as anintermediary between buyers and sellers, a brokerage house typically employs brokers who carryout the wishes of the firm's clients as they pertain to the trading of stocks. Broker services areusually provided on a commission basis.
http://financial-dictionary.thefreedictionary.com/Transactionshttp://financial-dictionary.thefreedictionary.com/Investment+Advisoryhttp://financial-dictionary.thefreedictionary.com/Profithttp://financial-dictionary.thefreedictionary.com/Commissionshttp://financial-dictionary.thefreedictionary.com/valuehttp://financial-dictionary.thefreedictionary.com/Feeshttp://financial-dictionary.thefreedictionary.com/Brokerage+Accountshttp://financial-dictionary.thefreedictionary.com/Advisory+Accountshttp://financial-dictionary.thefreedictionary.com/Discretionary+Accountshttp://financial-dictionary.thefreedictionary.com/Transactionshttp://financial-dictionary.thefreedictionary.com/Transactionshttp://financial-dictionary.thefreedictionary.com/Discretionary+Accountshttp://financial-dictionary.thefreedictionary.com/Advisory+Accountshttp://financial-dictionary.thefreedictionary.com/Brokerage+Accountshttp://financial-dictionary.thefreedictionary.com/Feeshttp://financial-dictionary.thefreedictionary.com/valuehttp://financial-dictionary.thefreedictionary.com/Commissionshttp://financial-dictionary.thefreedictionary.com/Profithttp://financial-dictionary.thefreedictionary.com/Investment+Advisoryhttp://financial-dictionary.thefreedictionary.com/Transactions


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2.9 BO account

A BO account is that by which one enjoys the benefits of owning a security or property,regardless of whose name the title in. The following steps one has to complete for opening aBeneficiary Owner (BO) account; if already have a bank account, otherwise first open anaccount at a bank-

1. Select a suitable Stockbroker/Brokerage House with whom you would do your business.Make sure that the Stockbroker you are selecting is a registered member of DSE and CSE.

2. Collect a BO account opening form from the respective Brokerage House and fill it up. Youwill need the following documents -

i) Bank CERTIFICATE / National ID Card (or both, depends on the brokerage house)ii) Three Copies of Passport Sized Photos

3. After filling the form out, pay the brokerage house the account opening fee (it ranges fromTk. 600Tk. 1000, depends on the brokerage house).

4. Submit it to them and wait for your account to be opened (from 3 days 1 month, dependson the brokerage house).

2.10 Margin Loan

Margin loan is borrowed money that is used to purchase securities. Buying on margin loan canbe extremely risky because both gains and loss are amplified. That is, while the potential forgreater profit exists, this comes at a heavy risk and the potential for greater losses. Margin alsosubjects the investor to a number of unique risks such as interest payments for use of theborrowed money. The merchant banks are providing margin loan in Bangladesh.

2.11 Issuer

Form share market a long time money exchanging company is called Issue Company. It calledlisted company when it list under SEC for the better exchange in secondary market. An issuer isa corporation, government, agency, or investment trust that sells securities, such as stocks andbonds, to investors. Issuers may sell the securities through an underwriter as part of a publicoffering or as a private placement. At the date of Dec-2010, DSE has 243 and CSE has 201 issuecompanies.

2.12 Issue Manager

The companies which manage IPO at share market on behalf of Issue Company are issuemanager. Generally in Bangladesh Merchant banks act as issue manager. According to SEC, law

1996, any applicant, who only interested as an issue manager, need at least BDT 1 corer ascapital.

2.13 Underwriter

The company or person who committed to buy the unsold issue of IPO is called underwriter. OnSEC underwriter must has 50% of total IPO and has at least BDT 5 crore as capital. The managerand underwriter may be same company.
http://www.investorwords.com/461/benefit.htmlhttp://www.investorwords.com/4446/security.htmlhttp://www.investorwords.com/3900/property.htmlhttp://www.investorwords.com/4992/title.htmlhttp://www.investorwords.com/4992/title.htmlhttp://www.investorwords.com/3900/property.htmlhttp://www.investorwords.com/4446/security.htmlhttp://www.investorwords.com/461/benefit.html


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2.14 Private Placement

Private placement occurs when a company makes an offering of securities not to the public, butdirectly to an individual or a small group of investors. Private placement are generallyconsidered a cost effective way for small business to rise capital without going to public throughan initial public offering (IPO)

2.15 Initial Public Offering

When companies offer shares to the general public for he first time it is known as initial publicoffering. These share buying directly from the company without paying stockholders

commission. Investors simply fill in the subscription from and deposit the form along withsubscription cheque in a branch of the designated banks

2.16 Right Issues

Right shares are issued when companies need to rise additional capital to finance there newexpansion projects or to meet working capital needs. The existing investors have the right tosubscribe to these new shares in proportion to there respective shareholders.

2.17 Stocks Trade Policy

Most stocks are traded on exchange, which are places where buyers and sellers meet and decideon a price. Some exchanges are physical locations where transactions are carried out on a tradingfloor. Two trading floor are located in Bangladesh, DSE which is located in Dhaka, CSE islocated in Chittagong. Chittagong stock exchange is expanded to compose of a network ofcomputers where trades can be made electronically. We should distinguish between the"primary" and "secondary" market. The primary market is the first phase of stock wheresecurities created before trading at the floor which is called IPO. In the secondary market, the

investor trades previously issued securities without the involvement of the issuing companies.The secondary market is what people are referring to when they talk about "the stock market."

2.18 Prices Change Causes

Stock prices change everyday by market forces. By this we mean that share prices changebecause of supply and demand. Any single time, if more people want to buy a stock (demand)than sell it (supply), then the price moves up. Conversely, if more people want to sell a stockthan buy it, which is a greater supply than demand, then the price falls.The company's value is different than its stock price. The value of a company is its marketcapitalization, which is the stock price multiplied by the number of shares outstanding. For

example, a company that trades at $100 per share and has 1,000,000 shares outstanding ($100 x1,000,000 = $100,000,000) has a lesser value than a company that trades at $50 but has5,000,000 shares outstanding ($50 x 5,000,000 = $250,000,000). To further complicate things,the price of a stock doesn't only reflect a company's current value; it also reflects the growth thatinvestors expect in the future.


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3. Recent Status of Share Market Scam-

At previous time it was very encouraging to see that the capital market of Bangladesh wasgrowing and the market capital reaching as high as $54 billion, with a daily turnover of around$300 million. However, the story doesn't end here. As the market grows it compromise on themoral side with random regulatory failures. Now the Capital market of Bangladesh is passing acrucial moment from few days. The recent scam has given an alarming signal not only for thestock market but also to the countrys economy. A large number of investors have faced lossfrom the capital market from the recent scam. In this report the scam status has highlightedbelow-

Retail investors lost at least Tk 20,000 crore to some dishonest traders, who were in a deepcollusion with stock market regulators.

The SEC, the ICB, military officers, government high officials and bourses are all connectedwith placement business.

The share market crash led retail investors to angry street demonstrations. Referring to market manipulation, he said the same 19 people used two different addresses to

purchase shares of Tk 19 crore through private placement.

Some businessmen might have taken undue advantages of their connection with the people inpower.

Issuer companies, issue managers, asset valuation agencies, audit firms, dealers, brokeragefirms and many others are involved in myriad illegal activities that include direct listing inIPO issuance and pre-IPO activities, revaluation of company assets, fixing of high indicativevalue, manipulation of book-building method and non-transparency in placement.

Merchant bankers are opening investors' accounts on their own. They are also operating onlyone beneficiary account (BO) account for every 5,000 to 10,000 accounts, showing sheernegligence to the laws.The number of Beneficiary Owners (BO) account in the stock marketis about 32 lac.

A number of companies overvalued their assets to influence the market. They include-Company Overvalued by

A 3472 percent

B 626 percent

C 518 percent

D 298 percentE 413 percent

F 296 percent

G 120 percent

Involvement of political-linked influential businessmen and traders in the stock marketdebacle. The SEC will remain ineffective and exposed to manipulations as long as the market


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players are able to influence the regulator. The investigation into the recent bourse debaclefound their roles to be under widespread public suspicion.

A most powerful business man had links in overpricing of shares and over valuation of assetof two renowned companies. He had made a lobbing for a company which was involved inmoney laundering.

Two Companies had taken money from the market by issuing preference shares for only onemonth. The companies fixed up the ratio of convertible shares in such a way that thedirectors can be benefited. Nowhere in the world have the preference shares matured in sucha short time which has been observed in Bangladesh.

Several lac shadow accounts had been used as tools for trickery. This shadow accountsshown as omnibus accounts with merchant banks did not reflect deposits and withdrawalsproperly. There are 31 Merchant Banks are in operation and operate 10000-12000subscribers under an Omnibus account.

8 listed and 26 non-listed companies collected a total of more than BDT 37.79 billionthrough distributing placement shares. Among them, some companies have distributed pre-placement shares equivalent of more than 90 per cent, 60 per cent or 50 per cent of theirpaid-up capital. There were some well-known persons involved in placement business. Insequence, BDT 4.50 billion was collected by distributing the placement shares of sevenmutual funds.

Some companies had set up abnormal price which demanded high premiums. Such as Company A- BDT 240 as premium for each shares of BDT 10 Company B- BDT 175 as premium for each share of BDT 10

An illegal Kerb market has been created for the business placement of shares under theprotection of few dishonest SEC officials. The placement shares changed hands againsttokens only and in that market no existence of electronic or paper shares.

28 companies issued right shares of BDT 26.17 billion, had taken high premiums. The Merchant Banks are facing liquidity crunch. The 14 Merchant Banks switch into

subsidiary and 13 at pipeline. At least, 3.80 percent portfolio is managed by the merchantbanks of the total market capital and constructs 21 percent of total market capital.

The surveillance department of regulatory authority and DSE isnt qualified. They havelimited professional personnel and no financial analysts exist in the stock market.

Eight non-listed companies raised BDT 1,367 crore from many individual and institutionalinvestors through private placement in 2010. But these renowned companies are yet to belisted on the stock exchanges. As a result, the prevailing liquidity crisis in the stock market,as the individuals' and institutional investors' money got stuck in the companies' placement.


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At January 20, 2011; Trading at both the country's bourses resumed at about 1:00 pm inaccordance with the regulator's earlier decision and the main market barometer, the DGEN,lost 600 points within five minutes, a record time in the history of the bourses.

At January 20, 2011; the securities regulator banned six brokerages from share trading for the30 days because of trigger sell within five minutes at the Dhaka Stock Exchange. Theiramount of sale orders in the six brokerages was far higher than the buy orders and placedhuge sale orders at very low prices compared to the buy orders. As a result, the stock marketfaced a huge trade volume in just five minutes into trading.

Securities and Exchange Commission (SEC) was introduced circuit breaker on the capitalmarket index in a bid to prevent unusual fluctuation in the market at January, 2011.

In 2010, The Share prices of a company were 16 times then its face value although thecompany suffered loss in the previous year.

The regulatory authority had not taken any steps when price of Z category shares weregradually increasing. Meanwhile, they closed transaction of a number of companies for fewdays at the end of 2010.

A probe committee was established by the government of Bangladesh for investigation therecent stock market scam at January 25, 2011 and they submitted the final report at April 07,2011. It identify the people and the institutions that withdrew unusually high amount ofmoney taking advantage of the overpriced market through direct listing, book building andfixed price.

At least 62 companies including 25 banks and financial institutions, 21 insurance and 7textile mills denominated their shares from BDT 100 to BDT 10. Market capitalizationcompanies, which split their shares between July 2009 and December 2010, soared by 655

percent and those which did not split their shares went up by 46 percent at the same time.The massive fall of share prices the small investor lost their investment.

An open-ended mutual fund is a professionally managed collective investment scheme thathas unlimited lifetime and size. The fund manager pools money from many sponsors orinvestors through its selling agents and invests it in stocks, bonds and short-term moneymarket instruments, and pays out dividends to the unit holders annually.

At May 11, 2011, the daily turnover on the Dhaka Stock Exchange goes down at 3.07 billionin value terms, down by 19 per cent, against 3.82 BDT billion in the previous session as wellas the lowest since February 19, 2009 when transactions recorded BDT 302 crore.

Dhaka stocks rebounded May 12; 2011and gained more than two per cent after two sessionsof losses as investors went for fresh buying following some positive steps taken by thegovernment.

According to report at May 12, 2011 BB take action against the financial institutions inquestion.


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A section of investors was bulk selling shares to quit the market for now. Most of the share prices of all major sectors went down, such as banks lost 0.72 percent, non-

bank financial institutions 0.35 percent, while the cement sector rose by 1.54 percent andtelecommunication closed flat on the day.

Brokerage firms affiliated with two bourses have failed to introduce common 'Back OfficeSoftware', despite repeated directive from the Securities and Exchange Commission (SEC) atMay 17, 2011.

Dhaka stocks inched down on a topsy-turvy trading on May 18,2011 after a three-daygaining streak as general investors were yet to shake off their doubts and uncertainties aboutthe level of efficiency of the Securities and Exchange Commission under reconstruction andthe tax measures for the capital market to be included in the countrys next budget.

At last at May19, 2011 Thursday the Securities and Exchange Commission (SEC) has agreedto bring some changes in the securities rules in a move to stabilize the stock market.

The upcoming fiscal year's budget would be a crucial one for the stock market, as a buzz is inthe air about tax on individuals' capital gain and compulsory tax identification for BOaccounts. Also, the possible comeback of the stock market from the ongoing upheavalsmostly depends on the budgetary measures. Investors, market intermediaries and experts lookto the upcoming budget to see what the government is going to do in the budget for the stockmarket.


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4.Reasons behind Share Market Scam-

The share market has fall down in 2010-2011 financial year. This is not for the first time. In 1996the share market had faced the crash. The 1996 crash was in the secondary market. But this timeit was created in the primary market from behind the scene by a nexus of the issuer, issuemanager, valuers, chartered accountant and placement holder with the SEC's support. The scamis result of some corrupt practices involving window dressed balance sheets, book buildingmethod, direct listing, private placement, share split, dividend declarations, preference shares andprice manipulations in the secondary market. Suspicious behaviors mention as causes behindShare Market Scam are following-

The market was heavily manipulated through rigging of shares by individuals and cartels. The book building method is a renowned method in IPO declaration but in Bangladesh it was not

used professionally.

The stock market was manipulating by many policymakers, businessmen. A few groups soldplacement shares verbally to other stakeholders without informing regulatory authority. They

made a verbal agreement with another group, sold and purchased share among themselves topush up their price just to sell the whole chunk at very high price later. They did this to lureretail investors into buying their shares at high price. They are responsible market volatile.

The regulatory authority changed decisions; rules and regulations hastily showed theregulator's weakness as well as set up different margin loan ratio for margin loan at differenttime. Therefore, the manipulator used to their advantage and has created an impact on themarket.

The regulatory authority didnt play its roles powerfully. The top officials had a pivotal rolein legitimizing the irregularities and responsible for the wrongdoing. Many officials took

undue advantages under the shelter of top officials. A number of officials have been engagedin share trading in the name of family members or relatives. The manipulators were able toinfluence the regulator.

The allotment of private and pre IPO placement shares has been used as weapons of pricemanipulation. As a result, the amount of free-floating shares reduced significantly and theopportunity of price manipulation was created in the secondary market.

There were 30 lakhs new BO account, 238 brokerage houses with 590 branches at 32 districtsestablished within last four years. Therefore broad money, black money, foreign remittanceentered in the stock market which was overvalued the market. In contrast, a small number ofnew shares came into market in the recent years.

Merchant bankers are opening investors' accounts on their own. They are also operating onlyone beneficiary account (BO) account for every 5,000 to 10,000 accounts, showingnegligence to the laws. As a result, investors stay behind the BO account and beyond thepublic eye. Their accounts with merchant banks have become the den of corruption andirregularities. BO accounts do not contain the names of people whose shares are being traded.


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At September-December 2010, a big group enters in the capital market through largeinvestment. Principally, they made bubble in the market and the manipulators are the well-

known person.

The Central Bank has defined the banks' investment volume at 10 per cent of their liabilities.That's why, a big amount of banks' loan entered the market and the share prices increasedabnormally.

Doubtful trading had been done from omnibus accounts. The shadow accounts shown asomnibus accounts with merchant banks did not reflect deposits and withdrawals properly.The regulatory authority had not taken any step against these omnibus accounts.

The two investors opened several accounts and transacted 25 percent of their total tradebetween themselves, impacting share price on the market.

Split of share does not have any impact on a companys earnings or assets. There shouldhave been no impacts of the split on share prices except for an adjustment to the face value.

This crumbling of shares had an unexpected impact on share price and liquidity in themarket. The manipulators played a physiological game with the retail investors andencourage them to buy lower denominated shares that had a huge impact on the stock market.

The market went down as the big and institutional investors are out of the market fearingfurther fall and merchant banks remained away from disbursing loans as the interest ratesincreased in the money market which caused fund shortage.

Dealers, brokers and many others are responsible for irregularities in circular and blocktrading, and unusual transactions. The issuer companies, issue managers, asset valuationagencies, audit firms, dealers, brokerage firms and many others are involved in illegalactivities that include direct listing in IPO issuance and pre-IPO activities, revaluation of

company assets, fixing of high indicative value, manipulation of book-building method andnon-transparency in placement.

When the capital market passing a booming time, a large number of investors entered in themarket and invest in high PE ratio shares by taking margin loans and made trigger sell toearn more within short time.

When the market was over-flooded with liquidity government failed to offload shares ofstate-owned companies. Now, when the market is falling continuously due to lack ofliquidity support, market cannot absorb new companies' shares. Many institutional buyers aregetting ready to buy state-owned companies' shares but their participation is still low in the

market.

In absence of security law the companies made approval of preference shares by the regulatorin accordance with their demands. They had issued preference shares just to ensure theirbenefits not to restore confidence in the market.

Some institutional investors approved highest level price than the indicative price. This kindof offer price indicates trickery or collaborative pricing.


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The probe report said some banks pocketed large profits violating the rules and regulations.Some of the banks were also involved in fuelling the stock prices in 2010.

Investment of untaxed or undeclared money in the stock market is also an issue on sharescam.


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5. Recommendation to Improve the Present Scenario of Capital MarketThe capital market needs to overcome the worst situation. Stock market probe report and

professional personnel expressed opinion on modification of regulatory authority. They also give

opinions to overcome the recent share price fall in the capital market. The Bangladesh

Government and regulatory authority should implement the suggestions of Stock scam probecommittee which reinforce the market. Proposed remedies are-

The omnibus accounts must be examined after reforming the regulatory authority. Thegovernment turn these omnibus accounts into beneficiary owners (BO) accounts, otherwise

the regulatory authority would block them.

The book building method is a well-known in IPO declaration but it was not effective inBangladesh. Some renowned companies came into market by this method. The regulatory

authority should take necessary steps for establishing this method again.

The stock market's stability would be achieved with political commitment at the highest levelwhich is capable of eliminating the 'vicious cycle' ruling the market.

The regulatory authority should establish rules and regulation for ensuring transparency indeclaration of IPO and pre IPO along with it must supervise by the regulatory authority

officials.

The regulatory authority should formulate a procedure on placement share. The companiesmust issue a non transferable placement allotment paper and submit a copy to regulatory

authority.

The regulatory authority should punish the overvalued companies, issue managers if anyunfair means in the revaluation of asset. The probe body suggested the government to

restructure the securities regulator

The Demutualization or separation of management of bourses from their shareholders isnecessary for the Dhaka Stock Exchange (DSE) either the professionalism will not establish.

Specific rules and regulation must need for margin loans and forced sale. The merchantbanks should consult with the investors before making any forced sale.

An investor must invest in the market for long time and must concern on Price Earning ratio,Earning per Share while investing in any company share.

The government should take initiative to ensure more liquidity by circulating rules andregulations and ensuring funds like Bangladesh Fund for the capital market and should

design master plan along with regulatory authority for long term for the development of

capital market.


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The regulatory authority should prevent the private placement business and direct listingmethod for IPO declaration from the capital market.

The stock market probe report suggested that, every company should convert their share intoBDT 10 which motivates the small investors to invest more on capital market.

At brokerage level, limit sell order size. By limiting the lot size for sell orders (how muchcan be sold per trade), the sell pressure will be spread out over the day and not flood thesystem all at once.

The report has recommended that the BB take action against the financial institutions inquestion.

Currently, the banks are allowed to invest 10 percent of its liabilities (deposits) in the sharemarket.

The probe committee on recent share market debacle in its report recommended that thegovernment make the TIN mandatory for BO accounts. The compulsory TIN will also forcemany of the investors to quit the market, as there is a common perception that everyone hasto face difficulties in getting a TIN.


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Conclusion

The capital market of Bangladesh has contribution in the development of countrys economy.

Plenty of individual and institutional investors have engaged in the capital market with long term

and short term investment. An individual or institution becomes the owner of the company by

purchasing the company share through primary market and secondary market and receive

dividend both cash and stock periodically.

The recent stock market has damaged. It in Bangladesh reopened after stopped trading for

several days when small investors went on a citywide massive rampage at the sudden fall of

values of shares of a large number of companies in the second biggest share-scam in

Bangladesh. First one occurs in 1996, hundreds of small investors were turned into paupers when

several companies artificially inflated the prices of the shares. In Bangladesh small and medium

range investors as well as unemployed and students are investing money in the share market in

hope of profit. In most cases, such investors are lured and misled by culprit companies as well as

some corrupt stock brokerage firms as well as corrupt officials within Dhaka Stock Exchange.

The government of Bangladesh, the central bank and regulatory authority must take necessarysteps for long term and short term to rebuild the confidence among the individual andinstitutional investors. The exchanges have enormous responsibilities that include listing ofcompanies as per listing regulation, providing screen-based automated trading of listedsecurities, settlement of trading under settlement and transaction regulation, administration andcontrol of market, monitoring activities of listed companies and the very important function ofmarket surveillance.

Most of the small investors in Bangladesh are inexperienced with very little idea about the stockexchange. Many of them are not capable of understanding financial strength of companies. They

are guided by advice of others who are possibly equally ignorant. So, investments are, often,rumor-driven. So market intervention by SEC becomes necessary at times to protect the interestof the inexperienced investors. In doing so, a situation has been created in which SEC isexpected to regulate stock price. Of late, in the context of a highly over-priced market, thecommission is possibly more concerned with the bubble in the market than its normalresponsibilities. This is indeed a paradoxical situation for the commission. Hope that the capitalmarket of Bangladesh would be strongest capital market and play its roles in the countrysdevelopment.


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References:

The report making information collected by following sources-

1. Stock Market Probe Report,2. Stock Market Probe Report Appendix3. Dhaka Stock Exchange web site4. The Financial Express5. The Daily Star6. The Star weekend7. Different Economics Blogs8. www.weeklyblitz.net9. www.priyo.com10.www.gulfnews.com

Appendix information collected from Dhaka Stock Exchange web site.
http://www.weeklyblitz.net/http://www.weeklyblitz.net/http://www.priyo.com/http://www.priyo.com/http://www.gulfnews.com/http://www.gulfnews.com/http://www.gulfnews.com/http://www.gulfnews.com/http://www.priyo.com/http://www.weeklyblitz.net/


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Appendix 01

Highest Records of Trade

Appendix 02

The Average Transactions (per day) from 2006-2010

Years Average Transactions (per day)

2006 32.5 crore

2007 136 crore

2008 282 crore

2009 605 crore

2010 1634 crore

Particulars Values Date

Total Number of Trades 389310 05-12-2010

Total Trade Volume 165464146 30-12-2010

Total Traded Value in Taka(mn) 32495.756 05-12-2010

Total Market Capital in Taka(mn) 3680714.195 05-12-2010

DSI Index 7383.93657 05-12-2010

DSE General Index 8918.51346 05-12-2010


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Appendix 03

Listed Company (Sector Wise)

Bank 30

Cement 5

Ceramics Sector 5

Corporate Bond 3

Debenture 8

Engineering 23

Financial Institutions 21

Food & Allied 15

Fuel & Power 11

Insurance 44

IT Sector 5

Jute 3

Mutual Funds 33Paper & Printing 9

Pharmaceuticals & Chemicals 21

Services & Real Estate 4

Tannery Industries 5

Telecommunication 1

Textile 25

Travel & Leisure 2

Treasury Bond 212

Appendix 04


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Appendix 05

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