Submitted To:

Tania HamidFaculty MemberBBA DepartmentEast West University Dhaka

Submitted by: Saiduzzaman Bhuiyan 2011-2-13-018

Submission Date: 12th August, 2015

LETTER OF TRANSMITTAL

12th August, 2015Mrs. Tania HamidFaculty Member, BBA Department East West University, Dhaka

Subject: Submission of final project.

Dear Mrs. Tania Hamid

It is a great pleasure and privilege for me to get an opportunity to make a project which given

by you. According to your requirement for Project, I have prepared my project on Capital

Market of Bangladesh.

The Project is required for students who are completing Bachelor of Business Administration

(BBA) from East West University. It is a three credit program. To prepare this report, I have

tried my best to include all necessary information and relevant explanation about Bangladesh

capital market. I was assigned to make report regarding stock market and stock market crash.

During making this report, I have learned about various aspects related to share market. I

have improved my communicating skills, while collecting information. This report also has

enriched my writing skills.

If for whichever cause, you are unable to deduce anything, please do not pause to contact

with me for clarification at this mail: Said_ewu@yahoo.com. Hope you will forgive any of

my mistakes, lacking or inconveniences.

Thank You for giving me this wonderful opportunity for preparing this Project.

Sincerely,

Saiduzzaman Bhuiyan2011-2-13-018

2 | P a g e

ACKNOWLEDGEMENT

First of all, thanks to Almighty Allah for giving us the knowledge and strength of doing this

report properly within the scheduled time.

I feel proud to express my gratitude from the core of my heart to the Department of Business

Administration from East West University for granting me the permission to make a project

on Capital market in Bangladesh.

For the successful completion of my Project I would like to thank and convey my sincere

gratitude to my respected academic Supervisor, Tania Hamid, Lecturer, Department of

Business Administration from East West University, for giving valuable advice, suggestion

and inspiration to complete the report in an appropriate manner and I would also like to

express my sincere appreciation for her wholehearted support and guidance.

3 | P a g e

EXECUTIVE SUMMARY

For my project a discuss with two professional person Mr. Shajahan Khan director of Danmonndi Securities and Mr. Sohag Hossain director of multi securities of Platan Branch. They give me lots of information about stock market and Stock market crash in Bangladesh. Which help me to make my project.

My Project is divided into seven major parts, which are Introduction Part, Overview Part, Regulatory Bodies Part, Analysis Part, Market Crash Part, Findings and Recommendations Part and Conclusion.

Chapter one describes the introduction of my report, background of the study, objectives, scope and limitations of the study.

In chapter two, I tried to describe in brief an overview Bangladesh stock market (DSE & CSE) and its history, mission, vision and major functions

Chapter three consists of Regulatory Bodies of Bangladesh Securities and Exchange Commission (BSEC), Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Also describe about their rules-regulation and responsibility.

Chapter four Analysis of Bangladesh Stock Market, Structure of Bangladesh Stock Market, market capital, settlement and clearness.

Chapter five Crash in Bangladesh Capital Market which occurred in 1996 and 2010 and reasons of the crash. Market Scenario and Investors’ Behavior after Market Crash.

Chapter six Analysis of market crash with some example of company which play a big game.

Chapter seven Findings & Recommendations. And finally, chapter eight Conclusion.

I have tried my best to accumulate relevant information in this report and make the report vivid and comprehensive within the scheduled time and limited resources.

4 | P a g e

TABLES OF CONTENTSChapter Number and Name Page no

1. INTRODUCTION:

1.1 Background of the study1.2 Origin of the Project1.3 Objectives of the study1.4 Scope1.5 Methodology1.6 Data Collection1.7 Limitation of the study

7

78889910

2. BANGLADESH STOCK MARKET

2.1 History of stock Market2.2 History of Bangladesh Stock Market2.3 Bangladesh Stock Market

2.3.1 Dhaka Stock Exchange (DSE)2.3.2 Chittagong Stock Exchange (CSE)

11

1111121213

3. REGULATORY BODIES

3.1 Bangladesh Securities and Exchange Commission (BSEC)3.1.1 Mission of the BSEC3.1.2 The Commission main Functions

3.2 The Present Commission Bodies of BSEC3.3 Board of Directors of Dhaka Stock3.4 Board of Directors of CSE

14

14141414151617

4. ANALYSIS OF BANGLADESH STOCK MARKET

4.1 Structure of Bangladesh Stock Market4.1.1 Primary Market4.1.2 Secondary Market4.1.3 Spot Market4.1.4 Block Market

4.2 Market Capitalization4.3 Sector wise Listing Companies4.4 DSE General Index4.5 Capital Market Size4.6 Capital market company category4.7 Clearing & Settlement System4.8 Security Exchange Commission4.9 Central Depository Bangladesh Limited

18

18181919192021222223242828

5 | P a g e

5. MARKET CRASH

5.1 Stock Market Crash5.2 Crash in Bangladesh Capital Market  5.2.1 Crash During 1996 5.2.1 Crash During 2010-11

5.3 Comparison Between Two Years5.4 Market Scenario and Investors’ Behavior after Market Crash

29

29292932

37

38

6. ANALYSIS OF MARKET CRASH

6.1 Analysis Market Crash in 1996 with Example6.2 Analysis Market Crash in 2010-11 with Example

43

43

45

7. FINDINGS & RECOMMENDATION

7.1 Findings7.2 General Recommendations7.3 Recommendations for the Government7.4 Recommendations for Bangladesh Bank

49

49495050

8. CONCLUSION 51

9. REFERENCE 52

6 | P a g e

CHAPTER ONECHAPTER ONEINTRODUCTIONINTRODUCTION

1.1 Background of the Study

Sound Capital Market is an indispensible part of an Economy. Without sound and efficient capital market, rapid economic development could be hampered as capital market provides long term funds to entrepreneurs. Capital Market of Bangladesh is still highly speculative and lacks transparency due to poor regulatory framework. In Bangladesh, Financial sector was historically driven by banks and capital market had fewer rules to play as people had mixed perception about the risk pattern in capital market that discouraged them mostly to invest there. But in the mid of ninetieths of last century capital market started to show vibrant behavior that make people interested about the stock exchanges. As the index was rising sharply and everyone was making money, many people started to invest their money to the heated market that made a bigger bubble and finally the bubble bursts. Benchmark index came down to 700 point in November 1997 from its highest 3600 point in November 1996. Thousands of investors lost their money that made them reluctant to invest in the capital market again. It took one decade for them to forget the history of collapse. After that, regulators had taken many steps to stabilize the market. Hundreds of new issues came to the market. Central depository, circuit breaker, online trading, etc. were introduced in the market to attract investors. As a result, the market started to grow again. Investors started to forget the history of 1996 and started to invest again. This time most investors were new and young with little knowledge about stocks and did not care about market risk. They invested their money and finally lost everything when the bubble started to burst in December, 2010 that had started to grow from the year 2009. This time Benchmark index came down to 4600 points in early July 2015 from its highest point 8918 in December 2010. Millions of investors lost their money and came down to the street. This is the small picture of stock market crashes in Bangladesh. In both cases regulators had failed to take proactive measures to not grow the bubble and caused losses for millions of investors when the bubbles burst. When analysts were anxious about the bubbles, regulators were ignoring them and even defended the bubbles. The recent volatility of the capital market of Bangladesh is an abnormal phenomenon and such volatility tends to economic instability. I believe it will be interested enough to look into the causes of the problem. As such volatility affects mass people (many investors), it is essential to try to minimize such volatility by identifying the causes (esp., Regulatory failure) and solving the problems. In my study, I will try to identify the reasons of this volatility and also to recommend some suggestions to minimize such volatility in future

7 | P a g e

1.2 ORIGIN OF THE PROJECT

Project is a requirement for the Graduation of the BBA students. The main purpose of Project is to get familiar with the analysis of corporate and business world.

To get and organize detail knowledge on the job responsibility. To experience the real business and market. To compare the real scenario with the lessons learned in the University To fulfill the requirement of BBA Program.

I accomplish the project, under the guidance of Tania Hamid, Lecturer with East West University. As a requirement of the completion of the project, I had to submit this report, which includes an overview of the organization and a research and analysis part.

1.3 Objectives of the Project

Objective of the report can be divided into two parts. These are: General objective Specific objective

General objective The general objective of the report is to find out the market scenario and investors’ behaviors on capital market.

Specific objective The specific objective of this topic is to find out the scenario behind the market crash 1996 and 2010-2011and after the historical crash, investors’ behavioral trend in capital market. In the whole report, I will thoroughly discuss about capital market and also discuss about trend after market crash and the rules and procedures of capital market. Besides, in the project, I will discuss about the effective solutions of these problems.

1.4SCOPE:

In my whole report, I will focus on the Stock market of Bangladesh and trend after the market crash 1996 and 2010-2011 and how investors are behaving after the market crash and why they are losing their money gradually, what capital market indicators show after the market crash. What are the reasons which make them satisfied and what are the barriers they find out. To complete a reflective and informative report, I studied different reports of market researchers on market crash 1996 and 2010-2011 and investors’ behaviors.

The study also explain the regulatory aspects of capital market of Bangladesh on the basis of disclosed regulations and will try to judge the quality of the regulations in terms of its achievement of the goals. This study is basically descriptive in nature.

8 | P a g e

1.5 MethodologyWhile doing this assignment, I have used both theoretical and practical elements for the assignment. And then compare and contrast both and come up with what is needed for the betterment of the organization. Basically, I mix up the theory, analysis with the practical scenario and then convey findings after the assignment.

The report is both descriptive & calculative by nature. The report is based on information collected from primary as well secondary sources. The indicators which are responsible for recent crash are measured by calculation. The trend of those indicators has also been measured for last three years. Statistical approach has also been used in the report.

To find out the critical issues of this sudden drama, I have collected secondary information from various sources. I have emphasized on quantitative and qualitative data to analyze the recent share market crash and it’s prevail crisis in Bangladesh stock market. All the quantitative data are extracted from Dhaka Stock Exchange website and qualitative data are collected from published research journals, newspapers, websites etc.

The task of data collection begins after the research problem has been defined and research design chalked out. While deciding the method of data collection to be used for the study, the researcher should keep in mind two types of data.

1.6 Data Collection:

Data is collected from both Primary (Stock Exchange, SEC) and secondary sources like different publications of DSE, CSE, BSCE and CDBL. Some other research papers in this line will also be used. The areas that will be concentrated are:

Various aspects of capital market regulations of Bangladesh Recent trends of Capital Market Bubble creation and Bubble Burst and reasons behind this market collapse

In order to make the report more meaningful and presentable, two sources of data and information has been used.

The Primary Sources are as follows-

Practical work exposureDiscussion with the respective executives & officers.

The Secondary Sources of data and information are-

Annual Reports of DSE.

9 | P a g e

Various publications regarding DSE

1.7 Limitation of the StudyWhile doing this assignment, I have faced some problems. Even though the Director of Danmonndi Securities was so helpful, but he has some limitations while giving interview like time-constrain. And for some extent, he does not want to give the whole information.

Other problems are basically from the organization. But there are also limitations from us-.

BSCE and DSE do not show confidential data.

Problem to get appointment of the men in honorable position.

Limitations of our knowledge.

Limited information in website.

Limited sources to collect data.

Unhelpfulness from the organization

However, from the nature of the study it could be easily understood that respondents were hard to reach. Another limitation was time constraint. The time was too short to complete a research on a topic like this. For further analysis, more time was required. Lack of secondary source is another limitation that I have faced. In fact, I did not find any previous research on this topic. However, I had to rely on other relevant studies, books and websites for this purpose.

10 | P a g e

CHAPTER TWO CHAPTER TWO BANGLADESH STOCK MARKETBANGLADESH STOCK MARKET

2.1 History of the stock market

The idea of debt dates back to the ancient world, as evidenced for example by ancient Mesopotamian clay tablets recording interest-bearing loans. There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company's founding in 1602, while others point to earlier developments. Economist Ulrike Malmendier of the University of California at Berkeley argues that a share market existed as far back as ancient Rome.

In the Roman Republic, which existed for centuries before the Empire was founded; there were society’s publican rum, organizations of contractors or leaseholders who performed temple-building and other services for the government. One such service was the feeding of geese on the Capitoline Hill as a reward to the birds after their honking warned of a Gallic invasion in 390 B.C. Participants in such organizations had parties or shares, a concept mentioned various times by the statesman and orator Cicero. In one speech, Cicero mentions "shares that had a very high price at the time." Such evidence, in Malmendier's view, suggests the instruments were tradable, with fluctuating values based on an organization's success. The societies declined into obscurity in the time of the emperors, as most of their services were taken over by direct agents of the state.

London's first stockbrokers, however, were barred from the old commercial center known as the Royal Exchange, reportedly because of their rude manners. Instead, the new trade was conducted from coffee houses along Exchange Alley. By 1698, a broker named John Casting, operating out of Jonathan's Coffee House, was posting regular lists of stock and commodity prices. Those lists mark the beginning of the London Stock Exchange.

2.2 History of the Bangladesh Stock Market

The voyage of Bangladesh stock market started on April 28, 1954 as East Pakistan Stock Exchange Association Ltd. At that time Pakistan ruled Bangladesh and the name of the country was East Pakistan. Other than trading on this market started in 1956 with a total paid up capital of Taka 4 billion and 196 securities were listed on this market. Besides, the exchange was renamed as Dhaka Stock Exchange (DSE) Limited on June 23, 1962. On the other hand, trading on Dhaka Stock Exchange was suspended from 1971 to 1976 because of liberation war and its post-independence weak economy. In 1976, the trading was started again with 9 listed securities having a total paid up capital of Taka 137.52 million.

By 1987, the number of listed companies in DSE increased up to 92. But high development of the market is noticeable in the 1990s comparing with any other time since its establishment. (Economy watch, 2010

11 | P a g e

2.3 BANGLADESH STOCK MARKET

Here, the study explains history of the Bangladesh stock market and the history of the two exchanges, Dhaka and Chittagong stock exchanges, with their role and functions. Moreover, it also gives concise information about the capital market structure of the country, Security & Exchange commission as the market regulator and CDBL as an important organization of the market.

2.3.1 Dhaka Stock Exchange (DSE)

Dhaka Stock Exchange is the first & biggest stock exchange of Bangladesh. The business of Dhaka Stock Exchange started on May 14, 1964 after renaming East Pakistan Stock Exchange Limited. Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its actions are regulated by its Articles of Association rules & regulations and bye-laws along with the Securities and Exchange Ordinance - 1969, Companies Act - 1994 & Securities & Exchange Commission Act - 1993.

In the beginning it was a physical stock exchange and used to buy and sell in the open out-cry system. After that automated trading system was introduced to secure smooth, timeliness & effective operation on the market. Moreover, the system was installed on 10th August, 1998 and was advanced time to time. The latest upgrading was done on 21st December, 2008.

On the other hand, the members in Dhaka Stock Exchange are 250 and total 533 listed securities. The working days of DSE is 5 days in a week without Saturday, Sunday public holidays & other government holidays. The trading time is from 11:00 am to 15:00 pm (local time). Investment options for an investor in this market are ordinary share, Debenture, Bond & Mutual funds.

As mentioned by Fellowes (2013), “Every stock market has its indices to show movements in the market as a whole”. In the beginning DSE had only one index. However, now there are three different indices which are DSI (All share), DSEX (A, B, G & N) and DSE 20. DSE introduces two new indices, which are known as the DSE Broad Index (DSEX) and DSE 30 Index (DS30).

The major functions are:

Listing of Companies (As per Listing Regulations). Providing the screen based automated trading of listed Securities. Settlement of trading (As per Settlement of Transaction Regulations). Gifting of share / granting approval to the transaction/transfer of share outside the trading system of the exchange (As per Listing Regulations 42). Market Administration & Control. Market Surveillance. Monitoring the activities of listed companies (As per Listing Regulations). Investors’ grievance Cell (Disposal of complaint by laws 1997). Announcement of Price sensitive or other information about listed companies through online

12 | P a g e

2.3.2 Chittagong Stock Exchange (CSE)

The Second stock exchange of Bangladesh is Chittagong Stock Exchange. As it introduces modern technology & sophisticated logistic support, it is said that CSE is the pioneer of the modern capital market of the country. Besides, it was incorporated as a self regulated non-profit organization on 1st April, 1995 and formally opened on November 4, 1995. Though it started its trading through cry-out system but after that Chittagong Stock Exchange started first automated trading bourse of the country. CSE started its automated trading on 2nd June, 1998 and internet trading service on 30th May, 2004.

The trading time of CSE is between 11:00 am to 15:00 pm. The working days & holidays of CSE are same as like as DSE. CSE consists of 25 members of whom 12 are elected through election of CSE members, 12 members are elected from different major economic & social arena of Bangladesh and CEO is nominated and appointed by its own board but the approval of SEC mandatory.

There are 147 members and 273 of listed securities in Chittagong Stock Exchange. Moreover, there are four different markets in CSE same as DSE which are public, Spot, Block & Odd Lot market. In addition, trading is done through all these four markets. The Five categories of company listed in CSE are A, B, N, G and Z but in G category there is not any company.

Chittagong Stock Exchange has its own indices to calculate movements of its total market value. CSE maintained only one index that was All Share Price Index until 10th October, 1995. Now CSE has 3 indices in the stock exchange those are All Share Price Index (CASPI), CSE Selective Index (CSE30) and CSE Selective Categories' Index (CSCX).

13 | P a g e

CHAPTER THREECHAPTER THREEREGULATORY BODIESREGULATORY BODIES

3.1 Bangladesh Securities and Exchange CommissionThe Bangladesh Securities and Exchange Commission (BSEC) was established on 8th June, 1993 as the regulator of the country’s capital market through enactment of the Securities and Exchange Commission Act 1993.  Through an amendment of the Securities and Exchange Commission Act, 1993, on December 10, 2012, its name has been changed as Bangladesh Securities and Exchange Commission from previous Securities and Exchange Commission.  The Commission consists of a Chairman and four Commissioners who are appointed for fulltime by the government for a period of four years and their appointment can be renewed only for further one term, but the condition is that age can’t exceed 65 in position during the tenure. The Chairman acts as the Chief Executive Officer (CEO) of the Commission. The Commission has overall responsibility to formulate securities legislation and to administer as well.  The Commission is a statutory body and attached to the Ministry of Finance. 

3.1.1 Mission of the BSEC is to: Protect the interests of the investors in securities. Develop and maintain fair, transparent and efficient securities markets.  Ensure proper issuance of securities and compliance with securities laws.

3.1.2 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 the securities marketRegistering, monitoring and regulating of collective investment scheme including all forms of mutual funds.Monitoring and regulating all authorized self regulatory organizations.Prohibiting fraudulent and unfair trade practices relating to securities trading in any securities market.Promoting investors’ education and providing training for intermediaries.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 of securities, the Stock Exchanges and   intermediaries and any self regulatory organization in the securities market.Conducting research and publishing information.

14 | P a g e

3.2 The Present Commission of BSEC:

Professor

Dr. M. Khairul Hossain Chairman

Professor

Md. Helal Uddin Nizami Commissioner

Mr. Md. Amzad Hossain Commissioner

Mr. Arif Khan Commissioner

Mr. Md. A. Salam Sikder Commissioner

15 | P a g e

3.3 Board of Directors of Dhaka Stock Exchange

Name Picture

JUSTICE SIDDIQUR RAHMAN MIAH

CHAIRMANDHAKA STOCK EXCHANGE LTD.

MRS. MONOWARA HAKIM ALI

DIRECTORDHAKA STOCK EXCHANGE LTD.

MR. RUHUL AMIN MBA FCMA

DIRECTORDHAKA STOCK EXCHANGE LTD.

PROFESSOR DR. ABUL HASHEM

DIRECTORDHAKA STOCK EXCHANGE LTD.

MR. WALIUL ISLAM

DIRECTORDHAKA STOCK EXCHANGE LTD.

PROFESSOR DR. M. KAYKOBAD

DIRECTORDHAKA STOCK EXCHANGE LTD.

BRIGADIER GENERAL MD. MAJIBUR RAHMAN

DIRECTORDHAKA STOCK EXCHANGE LTD.

16 | P a g e

3.4 Board of Directors of Chittagong Stock Exchange

Name Picture

Dr. Muhammad Abdul Mazid Chairman

Prof. Mamtaz Uddin Ahmed, FCMA Director

Dr. Mohammad Ayub Islam Director

Dr. Moinul Islam Mahmud Director

Mr. Md. Shafiul Islam Director

Mr. Showkat Hossain FCA Director

Mr. Nasir Uddin Chowdhury Director

17 | P a g e

CHAPTER FOURCHAPTER FOURANALYSIS OF BANGLADESH STOCK MARKETANALYSIS OF BANGLADESH STOCK MARKET

4.1 Structure of Bangladesh Stock Market:

4.1.1 Primary Market:

The primary market is where securities are created. It's in this market that firms sell

(float) new stocks and bonds to the public for the first time. Simply put, an IPO occurs

when a private company sells stocks to the public for the first time.

IPOs can be very complicated because many different rules and regulations dictate the

processes of institutions, but they all follow a general pattern.

A company contacts an underwriting firm to determine the legal and

financial details of the public offering.

A preliminary registration statement, detailing the company's interests and prospects and the specifics of the issue, is filed with the appropriate authorities. Known as a preliminary prospectus, or red herring, this document is neither finalized nor is it a solicitation by the company issuing the new shares. It is simply an information pamphlet and a letter describing the company's intent.The appropriate governing bodies must approve the finalized statement as

well as a final prospectus, which details the issue's price, restrictions and

18 | P a g e

benefits and is issued to those who purchase the securities. This final

prospectus is legally binding for the company

4.1.2 Secondary Market:

The secondary market is what people are talking about when they refer to the "stock

market". The defining characteristic of the secondary market is that investor’s trade

amongst themselves. That is, in the secondary market, investors trade previously-

issued securities without the involvement of the issuing companies.

When securities in form of secondary market can take place two mechanism:

Organized Exchange

Over the Counter Market (OTC)

Organized Exchange:

For trading settlement have specific location and should be standardized product have

some detailed listing rules and regulations. Risk is low. Example: DSE (Dhaka Stock

Exchange), Chittagong Stock Exchange (CSE).

Over the Counter Market (OTC): Trading settlement through the dealer of telecommunication does not have specific location and should not be standardized product because by using electronically network not have some detailed listing rules and regulations. Risk is high.

4.1.3 Spot Market:

“A commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective.” Trading is done in normal volume under corporate actions and must be settled in 24 hours.

4.1.4 Block Market:

“An order or trade submitted for sale or purchase of a large quantity of securities. A block trade involves a significantly large number of shares or bonds being traded at an arranged price between parties, outside of the open markets, in order to lessen the impact of such a large trade hitting the tape”. Moreover, in this market bulk volume of instruments are trades through pick & fill basis.

19 | P a g e

4.2 Market Capitalization:

The market capitalization refers to the sum that derived from the current stock price

per share times with the total number of shares outstanding.

20 | P a g e

4. 3 Sector wise Listing Companies:

NO Name of The Industry Company Number

1 Bank 302 Cement 73 Ceramics Sector 54 Corporate Bond 2

5   Debenture   86   Engineering   317 Financial Institutions   238 Food & Allied   18

9 Fuel & Power   1810 Insurance 4611 IT sector 612 Jute 3

13 Miscellaneous 1114 Mutual Funds 4115 Paper & printing 216 Pharmaceuticals & Chemicals 27

17 Service & Real Estate 418 Tannery Industries 519 Telecommunication 220 Textile 41

21 Travel & Leisure 422 Treasury Bond 221

Total No. Of Companies 555

21 | P a g e

4.4 DSE General Index: There are three General Index in Bangladesh Stock Market. DSEX, DSE30 and DSES

4.5 Capital Market Size

One of the important indicators of capital market is the number of its listed

companies. The rationale of including this measure is that as the number of listed

company increases, available securities and trading volume rises as well. Based on the

properties of the companies, the companies are divided into five groups; A, B, G, N

and Z. The properties of these companies are shown here in table.

22 | P a g e

4.6 Capital market company category and characteristics

Company Properties

A

Holding Annual Meetings (AGM) and have

declared dividend at the rate 10 percent or

more in a calendar year.

B Holding Annual Meetings (AGM) and have

declared dividend less at the rate 10 percent

or more in a calendar year.

G Greenfield companies.

N

All new listed companies except Greenfield

companies.

Z Have failed to hold the AGM or fail to

declare any dividend or which are not in

operation continuously

23 | P a g e

4.7 Clearing & Settlement System:

The Automated Clearing and Settlement System (CNS) is developed to automate all post trade activities regarding clearing and settlement. Its main stakeholders are Brokerage houses, CDBL, Clearing Banks and DSE Finance Division. Major activities of the system are as below;

Clearing: In clearing process DSE make payment by credit instruction and deliver share through CDBL clearing schedule to buying broker.

Settlement: In settlement process DSE receives all charges, receivable amount from selling brokers and earmark selling shares in selling broker clearing account through CDBL settlement schedule. Regulation 4 of the Settlement of Stock Exchange Transactions Regulation 1998 has been given effect time to time.

Here is a complete picture of the settlement system for all Instruments categories as A, B, G, N and Z which are traded in the Four (4) markets of DSE.

A-Category Companies:

Companies which are regular in holding the annual general meetings and have declared dividend at the rate of ten percent or more in the last English calendar year. Instruments of A category are traded in Public, Block & Odd-lot Market with trade for trade settlement facility for scrip only through DSE Clearing House on T+1, T+2 basis. "A" and "DA" are marked in BASES columns for Non-Demat & Demat instrument respectively in our TESA Trading Software.

24 | P a g e

The above cycle is valid for A, B, G & N category instruments traded in Public, Block & Odd-lot market.

B-Category Companies:

Companies which are regular in holding the annual general meetings but have failed to declare dividend at least at the rate of ten percent in the last English calendar year.

Instruments of B category are traded in Public, Block & Odd-lot Market with trade for trade settlement facility through DSE Clearing House on T+1, T+2 basis. "B" and "DB" are marked in BASES columns for Non-Demat & Demat instrument respectively in our TESA Trading software.

G-Category Companies:

Green-field companies of which shares are listed with the DSE before the company goes into commercial operation and prior to listing the said company declares the year of first declaration of dividend.

Traded in Public, Block & Odd-lot Market with trade for trade settlement facility through DSE Clearing House on T+1, T+2 basis. "G" and "DG" are marked in BASES columns for Non-Demat & Demat instrument respectively in our TESA Trading software.

4.8.6 N-Category Companies:

Newly listed companies except green-field companies which shall be transferred to other categories in accordance with their first dividend declaration and respective compliance after listing of their shares.

Traded in Public, Block & Odd-lot Market with trade for trade settlement facility through DSE Clearing House on T+1, T+2 base. "N" and "DN" are marked in BASES columns for Non-Demit & Demit instrument respectively in our TESA Trading software.

Z-Category Companies:

Companies which have failed to hold the annual general meeting when due or have failed to declare any dividend based on annual performance or which are not in operation continuously for more than six months or whose accumulated loss after adjustment of revenue reserve, if any, exceeds its paid up capital.

Provided that the Managing Director of the Exchange may bring any other company under this category, if deemed necessary, with the prior written consent from the Commission.

25 | P a g e

Traded in Public, Block & Odd-lot Market with trade for trade settlement facility through DSE Clearing House on T+1, T+9 basis. "Z" and "DZ" are marked in BASES columns for Non-Demit & Demit instrument respectively in our TESA Trading software.

N.B: The words, 'whose accumulated loss after adjustment of revenue reserve, if any, exceeds its paid up capital' shall not be applicable for the companies which have declared dividend out of the current profits in the last English calendar year and held annual general meeting(s) relating to all outstanding financial year(s) despite having such accumulated loss exceeding the paid up capital.

This cycle is valid only for Z group instruments traded in Public, Block & Odd-lot market.

 

Instruments Of All Groups Traded In Spot Market:

26 | P a g e

The above cycle is valid for A, B, G, N & Z category instruments traded in spot market.

Instruments of Foreign Trades (DVP) Of All Groups:

The above cycle is valid for A, B, G, N & Z category instruments of foreign trade

Remarks:

If any instrument declared as Compulsory Spot then Trades of Block and Odd-lot market of that Instrument will be settled like Spot Market.

Howla Charge, Laga Charge & Tax are always payable to DSE at Pay-In date for both Buyer and Seller traded in Public, Block & Odd-lot Market.

27 | P a g e

Howla Charge, Laga Charge & Tax are always payable to DSE at T+1 day for both Buyer and Seller traded in Spot Market.

Outside-Of-Netted settlement for "A" Group instrument has been withdrawn from 10th Dec 2006.

DVP Trades are Off-Market Settlement (Broker to Broker).

28 | P a g e

4.8 SECURITY & EXCHANGE COMMISSIONS (SEC): The reasons to form Security Exchange Commission are to protect investor`s interest, improvement of securities markets, appropriate issuance of securities and proper guiding of securities laws. Moreover, DSE, CSE, CDBL, stock brokers, merchant banks and asset management companies are under supervision of SEC. On 8th June, 1993, the Government of Bangladesh founded Security and Exchange Commission (SEC) under the Securities and Exchange Commission Act, 1993. Besides, there is a chairman and four members in this commission. In addition, the Chairman & members of security exchange commission are selected by the government of Bangladesh. However, SEC is directly connected with the ministry of Finance and has rights to manage all of securities laws & regulations. According to Securities and Exchange Ordinance, 1969 SEC has been authorized to control even self regulatory institutions for instance Stock Exchanges.

The main functions of SEC are following:

Registering and regulating the business operation of DSE, CSE, stock brokers, Merchant banks, underwriters, and shares transfer agents, portfolio managers and other intermediaries. Developing investor`s education, providing training for intermediaries, executing, market research and publishing those. Controlling every authorized self regulatory organizations too Inspecting and controlling fraudulent and unfair trading in security markets Auditing and investigating of any intermediaries or stock exchanges

4.9 CENTRAL DEPOSITORY BANGLADESH LIMITED (CDBL):CDBL has created a value to the stock market of Bangladesh and after the establishment of CDBL, it attracted more investors especially foreigners. Moreover, when the CDBL was not established, process of transferring and delivering ownership was too lengthy and risky. However, after implementing automated trading system in DSE & CSE and introducing central depository system, the stock market of Bangladesh became more effective and credible to the investors. CDBL was included as a public limited company on 20th August, 2000. DSE, CSE, banks, Investment Corporation of Bangladesh and some other financial institution are the owners of CDBL. Besides, the participants of CDBL are called Depository Participant (DP). CDBL charges fees from its participants for different services provided by CDBL.

The functions of CDBL are given below:

Operate and maintain the Central Depository System (CDS) of Electronic Book Recording and maintaining securities accounts and registering transfer of securities Changing the ownership without any physical movement or endorsement of certificates Supervision of Depository participant activities

29 | P a g e

Providing different investor services including providing a platform for the secondary market trading of Treasury Bills and Government Bonds issued by the Bangladesh Bank.

CHAPTER FIVECHAPTER FIVEMARKET CASHMARKET CASH

5.1 Stock market crash A stock market crash is a sudden dramatic fall of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper assets. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles. Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions, a prolonged period of rising stock prices and excessive economic optimism, a market where P/E ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants (Galbraith, The Great Crash 1929, 1988). There is no numerically specific definition of a stock market crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days. Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. The crash of 1987, for example, did not lead to a bear market. Likewise, the Japanese Nikkei bear market of the 1990s occurred over several years without any notable crashes

5.2 Crash in Bangladesh Capital Market  

The capital market of Bangladesh had two major debacles which occurred in 1996 and2010, creating some bad impacts upon the country’s total capital market.

5.2.1 Crash during 1996

During 1996 some local and foreign initiatives succeeded in drawing some international attention which was followed by an international conference in 1994. The conference followed by some regional as well international market destabilizing events, some hedge fund managers started investing in the local capital market. The market was neither operational nor in terms of legal structure ready to absorb such sudden surge in demand both at home and abroad. Consequently within a very short

30 | P a g e

tenure (from July to October of 1996) the market price level soared to a record level (of that time) height with the index rising from 894 levels to 3627 level.

The market P/E ratio of all the listed securities reached to the level of 66.5 within a short period of 4 months. The 'cry-out’ auction based trading system of DSE could not handle the huge demand coming from several thousand investors who crowded the Motijheel thoroughfare. Consequently street based curb market took over the legal trade executed through stock market sys-tem. Unsuspecting inexperienced new entrant investors allured by very quick profit potentials were buying anything without understanding substance, legality and validity of their investment. Unscrupulous market players (which even include some issuers) were minting fortunes by selling fake securities to the crowd who were eager to make quick profit from the market. Thereafter, for obvious reason the market experienced first major crash in l996 affecting about fifty thousand investors

Background of the 1996 crash

The scenario of stock market crash in 1996 was totally different. The number of BO account holders was only 300,000 and most of them were very new in the market. During the crash of 1996 paper shares used to be sold in front of DSE and it was not easy for investors to indentify fake and original shares. The market was enough developed to gain confidence of investors. There was no automated trading sys-tem, surveillance was not enough strong and no circuit breakers as well as international protections.

From 1991 to the end of 1995 DGEN price index gained by 139.3% and reached to 834 point. But in 1996 the market experienced dramatic change and pushed the price index up by 337%. DGEN Index recorded high growth from July and stood at 3648.7 points or by 280.5% on 5th November 1996.

During the ‘Bull Run’ period new records were posted almost every day in both bourses for example market capitalization achieved to $2 billion which is equal to 20% of total GDP. As market became overheated government took step by selling state owned institutions and Taka 2 billion will be given to ICB for buying shares and support the market. But the steps taken by the government did not work.

Finally abnormal rise of share prices started to fall and Bangladesh stock market experienced its first crash of the history in 1996. The index lost over 233 points on Nov 6, 1996. After the bubble burst DGEN index dropped to its lowest point and stood at 957 in April 1997. It stood at around the same point where it was 10 months before and DSE General Price index lost almost 70 percent from its highest point of November 1996.

31 | P a g e

Reasons of the 1996 crash

Manipulation

Some foreign portfolio, 28 managers, few brokers and sponsors of few listed companies were behind the stock price manipulation in October 1996. As a result all share price index of DSE dramatically sky rocketed to 3600 point from 1000 point in six months time. Few foreign & local investors that had inside information made huge profit and a lot of general investors paid heavily.

Demand Supply mismatch         

The cause of stock market crash in 1996 was the failure of market regulators mentioned by Afroz (2006). Stock exchanges did not take any action against the dramatic price in-crease of listed securities during June to November 1996. Bubble formed due to abnormal demand of securities by new investors where the numbers of listed securities were very few. The reason of huge influx of investors was political stability in the country and bringing confidence in investor`s mind.

 Defective (DVP) system

The delivery versus payment (DVP) system of trading used to allow buyer-seller to settle their transactions between them without stock exchange participation. Many brokers/dealers used it as a tool to show fake trading to increase demand of share from the general investor’s side. According to Bangladesh Bank analysis that there was an unauthorized kerb market consisting of over 25,000 investors outside the stock exchange where securities were traded at a very high price. Moreover, SEC could not handle the crisis for its defective infrastructure. Weak regulations and surveillances could not monitor market manipulators and market intermediaries. Even information inefficiency, artificial financial statements certified by chartered accountants, false information and rumor were other important factors that overheated the market and burst the bubble.

32 | P a g e

5.2.2 Crash during 2010

The market crash of 2010 drew greater degree of attention because much larger segments of population spreading all around the country are affected this time as the market in this period has gained significant growth. The securities market debacle in 2010 need to be viewed from different perspectives. The following section attempts to ex-amine those issues mostly from demand side factors. This is a plain logical analysis supported by some facts and figure. The analysis covered the period from 2004 till2010 because, the impacts of 1996 continued until 2003 period. It can be considered that, the market started consolidation and development from 2004.

Background of the 2010- 2011 crash

History of the stock market crashes show that ‘Bull Run’ before a stock market crash is kind of normal phenomenon. There was no exception for the stock market crash of Bangladesh in 2010-11.

According to CPD (2011), the total number of BO Account holders on 20th December, 2010 reached to 3.21 million though the number was 1.25 million in December 2009. Most of these new investors don’t have enough knowledge about the stock market but invest their most or all savings in the market.

As CPD (2011) found, internet-based trading operation, opening branches of brokerage houses across the country, easy access to the market information, arranging a countrywide ‘share mela (fair)’ are the factors for increasing investors. But supplies of new securities through IPOs were not enough to chase huge capital of too many investors in the market.

Last couple of years broad money made excess liquidity and the main motive behind it was Bangladesh Bank`s ex-change rate policy. A big portion of this excess liquidity had gone to the stock market but there were very few shares in the market. The policy that was adopted by BB to grow economy by increased exports & investment eventually misguided and ended up blowing the mother of all bubbles.

Moreover Security & Exchange Commissions was not capable to monitor the market conditions properly. Due to the poor monitoring & market surveillance share prices of Z Category Companies and small companies increased dramatically

15th December, BB increased CRR and SLR by 0.5 percent and increased to 19 & 6 percent. Another important directive initiated by BB was withdrawal of illegally invested industrial loans by December 31, 2010. As a lot of the reserved money was invested in capital market, banks started selling shares and withdrawing that money from the market. By the time investors became panicked. To handle the disastrous & assure the panicked investors BB extended its deadline for submitting and adjusting loans. For the merchant banks the deadline was January 15, 2011 and for the commercial bank February 15, 2011.

33 | P a g e

Institutional investors including financial institutions started selling shares from the be-ginning of December to show high return on investment at their balance sheet. As the Institutions & banks started selling their shares from the beginning of December the turnover of DSE was the highest ever in its history on 5th December. (Raisa, 2011)

19th December was a historical day of the financial year 2010-11 in Bangladesh stock market. On this day DSE witnessed its biggest one day fall in 55 years history until the date with losing 551.76 points or 6.71 percent. The losing index was even higher than 284.78 points or 3.32 percent of 12th December. Prices started to nosedive in an hour after the trading started and about 200 points were wiped off. In the middle of the session it recovered little bit and ended up the session at 7654 point.

Causes of stock market crash in 2010-2011

Increase of BO a/c

Most of the BO accounts were opened during June ’2009 to January ’2011 that indicated that more than half of the investors could be treated as new investors. During 2009, stock exchanges, Institutional investors and SEC make many campaigns within and outside the country to attract new investor that seems to be successful as the BO accountholders was doubled in last two years that might be treated as a potential for market development.

But due to scarcity of new securities market price increased substantially. This demand-supply mismatch along with inadequate investor’s knowledge made the stock prices in a new height and finally turned into a big depression that is still going on.

 Increase of listed securities

The fundamental strength of the market essentially comes from financial strength of the listed companies. The market witnessed that last few years many fundamental companies with strong financial strength have been listed in the market. From the graph, it is seen that number of security listing are increasing year to year and highest amount is in the year 2011.

 But growth of market demand for stock was much then that of supply that inflated the market in recent years and made the market most volatile one in the region

Increase of Market Cap and Turnover value.

The graph shows that market capitalization and turnover of Dhaka stock exchange, prime bourse of Bangladesh increased substantially in consecutive three years that might be considered as a good factor for capital market development. But as the supply side response was poor, stock price might go up due to excess liquidity. SEC

34 | P a g e

had nothing to do with this as they had no direct tool to control money supply and also they cannot force companies to come to the market.

The DSE General Index (DGEN) crossed 3000 marked point in December 2007 for the second time. Since the third quarter of FY09, the DGEN gained sharply and it jumped to 8918.51 in December 2010 increased by 5908.51 points or 197 percent from the index of end June 2009(3010 points).

Fluctuation of DGEN

In December 2010, DSE index had crossed 8500 points. The market had called bullish during this period. After this period, the market became bearish. The exchange lost 1800 point between, December 2010 and January 2011. In January 2011, the General Price Index (DGEN) fall 660 points. Again that during December 2011 to January 2012 Dhaka Stock Exchange general Index (DGEN) felled by more than 50% during that period, i.e., DGEN lose its value by 50% during the period that says that this is not simple volatility and it can be defined as a collapse.

January 2011, the General Price Index (DGEN) fall

Graph gives the highly volatile and sharply falling index trend of DSE general Index that started to increase from 2600 points in January 2009 and crossed its zenith price of 8600 in December 2010.

After climbing the highest point it started to fall sharply and came down below 4000 in December 2011 to January 2012 less than half of the highest point.

From graph, we find that DSE general index, Daily trade value and market capitalization of DSE increased substantially during last 4 years. But number of listed securities remained almost the same during the period that implies that supply side response was less relative to demand side response and market capitalization and index increased due to increased demand for securities.

Faulty listing methods

In the year 2010, regulator introduced Book building method to attract new companies to the market. Some companies abused this opportunity to exploit maximum benefits from listing that inflated the market. SEC allows companies to float securities through IPO (Fixed Price and Book Building method), Direct Listing and Repeat IPO where Book building method is used mostly in the year 2010.

Listed Companies with financial information

Traditionally DSE used fixed price method for flotation of new companies. But fixed price method does not attract good companies always. So, to attract new companies, SEC decided to introduce Book building method that is a globally acceptable method

35 | P a g e

for IPO. But in Bangladesh, Book Building method is handled very roughly that caused loss for millions of investors.

 Changes in Face Value (Stock Split) of Securities

With similar financial condition or weaker financial conditions lower face value companies were overvalued relative to higher face value companies in same industries. This situation was persisting for many years and regulator failed to identify the face value of all listed companies that created some overvalued securities in the market. Investors were eager to buy the securities of these companies that were going to change face and before split price of these were jumping.

 Stock price Manipulation:

Stock price manipulation was very common in last few years as some company’s stock price grew by more than 4000% in one year without any significant change in company fundamentals. Stock price was inflated with the help of serial trading by few numbers of big investors that was one of the reasons of recent collapse of stock market in Bangladesh.

Pre-IPO & IPO process:

Investigation committee considered that due to Pre-IPO & IPO manipulation share prices sky rocketed and that is the main reason for the share market crash. Manipulators illegally & unethically created a Curb market in Pre-IPO stage. Without recommendation by the listing committee application for IPO was accepted. SEC did not examine abnormal asset revaluation and indicative price. As a result in Pre-IPO or IPO stage placement process and placement trade Curb market overvalued share prices. This eventually generated liquidity crisis in the capital market.

Investment of bank in the capital market

In 2010 & 11 banks and financial institutions invested huge amount of deposit money in the stock market. As a result share prices sky rocketed until December 2010. When Bangladesh Bank restricted more than 10 percent investment of deposited money, increased CRR and SLR ratio, created liquidity crisis and market crashed.

Omnibus account

Investigation report found Omnibus accounts of ICB and merchant banks as another major reason behind the stock market debacle. Every branch of merchant bank operates only one omnibus account. There could be 3-10 thousands BO Accounts under the omnibus account which are not under the surveillance of SEC. So, information of individual accounts and its transaction 40 are kept only with merchant banks. As investigation reports shows that this kind of account made a lot of illegal

36 | P a g e

transactions. It publishes name of 30 big players including ICB for a lot of suspicious transactions and says most manipulators traded from the omnibus accounts. It was also reported at least Taka 2.5 billion has been traded from hidden or omnibus accounts.

Asset revaluation & Rumor

By taking chance of weak asset revaluation method companies have overvalued their asset. In this process dishonest auditors generated artificial audit reports. So, calculating of NAV on overvalued asset indicates wrong signal. Some companies issued Bonus shares against unrealized gain of revalued asset price which is a faulty accounting practice. There is rule to maintain provision against “deferred tax” during asset revaluation to pay tax in future, but companies are not following it.

Block placement

There was a lot of suspicious block trading of mutual funds. Some investors got enormous amount of placement time to time.

 Direct listing:

With the approval of SEC few companies have been directly listed in the stock exchange. These companies come to the market with inflated share prices.

 Suspicious transaction of top players

Investigation report reveals some names of individual and institutional investors as top buyers and sellers during abnormal increase and decrease of index in different time periods. The transactions of these investors were suspicious and affected the market heavily and liable for abnormal rise and fall.

Serial and artificial trading

Some manipulators created artificial active trading environment among themselves through bulk transaction and increased share 41 prices. Moreover serial trading and price manipulation by many buy-sell orders through different accounts and broker houses which overheated the market.

37 | P a g e

5.3.3 Comparison between two years:

2010-2011 1996

Trading was automated, Computer based Trading was  not automated, Paper Based

Surveillance was strong Surveillance was weak

Circuit breakers and international protections were in place

Circuit breakers and international protections were not properly in place

Being automated   there were no forged shares traded.

Being not automated   there were no forged shares traded.

There were also omnibus accounts in the market

There were no omnibus accounts in the market

The BO account value was 35 lacs 2010-2011 crash was an asset bubble

Compared to 3 lacs before the 1996 crash was a result of a speculative bubble

While in 2011 it lost up to 660 points, nearly 10 percent, Maximum Lost Index in one day

In the end, in 1996 the index lost 232 points, Maximum index lost by one day

38 | P a g e

5.4 Market Scenario and Investors’ Behavior after Market Crash

Market Scenario: Before and after the market crash 2010-2011, the scenario of stock market is different. If we look at the stock market trend from different views, we can predict the market conditions and investor’s movement according to this changing market.

By Collecting Data 2009-2014 data Market indicators are Describe Below:

Market Turnover:

Turnover 2009 2010 2011 2012 2013 2014

Total Turn. In Tk million

1475300.88

4009912.67 1560912.09 1001084.90 952742.08 1154458.87

Daily Avg. Turnover

6046.32 16434.07 6642.18 4206.24 4003.12 4850.67.

Highest Turnover

12451.79 32495.76 19579.28 12884.27 12946.16 12885.538.

Lowest turnover

2120.14 5064.12 680.84 1157.03 1012.72 1499.64

2009 2010 2011 2012 2013 20140

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

Total Turnover Tk. Mn

39 | P a g e

Figure 2: After Crash 2010-2011 total stock market turnover in 2009 to 2014

Here, we can see the huge turn over in 2010 by Tk. 4009912.67 million and the percentage change of that time is 171.8 which simply indicate that on that time huge liquidity was seen. Moreover, it indicates that trading is vigorous and stocks are highly liquid. It is simple to find buyers and sellers, although the pricing may be highly variable. And we all know that in 2010 the huge participation of investors made the market highly liquid.

Besides, a low share turnover reflects illiquidity, where shareholders have difficulty buying and selling stocks and could be in a trouble if they need to sell off their stock. On the other hand, in 2011 the market turnover in terms of Taka is decreasing which point out the market improvement a little bit from an abnormal scenario in 2010.

Foreign Trade Turnover:

Foreign Trade Turn. Tk Mn

2009 2010 2011 2012 2013 2014

Buy 5816.32 10791.59 12168.35 13483.94 26525.05 32582.03Sell 8567.57 17557.44 11384.03 5558.02 7096.10 9708.10

Total 14383.89 28349.03 235532.37 19041.93 33621.16 42290.13

2009 2010 2011 2012 2013 20140

5000

10000

15000

20000

25000

30000

35000

BuySell

The chart of the foreign trade turnover indicates that from the 2009 to 2011, foreign investors sold more their shares rather to buy more. In 2010, the selling volume was huge compare to

40 | P a g e

another year and as a result local investors were scared and they also sold their shares more. When investors are selling their shares rapidly, there is a chance of market crash. So, this could be a result of 2010-2011 market crash.

Market P/E Ratio:

2009 2010 2011 2012 2013 2014

25.65 29.16 13.68 12.07 15.07 18.19

Market P/E0

5

10

15

20

25

30

35

200920102011201220132104

A high P/E ratio depends on both the industry sector as well as the stock itself. Moreover, a high P/E ratio indicates that people are willing to pay a higher price for the stock in anticipation of future company performance. In 2010, the P/E ratio was higher than ever which was 29.16 or 30 percent compare to other years. It signifies that on that year people were willing to pay a higher price for some stocks and retail investors at that time had less knowledge about the market and they trade most of the time based on the rumor. For that reason, in 2010 we saw a historical fall in stock market.

41 | P a g e

Investors’ Behavior Scenario: The stock market or share market is a vital part of a country’s economy. People invest their money in the capital market to obtain economic prosperity for them, which also has positive effect on the country. However, if, for any reason like the stock market crash, this process of resource enlistment is threatened and as a result, investors become panic and begin seeking safe alternatives. Statistics shows around 3.3 million retail investors of Bangladesh engaged in the stock market during the market crash of 2010. In addition, they used to invest money from various sources such as savings in bank, idle money, and part of earnings or proceeds from selling their movable or immovable assets and so on. Unfortunately, after the crash they were left with nothing significant. After the month March, 2014 BO account numbers stood at 60 thousand and the total number of the BO account holder increased at 29lakh 55 thousand and 731 which was before at 29lakh 4 thousand 832. Moreover, in February the men BO account holders were 21lakh 43thousand and 917 and this number is increased by 21lakh 78thousand 305 that means after one month BO account of men increased at 34 thousand and 388. Besides, women BO account holders are 7lakh 67thousand and 569 in March. On the other hand, in March the company BO accounts is 9thousand and 857. Now a chart is giving below which shows the two months comparison of BO accounts.

Men BO Holder Women BO Holder

Company BO Holder

Total Bo0

500000

1000000

1500000

2000000

2500000

3000000

3500000

FebruaryMarch

We can see from the chart is that BO account is increasing. But the true fact is, investors are now more relying on IPO than secondary market because of the risk factor. Though IPO is held by lottery but there is no such chance to loss investor’s whole investment whereas in secondary market, there is no such chance and that’s why investors are opening BO account for the IPO and after IPO they are not interested to hold their shares in secondary market as they scared of losing their whole investment in secondary market.

42 | P a g e

Demutualization: Recently, capital market regulatory body the Securities and Exchange Commission has finalized a scheme to transform the country’s two bourses into joint stock companies, or in other words demutualising them. This is indeed a new step for the country’s share market. This demutualization was also proposed in the probe report filed by a committee set up to investigate the 2010 share market collapse. The report also said that such demutualization was very necessary to ensure that such scandals do not occur in the bourses in the long term. If the demutualization takes place, every stock exchange will be run by a board of 13 directors. Of these 13 individuals, one will be elected as an independent director.The stakeholders of the exchange houses, that is, those who are involved with bourses sometimes do not take effective measures against an irregularity if it suits their personal gains and sometimes create bars to such actions. Therefore, the bill proposes five directors to be chosen from the owners and the rest seven will be independent directors. One would have to think of how much change this limited number of independent directors can bring in a stock exchange of Bangladesh. If the Securities and Exchange Commission is not active in reality, doubts would continue to remain on the success that this demutualization processes can bring.At the same time, the extent of effort these independent directors would give for the benefit of investors would determine the true results of the demutualization scheme. But, one thing can be said that if these independent directors are chosen from honest individuals and are kept out of political influence, then a demutualization can indeed bring a relief in the sector.But it has to keep in mind that the instability and the share market scandal did not occur only because of the absence of a demutualization. Adverse decisions in monetary policy and other state decisions have given an untoward push in the indexes of the markets. Therefore, focus also has to put there or else a demutualization alone will not be able to solve the problem.Apart from that, other state policies has made other investment tools unattractive for savers, thus the entire investment was poured into the share market. Demutualization is a good step. Apart from demutualization, factors which have given rise to this sudden ‘bubble’ in the bourses also need to be checked. Or else, the scheme would not be of much use and the problems existing in the capital markets will continue to remain

43 | P a g e

CHAPTER SIXCHAPTER SIXANALYSIS OF MARKET CRASHANALYSIS OF MARKET CRASH

Bangladesh stock Market Crash in two times in 1996 and 2010-11. Behind the market crash there are some big investor as well as some company are responsibly. But Bangladesh Securities and Exchange Commission (BSEC) fail to catch those big fish. There are also several company price bubbles for the reason for big crash.

6.1 Analysis Market Crash in 1996 with Example: In 1996, Index starting with a base of 350 points, the share price index of the DSE rose, when the Awami League government was in power, the index of the DSE soared from 1,000 in June to 3,648.75 points on November 5, 1996 before the market crashed. Then it started falling and it came down to 462 points in May 1999.

Jan-96

Feb-96

Mar-96

Apr-96

May-96

Jun-96Jul-9

6

Aug-96Sep

-96Oct-

96

Nov-96Dec-

96Jan

-97Feb

-97

Mar-97

Apr-97

May-97

Jun-97Jul-9

7

Aug-97Sep

-97Oct-

97

Nov-97Dec-

97Jan

-980

5001000150020002500300035004000

DSE Index

That time share traded only by paper to paper. There was no grape or computer base trade system. Invest was trade on the basis of rumor which was used by big market player. They spared rumor that, that company will up because foreign buy will buy it or foreign investor was buying etc. Big player was used group of syndicate, who spared the rumor to small investor and small investor believe that rumor and they buy those share on highest price.That was the big reason for market crash in 1996.

During the period, some shares were sold by foreign investors, and there were some price-sensitive announcements when the prices peaked. It clearly indicates an act of manipulation and these dealings come within mischief under a section of the Securities and Exchange Ordinance.

A number of companies and some of the country's biggest brokers and influential individuals to be involved in market crash. BSEC found that there are 38 individuals, eight listed companies and six brokerage firms on charges of manipulating share prices through fraudulent means in 1996.

44 | P a g e

Heidelberg Cement, it was listed Bangladesh stock market in 1989. The prices crossed Tk 18,000 per share in 1996 against its book value of Tk 134. After market crash it price came again around 2000 at 1997. One of the directors of the company transferred a large number of shares during the July-November period of 1996 to one of his relatives that were sold in the market

Dec-89

Apr-90

Aug-90Dec-

90

Apr-91

Aug-91Dec-

91

Apr-92

Aug-92Dec-

92

Apr-93

Aug-93Dec-

93

Apr-94

Aug-94Dec-

94

Apr-95

Aug-95Dec-

95

Apr-96

Aug-96Dec-

96

Apr-97

02000400060008000

100001200014000160001800020000

Heidelberg Cement

Fig: Price Chart for Heidelberg Cement at 1989-1997

Another company was also involving market crash in 1996. It was Singer BD. SINGER BD, it was listed in Bangladesh stock market at 1983. Which face value was TK 100. In January 1996 its price was only 350 and then for market babble its price goes up around 16000+ TK. But the crash its price goes down and reached at around 4000.

May-83

Dec-83

Jul-84Feb

-85Sep

-85

Apr-86

Nov-86Jun-87

Jan-88

Aug-88

Mar-89Oct-

89

May-90

Dec-90

Jul-91Feb

-92Sep

-92

Apr-93

Nov-93Jun-94

Jan-95

Aug-95

Mar-96Oct-

96

May-97

Dec-97

02000400060008000

1000012000140001600018000

SINGER BD

For the limitation of computerized system share was not traded eclectically. For that company have not any historical grape or data for annual report. So it is hard to analysis the company which was mainly play the rule for market crash 1996.

45 | P a g e

6.2 Analysis Market Crash in 2010-11 with Example: In 2010-11 market crash, when again Awami League government was in power. The Awami League led alliance government to power in January 2009, the general index of the DSE stood at 2,726 points. Before the crash began, the general index had soared in 29 trading days from 7,522 points on October 20 to 8,918.51 points on December 5.

Jan-09

Mar-09

May-09

Jul-09Sep

-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10Sep

-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11Sep

-11

Nov-11

Jan-12

0100020003000400050006000700080009000

10000

DGEN Index

In 2010-11, stock market was computerized and investor around 33+ lacs who was traded electrical share computerized software. The company have historical data, annual report, grape of price which recorded by computer program. There are so many companies, big investors; Finance Institute and Bank was involved in market crash 2010-11. Like Bexmco, Aftab Auto, CVO-PLT and CMC Kamal, IDLC, Prime finance, PLFSL, NBL and South east Bank etc.

Bexmco Aftab Auto, CVO-PTL and CMC Kamal: 2009 2010 2011

EPS Price Range EPS Price Range EPS Price RangeLowest Highest Lowest Highest Lowest Highest

BEXMCO 3.46 30 95 4.20 92 160 2.10 50 155

Aftab Auto 3.19 20 110 19.61

95 310 16.15

93 240

Chittagong

Vegetable (CVO)

(24.4) 1.90 9.7 2.1 8.30 446 4.50 129.40 295.2

CMC Kamal

1.01 1.20 7.30 1.92 3.30 68.50 1.42 22.10 68.90

*EPS Calculate by according to face value of share TK 10

46 | P a g e

Bexmco is one of the largest company in Bangladesh, ASF Rahman (Chairman)Salman F Rahman (Vice Chairman) of the company. It was one of them company that was involve in market crash 2010-11. In 2009 Bexmco eps was 3.46, price TK 30 in January and December was TK 90. In January 2010 price was TK 92 and than its goes up TK 160 at December 2010 before crash start, 2010 EPS was 4.20. Then its fall quickly and reached TK 50 at 2011. EPS growth (4.20-3.46=0.74) but Price Rise TK 30 to 160. That was the reason for Big Fall.

In 2009 Aftab Auto EPS was 3.19, price TK 20 in January and December was TK 97. In January 2010 price was TK 95 and than its goes up TK 310 at December 2010 before market crash start, while EPS was 19.61. Then its fall quickly and reached TK 93 at 2011.

In 2009 Chittagong Vegetable (CVO-PTL) EPS was (–24.38), January price was only TK 1.9 and December was TK 9.7. January 2010 price was TK 8.30 and than its goes up TK 446 at December 2010 before market crash start. 2010 EPS was 2.10. Then its fall quickly and reached TK 93 at 2011.

In 2009 CMC Kamal EPS was 1.01, January price was only TK 1.20 and December was TK 7.30. Then January 2010 price was TK 3.30 and than its goes up TK 68.50 at December 2010 before market crash start. 2010 EPS was 1.92. Then its fall quickly and reached TK 93 at 2011.

EPS growth (1.92-1.01=0.91), but Price Rise TK 1.20 to 68.50. That was the reason for Big Fall.

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

0

50

100

150

200

250

300

350

400

450

500

MEXMCOAftab AutoCVO-PTLCMC Kamal

Fig: Market Up and Down Diffirent Company

47 | P a g e

Analysis Finance Institute: Some financial institute company also responsible for market crash. Those companies play a

significant game by up and down the share price. Like IDLC, Prime Finance and PLFSL. 2009 2010 2011

EPS Price Range EPS Price Range EPS Price RangeLowest Highest Lowest Highest Lowest Highest

IDLC 15.50 27.90 71 22.12 71 201.30 5.05 73 156

Prime Finance

2.86 16 44 4.04 43 170 1.90 51 148

PLFSL 4.94 9 23 9.94 21 155 2.76 44 145

*EPS Calculate by according to face value of share TK 10

In 2009 IDLC finance company EPS was 15.50, price TK 27.90 in January and December was TK 71. In January 2010 price was TK 71 and than its goes up TK 210.30 at December 2010 before market crash start, while EPS was 22.12. Then its fall quickly and reached TK 93 at 2011.

In 2009 Prime Finance EPS was 2.86, January price was only TK 16 and December was TK 44. Then January 2010 price was TK 43 and than its goes up TK 170 at December 2010 before market crash start. EPS was 4.04 in 2010. Then its fall quickly and reached TK 51 at 2011.

In 2009 PLFSL financial insinuate EPS was 4.94, January price was only TK 9 and December was TK 23. Then January 2010 price was TK 21 and than its goes up TK 155 at December 2010 before market crash start. EPS was 9.94 2010. Then its fall quickly and reached TK 44 at 2011.

Price was rise quickly against the growth of EPS. That was the reason for Big Fall.

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

0

50

100

150

200

250

IDLCPrime FinancePLFSL

Fig: Financial Institute

48 | P a g e

Analysis of Bank: Some bank also involve in market crash in 2010-11

2009 2010 2011EPS Price Range EPS Price Range EPS Price Range

Lowest Highest Lowest Highest Lowest Highest

NBL 0.73 7.4 13.5 1.56 12.50 62.40 0.77 31 58

South East Bank

.54 8.60 15.60 .45 15.80 49 .23 25 40

*EPS Calculate by according to face value of share TK 10

In 2009 NBL EPS was 0.73. January price was only TK 7.4 and December was TK 44.January 2010 price was TK 12.5 and than its goes up TK 62.4 at December 2010 before market crash start. EPS was 1.56 in 2010. Then its fall quickly and reached TK 31 at 2011.

In 2009 South East Bank EPS was only 0.54. January price was only TK 8.60 and December was TK 15.60. January 2010 price was TK 15.80 and than its goes up TK 49 at December 2010 before market crash start. EPS was .45 in 2010. Then its fall quickly and reached TK 25 at 2011.

Big investor, some company, Finance institute and Bank create an artificial crisis of share in market which helps market babble. That’s why the big fall was occurred.

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

0

10

20

30

40

50

60

70

NBLSouth East

Fig: Bank Sector

49 | P a g e

CHAPTER SEVENCHAPTER SEVENFINDINGS & FINDINGS & RECOMMENDATIONSRECOMMENDATIONS

After preparing this report, it has been come to my mind that only one factor cannot be mentioned greatly for this share market crash. But it is the collective of various factors who are responsible for this huge crash. The followings are some findings that are_

7.1 Findings

Investors are influenced by other investors’ decisions. Individual investors invest most of their investment in the stock market without any research. Investors most of the time take decisions based on the rumor. They want to grab short term profit rather long term profit. Most of the investors think, behind the market there are some people who manipulate the market. Some people are giving false information so that they can take some advantages. Regulator bodies are failing to control the false information.

Financial institutions are the biggest investors in the market and there aggressive involvement increased market liquidity manifold in recent years. Financial Institutes could invest more than 10% of their demand and time liabilities to the stock market and greater involvement of financial institutes increased the liquidity in the market that created a bubble in the stock market.SEC must be aware about this.

7.2 General Recommendations

Strengthening the Market Surveillance Systems To strengthen the SEC’s operations and governance, (i) a real-time market surveillance system should be installed, and (ii) capacity building will be provided to improve monitoring, supervision, and enforcement capacity of the SEC.

Co-ordination between SEC and Stock ExchangesFrom the analysis and Investigation report we found lack of coordination and inconsistencies between the functions of SEC and Stock Exchanges. Esp. in case of Company listing and surveillance, Coordination is highly important. To combat future debacle both SEC and stock exchanges should work closely.

Bank Finance in Capital Market Commercial Banks relies heavily on capital market by investing directly and indirectly (Margin Loans) that creates high risk on depositor’s money. So Regulators

50 | P a g e

should impose restriction on investment on Capital market by Banks. In India, Banks can invest a certain portion of their owner’s equity/capital (not deposit) to capital market but in Bangladesh Banks can invest 10% of their total liability that is not rational at all. Such huge investment by banks pushes only the demand side and creates bubble to the market as supply side response is very low in Bangladesh. SO, regulators should set new limit on the basis of Shareholders equity and should monitor this very strictly.

Consistency in Regulation From the analysis made in this report, I found various inconsistencies in the SEC regulations. SEC notification came only when the market rises continuously for many days that do not reflect good regulation.

Serial Trading and Manipulation As there are many evidences that some investors and institutions were involved in the serial trading and insider trading to manipulate the price of individual stocks under regulatory supports. Manipulative trading under Omnibus accounts should be fully investigated and peoples and institutions under the hidden accounts should be identified and also should bring under trial if any irregularity is found.

7.3 Recommendations for the Government

 There is no doubt that the failure of the government in making various decisions regarding capital market played role behind the recent crash:-

Government should ensure the supply of fundamentally strong shares in the market to meet the demand which will make the market efficient as investors would not go for buying junk shares. For ensuring the supplies of such shares, Government can offload the shares of different companies which it possesses now. It also can urge the private limited companies to go public by offering tax benefits Government should delegate all power to the SEC to take legal actions against the criminals. Even if necessary, new Act may be passed in the Parliament in this regard.

     

7.4 Recommendations for Bangladesh Bank

Former DSE chief executive officer professor Salahuddin Ahmed told New Age that the recent shortage of cash in the banking sector following the Bangladesh Bank’s move created a liquidity crisis in the capital market resulting in the market collapse.

The banks and financial institutes accumulated funds by borrowing from other banks or by selling off shares on the capital market to fulfill a BB directive to increase their SLR and CRR. So BB should take positive Bank exposures limit which help Capital market.

51 | P a g e

CHAPTER SEVENCHAPTER SEVENCONCLUSIONCONCLUSION

The capital market is the engine of growth for an economy, and performs a critical role in

acting as an intermediary between savers and companies seeking additional financing for

business expansion. Vibrant capital is likely to support a robust economy. While lending by

commercial banks provides valuable initial support for corporate growth, a developed stock-

market is an important pre-requisite for moving into a more mature growth phase with more

sophisticated conglomerates. Bangladesh's stock market is poised for rapid development. For

this the SEC, DSE, CSE and all market players should work together with the support of the

government. Market confidence is sure to erode if conflicting signals are received from

different authorities. At the same time investors will have to understand that in any stock

market there are ups and downs and they cannot blame others whenever stock prices slide

down. Fortunately, investors are getting matured gradually and hopefully we may not have to

see shouting and slogan in front of the exchanges any longer. Bangladesh should really focus

on improving governance and developing advanced market products, such as derivatives.

52 | P a g e

REFERENCESREFERENCES1. Bhuiyan K., 2011. Small investors’ anger may turn into big issue! [Internet], Available

from: <http://www.e-dirts.com/2010/small-investors%E2%80%99-anger-may-turn-into-big-issue/ > [Accessed March 26 2014]. Carlson, M., 2006. A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response.

2. ChowdhuryS.T.2011. Dhaka investors feel the pain. [Internet],Available from:<http://www.atimes.com/atimes/South_Asia/MA14Df02.html> [Accessed March 28 2014].

3. CPD, 2011. Independent. Review of Bangladesh’s Development (IRBD). [Internet], <http://www.cpd.org.bd/downloads/IRBD%20FY11_First%20Reading.pdf> [Accessed March 28 2014].

4. Economy watch, 2010. A Brief Introduction to the Dhaka Stock Exchange. [Internet], Available from: <http://www.economywatch.com/stockexchanges/dhaka.html> [Accessed March 29 2014].

5. Hassan M. K., Islam A. M., & Basher S. A., 2000. Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market.

6. Haque, M. S., (n.d.). Recent stock market crash in Bangladesh. [Internet], Available from:<http://www.nub.ac.bd/recent-stock-market-crash-in-bangladesh-wrong-signals-from-responsible-quarters since-the-ctg-caused-the-asset-price-bubble/> [Accessed April 2 2014]

7. Rahman J., 2011. Share Market Bubble — the Big Picture. [Internet], Available from: <http://dpwriters.wordpress.com/2011/02/04/share-market-bubble-the-big-picture/> [Accessed April 12 2014].

8. Raisa A., 2011. Behind the Scenes The Stock Market Saga. [Internet] <http://www.thedailystar.net/magazine/2011/01/03/cover.htm> [Accessed April 16 2014].

Websites:http://www.dsebd.org/

http://www.cse.com.bd/

http://www.cdbl.com.bd/

http://www.stockbangladesh.com/users/index

http://www.thedailystar.net/business/tribunal-moves-1996-stock-scam-122539

http://news.priyo.com/story/2010/dec/20/15063-1996-revisits-stock-market

53 | P a g e