Capital market
A financial market that works as a conduit for demand and supply of debt and equity capital. It channels the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and investees through a variety of financial instruments (bonds, notes, shares) called securities.
A capital market is not a compact unit, but a highly decentralized system made up of three major parts: (1) stock market, (2) bond market, and (3) money market. It also works as an exchange for trading existing claims on capital in the form of shares.
Present scenario of Bangladesh Capital Market
Albeit Bangladesh economy is not more integrated with the global economies, Global Financial Crisis 2008 has dented every sphere of Bangladesh. Bangladesh economy has also been limping since being dented by the blow of financial meltdown. On the one hand, Bangladesh economy has been gaining benefits from the crisis and on the other hand it has lost. Because of income declining of developed countries’ citizens low-priced garments of Bangladesh have been very popular registering more growth in the country’s apparel sector. But financial collapse in many developed countries slowed down the infrastructural development especially construction works in Middle East which have pushed many Bangladeshi workers come back. Remittance inflow has risen but number of workers going abroad has fallen drastically. In the year 2009-10 a record$11 billon remittance has come to Bangladesh against $9.76 billion in 2008-09 fiscal year. Country’s foreign currency reserve hit new record of $11.35 billion recently be-cause of low import expenditure and rising trend of export earnings. But still 44 per-cent people are under poverty level; the Government and other concerned organizations should take comprehensive efforts to eradicate poverty. But to achieve desired level of growth to turn Bangladesh into a middle income country by 2021, growth rate should be accelerated. To do that more investment in infrastructure especially power sector, roads and highway, modern and sophisticated port facilities are badly needed. Cost of doing business should also be reduced along with the removal of red-tapeism in commencing business. Public-Private Partnership has been incorporated in the budget for 2010-11 but success will depend on time-bound implementation. Instead of eying towards foreign countries, multi-lateral donors and agencies Government should choose country ’s capital market to raise fund for development projects especially for the construction of Padma Bridge, elevated express-way and other big projects which will also ensure people’s association in profitable Government properties. Associating general people in lucrative Government venture means to create the way of ensuring equitable distribution of wealth and this is only possible through strong and vibrant capital market.
Another important issue is that
tax to GDP (Gross Domestic Product) is very
poor in Bangladesh, which has been another cause of fiscal deficit in almost every year. The Government has been regularly
depending upon the borrowing both from internal and external sources. Because of
huge Government borrowing from the country ’s for-mal banking sector private
industrial ventures and other commercial set ups have been on declining trend.
Instead of borrowing from banking sources and other foreign lenders Government should depend on raising fund from the country’s capital
market.
Some problems of the Capital Market of Bangladesh are mentioned below:
-The Securities and Exchange Commission
(SEC) and capital market participants are weak.
- Market
participants, including brokers, dealers, and merchant bankers, require
a license to trade from the SEC.
- The limited number of
listed securities has always been a constraint on improving the liquidity and
market capitalization of the stock market.
- Market
participants, including brokers, dealers, and merchant bankers, require
a license to trade from the SEC.
- The
majority Government-owned Investment Corporation of Bangladesh (ICB)remains the
single largest integrated capital market operator.
Imposed by the SEC or the exchanges on
any of the intermediaries. To strengthen governance and the quality of market
intermediaries, an examination and minimum qualification standards need to be
introduced as a prerequisite for licensing by the SEC. Only qualified and duly
licensed personnel should be al-lowed to deal with the public in transactions
involving securities. Currently, there are no institutions in Bangladesh which
offer courses specifically related to the functions and regulation of financial
intermediaries.
-The majority Government-owned
Investment Corporation of Bangladesh (ICB) remains the single largest
integrated capital market operator. ICB and its subsidiaries accounted for 32%
of total combined turnover on the DSE and CSE inFY2004. To address conflicts of
interest in its combined operations, three separate subsidiaries were created
at ICB in 2002. However, all the objectives of un-bundling ICB’s operations
have yet to be achieved. Other problems include the followings:
-Lack of infrastructure and physical
facilities
-Existence of only dealer-broker-members
(no specialist/market maker)
-Market dominated largely by
unsophisticated investors
-Lack of diversity in products'
availability in the market
-Inefficient capital market—both
operational and informational
-Lack of proper and adequate disclosures
-Certifiers of financial statements and
property evaluators of the company are the same/identical
-Management and Owners (Councillors) of
DSE are entwined
-Lack of enforcement with the compliance
of rules and regulations
-Corporate governance—sponsor-owners are
managing the firm. In al-most all cases, no professional managements are hired
to run the affairs of the listed company.
-Lack of ethical orientation, education
about capital & securities markets.
-Lack of trust, self-respect amongst
interest groups. These are important preconditions for building up a
healthy and investment friendly market atmosphere.
-Lack of potential securities and narrow
options for the investors.
-Disclosure problem-inadequate
disclosure, concealment of facts or some-times fabricated disclosures appear in
the annual reports.
-Infusion of fake shares.
-Exaggerated projection in
prospectuses.
-Credit facilities are inadequate and
interest rates are exorbitant.
Problem
of rebuilding the image of presently depressed market.
4.1 Measures to be taken to resolve the
problems
Capital market development is related
with the financial deepening, which in turn, de-pends on effective financial
intermediation as well as on the availability of a wide variety of financial
instruments. In this context, merchant banks have yet to play due role in
revitalizing the stock market. Measures can be initiated to remove the
constraints that merchant banks are facing in order to make them effective are
as follows:
1-Merchant banks (MBs) should be allowed
to deal in secondary securities on their own account, which are not currently
allowed.
2 -Merchant banks should provide
price support/stabilization of their under-written IPOs in the immediate
aftermarket. They would be able to offer market-making activities in primary
and secondary market and to extend loans to their clients for margin buying of
securities, if they could access funds at softer rates.
3. Capital Market
stabilization/Development fund should be established at the Bangladesh Bank
(BB). The fund will counter finance merchant banks through commercial banks to
finance their clients' investment activities. Otherwise, merchant banks should
be able to obtain refinancing facilities from the BB on certain margin basis.
This will make MBs active and inject fresh fund in the securities market.
4. MBs as wholesale banking are given
more activities in order to be sustainable and viable ones.
5. Making the market information
dissemination system perfect and pure.
6. Corrective measures to rumours and
fake reports and thus making the trading of securities smooth and
uninterrupted.
7. Prompt explanations to unusual market
actions.
8. Refrain companies from misleading
potential investors through fake re-porting and forecasting.
9. Refrain sponsors from buying and
selling own company securities without notifying the exchange through
writing.
10. Making the sources of rumours ineffective
in the trading floor by strengthening the market intelligence force.
11. Quick transformation to Central
Depository System, which is expected to reduce workload of physical deposit and
withdrawal of securities.
11.-Enhancement of ethical standard of
all the parties involved in trading.
12.-The listed companies that pay
regular dividend should be given tax incentives and tax rebates as well.
-The mode of privatization of industries
will be implemented through public issue of shares. This will deepen the
securities market, diffuse ownership and bring in market disciplines.
-The government should off-load its
equity holdings in SOEs and MNCs through stock market. This will improve the
supply of securities in the market.
-Bond market needs to be developed. The
implementation of government securities with medium-term and long-term
maturities will also broaden the base of bond market.
-Establishment of a separate judicial
security tribunal for dealing with cases related to securities market.
-Disclosure of information to the public
in the fullest possible dissemination system can make the people aware about
the latest situation.
-Prompt clarification or confirmation of
rumours and reports that may likely to have an effect on the trading of
securities or would likely to have a bearing on investment decision.
-The companies concerned must refrain
from disclosure like exaggerated
-reports or predictions which exceeds
what is necessary to enable the public to make informed investment decisions.