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On January 9, the benchmark index of the Dhaka Stock Exchange DSE suffered the steepest ever single-day fall in the bourse's year history. The capital market was shut; small investors turned vandalistic; and the business district of Motijheel was transformed into a battlefield between protesters and law-enforcers. Despite the measures taken by the regulatory commissions, people suffered major financial loss and worse than that, many lost confidence in the stock market.
After the big boom in , what caused the disasters witnessed during the past one and a half months? How secure is the securities market? The recent market collapse was not a one-day event. Bangladesh stock index marked 80 percent growth in the year of The bull run, however, faced its first halt in December Eleven days later on December 19, DSE suffered its biggest crash, of course up until then, as the index nosedived by points or 6.
The raging bull was finally tamed on back-to-back record plunges on January 9 and The upheaval continued as the DGEN, after the nosedives, took a high jump rising more than 15 percent which was the highest one-day spike ever —a rebounding record.
To understand what actually triggered the Sturm und Drang in the stock market one has to go back to the story behind the rise of the stocks and then come to understanding the falls. There was hardly any investor who made losses in The stock market witnessed a manifold boom —the price index, turnover, market capitalisation and its ratio to GDP gross domestic product , and the number of new arrivals both in terms of issues and investors.
The Dhaka market ranked third globally in terms of performance, according to an analysis of LankaBangla Securities. The country had been in a stagnating position in terms of investment for the last few years.
Initially the military junta caused a halt in investment, followed by a lack of power and gas supply that forced the government to stop new connections to any end users. Consequently, in a country having more than 32 percent national savings and poor state of investment, a lower rate of nominal interest rate, negative real rate of interest rate encouraged many new investors to the market.
Such new entry was also supported by easier access to the market due to branch expansion by the brokers. Meanwhile, financial institutions also found that, due to lack of business opportunities they were being burdened with huge amounts of excess liquidity. The cost of bearing the extra liquidity could not be utilised in alternative investment avenues where the securities market ushered the path for fund deployment.
During this time, as the real investment scenario was unclear, so flows of new securities in the form of Initial Public Offerings IPOs were also quite scanty. To add to the misery of the market, the government imposed some unnecessary restrictions on the IPOs causing the flow to slow down further.
The restrictions were partially lifted by November. Another problem was caused by poor monitoring and market surveillance which resulted in abnormal price behaviour for many securities, especially for those securities where free float shares are few or the company is very small and so an imperfect market situation enabled the prices to rise significantly.
An inside trader in the DSE, preferring anonymity, informs that during the recession of , the banks in Bangladesh had a lot of idle money in reserve.
This brought an overflow of liquidity in the market. Due to the opportunity of making huge profits, 1. This number increased by percent in The opening of brokerage houses at the district level brokerage houses of DSE opened branches at 32 districts , arranging a countrywide 'share mela fair ' and introducing interest-based trading operation, easy access to market information, were some of the factors identified by the CPD that accelerated the flow of investors.
The booming bubble finally burst, the bull run finally stopped; on December 8 of with the third highest plummet since , the DGEN closed at That was just the beginning; on December 19, the DSE witnessed the steepest till date single-day fall — points or 6. The down slope of the index continued till January 10, , with frequent record sets and breaks.
According to Professor Salahuddin Ahmed Khan, since in a market environment, prices cannot remain very high for a prolonged period, the downward slide was quite predictable. The rate of decline was basically due to the nervous state of the market participants. Well, no divine order triggered the continuous plunges in the stock market. A series of events, actually, made it quite inevitable. On December 1, the Central Bank sent 50 teams on surprise visits to different bank branches in Dhaka and Chittagong after it received complaints that the banks were investing in the stock market from their reserves to make profit.
Some banks were in fact found involved in such irregularities. During that time, the daily transaction in the share market was on an average of Tk crore and sometimes even Tk crore, which was double compared to that of the previous year To bring the ever increasing price of shares in the market under control, both Bangladesh Bank BB and Security and Exchange Commission SEC had sent different directives; Bangladesh Bank initiated the withdrawal of illegally invested industrial loans from the market by December 31, and raised the Cash Reserve Requirement CRR and statutory liquidity requirement SLR both to 6 percent and 19 percent respectively to safeguard the interest of the depositors.
According to Sharif Mohammad Kibria, an employee at a renowned merchant bank this might be one of the reasons to blame for the recent fall of the market as it took away at least crore hard cash from the money market resulting in less capacity of investment.
According to Abu Nayeem Md Anuruzzaman, another employee at the same bank, though former SEC member Monsur Alam's two directives— netting or adjustment facilities Sell before buy , and en-cashing of cheques submitted by investors against their share purchase orders— were blamed to influence the index slide in December, they were, in fact, lawful and did not attribute to the liquid crisis.
The central bank circular issued on November 28, asked banks to adjust all loans, amounting Tk 10 million and above, that have been diverted to areas other than the purposes mentioned in the loan applications by December This surely put the banks in trouble as a lot of that money was invested in the share market. As a result, banks started selling shares and withdrawing money from the stock market. This was the beginning of the price-slides in December.
To tackle the disaster and assure the panicked investors the central bank extended the time limit by one month for the banks for submission of the list of loans to January 15, The commercial banks were instructed to adjust such loan portfolios by February 15, instead of January 15 to ease the pressure on the money market.
The securities regulator increased the margin loan ratio from 1: But that did not prevent the fall. After consecutive days of index decline, the stock market suffered from record-breaking disasters in January.
According to a DSE insider, who preferred to remain unnamed, as it was the financial institutions' year closing, they had to pull off money invested in the market for balance purposes and as a result the banks were neither able to provide the 1: This event caused less investment from the retail side as well. With the butterfly effect, the stock market headed towards a liquidity crunch. The liquidity crisis in the money market was one of the key factors behind the continuous slide in share prices and turnover.
Like most of the market analysts, the anonymous DSE insider blamed price-correction and price re-adjustment of the financial institution stocks, which were over exposed in the capital market for drop in share prices. Along with the panicked investors who started selling shares after losing confidence in the market, the anonymous insider suspects that some syndicates created the unusual sell pressure, which would help them to purchase shares at low rates.
On January 11, , reversing the trend of the previous few days, DSE index ascended with a record gain of 15 percent. The DGEN stood at 7, points at the closing of the day's trading, recovering 1, of the 1, points lost on the preceding two days. This magic jump was not due to any divine intervention either.
A stockbroker, again preferring to be anonymous says: And there were few institutional buyers who backed up the market. On January 10, the nervous syndrome led to panic sales. The government and especially the Prime Minister's instruction to Bangladesh Bank to ensure that flow of funds to the market will be easier again brought back investors' confidence for which they wanted to recap the loss they sustained in the previous days. That caused the record level upward trends in the market.
Though the unusually high buy-pressure pushed the index high, due to the stalemate in the buy-sell, the single turnover was very low— Tk crore. Since the nail-biting drama, the market is still dangling through ups and downs.
Initiatives are being taken from all aspects: As you can observe by now that the liquidity position as well and nervousness of investors are still prevailing. It will take sometime to overcome the current state of the market. Here the investors must also demonstrate some degree of restraint to overcome present difficulties.
The continuously shrinking turnover stood at only Tk 8. An official from a broker house, in condition of anonymity, says that as Bangladesh Bank has not provided any written order on relaxing the bank loan threshold of 15 percent of their total capital to their subsidiary companies, the banks are not yet confident in providing margin loans to investors and increase client exposure.
Added to this, nor institutions neither retail investors are interested in buying shares with high PE ratios. The anonymous official complains that the merchant banks do have the money as they had sold most of their shares months before the slide started.
They are whining about their liquid crisis just to create pressure on the Bangladesh Bank. So what really went wrong? Why did the giant gas balloon, flying so high, start leaking?
The wavering policies of the regulatory commission are mostly blamed by the investors. The regulator put in 83 directives during the period between January 17, and January 10, It changed the directives of margin loan ratio 19 times.
The central banks all over the world are always very slow to respond. They seriously try to look before they leap. Here in Bangladesh they are similar in characteristics. They have been observing the financial institutions are crossing their limits for investment in listed securities and the actions came lately.
On the other hand the SEC in Bangladesh always remains nervous. They like to feel that whatever happens to the market, they will be held responsible. So they don't want to see the market index or transaction go up and down at a high rate or beyond a certain level. Newer securities like derivative products, stocks, bonds etc need to be brought, more institutional investment vehicles like pension funds, portfolio managers not the lending based merchant banks , mutual funds, unit trusts etc need to be created.
The market regulations should be done more professionally and the stock exchanges need to be demutualizsed at the earliest possible time. However, one must realise that, the capital market is a dynamic market and so it cannot remain stable.
It will have waves moving ups and downs. Oops, you lost the game! When such boxes flash on one's computer screen it might not be such a big deal for the player to stop the game that he or she has been playing for hours; it is not even that difficult to go on with the game because what is at stake are a few points.
Quitting or continuing is just a matter of clicking the right button of the mouse and does not make much a difference in one's life, as he or she is not investing any resource in the game. But when one invests, especially when it is liquid money, the question of quitting matters quit a bit. Take Zahir, a supervisor of an apartment complex at city's Dhanmondi, who earns around Tk 6, a month for his job. As the number of his family members has just increased, he needs some extra earning.