Limited products, sponsors' tendency to get involved in share trading and loopholes in laws are hampering the growth of the country's bourses and denting investor confidence, said a former president of the Dhaka Stock Exchange.
“Products are being listed on the market but they are not of good quality. As a result, they can't pull investors,” Rakibur Rahman, a former president of the DSE, told The Daily Star in an interview on Tuesday.
He went on to cite Grameenphone that got listed in 2009 as an example of a quality stock. Grameenphone had brought in several thousand fresh investors to the market.
Since Grameenphone's initial public offering, more than 100 new companies have gone public but they have failed to catch the attention of investors, he said.
The government should do everything it can to bring public, multinational and private companies to the market as it will improve transparency and accountability and increase revenues.
Rahman, currently a director of the exchange, lauded the DSE move to introduce a new trading board for small-cap stocks.
“I hope many small companies that can't raise funds from the capital market because of a restriction will be able to do so.”
Presently, companies with less than Tk 30 crore in paid-up capital are not allowed to get listed. The figure will be brought down to Tk 5 crore only for small companies, he said.
Rahman, who led the bourse as its president for three times, also touched upon some of the challenges confronting the market.
One of them is related to sponsors of some listed companies getting involved in the market rather than giving utmost attention to their main business. It is not expected that sponsors will enter into stock trade as they may be tempted to manipulate the price.
“These are mostly seen in case of newly listed companies. At first, they went public and then they got involved in share trading by way of inflating earnings per share. It affects general investors. If sponsors don't stop it, the market will be affected badly.”
Rahman recommended extending the lock-in period on the shares held by sponsors and putting in place a rule so that sponsors only get the chance to sell their stocks in the block market instead of the main market.
The block market is a platform of a stock exchange where a large number of shares are traded in a single transaction at a negotiated price. As it does not take place in the main market, the transaction does not cause huge price fluctuation of a share.
Rahman criticised some companies' tendency to distribute only stock dividends.
“A company can declare stock dividend only if it has huge growth potential. Besides, it should declare cash and stock dividend equally.”
Rahman said some large entrepreneurs do not want to go public as they do not want to share the ownership of their companies with the public.
“However, if a company gets listed on the stockmarket it has to ensure accountability, which, in turn, helps it to sustain. If businesses remain family-oriented and do not go public, they may collapse.”
Getting listed on the stockmarket is a win-win situation for both parties, he said. The market gets a steady supply of stocks and the companies have an alternative source of funds to banks.
“This will also help the country's banking system by way of cutting the non-performing loans,” said Rahman, also the managing director of Midway Securities.
The NPL has become a major burden for the banking sector as a consequence of providing long-term, large amounts of loans.
“No bank in any country can provide such a big amount loans and for such a long time.”
Rahman also touched upon the advantage of choosing a Chinese consortium as the strategic partner of the DSE. The Chinese consortium, comprising of the Shenzhen Stock Exchange and the Shanghai Stock Exchange, bought 25 percent stake of the bourse last year.
“The consortium will help the bourse upgrade technologically and boost the confidence of both local and foreign investors,” he said.
But to draw in foreign investors, the government would have to bring in well-performing companies, multinational firms and government-owned enterprises to the market.
“The government can raise funds from the market to build infrastructure. It will ensure the accountability of the projects and reduce the government's loan burden.”
Rahman had first-hand experience of witnessing two stock market crashes: one in 1996 and the other in 2010.
He blamed the inadequate supply of the stocks compared to the rising demand for the crash in 2010.
“Financial institutions also invested heavily and a lot of people invested in the market without any knowledge.”
According to Rahman, the central bank did not rein in the financial institutions when they crossed their exposure limit. The Bangladesh Bank suddenly directed the financial institutions to bring down the exposure within the regulatory limit within three months.
“If the financial institutions were allowed to cut their exposure in phases, there might have been a soft landing instead of the crash landing.”
Investors though have not learnt from the debacles. “That is why we see junk stocks and small-cap companies' shares soar despite warnings from the companies and the stock exchanges.”
Rahman recommended sending junk stocks and small-cap companies to the over-the-counter market to keep gambling centring on the securities in check.
“The stockmarket regulator should take tough measures against any anomalies.”
Speaking about anomalies, Rahman said directors of 53 listed companies hold less than 2 percent shares individually and less than 30 percent shares combined, breaching directives of the Bangladesh Securities and Exchange Commission.
“Moreover, some directors sell shares without giving any declaration in advance, which is again in violation of the regulator's direction.”