A Study on Recent Stock Market Crash in Bangladesh

Introduction: Currently share market is well known to all. It is known that the economic stability and prosperity of a country depend on the condition of her share market.

Many brokerage houses are now operating in our country to help investors. When Bangladesh economy looks like a good shape based on capital/share market, that time Trading on the Dhaka Stock Exchange index was halted after it fell by 660 points, or 9. 25%, in less than an hour. Chittagong Stock Market also met a similar fate.An abrupt crash of the market sparked violent protests from the Bangladeshi investors.

It was the biggest one-day fall in its 55-year history. It is estimated that over three million people – many of them small-scale individual investors – have lost money because of the plunging share prices. The benchmark index had climbed by 80% in 2010 but has lost more than 27% since early December. As a result Investment in the share market is a popular business among the educated middle class of Bangladesh who were left frustrated with the sudden loss to their capital.They were finding ways and means to exit from the market in order to minimize the losses Why this is happen our question is raise, it is not expected for us miracle index up and suddenly down. The experts give their comment that the immediate reason for this crash was the policy of the regulators of the market who laid down a limit for investment by the banks and other financial institutions in the stocks.

This was done in order to avoid the market being overvalued. As the banks and other big investor institutions withdrew the capital from the market, the panic ensued. Objective: 1.Findings Regarding Possible Reasons for Stock Market Crash. 2. Remedies/Recommendations to Avoid Stock Market Crash in Future.

Findings Regarding Possible Reasons of Stock Market Crash Bangladesh suffered a big bang crash in stock market last three months which results in many investors’ loss and especially trust of the small investors have drastically reduced from the market. One of the biggest reasons may be is that market got artificial rise last month just to encourage the small and medium investors and as soon as they stuck their money in the market big fishes withdrew their money to a large extent hence causes sudden decline.Crash of Bangladesh market is a big blow to small investors, most of who heavily rely on stock market. Although artificial rise of stock prices is never a good omen for the economy but a sudden fall of market is equally damaging. The authorities in Bangladesh should have thought of the consequences of their decision to set the limits for the banks and other financial institutions to invest in the stocks. I do no doubt the good intention of the authorities but the way it was done and implemented had serious repercussions.

They should have done it slowly and gradually. At this point of time it is not clear how much time and effort is required for Bangladesh stock market to recover from this shock. Having been a passive investor in a small way and watching things from a far, we outlined the following reasons for the market gyration while it was in motion, so it was good to see some of the recent policy responses address some of the points raised below.We believe the following played a major role in contributing to the crash: Aggressive Investment made by the Investors Reportedly, aggressive investment made by the investors in the capital market is the main reason behind the share market bubble and said a subsequent plunge in share prices has put pressure on the financial sector with a portion of bank credit being diverted to stock investment from productive sectors. Overenthusiastic InvestorsUnrealistic expectation of investors who for some reason or another seem to think the market would only go up (taking a longer term view — in decades — this is probably not completely off the mark when anyone takes into account Bangladesh’s growing economy, competitive positioning and progressive integration with the world market economy).

Most of the investors thought it was because it was going up and they heard from other people it was a good script. A good portion of the investments in Bangladesh stock exchange are trend-driven and unfortunately even rumour-driven.Omnibus Account used as Umbrella At least Tk 2,500 crore has been traded from hidden or omnibus accounts used as a major tool of stock market manipulation, according to the government probe body on the recent market debacle. The syndicate players of the Investment Corporation of Bangladesh (ICB) traded Tk 2,348 crore from nine omnibus accounts of the ICB alone. An omnibus account is a stock holding account that involves more than 10,000 investors although actual shareholders, individual investors don’t have the accounts in their names.

Most big players chose omnibus accounts to gamble in the market, as it’s not possible to find out issue-wise or client-wise transactions of actual number of shares from omnibus accounts. The committee sampled 10 players and examined their accounts from which transactions between Tk 21 crore and Tk 900 crore were made. The committee held responsible 30 big players including the ICB for the share market debacle and said most manipulators traded from omnibus accounts. Some big players manipulated the stock market through omnibus accounts during market swings. Share Splitting used as a Tool to Inflate PricesSplit of shares used as a tool to sweep up small investors’ money had been a major reason behind the massive price inflation on the stock market for the recent market debacle. Split of shares affected the circuit breaker on share price movement, the probe body said.

In order to control price movement, the circuit breaker threshold remains low, if the share price slab is high. Market capitalization of the companies, which split their shares between July 2009 and December 2010, soared by 655 percent, and that of those which did not split shares went up by 46 percent at the same time.This fragmentation of shares had an “unexpected impact” on share prices and liquidity in the market. Market capitalization of companies that did not split shares was three times higher than the companies that split shares until July 2, 2009. But market capitalization of companies, which split shares, doubled compared to the ones that did not between July 2009 and December 2010, the committee found. Issuance of Right Shares in the wrong way On issuance of right shares, a company’s earnings per share are diluted as the number of shares gets increased.

Although share prices are supposed to ome down after that, the opposite happens on Bangladesh’s capital market. Here the prices go up after issuance of right shares. Stock Protectors turned Predators Market regulator officials and their relatives made windfall profits from share market by using power, which played a major role behind the recent stock market manipulation, as per government probe. Policy Failure from Securities and Exchange Commission (SEC) Policy failure from Securities and Exchange Commission (SEC) to make any meaningful policy change that could have stopped the bubble when the market was moving up 3% + every week for months.It’s not sustainable or even natural for markets to rise consistently on a daily basis as it has for the last nine months or so and we have seen what happens when it does.

While we agree that there was some warning from the policy makers, they failed to take any concerted actions to impact the rise in any sustainable way. And when the SEC did take action, the regulators were flimsy in adhering to the policies, caving under pressure whenever there was protest as often happened when there was a 2% correction.This whimsical behavior does not exactly lend to its credibility as a market regulator. When an overdue market correction was finally underway, the constant policy change of SEC didn’t help the fact; it added additional uncertainty to a market that was already volatile. If there is one thing markets hate more than negative news, its downbeat uncertainties.

Had the “regulators” stayed away and not made drastic policy changes every other hour, things would have been more manageable. Violating the Rules of SEC by High OfficialsAnwarul Kabir Bhuiyan, an executive director of Securities and Exchange Commission (SEC), violating a circular that he had signed did share business through his wife’s BO accounts. The circular prohibited stock business for SEC officials and their relatives. Anwarul Kabir bought shares worth around Tk 21 crore through four BO accounts of his wife Roksana Akter between January 2009 and December 2010, found the probe. During the time, shares worth about Tk 19 crore were sold from these accounts with Al-Arafah Islami Bank, LankaBangla Securities, BLI Securities and NBL Securities.

Operating our BO accounts in wife’s name is a direct violation of the SEC circular. Besides, big transactions were made through these accounts. Involvement in the Share Scam of Some Political Persons According the probe committee three-member probe body on stock market scam found Salman Rahman and his associates as the masterminds behind the recent bourse debacle in the country, according to a reliable source. An organized group took out or plundered at least Taka 3,000 crore from the small and medium investors through illegal manipulation, according to the findings of the report submitted to Finance Minister AMA Muhith.The probe committee, formed on January 26 this year with Khondoker Ibrahim Khaled as its head, identified Salman Rahman, an Adviser to Prime Minister Sheikh Hasina on Private Sector Development, and Mosaddeq Ali Falu, a former private secretary to BNP chairperson Khaleda Zia, had taken the leading role in the manipulation game.

The probe committee also spotted a group including ruling party MP CM Kamal (alias Lotus Kamal), Commerce Minister Faruk Khan’s brother Azam Khan of Summit Group, HBM Iqbal, and Jahurul Huq Sikder for their involvement in the share scam.Remedies/Recommendations to Avoid Stock Market Crash in Future Our first long-term recommendation for the SEC/our exchanges is to build a partnership with other developed exchanges in the region to become competent; much like the Bombay exchange has with Singapore Exchange. This will facilitate knowledge-sharing that can potentially be adapted to our exchange over time, whether it’s surveillance programme or technology adaptation. Singapore Exchange is a premier bourse in the region that not only enjoys confidence of global investors and institutions all over but is also one of the most profitable.Our second recommendation for the SEC to review its policy on share dividends and rights share is to ensure that it does not add to instability of the market. We are pleading ignorance here as I could not find any documents to understand on what basis dividends bonus share and rights share are approved by SEC but my feeling is that it is a very arbitrary and non-transparent process.

The arbitrary nature of this process not only opens it up for abuse and outside influence but also indirectly fuels some of the high P/E ratio we are witnessing in some of the sectors and companies right now. The other important recommendations are as below:Demutualization of DSE & CSE The demutualization of the exchanges begins after the crash. Demutualization will mean converting these organizations into for-profit share-holding joint stock companies. Demutualization offers potential opportunities for strengthening governance, offering alternative business models, raising capital and improving operational efficiency. Most of the major exchanges in our neighboring countries have already gone through the process of demutualization. However, our exchanges do not seem to be ready for it yet partly because of unfounded concern of the existing members.

It may be mentioned that a membership can be transferred in exchange of a fabulous amount of money and, therefore, cause of concern however, unfounded, is understandable. While demutualization is likely to take some time, currently the member-based exchanges are managed by boards of elected and non-elected mix of directors. Being member-based, the exchanges lack proper corporate management and the chief executive officers (CEOs) may often be influenced by leading members. This can be a major cause of concern of the investors and other stake holders. Corporate Governance Practice in the ExchangesCorporate governance practice in the exchanges is extremely important because they are the front-line regulators and need to function independently without being influenced by the members to ensure transparency and build confidence among stake holders. The exchanges have enormous responsibilities that include listing of companies as per listing regulation, providing screen-based automated trading of listed securities, settlement of trading under settlement and transaction regulation, administration and control of market, monitoring activities of listed companies and the very important function of market surveillance.

Exchanges need High Degree of Expertise and Professionalism and Adequate Infra-structure For efficient execution of responsibilities, exchanges need high degree of expertise and professionalism and adequate infra-structure. These are not there in any of the exchanges. One basic problem is lack of professional manpower for management of capital market. The market expanded quickly in the last few years. New asset management companies, mutual funds, merchant banks, broker houses and other market intermediaries sprang up to seize the opportunities of a rapidly emerging market.All of them need capital market professionals and there are not many.

As a result, the exchanges like many other capital market-related organizations are short of trained manpower. The SEC is addressing the problem by establishing a securities training institute. Meanwhile the problem is likely to continue or perhaps aggravate and the exchanges will have to struggle with the problem. Other infrastructural facilities also need to be improved to strengthen market monitoring, surveillance and control.Settlement procedure in the exchanges is outdated.

Establishment of the proposed company for automated settlement calls for urgent attention. Need Assistance from International Association of Securities Commissions (IOSCO) A brief reference to the international regulator is possibly necessary to complete this piece of writing. Bangladesh is a member of the International Association of Securities Commissions (IOSCO). This organization was established in 1983 with a permanent secretariat in Madrid to regulate world’s securities and future markets.IOSCO has membership of more than one hundred countries and regulate more than 90% of world’ securities markets. Role of this organization is to assist its members to promote high standard of regulation in order to maintain just, efficient and sound market and to act as a forum of national regulators.

IOSCO has a set of objectives and principles and recommends all its members to adopt these regulatory principles. It also has a committee for emerging markets and Bangladesh is a member of this committee.However, it only recommends the principles and does not have the mandate to enforce them on member countries. Bangladesh maintains a low profile in the activities of this organization and needs to be more actively involved in IOSCO like our neighboring countries. Closer association with IOSCO can equip SEC with the knowledge of the latest securities laws and practices in developed and emerging markets and help improve professional expertise of the commission.

Proposed Changes in Book Building MethodThe Securities and Exchange Commission (SEC) has sent to the finance ministry for approval a guideline that, among others, contains the maximum allowable price-earning (P/E) ratio at 15 for a company willing to go public under the book building method, sources said. The securities regulator has also proposed the formation of a five-member committee to review the balance sheets of the companies that are interested to go public under book building method. A top official of the SEC said the review committee will work until the government forms the Financial Reporting Council of Bangladesh.In the revised guideline, the regulator has also proposed a two-month lock-in on the shares of institutional investors who will quote to fix the companies’ indicative prices during road shows. The stakeholders, according to media reports, at a meeting convened by the SEC last Monday, did not agree with most of the SEC proposals and recommended that the exercise be postponed until the publication of the much-hyped report of the stock market probe committee, headed by Khandaker Ibrahim Khaled. The Role of Bangladesh BankThe role of Bangladesh Bank should have been more strong and timely in dealing with the commercial banks’ involvement in the market.

The experts observed that until now all blames fell on only SEC as a regulator. Khondaker Ibrahim Khaled, probe committee chief, said he highlighted the regulatory lapses by the central bank officials in some decision making process in 2009 and 2010, which resulted in market bubbles. Ibrahim Khaled, however, said that he tried his best to find out the responsibilities of regulators and share traders, explicitly in a very short period of time.No doubt, SEC has played the most devastating role. ” However, he said other agencies and institutions having stakes in the share market possibly failed to perform the need of oversight functions.

“For example, BB should have come down more strongly and much earlier to arrest the over exposure of the commercial banks to the market,” he added. Because of the overexposure of some commercial banks, the share market experienced bullish trend in most part of the last year. The BB should also have more effectively track down the money commercial banks had invested in the share market.Regulators then took measures to limit the proportion of deposits that banks can invest in the stock market, amid concerns over shares being over-valued and financial institutions getting over-exposed to the volatility in the capital market. Reform of SEC The government should reform the securities regulator, identifying its “complete failure” to remove irregularities as one of the prime factors leading to the largest ever fall of the prices of the listed issues in the capital market.It also suggested that the government should disallow forthwith any “distribution of placement shares” as many key persons have “become corrupt” through both allotment and transfer of such shares.

We think the government should appoint the persons of integrity at the office of the Securities and Exchange Commission (SEC), the capital market watchdog, so that they cannot be influenced by the vested quarters. The system of distribution of private placement shares has polluted the society.We have seen that the private placement has become a very alarming issue in the country as a large number of people were used in the process of allotment of placement shares for the interest of the vested quarters. It is alleged that many important persons, including the key officials of government, securities’ regulator, Investment Corporation of Bangladesh (ICB) and both the bourses were favored with placement shares to serve the interests of such vested quarters.In one example, we have found that the placement shares of Tk 190 million were transferred to two individual addresses.

Even some journalists who cover stock market were involved in the business of placement shares. According to the probe body’s chief, the committee in its recommendation largely blamed the securities regulator for recent stock market scam as it completely failed to ensure ‘due-diligence’ about issues in the primary market. The irresponsibility and dilly-dally on the part of the SEC paved the way for corruption and irregularities that occurred in the stock market.SEC Official should not involve in Share Transaction in the Secondary Market After investigation we like to suggest the government to stop involvement of any SEC official in share transaction in the secondary market. Activate the Institutional Participants Moreover, as one of the many measures, the regulators must take immediate steps to fully activate the institutional participants who are the vital players in the market. We are not yet clear why the intuitional investors are almost inactive.

One answer was the liquidity crisis but recently that has also been removed as can be perceived speaking to the banking professionals.We have no idea about the real reasons although we feel that there should be an urgent full-fledged reactivation of the institutional participants. However, the gambling issue is there still now. The government is trying hard to find out the culprits. Every day there are such promises and every night they go into oblivion.

The government is trying, really working hard to find them. True, but they are still unable to find out those big gamblers who have destroyed the market and ruined the fate of millions of small investors. Some Advice Regarding Investment in the Stock Market All Investor should to be more careful and consider couple of think when he/she invest money in market ? Never sell valuable property only to invest in share market ? If anyone is not well educated about share market than only invest in primary share of reputed companies and don’t take risk anyway. ? Try to attend in seminars which are conducted by stock exchanges to teach investors about the current condition and investment policy of share market. ? Discuss with educated and experienced people to learn about share market and Read newspapers, books, etc to learn about share market ?Invest in Secondary market very meticulously when he or she has confident that know well about the secondary market.

? Never and Never invest only hear the fake information about the condition of various companies. Many evil people make rumor to plunder the hard earned money of small investors. And always keep it mind that invest in share market is like invest in other risky business. Nobody can earn money here only by luck Basic Stock Investing Rules Every Successful Investor Should Follow ?There are many important things one needs to know to trade and invest successfully in the stock market or any other market. 12 of the most important things that are enumerated below.

? Buy low-sell high. As simple as this concept appears to be, the vast majority of investors do the exact opposite. One’s ability to consistently buy low and sell high, will determine the success, or failure, of his/her investments. One’s rate of return is determined 100% by when he/she enters the stock market. ? The stock market is always right and price is the only reality in trading.If anyone wants to make money in any market, he/she needs to mirror what the market is doing.

If the market is going down and he/she is long, the market is right and he/she is long wrong. If the stock market is going up and he/she is long short, the market is right and he/she is long wrong. ? Other things being equal, the longer one stays right with the stock market, the more money he/she will make. The longer one stays wrong with the stock market, the more money he/she will lose. ? Every market or stock that goes up will go down and most markets or stocks that have gone down will go up.

The more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also known as “the trend always changes rule. ” ? If one is looking for “reasons” that stocks or markets make large directional moves, he/she will probably never know for certain. Since we are dealing with perception of markets-not necessarily reality, he/she is wasting his/her time looking for the many reasons markets move. ? A huge mistake most investors make is assuming that stock markets are rational or that they are capable of ascertaining why markets do anything.

To make a profit trading, it is only necessary to know that markets are moving – not why they are moving. Stock market winners only care about direction and duration, while market losers are obsessed with the whys. ? Stock markets generally move in advance of news or supportive fundamentals – sometimes months in advance. If one waits to invest until it is totally clear to him/her why a stock or a market is moving, he/she has to assume that others have done the same thing and he/she may be too late. ? One needs to get positioned before the largest directional trend move takes place.The market reaction to good or bad news in a bull market will be positive more often than not.

The market reaction to good or bad news in a bear market will be negative more often than not. ? The trend is investor’s friend. Since the trend is the basis of all profit, we need long term trends to make sizeable money. The key is to know when to get aboard a trend and stick with it for a long period of time to maximize profits. Contrary to the short term perspective of most investors today, all the big money is made by catching large market moves – not by day trading or short term stock investing.

Investors must let his/her profits run and cut his/her losses quickly if he/she is to have any chance of being successful. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If investors do not practice highly disciplined trading, he/she will not make money over the long term. This is a stock trading “system” in itself. ? The Efficient Market Hypothesis is fallacious and is actually a derivative of the perfect competition model of capitalism.

The Efficient Market Hypothesis at root shares many of the same false premises as the perfect competition paradigm as described by a well known economist. ? The perfect competition model is not based on anything that exists on this earth. Consistently profitable professional traders simply have better information – and they act on it. Most non-professionals trade strictly on emotion, and lose much more money than they earn. ? The combination of superior information for some investors and the usual panic as losses mount caused by buying high and selling low for others, creates inefficient markets. Traditional technical and fundamental analysis alone may not enable you to consistently make money in the markets.

Successful market timing is possible but not with the tools of analysis that most people employ. ? If investors eliminate optimization, data mining, subjectivism, and other such statistical tricks and data manipulation, most trading ideas are losers. ? Never trust the advice and/or ideas of trading software vendors, stock trading system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc. unless they trade their own money and have traded successfully for years. ? Note those that have traded successfully over very long periods of time are very few in number. Keep in mind that Wall Street and other financial firms make money by selling investor something – not instilling wisdom in the investor.

One should make one’s own trading decisions based on a rational analysis of all the facts. ? The worst thing an investor can do is take a large loss on their position or portfolio. Market timing can help avert this much too common experience. Investors can avoid making that huge mistake by avoiding buying things when they are high. It should be obvious that you should only buy when stocks are low and only sell when stocks are high.

? Since one’s starting point is critical in determining one’s total return, if he/she buy low, his/her long term investment results are irrefutably better than someone that bought high. ? The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved. ConclusionIt is expected that the implementations of the above suggestions would help strengthen our share market and beware of manipulators. In the country’s financial sector through ameliorating concerns regarding market failure and redressing problems arising from missing markets and institutions. Last but not least, serious act with prudence to strengthen our share market and beware of manipulators.

And the government of Bangladesh may be under pressure to intervene in order to protect the hard earned money of the small investors from being lost due to this unusual crash of the stock market.So, this is the right time to work together (Government as well as other financial institutes) to decide what actions to take to save the market from further falls. REFERENCES Hossain M. (2011), “Recent Stock Market crash and role of Monetary policy”, Bangladesh Institution of Development Studies (BIDS) Matin T. A (2011), “Money supply and yield seeking behavior”, Brac EPL, stock brokerage limited Debnath C.

N. (2011), “Putting capital market on right track” The Daily Star [pic]