What is the 'Stock Market'

The stock market is the market in which shares of publicly held companies are issued
and traded either through exchanges or over-the-counter markets. Also known as
the equity market, the stock market is one of the most vital components of a freemarket economy, as it provides companies with access to capital in exchange for
giving investors a slice of ownership in the company. The stock market makes it
possible to grow small initial sums of money into large ones, and to become wealthy
without taking the risk of starting a business or making the sacrifices that often
accompany a high-paying career.

BANGLADESH STOCK MARKET

This part of the study explains history of the Bangladesh stock market with role and
functions of Dhaka and Chittagong stock exchanges.

3.1 History of Bangladesh stock market

The journey of Bangladesh stock market started on April 28, 1954 as East Pakistan Stock
Exchange Association Ltd. At that time Bangladesh used to be ruled by Pakistan and the
name of the country was East Pakistan.

But 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. The exchange was renamed on June 23, 1962 as
Dhaka Stock Exchange (DSE) Limited. Trading on Dhaka Stock Exchange was suspended
from 1971 to 1976 because of liberation war and its post-independence weak economy. Then
the trading was resumed in 1976 with 9 listed securities having a total paid up capital of
Taka 137.52 million. (Hassan, Islam & Basher, 2000)

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)

3.2 Dhaka Stock Exchange (DSE)

Dhaka Stock Exchange is the first & biggest stock exchange of the country. The operation 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 activities
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 DSE was a physical stock exchange and used to trade in the open outcry
system. After that to secure smooth, timeliness & effective operation on the market, DSE
uses automated trading system. The system was installed on 10th August, 1998 and was
upgraded time to time. The latest upgrading was done on 21st December, 2008. There are
238 members and total 507 listed securities in Dhaka Stock Exchange. 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 (2008), 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), DGEN (A, B, G & N) and DSE 20.

Stock market crash

A stock market crash is a sudden dramatic decline of stock prices across a significant
cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are
driven by panic as much as by underlying economic factors. They often follow
speculative stock market bubbles.

STOCK MARKET CRASH OF BANGLADESH

History of the stock market crashes show that Bull Run before a stock market crash is kind
of normal phenomenon.
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 mar-ket. 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.
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 investors 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.

Background of the 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
dont 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.
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 2010-2011 crash

The most common reasons of the crash are incomplete account, placement share, book
building method, rumors and so on. According to M. Shamsul Haque Combination of
wrong information to the investors, illegal participation of banks and institutions in the
stock markets, weak accounting functions are at the core of the crisis that saw billions of Tk.
wiped out.

Role Of Market Regulators And Their Employees

Rapid Investment Of Bank In The Capital Market

Stock Price Manipulation

Valuation of Assets

Direct Entry

Disparity of demand and supply of shares

Blindness of investors on financial report

Unfair audit report

Buying shares based on rumor & without study

Majority of general investors don't have knowledge about capital market

Intervention of Bangladesh Bank (central bank)

Over expectation of general investor

Liquidity crisis

Comparison between two years

Impact of the crash on the Economy

1) Taka has lost value against Dollar: Bangladesh currency taka continues to fall against
the US dollar. Taka loses about 17.5% value against dollar during the year. Devaluation of taka
hits new record. The value of taka has been diminishing in automatic process when dollar is
disappearing from the market. Dollar has become unavailable in both the formal and informal
markets.
2) Investment has gone down: Because of the scam, investors has loose the interest of
investing in Bangladesh, even in the infrastructural development. Bangladesh is now losing the
opportunity to be developed by infrastructural development. The scam has created crisis in the
market because other investment sectors are in lack of investment. That will have adverse effects
on consumption as well.

3) Economic growths are in stuck: Many of the people lost their money in the stock market so
that the real rate of economic growth will be adversely affected which is already started.
Entrepreneurs are not willing to start new business in afraid of business failure or low price of
market share.
4) Default Capital Structure: because of low share price, financial institutions like Corporate
& Investment Banks are not willing to provide easy loan to the organizations, that s why
companies are unable to manage proper Capital Structure. So tax payment is very high and
business firms are afraid to survive.
5) Job for millions will not come as were expected: The investment of millions of people
stuck in the market and they lost everything so that numbers of business are not being
established during these years. So, it is expected that numbers of job facilities will not come as
expected.
6) Rise in the Inflation rate: The peoples who made the share market manipulated for their
interest, huge sum of black money is stuck with them. So when the money comes out to the
consumption market the inflation rate will automatically be raised. Because, the money is
already gone as per the records of Bangladesh Bank. In fact, the inflation rate according to
Government is about 12% but the real inflation rate is about 33% accumulating the CPI
[Consumer Price Index].
7) Standard of Living has gone down: Standard of living refers to the degree of wealth and
material comfort available to a person or community. The standard of living includes factors
such as income, quality and availability of employment, class disparity, poverty rate, quality and
affordability of housing, gross domestic product, inflation rate, cost of goods and services,
infrastructure, national economic growth, economic and political stability, environmental
quality, climate and safety which things are totally not feasible in our country because of current
situation of stock market.
8) Stock market loses the investors attraction: Investors those who are capable of changing
the face of stock market and expertise on the title; they are losing the attraction of investing in
Bangladesh after the overwhelming clash in afraid of losing capital.
9) Money Captured by Special Group: Because of the stock market scam, a few numbers of
people has captured the huge amount of money by insider trading. As a result common people
have gone caught off losing their initial investment. Middle class people have brought down to
the street & top class people has become minor.

10) Lack of liquidity in market: Bangladesh capital markets lack the liquidity needed for a
sustainable bond market that can fund growth and development in the public and private sectors.
This is a proposal to financial market illiquidity and provides recommendations. The economic
environment in Bangladesh is penetrating and can be suitable to create a sustainable vibrant
bond market that can be vital in economic development.
Recommendation
All are responsible for crash. So proper activities have to be adopted by everybody from their own
situations to restore the previous situation of the market. Some of them are in the following.
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 through fiscal policy. Even it can offer shares to the public for infrastructural
development work like constructing big bridges, highways and power stations.
Government must ensure the appointment of skilled and capable personnel in different
regulatory bodies and must give punishment to the persons responsible for any kinds of
irregularities.
The responsible persons of the Government should refrain from delivering irrelevant,
irresponsible and sensitive speeches which many of them did before.
Government should ensure more active merchant banks to participate in the smooth building
of a sound stock market.
Government must ensure that the chairman and members of the Investment Corporation of
Bangladesh (ICB) are honest and skilled. Any sort of direct or indirect involvement of any of the
ICB members and officials in the stock market must be stopped in any way.
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.
Flow of black money in the capital market must be restricted as it can never bring any good
results in the long run other than creating bubble in the stock market the blast of which nothing but
a disaster.
Recommendations for Securities and Exchange Commission (SEC)
SEC as the guardian of capital market should play significant role to make it march forward. It
must ensure the followings:

SEC must ensure that neither of its members nor any of its officials is involved either directly
or indirectly with the transactions in the stock market.
The monitoring and surveillance should be strengthen so that none can get chance to gamble.
SEC must have its own certified Chartered Accountants to ensure the accuracy of the Financial
Statements of the listed companies and they should give punishment if the books of accounts are
not accurately audited.
SEC must rethink about the rule of disclosure of quarterly financial reports by the companies
because many of the companies misused it as a vehicle of misguiding the investors. In fact, it
became a common practice of most of the listed companies to show high quarterly EPS in its unaudited quarterly report to bring down P/E ratio. In some cases, it is seen that a few companies
annual audited EPS for the year ended 2010 was lower than its accumulated EPS of three quarters.
It must ensure speedy disposal of decision for market operation and all the decisions should be
taken considering the long term effect on the market.
To bring fundamentally strong private companies in the capital market, there is no alternative
of Book Building Method of IPO. So, the postponed Book Building Method must be reintroduced
with necessary correction to resist all sorts of manipulation.
It is high time for SEC to take a decision regarding the stocks in the OTC market because huge
amount of money has been blocked due to inefficient OTC market. The companies in the OTC
market should either be de-listed and their assets and liabilities should be settled or these
companies may be brought in the main market through acquisition by the Government or by the
interested entrepreneurs restarting production of those enterprises.
Recommendations for DSE
Dhaka Stock Exchange has important role to play as the monitoring authority of the Broker
Houses. So, it needs to play vital role by ensuring the followings:
It must ensure proper monitoring of the brokerage houses for which more skilled manpower
should be appointed in the Monitoring and Surveillance Team.
Any sort of irregularities in case of trading should be identified promptly and immediate action
should be taken.
The operating software of the stock exchange should be updated as often these fail to take
immediate sale or buy order. So, it must bring new software within the shortest possible time to
bridge a gap between the prices of script in stock exchange
Now there is a common practice by DSE to ask for query for price hike of any script which is
nothing but a routine work. To make such query fruitful, visible action should be taken if any
involvement of sponsor/directors is identified.

To aware investors having no or insufficient skills about the investment in stock market should
be trained through different training programs, seminars and motivating fair.
Last but not the least that the stock exchanges need to be demutualized as it is the demand of
time now to have a new corporate governance structure for more effective conflict management
among market participants, and to make more quick decision with greater flexibility.
Recommendations for Bangladesh Bank
Though Bangladesh Bank is the regulatory body of Money Market; but its decisions are also
reflected in the capital market as the money market and capital market are interrelated. In this
regard it has the following roles to play:
It must ensure that the Banks and Other financial institutions exposures do not exceed the
limit from the very beginning. But in the recent slump it failed to do so as it could not monitor the
involvement in the early periods while it put pressure on the banks to readjust their capital market
exposures at the eleventh hour which accelerate a huge sale pressure from their side.
It must ensure the proper functioning of the Merchant Banks through arranging money from
the parent company to mitigate liquidity crisis.
It should keenly monitor the loan of the commercial banks to industrial sector and take regular
feedback so that no industrial loan may flow to the capital market. It is found that in case of recent
catastrophe, it failed to do so.
Recommendations for Institutional Buyers
Institutional Buyers (Mutual Funds, Merchant Banks etc.) ensure balance in capital market
through reacting according to the interaction between demand and supply. But in recent past they
completely did the opposite as when there was huge sales pressure in the market instead of buying,
they also sold shares in a large scale resulting further decline. Their behavior in that case was not
different from individual investors.
They must show mature behavior to ensure balance in the stock market by buying shares when
there is sale pressure and vice-versa.
In providing margin loan, they must follow the rules as prescribed by SEC as well.
They should advise their client giving emphasis on the benefits of the clients instead of
thinking their own benefits only.
At the time of huge decline they should not be involved in forced/trigger sale of clients shares
without giving them any chance to adjust their loan.
All sorts of transactions through omnibus accounts should be restrained.
Recommendations for Individual Investors

No matter what is the reason of a crash, individual investors are the ultimate losers. Hence, it is
their own responsibility to take care of their own money and they ought to consider the following
things while taking investment decisions.
Before investing in a particular script they must analyze the key factors of that company to
justify whether the company is fundamentally strong. Such factors include EPS, P/E Ratio,
dividend policy, future growth, industry average etc.
In analyzing financial strength of a company they must consider the audited annual reports
instead of quarterly un-audited report as often these information is not accurate or do not reflect
the real position of the company.
They must restrict themselves from buying junk shares and taking whimsical investment
decision.
They must build their portfolio in a way which will involve at least three or four different
types of fundamentally strong shares from different industries. It should also contain shares
considering both long term and midterm benefits.
Instead of being traders, the retail investors need to think of being investors.
They ought to keep some cash for emergency so that they might buy more shares
(fundamentally strong) which they bought earlier when there is a big decline in price.
They should not buy on the basis of rumor or following advices of the persons who do not
possess sufficient knowledge about capital market investment.
They ought to participate in different seminars and training programs relating to stock market
to enhance their knowledge and skill in making stock market investment decisions.
They must know that both gain and loss are the indispensable parts of stock market.
Instead of looking for gain, sometimes they must accept loss with patience so that they may
recover the loss in future through higher gain.
Above all, they must understand that perseverance and patience is the key to success in
investing in capital market.
Conclusion
From our analysis we have found that major indicators of the countrys major stock exchange is
becoming more volatile over time and the regulators are not efficient enough to guard this
volatility. But, for a developing country like Bangladesh, the importance of sound development of
the market cannot be undermined. Although the SEC has been trying to maintain a continuous
flow in the market, very often its role meets the broad economic objectives. In order to make the
market less volatile, SEC itself should be strengthen both in terms of number of manpower and
quality of the professionals involved with special focus on independent research, monitoring
mechanism and prompt decision making.

Security and Exchange Commission (SEC) of Bangladesh and government should take the short
term and long term initiatives to stabilize the market. They should encourage more public limited
companies to offer more share to meet the current demands. Income tax rebate, Injection of
Market Stabilization Fund, Mandatory holding certain percentage of share among the board of
directors, short term incentives packages should be introduced to get back the confidence among
the existing investors. Regulatory bodies of Bangladesh stock market must educate the current and
potential investors about the market mechanism and provide them the accurate information so that
investors trade their shares carefully. Unless, there are any corrective measures, Bangladeshi stock
market will be facing this irrational downward of DGEN Index again in the near future.
To guide and restore the confidence of individual investor in capital market, the regulatory
authority should take necessary actions to encourage corporate governance rating among listed
companies, which will enable investors to differentiate the good governance companies from the
rest and can then attach higher value to those firms as well. And, without improving the
governance of the market and eliminating scope of manipulation, it will be difficult to attract good
scripts at the desired level. In this endeavor, regulators must adapt continuously to the changes in
the economy and the pressures of globalization.
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Newspapers of Bangladesh

Websites
Central Depository Bangladesh Limited, www.cdbl.com
Dhaka Stock Exchanges, www.dsebd.org
Security and exchange commission, www.secbd.org.26.16