Internship Report on Stock

Market Crashes in Bangladesh

K. M Naimul Hasan
Id: 10164006, MBA Program
 Internship Report
On
Stock Market Crashes in Bangladesh

Submitted to:

Ms. Asphia Habib

Lecturer
BRAC Business School
BRAC University

Submitted by:

K. M Naimul Hasan
Id. 10164006
MBA Program
BRAC Business School

Date of Submission: 20th September, 2012

Letter of Transmittal
To

Ms. Asphia Habib

Internship Supervisor,
BBS

Sub: Submission of Internship Report.

Dear Madam,
It’s my pleasure to finally submit my internship report on “Stock Market Crashes in Bangladesh”. I have
worked hard on this subject and included every possible issue in my analysis. I have worked at
StockBangladesh Limited from 04 June, 2012 to 30 August, 2012 and my prime focus was to learn about
stock market in Bangladesh as well as to collect information for my project.

It was a great opportunity for me to learn and gather practical knowledge from this internship program. I
thank the university authority for giving me the opportunity to take part in this program and for their
support.

Sincerely Yours,

K. M. Naimul Hasan
Id. 10164006
MBA Program
BRAC University
 Acknowledgement
By the grace of almighty Allah, I have successfully completed my internship at StockBangladesh
Limited and done my internship report on “Recent Stock Market Crashes in Bangladesh”. I
express my utmost respect and gratitude to the people who have helped me successfully
accomplish this challenging tasks and supported me come this far. I would like to thank the
Director of BBS Prof. Mamun Rashid, on campus Supervisor Ms. Asphia Habib, Senior Asst.
Dir. of CSO Ms. Asma Banu, CSO Admin Ms. Shanzida Shahab Uddin and all BBS officials. I
would also like to thank Mr. Sirajul Islam, Gen. Manager, Mushfiqur Rahaman, Senior
Executive & Internee Supervisor and all staffs of StockBangladesh Ltd. While preparing this
report I have collected data and information from various website and publications. I am grateful
to all the authors and site owners for helping me finish this challenging task.
 Table of Contents:

Title Page no.

About StockBangladesh Limited 6

Internship Job Description 9

Chapter 1: Stock Market Definition, History and Structure 13-17

of Bangladeshi Stock Market

Chapter 2: Economic Bubble Creation, Bubble Burst and 18-19

Stock Market Crash

Chapter 3: Major Stock market Crashes in Bangladesh 20-24

Chapter 4: Recent Crashes, Their Characteristics and 25-34

Reasons behind the fall

Chapter 5: Comparative Views of 1996 and 2011 Market 35-37

Scam

Chapter 6 38-39
Suggestions, Recommendations and Recent Changes

Conclusion

References
 Executive Summery

Stock market is an important medium of flowing funds from deficit economic units to surplus
economic units. Stock markets help nations build a strong and efficient economy through
providing needed funds to the firms and companies. Thus stock market is playing a vital role to
develop and strengthen the economy of a nation along with the banking and other financial
sectors. In a developing country like Bangladesh, more than 90 percent of the total financial
sector has been dominated by the banking sector; however the growth of stock market has been
impressive in the last few years. After the succession of an elected govt. local stock market
experienced a bullish trend. The economy had also got a prompt boost in the year 2009-10 which
assisted stock market to go sky high. People had gone crazy as the market index were increasing
everyday as if there was no looking back. Hundred thousand crore taka was invested by the
general investors in the market. A huge stock bubble had been created by the market players as
they were manipulating the price and general investor’s lack of knowledge helped them
capitalize the situation. But then the bubble burst and the market experienced nothing but a
devastating crash in January 2011, since then the market has been struggling to recover its
indices, govt. has made many decisions but few of them were effective rather most of the
decisions became boomerang for the stock market, which eventually emptied many small and
medium investor’s pocket, even suicide done by some of them in Dhaka and Chittagong.
Accused players of 1996 scam again successfully have taken out a huge amount of money from
the market. A probe committee led by Ibrahim Khaled was able to discover the reasons and the
names behind the crash, but unfortunately the govt. hasn’t disclosed the report to public and
saved the culprits which made the market situation worse. Now it seems the market has started to
recover its position but the scar is still uncured, as the criminals has not been punished yet and
the investors are not getting the confidence to reinvest in this unpredictable and insecure market.
On the other hand banking sector which has been backing up the market is now having a tough
time due to economic recession which is not good news for the investors. Very recently
siphoning of a huge amount of money from a nationalized bank as well as allegation of same
activities against some other banks have made banking sector unstable and lost the trust of many
investors. All in all the market is passing a metamorphosis phase, and after analyzing overall
situation and all influencing factors, I think we have to wait some more time to see any
substantial progress in the stock market.
About StockBangladesh Limited:
StockBangladesh Limited is a stock market based research & training firm who does research
activities, generates valuable information for companies and brokerage houses, and conducts
training programs for general investors as well as anyone who is interested in stock market and
investment.
nvestment. It is the first organization who started using technical analysis for stock market in
Bangladesh. SB also provides information to media channels like Ekushe TV, 71 TV and other
medias. The company started its operation in 2007, with a view to asassist
sist Dhaka Stock Exchange
investors and to make them more knowledgeable and rational investors. At present it has nearly
30 employees in R &D, Marketing & Admin, Accounts, IT, Training, Front Desk etc.

Mission & Goals:

It’s Mission to make people a better investor so that you can invest conveniently at Bangladesh
stock exchange. Our Stock Bangladesh tool lets investors create the web's best looking financial
charts for technical analysis. Our Scan Engine shows investors the Bangladesh share market's
best investing opportunities.

In today's world, if investors rely on fundamental analysis, brokers advise, share price
information, newspaper articles or business channels for investor’s investing or trading
decisions, investors are asking for a painful experien
experience in the markets.

SB’s goal is to help traders and investors of Bangladesh share market to achieve above
above-average
returns from the markets by providing them with profitable trading signals and at the same time
protect their trading capital from large drawd
drawdowns
owns with our sound money management
principles.

The methods used to analyze securities and make investment decisions fall into two very broad
categories: fundamental analysis and technical analysis. Fundamental analysis involves
analyzing the characteristics
ics of a company in order to estimate its value. Technical analysis takes
a completely different approach; it doesn't care one bit about the "value" of a company or a
commodity. Technicians (sometimes called chartists) are only interested in the price move
movements
in the market.

Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and
demand in a market in an attempt to determine what direction, or trend, will continue in the
future. In other words, technical analysi
analysiss attempts to understand the emotions in the market by
 studying the market itself, as opposed to its components. If investors understand the benefits and
limitations of technical analysis, it can give them a new set of tools or skills that will enable you
to be a better trader or investor.

Products/services of SB:

I. Exclusive Training Programs: SB offers training program every month including

exclusive training program on fundamental analysis, technical analysis and fusion
analysis. It also arranges special training program on MS Office, Tax-audit etc.
II. Portfolio Management: SB technical analysis team manages Portfolio on behalf of its
valued clients.
III. Provides Information: It generates stock related information and discloses those
information through its websites for general investors. Its technical experts provide buy-
sell signals to its clients as well as associate broker houses.
IV. Publishing Books: SB also publishes books which are used to aid its training classes.
V. Software solutions: AmiBroker software solution for users.

Research and Development:

As a research firm, R & D is in the center of all activities at SB. R & D has two team,
Fundamental Analysis and Technical Analysis Team. Interns from different universities usually
work with the Fundamental team and provide assistance to their research activities.

I. Fundamental Analysis: Fundamental analysis is a method of evaluating a security that

entails attempting to measure its intrinsic value by examining related economic, financial and
other qualitative and quantitative factors. Fundamental analysts attempt to study everything
that can affect the security's value, including macroeconomic factors (like the overall
economy and industry conditions) and company-specific factors (like financial condition and
management). Fundamental analysis works on following parts: a)investment, b)Stock,
c)qualitative & quantitative analysis d)valuation e)Risk and portfolio management

II. Technical Analysis: The principles of technical analysis derive from the observation of
financial markets over hundreds of years. The oldest known hints of technical analysis appear
in Joseph de la Vega's accounts of the Dutch markets in the 17th century. In Asia, the oldest
example of technical analysis is thought to be a method developed by Homma Munehisa
during early 18th century which evolved into the use of candlestick techniques, and is today a
main charting too. In the 1920s and 1930s Richard W. Schabacker published several books
which continued the work of Dow and William Peter Hamilton: Stock Market Theory and
Practice, Technical Market Analysis.
 As is obvious, early technical analysis was almost exclusively the analysis of charts, because
the processing power of computers was not available for statistical analysis. Charles Dow
reportedly originated a form of chart analysis used by technicians -- point and figure analysis.

Figure 1: Technical Analysis Chart

Dow Theory is based on the collected writings of Dow Jones co-founder and editor Charles
Dow, and inspired the use and development of modern technical analysis from the end of the
19th century. Other pioneers of analysis techniques include Ralph Nelson Elliott, William
Delbert Gann and Richard Wyckoff who developed their respective techniques in the early 20th
century.

Many more technical tools and theories have been developed and enhanced in recent decades,
with an increasing emphasis on computer-assisted techniques.
Future visions of SB

Recent stock market crash and long term bearish market has hampered the growth of SB in many
ways. Company’s income has shrunk and employee turnover has been high. The company
started publishing a daily newspaper in 2010 but then the crash made the management to shut
down the paper. Even in this adverse situation the company is trying to gain strength and to
better the quality of its services. Very recently the company has published an exclusive book on
technical analysis with the examples taken from Bangladeshi perspective, which is thought to be
very first in Bangladesh. SB also published teaching materials on fundamental analysis from
Bangladeshi perspective. The company hopes to publish more books on technical and
fundamental analysis in near future.

Internship Job Description:

As an intern my duties and responsibilities were as follows:

1. Updating Database: The Company has been developing a data base for assisting
research work where we had to get data of different public companies from its annual
reports and DSE website. One was company form where I had given input of the general
information of a company i.e. its management, shareholding position of different groups,
address, paid up capital, company rating etc. another was year form where I gave input
from a company’s yearly financial statements i.e. balance sheet, income statement and
cash flow statement. While I was there I updated more than 100 companies.
2. Analyzing company performance: I was also assigned to analyze the performance of
Bangladeshi cement industry and cement companies where I made analysis of growth
performance, market performance in terms of sales, net profit growth and so on.
3. Updating NAV charts every week
4. Creating Company Directory: where corporate address, websites, e-mail, and phone no.
are included using Excel.
5. Making contacts: I was also assigned to make contacts with different corporate offices
and share dept. to collect information.

I worked at SB for 3 months, 5 days every week and office time was 9.30am-5.30pm. I was
given deadlines for every assignment, and a supervisor constantly monitored and evaluated
my performance. Workload was very high and sometimes stressful.
Internship
Report on
Stock 1996-
Market
Crashes in 2011
Bangladesh
Background:

Stock market is one of the most important financial institutions of any economy as well as
Bangladesh. It opens door for companies to raise huge amount of capital from a lot of individual
investors inside & outside of a country. Growth of new businesses or our economy would not be
possible without availability of stocks and development of financial markets.

Since 2007 share prices of Bangladesh stock market have been increasing steadily over the past
four years and it outperformed almost all the world´s markets. For instance, it performed as 2nd
best in the world after Sri lanka in 2010 gaining nearly 83%. The financial year 2008-09 is
known for the global financial and economic crisis. Many developed and developing countries
fall into recession. However, it could not affect Bangladesh economy greatly. So, the stock
market of the country did not see any significant changes or fall. As CPD (2011) reported,
financial year 2008-09 was a volatile year but during this year Bangladesh economy benefited
from low prices of import-able and was able to avoid negative pressure on its export of goods
and services.

The consecutive outstanding performance of Bangladesh stock market in recent years before the
crash lured millions of investors to the stock market to invest their little savings. Before the stock
market crash the market had become a route of easy money for too many new individual
investors. That is why millions of fresh investors invest their small saving in the market during
this period. For these fresh investors investing in this market provided a way to avoid working a
job. Even some BO account holders worked as intermediaries of friends, relatives to invest their
money in the stock market.

Finally, the stock market crashed and taught these investors that investing money in the stock
market involves risk too. This project finds out the reasons behind recent Bangladeshi stock
market crash and its aftermaths. The project probes into the critical factors behind the crash and
its ripple effects later on. An exclusive analysis of stock market crashes based on the last 3 years
data has been done to assist this project. A comparison of major crashes has been done for a
better view. It also reports the initiatives taken by respective authorities and govt. for stabilizing
stock markets and to save small investors. Important points have been listed and possible
suggestions have been made at the end of this report.

Objectives of the Project:

1. To find out the reasons behind recent stock market crashes in Bangladesh and to compare the
scenarios with major crash in 1996.
2. Analyze the factors of the crashes and suggest necessary steps to be taken on account of the
recent incidents.
Methodology:
This is an exploratory research which is mainly qualitative in nature. This study involves in
depth literature review and qualitative analysis.

This study is mainly on secondary data sources with some conversational interview with some
stock market broker and experienced stockholders. Chronological and statistical Data and
information have been gathered from different newspaper articles, feature writing, DSE circulars,
DSE Archive & published theses papers. In depth discussion regarding the issues has also been
done with stock market experts and also with some general investors.

Limitations:

Time constraint a major limitation for my project, otherwise I could have done more in depth
analysis on this matter. My lack of expert knowledge on stock market was also a setback for this
project.
Chapter 1
Stock Market Definition, History and Structure of Bangladeshi Stock
Market

What is a Stock market?

Stock market is the market in which shares are issued and traded either through exchanges
or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of
a market economy as it provides companies with access to capital and investors with a slice of
ownership in the company and the potential of gains based on the company's future performance.

It is a public entity (a loose network of economic transactions, not a physical facility or discrete
entity) for the trading of company stock (shares) and derivatives at an agreed price; these
are securities listed on a stock exchange as well as those only traded privately. The stocks are
listed and traded on stock exchanges which are entities of a corporation or mutual
organization specialized in the business of bringing buyers and sellers of the organizations to a
listing of stocks and securities together.

A common stock (typically just called a stock) represents a share of ownership in a corporation.
It is a security that is a claim on the earnings and assets of the corporation. Issuing stock and
selling it to the public is a way for corporations to raise funds to finance their activities. The
stock market, in which claims on the earnings of corporations (shares of stock) are traded, is the
most widely followed financial market in almost every country that has one; that’s why it is often
called simply “the market.”

Financial markets are Markets in which funds are transferred from people who have a surplus of
available funds to people who have a shortage of available funds. Stock market is a kind of
financial market.

The stock market is one of the most important sources for companies to raise money. This allows
businesses to be publicly traded, or raise additional financial capital for expansion by selling
shares of ownership of the company in a public market. The liquidity that an exchange affords
the investors gives them the ability to quickly and easily sell securities. This is an attractive
feature of investing in stocks, compared to other less liquid investments such as real estate. Some
companies actively increase liquidity by trading in their own shares.
History of Bangladeshi Stock Market
Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia
region. It has two full-fledged
fledged automated stock exchanges namely Dhaka Stock Exchange (DSE)
and Chittagong Stock Exchange (CSE).

Dhaka Stock Exchange was setup on 28th April, 1954 that started formal trading on early 1956.
Post–independence
independence government did not promote a capital market during the first five years, and
it was activated again in 1976 with 9 issues on board. In 1995, a second bourse, the Chittagong
Stock Exchange, was setup with sophisticated logistic support and modern management.

Dhaka Stock Exchange (DSE)

Dhaka Stock Exchange is the first capital market in Bangladesh for keeping the interest of large
organization by accumulating capital from the investors of the nation and also influences
international investor toward our capital market and incr
increase
ease the strength of local organization to
invest in profitable sector to boost up the national economy. The market operated from 1954 to
till. As the independent public limited organization under the act
act– 1913 & 1994, the organization
has its own glance too serve the capital market and to bring the industrial revolution as well as
insisting the investor to invest at the market.

The organization has its own rules and regulation to control over the market. The organization
also provides the economical and th
thee industrial movement information toward the investor to
make our market acceptable to outside of the nation.

Figure 2: Components of Stock Market

Chittagong Stock Exchange (CSE)

Chittagong Stock Exchange (CSE) is a not not-for-profit organization, formed

ormed and registered with
the registrar Joint Stock Companies and Firms in Bangladesh on April 1, 1995 as a public
company limited by guarantee with an Authorized capital of 15 0’000’000 divided into 500
shares of Tk. 300’000 each. The Exchange members are not its beneficiaries since they are not
involved in profit sharing and taking dividend. All its surpluses are spent on the development of
capital market in the country. The principal activities of the Exchange are to conduct, regulate
and control the trade.
de. Starting from a rental building, the exchange currently owns a two
two-storey
building measuring 28’000 sft. It is the second stock exchange of Bangladesh that started its
journey with the aim of offering the investors a transparent and efficient capital m market. On
October 10, 1995 CSE introduced a fully automated screen based trading system replacing the
obsolete setup enabling its trade operations from three major cities in Bangladesh.

Security & Exchange Commissions (SEC)

The aims of forming Security Exc Exchange

hange Commission are to protect investor`s interest,
improvement of securities markets, appropriate issuance of securities and proper guiding of
securities laws. The most important organizations and intermediaries under supervision of SEC
are DSE, CSE, CDBL, L, stock brokers, merchant banks and asset management companies. The
Government of Bangladesh founded Security and Exchange Commission (SEC) on 8th June,
1993 under the Securities and Exchange Commission Act, 1993. The commission is consists of a
chairman and four members. The Chairman & members of security exchange commission are
appointed by the government of Bangladesh. SEC is directly connected with the ministry of
Finance and has rights to supervise all of securities laws

Structure of Bangladesh Stock

ck Market

Figure 3: Types of market

This market can be split into two main sections: the primary and secondary market. The primary
market is where new issues are first offered, with any subsequent trading going on in the
secondary market.
Primary Market: Initial Public Offerings (IPOs), new share issuance of a company comes
through primary market. Companies can issue new securities after getting permission from the
market regulators.

Secondary Market: Secondary market deals with existing securities or previously issued
securities. Securities can be sold or bought from this market. In a stock exchange most of the
trading figures comes from the secondary market. This market is also divided according to its
different trading characteristics.

Figure 4: Different Markets

I. Public Market: Instruments are traded on this market in normal volume which is called lot
share.

II. Spot Market: Trading is done in normal volume under corporate actions and must be settled in
24 hours.

t: In this market bulk volume of instruments are trades through pick & fill basis.
III. Block Market:

IV. Odd lot Market: Odd lot refers to a quantity of shares that is less than market lot. Odd lots of
all instruments are traded through pick & fills in this market. Basicall
Basicallyy odd lots generated from
bonus and rights issues.
Settlement

I. Trade in Public, Block & Odd-lot Market: Trade in Public, Block & Odd-lot market has two
different settlement periods for A, B, G, N & Z categories shares and Settlement is executed
through stock exchange clearing house. Here the settlement period is same for A, B, G & N.
However, for Z category share settlement period is different.

a. A, B, G & N Category: Settlement is done through DSE or CSE clearing house on T+1(pay in
day) and T+3 (pay out day).

b. Z Category: Settled on the basis of T+1 (pay in day) and T+9 (pay out day).

II. Trade in Spot Market (A, B, G, N & Z category): Settlement period is same for all category
shares traded in this market through clearing house that is T+0 (pay in day), T+1 (pay out day).

III. Settlement of foreign traders: Foreign buyers and sellers settle their transaction between
themselves involving custodian bank. It is processed within T+5 (pay in day) and T+6 (Pay out
day).
Chapter 2
Economic Bubble Creation, Bubble Burst and Stock Market Crash

Stock Market Crash

A stock market crash is often defined as a sharp dip in share prices of equities listed on the stock
exchanges. In parallel with various economic factors, a reason for stock market crashes is also
due to panic and investing public's loss of confidence. Often, stock market crashes end
speculative economic bubbles. Amadeo defined stock market crash as more than 10% loss within
few days in a stock market. But stock market crash has differentiated from stock market
correction where the loss is 10% or less.

“Stock market crash is a sharp and unexpected decline of stock market prices for a very short
period of time, usually accompanied with the decline of many other assets’ prices” mentioned by
stockmarketcrashes.net. It causes significant capital losses of investors and speculators. The
market participants become panicked which leads to more losses.

A stock market bubble is a type of economic bubble taking place in stock markets when market
participants drive stock prices above their value in relation to some system of stock valuation.

An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price

bubble, a financial bubble, a speculative mania or a balloon) is "trade in high volumes at prices
that are considerably at variance with intrinsic values”. It could also be described as a trade in
products or assets with inflated values.

Reasons behind Bubble Creation and Market Crash:

If speculators and over-eager investors are pushing the overall value of a market beyond its
proper value, then the market is said to be in a "bubble". Usually the culprit is a "herd mentality".
A person hears that their neighbor is investing in the markets and doing really well, so suddenly
they want in too. Before you know it, millions of people are suddenly plunging their money into
equities (or gold or whatever else is the flavor of the day), and the market reacts accordingly.

There is a saying that "water seeks its own level". It means that, despite short-term fluctuations
higher or lower, the markets will eventually determine the proper value of a security.

Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often
conclusively identified only in retrospect, when a sudden drop in prices appears. Such a drop is
known as a crash or a bubble burst. Both the boom and the burst phases of the bubble are
examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that
determines the equilibrium price under normal market circumstances. Prices in an economic
bubble can fluctuate erratically, and become impossible to predict from supply and demand
alone.

Bubbles form in economies, securities, stock markets and business sectors because of a change in
the way players conduct business. This can be a real change, as occurred in the bubble economy
of Japan in the 1980s when banks were partially deregulated, or a paradigm shift, as happened
during the dotcom boom in the late '90s and early 2000s. During the boom people bought tech
stocks at high prices, believing they could sell them at a higher price until confidence was lost
and a large market correction, or crash, occurs. Bubbles in equities markets and economies cause
resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved
again, causing prices to deflate. Thus, there is little long-term return on those assets.
Chapter 3
Major Stock market Crashes in Bangladesh

Bangladeshi stock market experienced several crashes in the last 3 decades prominently in 1987,
1996 and 2010-11.

Market Crash in 1996:

Bangladesh securities market experienced the worst turmoil in 1996. Until, mid 1996 Bangladesh
securities market failed to attract investors, both local and international. However between July
and mid- November 1996, both Dhaka and Chittagong Stock Exchanges experienced an
unprecedented bullish run. During this period, market capitalization went up by 265% and the
average daily turnover increased by over 1000%. There were about 192 securities listed with
both the stock exchanges at that time. According to the official record, price index at Dhaka
Stock Exchange increased by 281% and at Chittagong Stock Exchange increased by 258%. Then
the bubble burst share prices of both the stock exchanges dropped by 25% from their peak in
mid-November. It was reported that outside in the informal market the prices went down further.

Figure 5: 1996 Bubble Creation and Market Fall

 Month Month Month Month
closing High Low
Index
1995 January 834.08 846.68 809.7
February 823.02 838 759.41
March 784.66 837.44 784.66
April 765.88 783.6 763.06
May 702.96 702.96 763.81
June 776.88 776.88 710.76
July 780.26 781.67 756.56
August 778.22 789.61 769.86
September 836.78 852.67 778.53
October 887.99 903.04 831.36
November 844.14 890.42 824.74
December 834.73 843.79 830.65
1996 January 775.65 832.57 751.4
February 792.6 792.6 765.07
March 804.81 804.81 789.29
April 834.94 834.94 810.82
May 864.87 884.67 841.07
June 959.05 977.13 859.89
July 1156.18 1156.18 956.7
August 1217.74 1217.74 1109.85
September 1690.25 1690.25 1249.91
October 2986.29 2986.29 1688.88
November 3064.99 3648.75 3033.37
December 2300.15 3012.97 2241.83
1997 January 1962.32 2450.57 1962.32
February 1702.49 1938.48 1702.49
March 1153.52 1660.21 1153.52
April 957.48 1225.49 899.38
May 1216.68 1239.18 978.08
June 1111.55 1197.5 1091.7
July 973.13 1098.35 939.66
August 823.82 963.98 814.98
September 939.91 1111.56 748.33
October 839.61 984.81 810.12
November 749.85 849.46 749.85
December 756.78 833.35 711.14

Table 1: DSE Indices from 1995-97

Factors Behind 1996 Crash:
1. Regulatory Response

The regulatory move to control the situation was very slow. The regulatory authority took time to
realize the possible impact of index crash on the entire economy. The Bangladesh Securities and
Exchange Commission (SEC) declared that the market would be viewed as 'normal' till the index
remained above the 1500 points. The government carried on a massive media campaign striking
out any possibility of crash and further promised recovery measures only if the index dropped
below 1500. The Finance Minister even made public statement to the effect that 'It's not at all a
crashing situation. The market has become over heated and now it is stabilizing through
correction.'

It was only in late December 1996 that the SEC constituted an Enquiry Committee to investigate
into the irregularities of stock market activities during July 1996 to November 1996. In March
1997, the Enquiry Committee prepared a lengthy report identifying a number of companies being
in breach of specific provisions of securities market regulation and commented that such
companies were guilty of fraudulent acts in relation to securities trading. The Enquiry Committee
also identified some of the country's biggest brokers who were apparently involved in market
manipulation. Based upon the Enquiry Committee Report, the SEC obtained warrants of arrest
against 32 people in 7 brokerage firms and 8 listed companies. The SEC also filed 15 share-scam
cases in the High Court Division of the Supreme Court of Bangladesh.

2. A Case Of Regulatory Failure

1996 index crash was caused by the failure of a number of regulatory institutions. However, it is
unfortunate that the Enquiry Committee Report failed to address the regulatory aspects in a
comprehensive way. The said Report served two purposes: (a) it identified some of the market
manipulators involved in many fraudulent activities during the period in question; and (b) it
brought into light the irregularities involved in the day-to-day operation of the stock exchanges.
The Report, however, completely ignored the role that should have been played by the SEC as a
regulatory body to handle the crisis.

3. Regulatory Failure By The Stock Exchanges

During June-November, 1996 the two stock exchanges were aware of many irregularities and
mal-practices that took place at the exchanges. However, the exchanges remained indifferent
towards regulating (and/or banning) such activities. According to the records, the exchanges,
even though were experiencing sharp increase of prices in most of their listed shares, they did
not take any action to investigate or control the situation.

Further the trading procedure at both the stock exchanges was susceptible to fraudulent misuse
by vested quarter. The Delivery Versus Payment System (DVP) of trading method at the stock
exchanges allowed the buyers/seller of the share to settle the transactions directly between them
and without involving the stock exchanges. This system was misused by many brokers/dealers to
show artificial trading so that the investors would be induced to buy and demand more shares.
Also, the usual practice of T+4 settlement procedure was not followed at the Dhaka Stock
Exchange. Forward deals, though forbidden under law, took place in the exchanges at very high
prices.

Also, the management system of the Dhaka Stock Exchange was not appropriate; there was no
clear demarcation between management and operation and as such, conflict of interest was
bound to grow. In addition, such concentration of control in the same group of people actually
discouraged to take strict actions against members of the stock exchanges engaged in unethical
practices. It was also observed that the stock exchanges did not have internal auditing system for
their day-to-day operation.

4. Regulatory Failure By The SEC

It is true that in 1996, securities market of Bangladesh had only a few years of experience in
active trading. Therefore, the SEC, as the central regulator of the securities market, should have
been more careful in performing its duty as a market watchdog. However, over the period June
November 1996 the SEC was rather in conscious disregard of market movements. For example,
there emerged an unauthorized and unregulated kerb market right outside the Dhaka Stock
Exchange and securities were traded at exceptional high prices in the kerb market affecting the
overall price movement. However, the SEC failed to take necessary steps to control such
activities and thereby the SEC failed miserably to watch and guard the interest of the market.

The SEC also failed to carry on necessary inspection to monitor the activities of market
intermediaries. Irregularities at the stock exchanges or by the brokers/dealers could have been
guarded in proper time had the SEC become a bit more vigilant in protecting the interest of the
market. Also, the SEC needed to be more alert to the cases of insider trading and market
manipulation, which ultimately results in loosing of market confidence.

Finally, it is the duty of the securities market regulators to be alert and prepared for any crash
situation. However, in 1996, the regulatory response to merely identify a crash was far behind
the time. A more regulatory effort to carry on market surveillance could enable the SEC to make
a timely response to the crash.

Further it is essential for regulators to make it apparent to the market that they have a power to
control the market, as and when necessary. Enforcement mechanism, exercised by the regulators,
encourages the market to move towards proper direction. By adhering to strict enforcement
mechanisms against market culprits, the regulators can always discourage such happening in
future. However, it is argued that during June-November 1996, the SEC unfortunately failed to
enforce securities market regulations against the market malpractices.

It became apparent that from June-November 1996, the stock exchanges were not self-regulating
themselves well and market intermediaries were in breach of a number of legal provisions; there
was wide range of insider trading taking place to manipulate the market price of the shares.
There were even serious allegations regarding the registered chartered accountants certifying
false financial statements along with the valuation of assets and property. Many of these
activities could amount to fraud and would clearly violate specific provisions of the already
existing securities market laws of the country.

However, the SEC, even though entrusted with wide regulatory power, failed to take strict action
against such market misbehavior/malpractices. For example, the SEC failed to prosecute under
Order 17 and/or to impose penalty under Order 24 of the Securities and Exchange Ordinance
1969 against 'insider trading' committed by director or sponsor of the issuers. Similarly, the SEC
even though observed that during 1996 a number of companies management were making public
disclosure of false information, it failed to take any timely action against those companies. Also,
the market manipulation activities of the brokers/dealers clearly fell under the fraudulent
activities as stated in Ordinance 17 of the Securities and Exchange Ordinance of 1969 and
therefore, would attract the penalty provision under Ordinance 24. Nevertheless, the SEC failed
to take any reasonable regulatory measure to control such activities.

It is stated that a regulator should be a thoughtful observer to the market and not a reluctant
bystander. From the ongoing discussion it is clear that both the SEC and the stock exchanges
were inactive to apply any enforcement mechanism against fraudulent activities and malpractices
in 1996. It is stated that such failure of the SEC and the stock exchanges to actively enforce their
regulatory power has made the market vulnerable to manipulation and finally to crash.
Alternatively, it is strongly argued that in 1996 neither the SEC, nor the stock exchanges had the
required 'regulatory capacity' to regulate the securities market and as such, the unregulated
market had valid reasons to crash.
Chapter 4
Recent Crashes, Their Characteristics and Reasons behind the fall

Stock Market Crash in 2010-11

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. Most important factors that guided to the Bull Run are de-scribed here.

Root of Bubble

Due to political unrest of Bangladesh state of emergency was declared and military took power
of the country in 2007. During military-backed regime investment in real sectors as well as FDI
decreased but the inflow of foreign remittance increased. Investors tried to find alternative
investment sector to invest their savings and found stock market as an attractive alternative.

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 don’t have enough knowledge about the stock market but invest their most or all
savings in the market. 238 brokerage houses opened 590 branches at 32 districts. 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.

Banks & other financial institutions of Bangladesh had a lot of excess liquidity due to less
business opportunities in the recession period of 2009-10. To minimize the cost of bearing
excess liquidity and as a great opportunity, theses financial institutions & its officials as well as
other people took loan and invest in the share market. This made a huge influx of liquidity in the
share market. It was seen that the daily transaction in the share market was on an average from
Taka 20,000 to 30,000 million in 2010 and the figure was double comparing to 2009. To grow
Bangladesh`s economy by 7-8% per year Bangladesh Bank adopted accommodative monetary
policy during the high inflation periods to support investment.

Bangladesh Bank has pegged Taka against dollar to support exports. As Taka has been
undervalued it has made excess growth in money supply. 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.
Then government again fuelled the bubble after permitting whitening of black money through
tax breaks and schemes. 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. Moreover, some
initiatives taken by SEC were not effective and changed directives frequently such as; it changed
directives of margin loan ratio 19 times.

Time of Historical Fall

Timeline of historical fall of the crash has been divided into two sections which are December
2010 and January 2011.

December 2010

5th December, 2010 was the last glorious day of the year for the investors of Bangladesh stock
market. On this day DSE General Index (DGEN) gained its all-time highest 8, 918.51 point &
broke all old records of DSE turnover by Taka 32.50 billion. Security & Exchange Commissions
and Bangladesh Bank applied a lot of directives to keep the market under control in 2010. But in
December both BB & SEC changed many of their previous directives and applied new more. On
6th December, 2010 SEC introduced a directive saying that buy orders will be performed after

10000
9000
8000
7000
6000
5000 DSI Index
4000 DSE General Index
3000
2000
1000
0
1/1/2009 1/1/2010 1/1/2011 1/1/2012

Figure 6: 2010-11 Market Crash

encashment of Investor`s cheque. On the following day another directive called “netting
facilities” was applied. This indicates that no investor will be able to purchase securities against
the sale proceedings of any other securities during the settlement & clearance period. But both
directives of 6th & 7th December were cancelled on 8th December. The reason of cancel-ling
these directives was a significant fall of share prices on 8th December.
 Date DSI Index DSE General Index
1/1/2009 2321.0418 2807.61264
4/1/2009 2028.8984 2443.2516
5/3/2009 2110.0402 2539.1693
6/1/2009 2168.39325 2596.99779
6/30/2009 2520.14972 3010.26379
8/2/2009 2463.8661 2941.017
10/1/2009 2624.8714 3123.2396
11/1/2009 2836.0287 3392.0215
12/30/2009 3747.52876 4535.53176
1/3/2010 3773.76293 4568.40405
1/4/2010 3837.65394 4643.39716
4/5/2010 4564.10226 5573.36917
4/11/2010 4552.46622 5556.52794
5/30/2010 5027.62946 6108.5034
9/30/2010 5930.90201 7097.3816
10/3/2010 6031.47631 7223.48757
11/30/2010 7135.1628 8602.44148
12/1/2010 7232.20007 8723.18238
12/5/2010 7383.9366 8918.5135
12/6/2010 7261.26144 8771.41271
12/7/2010 7105.87722 8585.88067
12/8/2010 7001.1645 8451.59443
12/9/2010 7117.1141 8580.19779
12/12/2010 6881.38381 8295.41835
12/13/2010 6905.28306 8329.11357
12/15/2010 6807.15313 8206.17226
12/19/2010 6356.54234 7654.4051
12/20/2010 6605.49492 7959.27532
12/29/2010 6814.57976 8215.0548
1/5/2011 6608.97903 7948.43078
1/6/2011 6432.42721 7735.21715
1/9/2011 5938.02021 7135.02011
1/10/2011 5420.11756 6499.43591
1/11/2011 6249.359 7512.09417
1/18/2011 5925.4575 7140.24871
3/1/2011 4646.66872 5601.59856
3/31/2011 5275.12984 6352.1018
12/1/2011 4377.48368 5236.75797
12/29/2011 4383.94206 5257.60585
1/1/2012 4458.99727 5351.75435
1/31/2012 3488.98809 4153.96414
2/1/2012 3269.90597 3887.182
2/29/2012 3927.02505 4695.40854
3/1/2012 3810.73676 4553.76705
3/29/2012 4172.95021 4990.32474
8/30/2012 3761.88709 4446.8703
Table 2: DSE Indices from 2009-12
SEC changed directive of margin loan ratio by increasing it from 1:0.5 to 1:1 on 13th December
and later it was again hiked to 1:1.5 & 1:2 because of free fall of share prices.

Bangladesh Bank got a complaint that Banks are investing money in the stock market from their
reserve. On the 1st day of December BB sent 50 teams in different banks of Dhaka & Chittagong
to investigate and found some banks in such irregularities. Most important directives initiated by
BB in December 2010 are withdrawal of illegally invested industrial loans, increasing SLR &
CRR. On 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. 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. To meet CRR & SLR requirements of BB by the
deadline created liquidity crisis in banking sector and call money rate made a new record of
180% by 20th December. In-vestment Corporation of Bangladesh (ICB), state-owned
commercial banks (SCBs), regulators and government brought some kind of stability in the
market after the big fall of 19th December & liquidity crisis. As a result, share prices increased
from 20th to until 30th December and index stood at 8290 point at the end of the financial year
2010-11.

January 2011

Share prices started to fall from 3rd January, 2011 as investor had the information of on-going
liquidity crisis of financial & non-financial institutions that limiting margin loan.

The down slope of index is noticeable from January 2nd to 10th. As the Chairman of probe
committee Mr. Ibrahim Khaled (2011) mentioned, “Due to trigger sale of shares from 2nd to 5th
January, market experienced its biggest decline in share prices and market crash from 6th to 10th
January. On 9th January DSE General (DGEN) Index declined by 600 points and all indices
declined nearly 7.75 percent. On 10th January Dhaka Stock Exchange General (DGEN) Index
lost by 660 points or 9 percent & Chittagong Stock Exchange Selective (CSE) Index declined by
914 points or 6.8 percent within 50 minutes of trading. CSE All Share Price Index (CASPI) stood
at 19212.34 losing by 1,396.21point, which is 6.77 percent.

Figure 7: DSE daily DGEN index of December, 2010

CSE Selective Categories Index (CSCX) lost 914 points or 6.87 percent and CSE-30 Index also
lost 1490.83 or 8.28 percent.

Figure 8: CSE daily CASPI index of December, 2010

It had broken all previous records of decreasing index. After that Security & Exchange
Commissions called for an emergency meeting with BB and stop trading at both Dhaka &
Chittagong Stock Exchanges. Investors came out in the street with processions and
demonstrated against free fall of Share index in both bourses as well as suspension of trading.
Investors from different parts of the country such as, Chittagong, Comilla, Narsingdi,
Narayanganj and Jessore brought out processions and clashed with law en-forces in some places
as well.

Following two days consecutive historical fall of share prices the government, Central Bank &
SEC took instant actions to stabilize the market and bring the confidence among million of
small investors. The government created pressure on Bangladesh Bank & SEC to improve the
market condition. As a result, recovery was initiated with Institutional buyer for instance
merchant banks, state owned banks and non-financial institutions. On 11th January market
recovered 15.6 percent of General index by the end of the session and made a record in
Bangladesh stock market history of gain.

Institutional buyers were asked not to sell shares rather to buy. Bangladesh Bank pushed money
into the market as liquidity sup-port and repo. Index started to decline again on 18th January and
market hits the lowest turnover in nine months which is taka 8.49 billion. Because of free fall of
share prices, Investors came out in the street again and started protesting against free fall of share
prices and chanted slogans against market regulators. SEC asked DSE & CSE to halt trading for
the 2nd time within 8 days. DSE General Index (DGEN) declined by 243 points or 3.29 percent
and CSE Selective Category Index 298 points after a trading of around 2.4 hours.

Though steps were taken and applied by the government, BB and regulators to improve the
market conditions and bring the investors’ confidence market index declined heavily on 20th
January DGEN by slipping 599.77 points or 8.68 percent. From 26th of January there was an
increase trend of index. But finally Index stood at the lowest point which is 5579 from 7th to
14th February.

Factors Contributed To 2010 Crash

This time liable factors are- omnibus account, placement share, book building method, rumors
and so on. Misuse of those factors causes the capital market debacle.

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.

According to the Investigation report (2011) of the probe committee, reasons for the stock
market crash are following:
 I. Role of Market Regulators and Their Employees:

The role of SEC to control & monitor capital market, working in favor of manipulators,
approving unethical proposal and issuing wrong directives which lead to unexpected market
conditions deteriorated the image of SEC. Investigation report mentioned some names of corrupt
employees of the market regulators who were directly or indirectly responsible in the market
manipulation. There is a job overlapping between SEC and exchanges. Such as, DSE & SEC
both organizations have surveillance department for the same job but there is no co-ordination.
Listing committee of DSE & CSE examines listing application of company but SEC doesn’t do it
properly and approve it. Placement of Mutual fund & IPO at a price lower than the market value
has become a new method of bribery for powerful employees of regulators. There is another
accusation that these senior level employees received placement by using other`s name which is
very difficult to identify. The report admits that SEC doesn’t have enough employees for
example; qualified accountant, financial analyst and researcher to control and monitor the
market.

Rahman & Moazzem (2011) identified in their study that Dhaka stock exchange is becoming
more volatile but the regulators are unable to defend it. They also suggested increasing
manpower and quality of professionals in SEC.

II. Demutualization of Exchanges:

There are both elected & nominated members in DSE and CSE. Basically, elected members run
the administration due to less interest & relation of nominated members. As a result, the players
of the capital market act as controllers. Meanwhile, controllers are inactive during unethical
activities due to conflict of interest. In the investigation report it was said that different stake
holders of capital market and civil society support & demand for demutualization of exchanges.
The meaning of Demutualization is separating controlling functions from controller’s functions,
empowering controller and taking decisions without being motivated by the market players.

III. Investment of bank in the capital market:

In 2009 & 10 banks and financial institutions invested huge amount of deposit money in the
stock market. As a result share prices sky rocketed until December 2010. When Bangladesh
Bank restricted more than 10 percent investment of deposited money, increased CRR and SLR
ratio, created liquidity crisis and market crashed.

IV. Pre-IPO & IPO process:

Investigation committee considered that due to Pre-IPO & IPO manipulation share prices sky
rocketed and that is the main reason for the share market crash. Manipulators illegally &
unethically created a Kerb market in Pre-IPO stage. Without recommendation by the listing
committee application for IPO was accepted. SEC did not examine abnormal asset revaluation
 and indicative price. As a result in Pre-IPO or IPO stage placement process and placement trade
Kerb market overvalued share prices. This eventually generated liquidity crisis in the capital
market.

V. Uniform face value of share:

During the meeting between investigation committee and different stake holders of share market,
a most important reason for abnormal climbing of index was indicated to uniform face value of
share at Taka 10. Splitting share does not change revenue or asset of a company and should not
affect the share price. But Small investors showed their utmost interest to buy split share with
their small investment and consequently pushed the price up. Up to 62 listed companies split
their shares in 2009 & 2010. So, it abnormally increased liquidity of the market and brought
notable change in market capitalization. Investigation report shows that MC increased 655% of
companies those adopted share uniform and MC increased only 46% of those that did not adopt.
From July 2009 to December 2010 the role of total MC were 81.5% of companies which adopted
share uniform and only18.5% those that did not adopt.

VI. Placement trade / Kerb market:

Before issuing IPO, Issue manager or Issuer Company sell shares to their nominated person and
that is called Private placement or pre-IPO placement. Private placement is risky because it
doesn’t have accounting discloser. In the developed countries there are some fixed rules but in
Bangladesh SEC didn’t have proper rules for it. As a result some manipulators used it as a tool of
price manipulation. Investigation committee found that in most of the cases placement was
offered at less than the IPO price. Though aim of public offering is participation of public but
placement doesn’t make sure it.

Eight companies issued convertible preference share in 2009 & 10 in which average 69% went
for placement. So, participation of the public was hindered and that created placement trade or
Kerb market. Some companies distributed 50-90 percent of their paid up capital in private
placement. However, when a company raises too much paid up capital through private
placement, the number of free-floating shares decreased. That’s why the difference between
demand & supply push share prices up. Moreover, non-listed companies created liquidity crisis
as huge investment was stuck up with these companies. Placement created new process of
trading outside of the share market and that is illegal. By taking chance of placement many
small companies raised capital from illiterate and un-informed investors with their artificial
financial reports.

VII. Omnibus account:

Investigation report found Omnibus accounts of ICB and merchant banks as another major
reason behind the stock market debacle. Every branch of merchant bank operates only one
omnibus account. There could be 3-10 thousands BO Accounts under the omnibus account
 which are not under the surveillance of SEC. So, information of individual accounts and its
transaction are kept only with merchant banks. As investigation reports shows that this kind of
account made a lot of illegal transactions. It publishes name of 30 big players including ICB for
a lot of suspicious transactions and says most manipulators traded from the omnibus accounts. It
was also reported at least Taka 2.5 billion has been traded from hidden or omnibus accounts.

Asset revaluation & Rumor: By taking chance of weak asset revaluation method companies
have overvalued their asset. In this process dishonest auditors generated artificial audit reports.
So, calculating of NAV on overvalued asset indicates wrong signal. Some companies issued
Bonus shares against unrealized gain of revalued asset price which is a faulty accounting
practice. There is rule to maintain provision against “deferred tax” during asset revaluation to
pay tax in future, but companies are not following it. Investigation reports pointed some
companies which got NAV more than 100% to 3,472% after asset revaluation.

Book building method: It’s a procedure of determining price of IPO at which it is offered. The
fair price is determined by the demand of a security from institutional investors and their
indicative price. The main aim of introducing this method in Bangladesh stock market was to
attract more firms for enlisting in the stock exchanges through fair share pricing. However, it
was found as an instrument of manipulating market prices. Investigation report reveals that
during the price discovery/bidding stage investors manipulated share prices for placement with
too high price. High price was maintained only for the lock-in period and then investors
offloaded their shares. As a result they pulled out a lot of profit within a short period and after
that the share price did not increase. In this process corrupted Issuer and issue manager
manipulated the price.

VIII. Serial and artificial trading:

Some manipulators created artificial active trading environment among themselves through bulk
transaction and increased share prices. Moreover serial trading and price manipulation by many
buy-sell orders through different accounts and broker houses which overheated the market.

Issue of Right and preference share: Right Share is issued at a discount price to existing
shareholders. SEC took 4/5 months to take the decision of right issue proposal which is
mysterious. Meanwhile companies inform the market about Right issuance and increased the
share price. Moreover, issuance of Right share increase number of share which should decrease
share price but it did not happen.

Investing in Preference share is safe to get a fixed percentage of profit. To make the share
attractive companies keep an opportunity to convert it and in that case it is called Convertible
Preference Share. Companies issued preference share for only 2-3 months even for 1 month
which is not common in other countries. The faults with convertible preference share were its
time period (short), convertible process and private placement. Investigation committee found
that SEC did not have proper guidelines for Right and Preference Share issuance.
IX. Suspicious Transaction of Top Players:

Investigation report reveals some names of individual and institutional investors as top buyers
and sellers during abnormal increase and decrease of index in different time periods. The
transactions of these investors were suspicious and affected the market heavily and liable for
abnormal rise and fall.

X. Block placement:

There was a lot of suspicious block trading of mutual funds. Some investors got enormous
amount of placement time to time.

Direct listing: With the approval of SEC few companies have been directly listed in the stock
exchange. These companies come to the market with inflated share prices. Investigation report
mentioned that indicative prices of these companies were determined even 58 times more than
EPS and 9 times of NAV. Though share prices of these types of directly listed companies have
been artificially determined, but SEC or exchanges did not investigate the reason of abnormal
price.

XI. Government Failure:

The government initiated a couple of probes. But the report that listed the mischief makers was
not published. The probe chairman was himself questioned. The media in the meantime reported
huge flight of capital abroad. This was a case of inept handling by the government. It was
pushing itself into a corner.
Chapter 5

Comparative Views of 1996 and 2011 Market Scam

1996-2011: A Matter of Time?

We have observed a market crash in our capital market which we many didn’t expect after 1996
turmoil. The 1996 crash of share market not only depleted the market value and volume of the
Dhaka Stock Exchange, it ruined many families, mainly from the middle class, who were enticed
by a few manipulators. When thousands had put in their last stake, insiders made profit by selling
at the pick of value before leaving the market and siphoned the cash outside the country. This
happened while the government was in full function and regulatory bodies were active. When
millions lost their cash and left with scripts of negligible value, the courts, lawyers, government
bodies, human right groups and the civil society did not seem to care. Despite everything that
was said, nothing happened on the ground, except those who lost remained losers. The
subsequent government also dropped a few crocodile tears and shrugged off the matter.

In 2010 we also experienced the same as 1996. Aggrieved investors set fire to wood and paper in
front of the DSE building and blocked the road from Shapla Chattar to Ittefaq Moor. They
chanted slogans against the top bosses of the premier bourse and market regulators, and
demanded resignation of the central bank governor. Market insiders blamed the recent fall on the
central bank's measures to control the liquidity flow in the banking system. The central bank also
issued another directive asking financial institutions to adjust their stock investment exposure by
December. From January, no institution will be allowed to invest more than 10 percent of its
total liabilities in the stock market, and the exposure will be calculated based on market price,
not cost price.

The International Monetary Fund's prescription to Bangladesh Bank for addressing the
overexposure of commercial banks to the stock market also propelled the unprecedented fall. The
SEC's excessive initiatives to cool the market in a short time are also blamed for the crash. The
measures and unexpected and unnecessary intervention of a donor agency took a big toll on the
market

A strong cartel has used the primary market as a tool to fleece people by inflating share prices,
says a probe committee report.

“The 1996 crash was in the secondary market. But this time it was created in the primary market
from behind the scene by a nexus of the issuer, issue manager, valuer, chartered accountant and
placement holder with the SEC's support,” the report said.

“The huge price inflation due to misuse of premium, book building and placement before issuing
IPO caused massive instability in the secondary or open market,” the report said.
Primary market deals with the issuance of new securities. In Secondary market previously issued
securities and financial instruments in the primary market such as stock, bonds, options, and
futures are bought and sold or traded.

In 2009-10, 34 companies, eight of which were non-listed, raised capital totaling Tk 3,776 crore
through private placements.

Private placement is a non-public offering in which securities are usually sold to a limited
number of chosen private investors.

Some of them distributed primary shares equivalent to 50-90 percent of their paid-up capital.

“Using the placement illegally, the issuer companies or the issue managers or their
representatives gave placement shares to many high civil and military officials in a bid to
increase their share prices in the market,” the report said.

“It is not possible to know their complete identity by names and addresses mentioned in the
prospectuses. If extensive police or intelligence probe is launched against these
people….conspirators behind the scene will be unmasked and forgery in the stock market will be
stopped in future,” said the report. It also disclosed a list of 100 people who received shares
through placement in a big amount.

The probe found that business people, stock exchange members and directors, chief executives
of some merchant banks, relatives of high officials of the ICB and wives of banks officials were
among those who received placement shares worth above Tk 1 crore.

The probe committee also received allegations that high officials of the SEC and stock
exchanges members and directors took placement shares in condition of giving listing approval.

Eight non-listed companies raised Tk. 1,367 crore from many individual and institutional
investors through private placement. But these companies are yet to be listed on the stock
exchanges. As a result, the prevailing liquidity crisis in the stock market may be intensified
further, as the individuals' and institutional investors' money got stuck in the companies'
placement.

“The placement business outside the capital market has become a new system for share
transaction that is totally illegal. Taking this opportunity some weak companies through
fabricated financial statements raised hundreds of crores of taka from immature investors,” the
report said.

Pubali Bank Securities Limited is one of the institutional investors that bought around Tk 13
crore worth shares of Unique Hotel and Resorts Ltd and Energy Prima Limited through
placement. As the stockbroker's investment got stuck on the two companies, the bank brokerage
house on March 1 sent a letter to the SEC seeking support from the regulator to get back the
investment.

Not only in the case of companies placement, the probe committee also found irregularities in the
pre-IPO placement of mutual funds that also helped to create instability in the stock market.

According to the probe committee's finding, placement holder of six to seven mutual funds
pocketed around Tk 350 crore.

Lack of guidelines or rules in the SEC widened the scope of the irregularities in the placement,
said the report, which also suggested formulating specific rules on placement.

Many experts believe that this crash was nothing but a matter of time or kind of a time cycle and
they are expecting another crash in the 10 years.

Rules And Regulations Blamed For The Recent Crash:

Margin loan decision would be taken by broker houses and merchant banks not SEC

Sponsor director mandatory holds individually 2% and all together 30% shares

Book building method in IPO has been developed

Bangladesh Bank imposed limitations on Bank & financial institutions about their
exposure in the market.

Failing confidence level compelled the investors to liquidate their respective position, to
stem further losses to their portfolio in the current downtrend.
Chapter 6
Suggestions, Recommendations and Recent Changes

Recommendations to prevent crashes in future:

 Adoption of Software (surveillance) and surveillance team to monitor overall trading

activities
 Trustworthy IPO approval process
 Actual book building process should be introduced
 Introducing automated monitoring system that may control price manipulation,
malpractices and inside trading.
 Offloading government shares
 Margin loan decision should be taken by broker houses and merchant banks not SEC
 Insider trading would be strictly prohibited
 New regulation for the placement business on the eve of pre-IPO state.
 Regulators should perform their job honestly and sincerely
 SEC needs honest officials
 Insider trading should be prohibited
 Omnibus should be converted to BO account
 Role of government to prevent this kind of crash in future
 Actions should be taken against those who were involved in this recent stock market
crash
 Improving security laws and penalty for breaking those
 Balancing of demand and supply of shares
 Follow-up the market and protect against any kind of manipulation
Recent Changes and developments in the Stock markets:

 The Securities and Exchange Commission has formed a three-member panel to look into
the demutualization of stock exchanges. Demutualization is simply a process which
would transform the stock exchange from an entity owned by stockbrokers to a public
company owned by shareholders. The process is conducive to sound corporate
governance and operational efficiency. After the stock market crash at the beginning of
last year, market experts were advocating demutualization of the stock exchanges for
greater transparency and accountability. After the stock market crash at the beginning of
last year, market experts were advocating demutualization of the stock exchanges for
greater transparency and accountability.
 Government took a set of decisions including withdrawal of 10 percent tax on mutual
funds to lift the troubled stock market. It also decided to reduce tax on brokerage
commission at source by half to 0.05 percent. In another development, the central bank
gave the nod to underinvested banks to raise their investment in the stock market. The
government had earlier doubled tax on commission for brokerage houses to 0.1 percent
and imposed tax on mutual funds in 2011.
 Bangladesh Bank gave the nod for further investments by banks that have investments
less than 10 percent of their liabilities in the stock market.
 SEC required sponsor directors of all listed companies to hold minimum of 2 percent
total share to maintain their directorship.
 Opportunity given to whiten the black money by investing in stock market
 Appointing new chairman and members in SEC
 Establishment of law division
Conclusion
The market is still struggling to get back its natural pace. Market is trying to recover from its
bearish mood but we have observed still much confusion, lack of cooperation among the
government, DSE members, and regulators. All are waiting for a stable market so that investors
get confidence to put their valued money in this market. As the criminals have not been
punished, so the investors are not getting the confidence to reinvest in this unpredictable and
insecure market. On the other hand banking sector which has been backing up the market is now
having a tough time due to economic recession which is not a good news for the investors. Very
recently siphoning of a huge amount of money from a nationalized bank as well as allegation of
same activities against some other banks have made banking sector unstable and it has lost the
trust of many investors. All in all the market is passing a metamorphosis phase, and after
analyzing overall situation and all influencing factors, I think we have to wait some more time to
see any substantial progress in the stock market. If the govt. takes just steps according to the
report of probe committee and stop political backing up to the true culprits, we hope soon
investors would get back their confidence and the market would be able to recover its losses.
References:
Websites:

Dhaka Stock Exchanges, www.dsebd.org

Chittagong Stock Exchanges, http://www.cse.com.bd/

Security and exchange commission, www.secbd.org

Wikipedia the free encyclopedia, www.wikipedia.com

www.investopedia.com

The Daily star, www.thedailystar.net

Daily Prothom-alo, http://www.prothom-alo.com/

www.bdnews24.com

Books and Publications:

Sangit Saha, 2012. Stock Market Crash of Bangladesh in 2010-11: Reasons & Roles of
Regulators, Arcada

Khaled K. I., 2011. Investigation Report of Probe Committee.

StockBangladesh Limited In-House Publications

Mishkin, Eakins, 2012. Financial Markets and Institutions, Seventh Edition, Prentice Hall