Star (January 30, 2011)
Stock Market analysts yesterday identified deep collusion among market stakeholders as a major setback that distorts the capital market and takes it to dizzying heights in signs of high volatility.
The observation came days after the country's stockmarket witnessed a steep downswing, pushing tens of thousands of investors into deep trouble.
In an effort to guide the market out of mess, the analysts suggested that regulators allow the market to come down to the fundamental level and leave it on its own, without intervention.
“There is collusion among the independent actors; collusion between auditors and issuers,” said AB Mirza Azizul Islam, a former finance adviser and also former chairman of the Securities and Exchange Commission. He also pointed to collusion between merchant bankers and issuers, between stock exchanges and issuers and among investors themselves.
The former adviser was speaking at a roundtable on "recent stockmarket situation in Bangladesh and corporate governance in listed companies" organised by The Daily Star. The roundtable pulled in some 20 discussants, including economists, bankers, lawyers, auditors, merchant bankers and stockbrokers.
Aziz said rules are in place, but the question is whether they are enforced properly.
“The main problem is, the SEC does not have sufficient manpower and suffers from lack of competence in the existing workforce especially at junior level. Market intermediaries are also in need of professionals," he said.
The former adviser said he had initiated a move to set up a capital market institute when he was the SEC chairman. But the institute was launched only a few days ago. "That shows how long it takes to translate an idea into reality in Bangladesh.”
Shakil Rizvi, president of Dhaka Stock Exchange, said many companies with overvaluation in their accounts listed on the market, while weak companies received approval for listings by exercising pressure or influence.
The DSE has an option for making recommendations before listing of a new security but the final listing approval comes from the SEC, he said.
Referring to Mark BD, a shoe company that listed on the stockmarket with fabricated accounts during the 1996 share market scam, he said there is a tendency of accusing the buyers and sellers but "it was never discussed who brought the issues to the market, or who were the auditors and managers to the issues”.
"It will never be good for the market if companies are allowed in, with their accounts overvalued. It is time to reveal this window dressing of balance sheets,” he said. Window dressing is an accounting strategy to spruce up the balance sheet to make it more attractive than it really is.
Rizvi said there is no designated institution to look into matter or deal with the fabricated accounts by an issuer. These things should be checked at entry level so that companies with window-dressed accounts cannot enter the market, he said.
Mamun Rashid, a banker and economic analyst, said market capitalisation grew 10 times in five years to $50 billion in 2010.
Daily average turnover shot to $237 million in 2010 from $38 million in 2008. Compared to Bangladesh, the average trade of Vietnam and Philippines was $60 million and $82.5 million in 2010, he said quoting market data.
He said the supply of new issues has not increased in line with the inflows of funds and growth in numbers of beneficiary-owner accounts, which rose 65 percent to nearly 3.4 million in one and a half years. “The market is uniquely retail-driven: too many investors are chasing too few stocks,” he said.
At the same time, the systems of listing -- direct listing or book building -- were abused by sponsors, institutional investors and others, he said mentioning how valuation of a hotel was fixed at a staggering $850 million. Rashid said the hotel had earlier been valued at $50 million. "It went up to $850 million after introduction of book building, raising many eyebrows."
Rashid said the stockmarket saw an investment spree that led to the bubble on assumption that stock prices will only rise and the government will never allow the market to go down.
“We possibly need to focus on governance," he said pointing to the role of auditors, and book-keeping system.
Mahfuz Anam, editor and publisher of The Daily Star, moderated the roundtable.
"The market has seen a phenomenal rise. There are many factors behind it and there are allegations of manipulation," Anam said. To set the tone for the discussion, he said the roles of auditors have surfaced in public mind.
Mahmood Osman Imam, a professor of finance at Dhaka University, said the arithmetic mean that was used to determine the indicative price for initial public offerings (IPOs) under book building method showed connivance in the market. There was no problem in the book building method, but it was misused, he said.
AF Nesaruddin, partner of Hoda Vasi Choudhury and Company, came down heavily on the stockmarket regulator. He said it has failed completely to regulate the market.
Nesaruddin said a share of Tk 200 in net asset value was fixed at Tk 800-900. This high IPO pricing affected the prices of other items similar in nature, he said.
“Share overpricing cannot be done without the connivance of the SEC,” alleged Nesaruddin.
“Was the SEC sleeping?” he questioned.
Sheikh Mortoza Hossain, president of Bangladesh Merchant Bankers' Association, said merchant banks are blamed for every market fall although they are not solely responsible for the bubble.
Merchant banks mainly bring the initial public offerings (IPOs) to the market and maintain portfolio investment through discretionary and non-discretionary accounts, he said.
"We maintain non-discretionary accounts. It means our customers manage their portfolios and make decisions on their own," he said. The merchant bankers can hardly influence the investors' decisions. They work like brokers, he said.
Mortoza said the market started picking up in 2007 after the 1/11 changeover. A few merchant bankers were working at that time, as nobody was interested to invest in the market, he said.
“Mutual funds were undervalued at the time. Then we thought of increasing the supply side in the stockmarket. We also paid attention to the demand side. That's why we went for non-discretionary accounts to boost the demand side. We did no wrong,” Mortoza said.
He said the issue managers do not even have any idea of how to maintain accounts.
Mortoza reacted sharply to the allegations of merchant bankers' roles in market volatility and said: “You cannot just blame all merchant bankers and issue managers wholesale."
The market started going up from the beginning of January and continued up to November last year.
The merchant banks maintained due diligence even for the non-discretionary accounts. “They did not give loans against all securities. The prices of junk shares went up even though no loans were disbursed for them,” he added. "We maintain omnibus accounts. If you do not have omnibus accounts you cannot maintain discretionary accounts," he said.
Shahwar Jamal Nizam, senior legal associate of Singapore-based Duane Morris and Selvam LLP, stressed the importance of coordination between the regulators.
He also called for fixing the definition of market manipulation and arranging training programmes for imparting knowledge to the officials and investors.
"The independent directors should have more power in the board of directors of the companies to establish strong corporate governance. Such rules should be imposed; the listing processes should be written clearly," he said.
Ahsan H Mansur, executive director of Policy Research Institute, said the market could not have bubbled without the flow of money.
Mansur observed that expansion of money, tax exemption and black money have fuelled the market.
But the former official of the International Monetary Fund opposed any intervention in the market. “The market should be left on its own,” he said.
Fahmida Khatun, head of research at Centre for Policy Dialogue, put the market collapse down to 3Gs: greed of investors both large and small, gap in policy coordination and governance (lack of it).
Parven Mahmud, president of Institute of Chartered Accountants of Bangladesh, urged the SEC to better coordinate with the accountants.
Shahed Noman, former managing director of Dhaka Bank, criticised the SEC for lack of commitment and for not having a 'forensic department'. He said appointing independent directors to listed companies did not work, and the central bank should assess the issue.
Yawer Sayeed, managing director of AIMS of Bangladesh Ltd, identified three factors behind the stockmarket volatility: policy contradiction that was the base, overlapping of roles and contradiction of actions.
Black money was open for investment without any question at a time when the SEC was tightening the share credit ratio, Sayeed added.
The commission approved initial public offerings (IPOs) with a PE of 60, 70 or 80 when the same regulator fixed 40PE as a benchmark for margin allowing or justifying a company's share prices to go up that level.
"The government has come up with Rupali Bank shares, which were the worst, while Janata Bank said it will not go to the market unless it gets Tk 1,000 per share. But nobody talks about the listing of Basic Bank, which is one of the most profitable banks," he continued. “All these show policy contradiction by the SEC or the government.”
Sayeed said institutional investors and asset managers did not play their due roles either. In the name of floating mutual funds, the asset managers, sponsors or even trustee bodies engaged in private placement business.
Senior lawyer Ajmalul Hossain QC said greed has been the driving force behind the stockmarket. "The majority of small investors rushed to the market hoping to make a quick buck."
He said the country's stock exchanges always urge people to invest in stocks and get more benefit. "Their slogan worked and people rushed to it."
"One thing that has not happened is that the bourses did not warn people that prices can go up and down. They did not say the investors might lose everything. Now they should be told that they can lose everything they have.”
Dr Sharif Bhuiyan, a partner of Dr Kamal Hossain and Associates, said the absence of the rule of law is the main problem in the country.
"In Bangladesh, one who abides by the law is zero while one who violates the law is hero. This cannot be a proper characteristic of a market. There is also a culture of impunity. We have to address basic legal things.
"There must be mechanisms so that outsider interventions cannot influence the SEC.
"Many problems arose also due to conflict of interests. We have conflict of interests at SEC, bourses, issuers and investors levels. We should address the issue of these conflicts legally."
Waliul Maruf Matin, former CEO of Chittagong Stock Exchange, said: “The stockmarket operators have said nobody listens to their demands. This is scary."
All stakeholders such as merchant banks, stock exchanges, the regulator, the government, journalists and investors need to be educated for a better stockmarket. "There should also be independent directors and corporate governance. And the education must be linked with some certification."
The profession as financial adviser has not developed in the country at all, he said. For corporate governance, the country needs independent directors, he suggested. "The directors must have a minimum qualification."
Matin stressed the need to define the rules and regulations. "We do not know about regulations which define manipulation and what will be punishment if we breach that. If we cannot do that the probe will not yield any benefit. It will end up disgracing some people only, in most cases innocent people.”
