FE Report (January 21, 2011)
Until the first week of December last, scores of unsuspecting investors playing to the tune of behind-scene-players behaved bizarre and took the market to a record high. Apparently, it is the market regulator's turn to behave the same way in its bid to save a collapsing market.
But the latest actions, particularly that relating to the introduction of circuit breaker for trading at bourses, of the Securities and Exchange Commission (SEC) have not only infuriated small investors but also added to their miseries.
The circuit breaker can be likened to an act of putting the investors into a gas chamber. Even if the investors are willing to incur loss and make an exit, they are not allowed to do so.
The SEC has admitted that it had no other option but to impose the circuit breaker since all the tools available with it have failed to stabilize the market. But is it the perfect way of stabilizing the falling market?
One particular question that the agitating investors are asking is: Why did not the SEC take actions in time when the market was getting overheated?
In fact, the regulator cannot shirk its responsibility as far as the developments that took place in the stock market for more than a year. It did allow, by default or design, some institutions and individuals to take the market to the boiling point. The issuance of preference shares, direct listing, floating of IPO through book building system etc., are among the mechanisms used, or to be exact, abused by a section of influential people to siphon off billions from the market. Furthermore, the practice of offering pre-placement shares without going by the standard rules of the game is alleged by many to have played a foul-game in the market. And all these happened, as the perception goes, with the connivance, concurrence or indifference, on the part of the securities regulator. Even some days back, two companies took out a large fund from a good number of institutions who had participated in the biddings.
The people who know the stock market did warn both investors and other stakeholders some months back that the market was heading towards the inevitable -- the crash. But the regulator kept its actions mainly confined to the use of margin loan. And there, too, it behaved erratically. It had reversed its decisions on a number of occasions when the market shed a few points reacting to the reduction of the margin loan ratio. If the change in the margin loan ratio was meant for reining in a soaring market, then why did the SEC again increase the loan ratio?
What is more surprising is that it allowed listing a good number of issues through book-building at very high prices despite the fact their fundamentals did not support such pricing. As a regulator, the SEC has the power not to allow any issue to be listed on the bourses if the offered price does not justify its fundamentals. Bidders paid inflated prices to the companies and they in turn sold those stocks to small investors at prices even higher than those.
Meanwhile, there is a serious liquidity problem in the market. An amount of Taka 40 billion reportedly stuck up in two initial public offerings - one of which was floated more than 15 times of its face value. The merchant banks are also facing problem for adjustment of their loans earlier extended to the investors in a situation where stock prices have drastically fallen. And this has further been compounded by suspended trading following the restrictions imposed through circuit breaker. The institutional investors are largely absent now in the market. The government-owned Securities Trading Company, a subsidiary of the Investment Corporation of Bangladesh (ICB), has alone been active, pumping about Taka 6.0 billion (600 crore) in last four trading days.
Before the start of the plunge, it seemed like a free-for-all situation. And a few figures in the capital market played the role of the pied pipers. Then again, the central bank was too late to rein in the banks that had over-exposed themselves to capital market. Had it acted in time, the market would not have reached the current state.
One can blame the small investors for putting in their hard-earned money in stock market without knowing the basics of investment in stocks. But these hapless people were lured to the market by a band of crooks, old and new, having connections with the powerful quarters. The onus lies with the government to find them out and punish. They managed to escape in 1996. This time they should not be spared.
The latest stock market developments are likely to have an adverse snowballing effect on other sectors of the economy, including the banking sector and the non-banking financial institutions.
The situation, it seems, has gone beyond the control of the market regulator. The government would have to handle the situation with utmost care for the greater interest of the small investors and the economy.
But the latest actions, particularly that relating to the introduction of circuit breaker for trading at bourses, of the Securities and Exchange Commission (SEC) have not only infuriated small investors but also added to their miseries.
The circuit breaker can be likened to an act of putting the investors into a gas chamber. Even if the investors are willing to incur loss and make an exit, they are not allowed to do so.
The SEC has admitted that it had no other option but to impose the circuit breaker since all the tools available with it have failed to stabilize the market. But is it the perfect way of stabilizing the falling market?
One particular question that the agitating investors are asking is: Why did not the SEC take actions in time when the market was getting overheated?
In fact, the regulator cannot shirk its responsibility as far as the developments that took place in the stock market for more than a year. It did allow, by default or design, some institutions and individuals to take the market to the boiling point. The issuance of preference shares, direct listing, floating of IPO through book building system etc., are among the mechanisms used, or to be exact, abused by a section of influential people to siphon off billions from the market. Furthermore, the practice of offering pre-placement shares without going by the standard rules of the game is alleged by many to have played a foul-game in the market. And all these happened, as the perception goes, with the connivance, concurrence or indifference, on the part of the securities regulator. Even some days back, two companies took out a large fund from a good number of institutions who had participated in the biddings.
The people who know the stock market did warn both investors and other stakeholders some months back that the market was heading towards the inevitable -- the crash. But the regulator kept its actions mainly confined to the use of margin loan. And there, too, it behaved erratically. It had reversed its decisions on a number of occasions when the market shed a few points reacting to the reduction of the margin loan ratio. If the change in the margin loan ratio was meant for reining in a soaring market, then why did the SEC again increase the loan ratio?
What is more surprising is that it allowed listing a good number of issues through book-building at very high prices despite the fact their fundamentals did not support such pricing. As a regulator, the SEC has the power not to allow any issue to be listed on the bourses if the offered price does not justify its fundamentals. Bidders paid inflated prices to the companies and they in turn sold those stocks to small investors at prices even higher than those.
Meanwhile, there is a serious liquidity problem in the market. An amount of Taka 40 billion reportedly stuck up in two initial public offerings - one of which was floated more than 15 times of its face value. The merchant banks are also facing problem for adjustment of their loans earlier extended to the investors in a situation where stock prices have drastically fallen. And this has further been compounded by suspended trading following the restrictions imposed through circuit breaker. The institutional investors are largely absent now in the market. The government-owned Securities Trading Company, a subsidiary of the Investment Corporation of Bangladesh (ICB), has alone been active, pumping about Taka 6.0 billion (600 crore) in last four trading days.
Before the start of the plunge, it seemed like a free-for-all situation. And a few figures in the capital market played the role of the pied pipers. Then again, the central bank was too late to rein in the banks that had over-exposed themselves to capital market. Had it acted in time, the market would not have reached the current state.
One can blame the small investors for putting in their hard-earned money in stock market without knowing the basics of investment in stocks. But these hapless people were lured to the market by a band of crooks, old and new, having connections with the powerful quarters. The onus lies with the government to find them out and punish. They managed to escape in 1996. This time they should not be spared.
The latest stock market developments are likely to have an adverse snowballing effect on other sectors of the economy, including the banking sector and the non-banking financial institutions.
The situation, it seems, has gone beyond the control of the market regulator. The government would have to handle the situation with utmost care for the greater interest of the small investors and the economy.
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