Stabilising share market

Friday, 13 March 2009 02:45

The main index, the DSE Composite Index, went down 87 points to 2416.67 on February 11, 2009 from 2503.21 on the previous day. This prompted a group of investors to demonstrate in front of the DSE building.
Against this backdrop, the Securities and Exchange Commission (SEC) came up with a set of measures to increase the flow of funds to the capital market, in a move to boost investors' confidence that is rattled by a freefall of share prices.
The measures include an enhancement of the margin loan ratio provided by brokers to clients, increasing the banks and non-banking financial institutions' (NBFIs) capacity to give loans to brokers and an immediate issuance of more licenses to merchant bankers.
Some people are blaming vested quarters/syndicates, who are engaged in manipulating share prices. They are blaming syndicates involved in the shock market crash of 1996. Once upon a time, the stock market turnover was only approximately Tk 8 crore a day. At that time, an injection of Tk 20 lack was enough to manipulate the market. But now, daily turnover is more than Tk 200 crore. So, an injection of Tk 5 crore or Tk 10 crore, by a vested group of people, may not be enough to manipulate share prices. Still, it is possible that some big players are present in the market. The SEC should examine this.
Let us look at the forces behind the recent decline in the share price index. About 55 percent of total market capitalisation was captured by only 20 companies, (among these, 10 banks and 4 power sector companies are present). The total banking sector is alone responsible for 55 percent of market capitalisation, while the total power sector companies accounted for 15 percent of the total market capitalisation.
The Price Earnings Ratio (PER) of banks' shares is 14.15, while Earnings per share (EPS) is 20.67 percent, which means investors are willing to pay Tk 280 to Tk 300 per share for a earning per share of Tk 20.
Again, the fuel and power sector, whose P/E ratio is 11.52 and EPS is 44.04 percent, means the price of these shares should be an average Tk 507.34. In the case of banks, there is an expectation that earnings over the last two quarters of fiscal year (FY) 2008-2009 will decline, due to the turmoil in the global economy. So, the share prices of banks have been low. Additionally, power sector shares are mostly government owned. The investors are expecting lower return from these shares, which accounted for almost 70 percent (banks: 55 percent plus power: 15 percent) of the total market capitalisation. A downturn in these share prices caused the total share price index to fall.
We appreciate the measures taken by the SEC. But these measures are not enough. Moreover, the application of these measures should be revised. I would suggest the following, to stabilise our share market in the long run.
It is appreciated that the SEC has taken initiative to increase the number of merchant bankers in our country by providing more licenses, which is badly needed to stabilise the share market in our country. At the same time, we need to heed our attention to some problems we are facing regarding merchant banking. Ninety percent of our merchant bank portfolios consist of retail investor investment. So the merchant banks do not have any discretionary portfolio management. The merchant bankers must maintain at least 30 percent of their own portfolio and increase institutional investors to manage discretionary portfolio management.
We need to ponder over the license provided to a bank for merchant banking, whether it will be a wing of the bank or a subsidiary of the bank. It is undoubtedly argued that merchant bankers need to be created as a subsidiary of the banks, to increase account transparency and accountability.
More and more mutual funds need to be created. Institutions and agencies that are engaged in the mobilisation of the savings of innumerable investors, to channel them into productive investments of a wide variety of corporate and other securities, are called 'mutual funds'. The mutual fund industry has a large number of players, both in the public and private sector. Commercial banks are also making rapid strides in the realm of mutual fund business. ICB AMCL is going to launch three mutual funds worth around Tk 275 crore.
Current regulation regarding mutual funds does not support forming portfolio before IPO issue. So the time gap between IPO issue and portfolio creation utilises the sponsors' fund, which accounts for almost 20-30 percent of the total portfolio. So the portfolio should be allowed to form with the sponsors' money before IPO issue.
SEC has announced that Z category shares will be traded in the OTC market. But it will have little impact on the share market trading as the trade volume of Z category shares is less than 6 percent (Tk 12 crore out of a total turnover Tk 230 crore) of the total turnover of the share market.
Recently, there was a move regarding delisting Z category shares from the market. Z category shares will also not be shown from the top ten lists. Tis poses a serious concern, unless the public holding portions of Z category shares have to be paid out to the public before they are de-listed and become private. SEC has to work out the modalities of payment with the sponsors of Z category share and ensure clearing out the public holding before being de-listed from the market.
To increase dealer member role of brokerage houses, loan on lien of invested shares in CDBL should be made available, at least 50 percent subject to maximum limit such as Tk 5 crore or Tk 10 crore.
The ratio of brokerage loans to investors has been increased from 1:0.67 to 1:2. This action taken by the SEC will bring liquidity into the market. But to ensure effectiveness of this strategy, the confidence of the investors on the share market needs to be increased.
We also need to increase the job tenure of the chairman of SEC, which is currently 3 years on contractual terms. It requires time to get a grasp on the stock market. As they gain expertise, they can take better decisions.
Finally, the decline in the stock market index on that day was “intra-day volatility”, and not “inter-day volatility”. The DSE index again increased in the next day by 121.71 points to 2538.38. That was due to the institutional investors' investments. But it can only rescue the share market in the short run. To stabilise our share market in the long run, we need to take measures as noted earlier. Otherwise this type of volatility in the stock market will be seen more frequently in the future.

The writer is the chairman of the Department of Finance, University of Dhaka.