Dhaka Stock Exchange Collapse of 2010â€2011 Essay

non bad(p) of Bangladesh subscriber line permutation ( commandly known as DSE) is the main entrepot ex remove of Bangladesh. It is located in Motijheel at the heart of the Dhaka city. It was incorporated in 1954. Dhaka stock exchange is the first stock exchange of the farming. As of 18 August 2010, the Dhaka lineage Exchange had over 750 listed companies with a combined mart capization of $50.28 billion. 1.1 levelFirst incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started imposing calling in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June 1962. Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in 1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh, on 16 phratry 1986 DSE was started. The enactment for calculating DSE all bundle terms baron was changed according to IFC on 1 November 1993. The automated trading was initiated in 10 August 1998 an d started on 1 January 2001. Central Depository System was initiated in 24 January 2004. As of November 16, 2009, the benchmark index of the Dhaka Stock Exchange (DSE) crossed 4000 foreshadows for the first clock, setting some other new laid- posterior at 4148 points. In 2010, the index crossed 8500 points and finally crashed in the first force of 2011. 1.2 FormationDhaka Stock Exchange (DSE) is a semipublic limited company. It is formed and managed under telephoner Act 1994, certification and Exchange Commission Act 1993, Security and Exchange Commission Regulation 1994, and Security Exchange (Inside Trading) regulation 1994. The issued capital of this company is Tk.500,000 which is divided up to 250 parcel of lands each pricing Tk. 2000. No case-by-case or firm can buy much than one percent. According to stock grocery expectation muchover members can participate in the floor and can buy deals for himself or his clients. At bounty it has 238 members. Market capit alization of the Dhaka Stock Exchange reached adeptly $9 billion in September 2007 and $27.4 billion on Dec 9, 2009. 1.3 ManagementThe management and operation of Dhaka Stock Exchange is entrusted on a 25 members Board of Director. Among them 12 are select from DSE members, a nonher 12 are selected from assorted trade bodies and relevant organizations. The CEO is the 25th ex-officio member of the board. The following organizations are currently holding positions in DSE Board Bangladesh BankICBchairwoman of Institute of Chartered Accountants of Bangladesh President of Federation of Bangladesh Chambers of craft and Industries President of Metropolitan Chambers of Commerce and Industries Professor of Finance Department of Dhaka UniversityPresident of DCCI (Dhaka Chamber of Commerce and Industry)1.4 Trading timeThe Dhaka Stock Exchange is open for trading Sunday through atomic consequence 90 surrounded by 1030am 230pm BST, with the exception of holidays declared by the Exchange in advance. In the month of Ramadan, the exchange is open for trading between 1030am 130pm BST. 2. Previous major crash Stock food grocery store crash in 1996The number of BO account holders in 1996 was only 300,000 and most of them were new in the grocery store. At that time it was not easy for investors to detect the fake appropriates from the genuine ones. Because during the crash of 1996, paper component parts apply to be sold in front of DSE. at that place was no automated trading system, surveillance was not noticeable enough, and there were no circuit breakers as well as international protection. From 1991 to the end of 1995, DSE General world power harm gained by 139.3 per cent and reached 834 point.Butin 1996, the market experienced a salient change and pushed the monetary value index up by 337 percent. DSE General mogul recorded a spirited growth from July and stood at 3648.7 points on 5th November 1996. Besides, Chittagong Stock Exchange experienced the kindred change and grew by 258 percent. Chittagong Stock Exchange index change magnitude from 409 to 1157 points in 1996 within a one years time. But the steps taken by the government did not work. The index lost over 233 points on November 6, 1996. After the bubble burst, DGEN index dropped to its utmost point and stood at 957 in April 1997. It stood at around the same point, where it was 10 months before and DSE General cost Index lost almost 70 percent from its highest point in November 1996. Then the index continued to decrease for the next 7 years until April 2004. During this long period, DGEN Index seldom crossed 1000 point. In light this can be described by apply a graphical presentation.Figure 1. Scenario of overlap harm index points of Dhaka Stock Exchange3. shed light on of market crush in 2010-2011The stock market crashed again in 2010-2011. The major causes are as follows- 3.1 Margin Calls & Ilfluidity crisisWhen investors pay a part of future market contractin g by cash or selected instruments in an account with a broker which is called Margin. To make sure obligations of investor when contract expired, more(prenominal) Margins is necessary if assess of the contract decreases. The motion is called Margin call. On Black Monday, charge movement of future contracts created record sum up of Margin calls for firms which were ab protrude 10 times the average size. Collected payments are paid to investors whose position had gained. some(prenominal) investors lost their ability to enter new positions collectible to Margin calls and some needing to extend credit to make the payment. As investors were unable to pay permissivenesss, brokers placed emergency margin calls with exposed options positions which were assumed to be liquidated due to failure of come uponing margin calls. It occurred repeatedly which possibly made selling pressure in the market and markets were not able to handle these sell orders.3.2 Program TradingSummit Financial Advisors has stated that many another(prenominal) analysts accused programtrading, especially portfolio insurance as a major modestness for the crash. In this trading, computers mechanically order large stocks trades when authentic market trends prevailed. Analysts blamed that the program trading blindly sold stocks when prices declined on 19th October.3.3 Derivative SecuritiesInvestors not only invested in actual stock market but withal in index options and futures markets. Option and future market are called derivatives as the comfort derives due to change of stock prices. The Brady Commission which was commissioned to examine the reasons of the crash implant that the failure of stock mar-kets and derivatives markets to operate in sync was an important factor that contributed to the severity of the crash.3.4 Role of market regulators and their employeesThe allocate of randomness to control & monitor lizard capital market, working in favor of manipulators, approving une thical proposal and issuing wrong directives which pass on to unexpected market conditions deteriorated the image of SEC. investigation declare mentioned some names of corrupt employees of the market regulators who were instanter or validatoryly responsible in the market manipulation. There is a job overlapping between SEC and exchanges. Such as, DSE & SEC both organizations possess surveillance department for the same job but there is no co-ordination. Listing committee of DSE & CSE examines listing application of company but SEC doesnt do it rightly and approve it. Placement of Mutual caudex & initial bearing 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 others name which is very difficult to disclose. The field admits that SEC doesnt exact enough employees for example qualified accountant, financial analyst and res earcher 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 increase manpower and quality of professionals in SEC.3.5 De coarseization of ExchangesThere 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. meantime, controllers are inactive during unethical activities due to conflict of interest. In the investigating report it was said that different stake holders of capital market and civil society support & contend for demutualization of exchanges. The meaning of Demutualization is separating controlling functions from controllers functions, empowering controller and taking decisions without being motivated by the market players. 3.6 Investment of margin in the c apital marketIn 2009 & 10 banks and financial institutions invested huge bill of deposit bills in the stock market. As a result share prices sky rocketed until declination 2010. When Bangladesh Bank restricted more than 10 percent investment of deposited money, change magnitude CRR and SLR ratio, created liquidity crisis and market crashed.3.7 Pre-IPO & IPO processInvestigation 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 perverted asset recap 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.3.8 like face value of shareDuring the meeting between investigation committee and different stake holders of share market, a most important reason for freakish 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 inter-est 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, itabnormally 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 celestial latitude 2010 the role of total MC were 81.5% of companies which adopted share uniform and only18.5% those that did not adopt.3.9 Placement trade / Kerb marketBefore issuing IPO, Issue manager or Issuer Company sell shares to their nominated person and that is called individual(a) placement or pre-IPO placement. Private placement is risky because it doesnt have accounting discloser. In the unquestionable countries there are some fixed rules but in Bangladesh SEC didnt 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 purpose of public offering is participation of public but placement doesnt make sure it. eighter from Decatur 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. most companies distributed 50-90 percent of their paid up capital in sequestered placement. However, when a company raises too much paid up capital through private placement, the number of free-floating shares decreased. Thats why the difference between deman d & supply push share prices up. besides, 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 unskilled and un-informed investors with their artificial financial reports. 3.10 Omnibus accountInvestigation 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 reportsshows that this kind of account made a lot of illegal transactions. It publishes name of 30 monumental 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.3.11 Asset recapitulation & RumorBy taking chance of weak asset revaluation method companies have overvalued their asset. In this process dishonest examineors 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. 3.12 Book building methodIts a procedure of find price of IPO at which it is offered. The fair price is determined by the demand of a credentials from institutional investors and their indicative price. The main a im 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.3.13 Serial and artificial tradingSome 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 heat the market.3.14 Issue of Right and preference shareRi ght Share is issued at a discount price to lively 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 hap-pen. Investing in Preference share is safe to captivate a fixed percentage of profit. To make the share lovely 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.3.15 Suspicious transaction of top playersInvestigation report reveals some names of ind ividual 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.3.16 Block placementThere was a lot of suspicious block trading of mutual funds. Some investors got enormous amount of placement time to time.3.17 Direct listingWith the approval of SEC a few(prenominal) 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.4. Impact of the crash East Pakistani stock market experienced through inefficient and irrational hesitat ion of DGEN Index in the year 1996 and 2011 . During 2010, the bullish market turned bearish with the exchange losing 1,800 points between celestial latitude 2010 and January 2011. DGEN Index climbed at point 8918.51 on December 05, 2010 which was overvalued in all aspect. Then the market crashed at point 4877 in November 2011.Figure 3 Daily DGEN index of January, 2011Figure 4 Showing the drift of DSE General Index from June- 10 to May- 11 Impacts of the crash wereAs a result of the market crash, millions of investors have been rendered bankrupt. 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. Random objects like wood and papers were set on fire in front of the DSE office in Motijheel. 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 dif ferent 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. Investors blamed the speculators and regulators for the bubble that finally burst. providence faced liquidity crisis. Authoritites and government took steps to handle the crisis. But stock market of Bangladesh had already got the adjectival of the worst stock market in the world. And an on red ink market turmoil is still going on.5. Measures taken to stabilize the stock marketSince the collapse of the market in December 2010, a number of initiatives were undertaken by Ministry of Finance (MoF), Security and Exchange Commission (SEC), Bangladesh Bank, Government and Dhaka Stock Exchange (DSE)/ Chittagong Stock Exchange (CSE) to stabilize the market. 5.1 Steps taken by government-The government took a number of measures to inject money in the market. This included Tk. 600 crore worth of funds distributed to the st ate-owned banks and Investment Corporation of Bangladesh (ICB), and formation of a mutual fund titled Bangladesh Fund with an initial resource of Tk. 1,500 crore. Under the national budget of FY2011-12, government announced a number of incentives to recover the capital market note. Some of these were re-introduction of tax rebate facilities, tax-free facilities for mutual funds, time extension for non-bank financial institutions (NBFIs) to adjust their investment in stock market (revised timeline is December 2013), and adjustment of sensation borrower exposure limit by the commercial banks (revised timeline is December 2013). All these budgetary measures have direct and indirect implications for raising fund for the ailing capital market. A probe committee was created by the government to identify the reasons, people and solution regarding the problem of the stock market. The Probe Committee and the MOF came up with a list of 36-point measures which were to be implemented in three phases (i.e. immediate, short and medium-term). 5.2 Steps taken by SEC-Security & Exchange Commissions employ a lot of directives to keep the market under control in 2010. SEC changed directive of margin loan ratio by increasing it from 10.5 to 11 on 13th December and later it was again hiked to 11.5 & 12 because of free fall of share prices. Actions were taken against persons found guilty for their fraudulent activities, investigation of allegations against the SEC officials who indulged in market manipulation, examination of assets of some of the companies alleged to have been involved in illegal trading, and initiation to probe allegations against several companies was also done. Criminal investigation against a number of companies and persons which was supposed to be carried out by the Anti-Corruption Commission (ACC) was started but without much visible progress. SEC under its new management has also prepared a 29-point work plan.Of these, eight activities were identified as top urgent, three as urgent, 14 as short term tasks and quadruplet as medium term tasks. The MoF along with SEC and other stakeholders prepared the much-hyped Market Rejuvenation Package. This 21-point parcel focuses on greater participation of banks and other financial institutions in the stock market, besidessetting up a special scheme to provide support to small investors who lost their capital. 5.3 Steps taken by Bangladesh Bank-Bangladesh Bank pushed money into the market as liquidity support. Banks have reportedly kept buying shares patronage suffering from liquidity crises themselves, and not selling any shares.6. Outlook for the futureTo protect the share market of Bangladesh, the regulatory body should take some effective measures. It should introduce some monitoring systems to protect the price manipulations of the share. Provisions should be made to provide all the financial data to the investors so that they can get a proper idea about the company. The market should be free from fake certificates. The government should offer income tax rebate on the income of share market and encourage the banks and non banking institutions to come to the market directly. Some incentives software program for the investors like getting financing at a low cost has to be offered to bring back the investors in the market. Market stabilization fund must be introduced so that it can help to meet up with crisis situation.Since Bangladesh is heading toward the developing nation, capital market can be the engine of growth for its thrift if market becomes structured and efficient. Around the world well reputed stock markets like New York Stock Exchange, capital of the United Kingdom Stock Exchange, Shanghai Stock Exchange, Tokyo Stock Exchange, Australian Securities Exchange, Dubai Stock Exchange and so on, are regulated and running efficiently that provides significant contribution to their individual economy. Because, stock market is association establish game rather than a place of gambling there must be rational win-lose situation always. But Bangladeshi stock market experienced through inefficient and irrational fluctuation of DGEN Index in the year 1996 and 2011 which resembles the place of gambling. To sum up, from our study, we have found that, there are problems like regretful Gap between the Demand and Supply of stock, extraordinary over pricing of stock, market manipulation, lack of knowledge about the stock market machine among the general investors, price distortion, inefficient regulations, political unrest, etc. These caused the steepest descending(prenominal) fall of DGEN Index in the financial year 2011.As a result, about millions of investors lost their capital which turned them empty within few months. Security and Exchange Commission (SEC) ofBangladesh and government should take the short term and long term initiatives to stabilize the market. They should encourage more public limited companies to offer more share to meet the current demands. Income tax rebate, Injection of Market Stabilization Fund, Mandatory holding certain percentage of share among the board of directors, short term incentives packages should be introduced to get back the confidence among the existing investors. Regulatory bodies of Bangladesh stock market must educate the current and potential investors about the market mechanism and provide them the accurate information so that investors trade their shares carefully. Unless, appropiate corrective measures are well formulated and implemented, Bangladeshi stock market will be facing this irrational downward again in the near future. 7. ARAMIT from 2010- 2013From the graph we see that, before the crash market price was above tk 450. And in the time of market crash from December 2010- January11, the price of aramit started to fall and reached tk 436 at the end of January 2011. After that the market fluctuated and hit its lowest of tk 192.6 on february 2012. The current market price as of 24th February,2013 is tk 216.Profit StatusBased on Annualized EPS of 2012 (Q3)BasicCurrent Price Earning Ratio (P/E)(Based on Continuing operation)12.65Based on audited EPS of 2011Current Price Earning Ratio (P/E)(Based on Continuing Operation)15.15Reference 1. http//www.cpd.org.bd/pub_attach/WP95.pdf2. http//publications.theseus.fi/bitstream/handle/10024/47195/saha_sangit.pdf?sequence=1 3. http//www.dsebd.org/displayCompany.php?name=ARAMIT4. http//en.wikipedia.org/wiki/2011_Bangladesh_share_market_scam 5. http//en.wikipedia.org/wiki/Dhaka_Stock_Exchange6. http//www.similarsites.com/goto/bdstock.com?pos=2&s=10