Strengthening the Stock Market
The question is: how can the stock market be made efficient? To answer this, the first thing to consider are the regulatory compliances. In an economy like Bangladesh's where free flow of information is yet to develop, and the investors are not habituated to taking risks of loss, these government policies are a prerequisite rescue path. It is true that listed companies get the comparative tax benefit (30% tax for the listed companies in comparison to 40% for the non-listed). But it's a matter of great regret that only 253 companies are listed under the Stock Exchange. Many of the companies are not in the market but they are still enjoying comparative benefits. The source of their benefits might be the low cost debt financing where the tax benefit is direct. But the companies that are using more debt financing are more at risk as the business as well as the financial risk burden increase many fold. Another benefit is that companies do not come to the public for fear of the controlling power. This problem is acute, as many of our domestic industries are joint family concerns. There should be a policy to maintain a strong Debt-Equity ratio for these companies which in turn can encourage them to come to the public.
Secondly, the fate of the stock market is strongly related to the performance of the banking industry, particularly in Bangladesh. But the government policy to keep the interest rate at single digit and at the same time higher rate of Statutory Liquidity Reserve (SLR) and Cash Reserve Requirement (CRR) makes the issue more complicated. These steps caused the banks to undergo liquidity crisis resulting in higher call money rate also. Banks are the major institutional investors in the stock market. When they undergo liquidity problem, they cannot invest in the capital market. Now, if the Central Bank reduces the required reserve by 2% then more than Tk 6 crore will be freed. Recently, the bankers association asked Bangladesh Bank to reduce the CRR. This seems to be logical. As borrowers from the banks are loan defaulters, banks should invest in the stock market.
For all latest news, follow The Daily Star's Google News channel. Thirdly, there are 296 securities of different industries listed with the Stock Exchanges. One is agro processing and agro based industries. This industry is dependent on the mercy of nature. Rain and drought equally affect this industry. So, it is better if we can classify our securities and treat them in different ways instead of weighing them with same scale.
Fourthly, strict regulation should be enforced to curb those who manipulate the share price. Price manipulation was the single largest factor for the 1996 collapse in the stock market. Asymmetric information is a problem but the beneficiaries of this should be rooted out. The hope is that, presently, our stock market has been automated and much developed. Securities are being traded in dematerialized form (electronic listing and transfer of ownership) instead of manual format. In this dematerialized form of securities trading (Central Depository Bangladesh Limited or CDBL responsible), the scope for forgery, fake trading and transfer of ownership is not available. Another great step to strengthen the stock market is the decentralization of trading. Under the current electronic stock trading system, investors need not be present physically for the transaction. They can view the index on line and instruct their brokers over phone for successful transaction. Certainly this facility has lessened the hassle from the issuers' side also. Now company location is not a problem for listing and IPO as well as secondary market trading of their issued securities.
Fifthly, continuous monitoring and performance evaluation of the listed companies are necessary. Merely categorizing them as ABZ or G is not all. Dividend declaration, regular AGM, business and financial performance through ratio analysis are necessary also. Securities and Exchange Commission and Central Bank can play vital roles in this regard.
Finally, this is the era of open market economy. Demand and supply forces ultimately make the market. Price is the dominant factor which influences demand and supply. So, issuing companies should measure the intrinsic value of their issue and must refrain from unethical moves to manipulate the price. This supply side practice will have a positive impact on the investors' investment analysis, whether it is fundamental or technical. Along with this, stability in the national political scenario and long term policies to attract the more financially sound and foreign companies operating in Bangladesh to come to the stock market, will certainly help us to boost our stock market.