On Overall Financial Operation of Dhaka Stock Exchange

Executive Summary:

Classroom discussion alone cannot make a student perfect in handling the real business situation. For this reason practical exposure to real business world is very important, so that the students of BBA can prepare them for banking jobs in future and can reflect their theoretical learning. My dissertation was “Overall Financial operation of Dhaka stock Exchange.”  I got the opportunities to learn about different component of security market and its influence on financial condition and economy.

The security market particularly the DSE has been playing a vital role in the economy of Bangladesh by diversifying the stock and bond to the investor, Capital Market. Amongst the financial institutions, Stock Exchange constitutes the reflection of the financial structure since it has the ability to relate people to the company and thus create sound financial environment. Now the DSE is one of the most important financial institutions in this country.

Bangladesh Capital Market, barometer of the economy, has passed 2009 more successfully with many new records and making significant contribution to the national economy. Emerging as the cheap and long-term source of finance for the expansion of business and industrial sector and keeping the legacy of success country’s capital market is entering into the New Year 2010. Capital market today is not merely a place of securities trading rather it has emerged as time-bound role, in a catalyst from, player in the overall economy.

Market Capitalization has increased from Tk 1 Lakh 4 thousand 379 crore 90 lakh 20 thousand and Tk 925 to Tk 2 lakh 16 thousand 752 crore 67 lakh 8 thousand and 225 registering 107.66 per cent growth. Market Capitalization to GDP (Gross Domestic Product) has increased from 19.26 per cent to 35.25 per cent.

DSE General Index (benchmark index) has increased from 2,795.34 points to 5,312.44 points showing 2 thousand 517.10 points up. Highest single day turnover touched the milestone of Tk. 1,503.56 corer on 25 January, 2010.

Origin of the report

The report entitled “Overall Financial Operation Of Dhaka Stock Exchange.” has been prepared as a partial fulfillment of BBA program authorized by the Department of Business Administration, Stamford UniversityBangladesh. This thesis program has been conducted to know the financial operation of Dhaka Stock Exchange.

Background of the Study

Security market of Bangladesh has been flourished during last few decades. It results due to the adoption of privatization policy. Until, Government sector owned, controlled and operated financial sector of Bangladesh with the objective of allocating funds to priority sectors.. Having affected by the worst financial crisis in 2008 the economy of Bangladesh registered 5.88 per cent growth during the year 2008-09 as compared to 6.2 per cent in 2007-08. Bangladesh economy maintained steady growth over the last few years but in 2008-09 it has been the victim of global financial meltdown 2008. But the financial market of the country has remained unaffected, as it is isolated from the global financial markets. The foreign portfolio at the country’s premier bourse stood near about 2 per cent, which has been the major reason that Bangladesh capital market has not been affected. On the other hand, Bangladesh Bank took prompt and time-bound measures to safeguard the banks and other financial institutions from the crisis. Actually, financial crisis of 2008 has started denting Bangladesh economy in the fiscal year 2009-10, as export earning has started declining. Manpower export has declined but amount of remittance inflow has made new record US$ 9.76 billion in 2008-09. But amid many formidable obstacles the economy of Bangladesh has witnessed mixed reactions in financial and economic indicators. Like many other countries Bangladesh government, after assuming power on January 06, 2009, also adopted stimulus package worth of Tk 3,400 crore and also Tk 5,000 crore as fiscal stimulus in the budget 2009-10 to save the different sectors of the economy. The central bank in line with the government instruction has also reduced the interest rate on bank loan, which will also help the country’s trade and commerce related activities. The government has placed due importance in the budget for 2009-10 fiscal year to the development of the capital market. Government’s measures including recent initiatives to off-load shares of 26 companies (govt. owned portion) will definitely help increase the growth and depth of the capital market. So understanding the above circumstances, I being a business undergraduate student, become interested in the financial sector. Since thesis program is the integral part of the BBA program, completed my thesis program in DSE.

 Objective of the Study

The primary objective of this report is to comply with the requirement of the DSE. But the objective behind this study is something broader. Objectives of the study are summarized in the following manner:

 General Objective

The General Objective of the report is to complete the thesis. As per requirement of BBA program Stamford UniversityBangladesh, one student needs to study on financial organization or business organizations to acquire practical knowledge about real financial operation.

Specific Objectives

• To apply theoretical knowledge in the practical field.
• To gain practical knowledge by studying on different financial theory and implemented practical fact.
• To make a bridge between the theories and practical procedures of financial operations.
• To observe the financial contribution done by DSE.
• To study existing Security Exchange rules & regulations.
• To know the overall functioning of DSE.
• To find out the activities of listed company within financial system.
• To understand the investor role in security market.
• To present my suggestion to DSE from my observation.
• To have some practical exposures that will be helpful for my future career.

Scope of the Study

This report has been prepared through extensive discussion with DSE and with the other financial institution. While preparing this report, I had a great opportunity to have in depth knowledge of all the financial activities practiced by the DSE Limited,

 Methodology of the Study

The study requires a systematic procedure from selection of the topic to final report preparation. To perform the study the data sources are to be identified and collected, they are to be classified, analyzed, interpreted and presented in a systematic manner and key points are to be found out. The over all process of methodology is given in the following page in a form of flow chart that has been followed in the study.

 Source of Information

Essential data sources both primary and secondary are identified which will be needed to complete and work out the study. To meet up the need of data primary data are used and study also requires interviewing the official and staffs were necessary. The report also required secondary data.

Information collected to furnish this report is both from primary and secondary sources.

 i) The primary sources are:

• Face-to-face conversation with the respective officers and staffs of the DSE.
• Informal conversation with the investor.
• Practical observation of the market transaction.
• Relevant files study as provided by the concerned officers.

ii) The Secondary sources are:

• Annual reports of DSE.
• Publications of Bangladesh Bank (BB).
• Relevant books, newspapers, journals, etc.

Collection of data: Primary data are collected by using interviewing technique. The reports are an exploratory research and for qualitative survey open ended question were ask to the investor.

Classification, analysis, interpretations and presentation of data: some arithmetic and graphical tools are used in this report for analyzing the collected data and to classifying those to interpret them clearly.

Findings of the study: The collected data were scrutinized very well and were pointed out and shown as findings. Few recommendations are also made for improvement of the current situation.

Final report preparation: On the basis of the suggestions of our honorable faculty advisor some corrections were made to present the paper in this form.

Limitations of the study

The present study was not out of limitations. But as a study it was a great opportunity for me to know the financial activities of Bangladesh especially DSE. Some restraints are disclosed bellow:

1.               i.      Assigned time for the Study: Duration of the study was only 75 days. A broad study need many time to find perfect conclusion and this time limit may not let me to explore vastly then I have expected.
2.             ii.      Poor library facility: Unlike many other organizations, DSE does not have a very rich library. This causes Non-availability of some preceding and latest data. Moreover some of the information, needed to explore the current marker scenario of the organization was not disclosed.
3.           iii.      Data Insufficiency: My study was on  DSE, as a center point of all financial activity of Bangladesh I have to study huge amount of information that was not specific or certain, Though the officials tried to assist, sometimes their working pressure couldn’t give me proper assistance what I needed. Besides, sufficient books, publications, facts and figures are not available. These constraints narrowed the scope of accurate analysis.
4.           iv.      Part of organizational culture was written from individual’s perception and may vary from person to person and many procedural matters were written from my own observation, which may also vary from person to person.

The Necessity Of Establishing A Stock Exchange In The Then East Pakistan Was First Decided By The Government When, Early In 1952.It Was Learnt That The Calcutta Stock Exchange Had Prohibited The Transactions In Pakistani Shares And Securities. The Provincial Industrial Advisory Council Soon Thereafter Set Up An Organizing Committee For The Formation Of A Stock Exchange In East Pakistan. A Decisive Step Was Taken The Second Meeting Of The Organizing Committee Held On The 13th March,1953. In The Cabinet Room, EdenBuilding ,Under The Chairmanship Of Mr. A . Khaleeli, Secretary Government Of East Bengal , Commerce, Labor And Industries Department At Which Various Aspects Of The Issue Were Discussed In Detail. The Then Central Governments Proposal Regarding The Karachi Stock Exchange Opening A Branch At Dhaka. , Did Not Find Favour With The Meeting Who Felt That East Pakistan Should Have An Independent Stock Exchange. It Was Suggested That Dhaka Narayanganj Chamber Of Commerce & Industry Should Approach Its Members For Parchase Of Membership Cards At RS.2000 Each For The Proposed Stock Exchange. The Location Of The Exchange It Was Thought Should Be Either Dhaka Narayanganj Or Chittagong. An Organizing Committee Was Appointed Consisting Of Leading Commercial And Industrial Personalities Of The Province With Mr. Mehdi Ispahani As The Convener In Order To Organize The Exchange.

The Chamber Informed Its Members And Members Of Its Affiliated Associations Of

The Proceedings Of The Above Meeting, Requesting Them To Intimate Whether They Were Interested In Joining The Proposed Stock Exchange. This Was Followed By A Meeting , At The Chamber Of About 100 Persons Interested In The Formation Of The Exchange On 07.07.1953. The Meeting Invited 8 Gentleman To Become Promoters Of The Exchange With Mr. M Mehdi Ispahani As The Convener And Authorized Them To Draw Up The Memorandum And Article Of Association Of The Exchange And Proceed To Obtain Register Under The Companies Act.1913. The Other 7 Promoters Of The Exchange Were Mr. J M Addision-Scott, Mr. Mhodammed Hanif, Mr. A C Jain, Mr. A K Khan , Mr M Shabbir Ahmed And Mr. Sakhawat Hossin.

It Was Also Decided That Membership Fee Was To Be Rs.2000 And Subscription Rate At 15 Per Month. The Exchange Was To Consist Of Not More Than 150 Members. A Meeting Of The Promoters Was Held At The Chamber On 03.09.1953 When It Was Decided To Appoint Orr Dignam & Co., Solicitors To Draw Up The Memorandum And Articles Of Association Of The Stock Exchange Based On The Rules Of Stock Exchange Existing In Other Countries And Taking Into Account Local Conditions.

The 8 Promoters Incorporated The Formation As The East Pakistan Stock Exchange Association Ltd. On 28.04.1954. As Public Company.On 23.06.1962 The Name Aws Revised To East Pakistan Stock Exchange Ltd. Again On 14.05.1964 The Name Of East Pakistan Stock Exchange Limited Was Changed To “Dhaka Stock Exchange Ltd.”

At The Time Of Incorporation The Authorized Capital Of The Exchange Was Rs. 300000 Divided Into 150 Shares. Of Rs. 2000 each and by an extra ordinary general meeting adopted at the extra ordinary general meeting held on 22.02.1964 the authorized capital of the exchange was increased to Tk. 500000 divided into 250 shares of Tk. 2000 each. The paid up capital of the exchange now stood at Tk.460000 dividend into 230 shares of Tk. 2000 each. However 35 shares out of 230 shares were issued at TK. 80,00,000 only per share of TK. 2000 with a premium of TK. 79,98,000 .

Although incorporated in 1954, the formal trading was started in 1956 at Narayanganj after obtaining the certificates of commencement of business. But in 1958 it was shifted to Dhaka and started functioning at the Narayangonj chamber building in Motijheel C/A.

On 1.10.1957 the stock exchange purchase a land measuring 8.75 Kattah at 9F Motijheel C/A from the Government and shifted the stock Exchange to its own location in 1959.

The automated trading was initiated in 10 August 1998. In 1 January 2001 was started. 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 points for the first time, setting another new high at 4148 points.

Dhaka Stock Exchange (DSE) is a public limited company. It is formed and managed under Company Act 1994, Security 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 shares each pricing Tk. 2000. No individual or firm can buy more than one share. According to stock market rule only members can participate in the floor and can buy shares for himself or his clients. At present it has 230 members. Market capitalization of the Dhaka Stock Exchange reached nearly $9 billion in September 2007 and $27.4 billion on Dec 9, 2009.

The management and operation of Dhaka Stock Exchange is entrusted on a 25 members Board of Director. Among them 12 are elected from DSE members, another 12 are selected from different 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 Bank
• ICB
• President of Institute of Chartered Accountants of Bangladesh
• President of Federation of Bangladesh Chambers of Commerce and Industries
• President of Metropolitan Chambers of Commerce and Industries
• Professor of Finance Department of Dhaka University
• President of DCCI (Dhaka Chamber of Commerce and Industry)

Mr. Md. Shakil Rizvi is the current president of DSE

The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities are regulated by its Articles of Association rules & regulations and bye-laws along with the Securities and Exchange Ordinance, 1969, Companies Act 1994 & Securities & Exchange Commission Act, 1993.

The major functions are:

      Listing of Companies.(As per Listing Regulations).

      Providing the screen based automated trading of listed Securities.

      Settlement of trading.(As per Settlement of Transaction Regulations)

      Gifting of share / granting approval to the transaction/transfer of share outside the trading     system of the exchange (As per Listing Regulations 42)

      Market Administration & Control.

      Market Surveillance.

      Publication of Monthly Review.

      Monitoring the activities of listed companies. (As per Listing Regulations).

      Investor’s grievance Cell (Disposal of complaint bye laws 1997).

      Investors Protection Fund (As per investor protection fund Regulations 1999)

      Announcement of Price sensitive or other information about listed company    through online.

Globally the developments in information & communication technologies (ICT) have created a new instance in the securities market operations. Stock Exchanges all over the world have realized the potentiality of ICT and inclined to the electronic trading systems. It was understood by DSE that technology would ensure transparency, timeliness and satisfaction in customer service. Considering those DSE introduced Automated Trading System on 10th August 1998.In other words, the trading floor moved right into the member’s office premises where an investor started to place buy/sell orders.

Considering market growth the Automated Trading System was upgraded two times. The recently Upgraded Trading System was started from 21st December, 2008.

DSE Automated Trading System (HP NonStop S7806) is running on fault tolerant, high available, scalable and maintainable Mainframe Server. Previously DSE established the TANDEM NonStop K204 System on September 1998 and on August 2005 it was replaced with highly scaleable HP NonStop S7802.

DSE upgraded the Trading System again on 21st December, 2008. The existing HP NonStop S7806 Server is highly fault tolerant to the fact that no single component failure will halt the system. Its constituent parts are hot swappable, and upward compatible; components can be added or removed while the system is running and any compatible new upgraded will work with the system.

All disk drives are mirrored so, if any of the disk crashes the exact copy of the data is available at online. Moreover the connecting path for every disk whether it is primary or mirror is also redundant. In every case, minimum two peripheral devices exist. All the components are working active – active load balancing procedure . To ensure better power quality we have ensured high end UPS’s with long durable backup capability, two instant backup generations and other electrical devices.

DSE LAN/WAN Expansion                                         DSE LAN/WAN Expansion
within Dhaka City:                                                    Outside of Dhaka City:

The entire Member (238 members) Server Applications (MSA) are connected with NonStop HP S-Series Server through either DSE LAN or WAN connectivity. Each member has one or more Trader Work Station (TWS). The TWSs are being connected to the Trading Server via respective MSA through LAN and WAN connection.

DSE outsourced MetroNet Ltd., DNS Ltd. , X-Net Ltd., Dhaka Com Ltd., Ranks ITT,Link-3, Royal Green Online Ltd. etc Network Service Providers (NSP under WAN Expansion Project.

Now day’s members can establish a main office or branch offices to their remote location and can trade smoothly by using different media ADSL, Optical fiber and Radio Link from Dhaka and other important cities such as Gazipur, Narayanganj, Comilla, Hobiganj, Chittagong, Sylhet, Khulna, Barisal, Rajshahi, Bogra at the same time.

Three DSE branch offices located at Chittagong, Sylhet and Khulna are connected via BTTB’s DDN link. We also used connectivity for redundancy for the DDN link. We have a plan to reach the DSE branches in same way.

In case of trade interruption due to serious hardware, software, network failure or telecommunication disruption at the Brokerage houses, there is a provision to allow traders to trade at DSE Contingency Trading floor.

The system software is HP Proprietary NonStop KERNEL and includes the database as part of the operating system thereby eliminating the layer typically found in most Database Management Systems (DBMS). The Database functionalities are handled by NONSTOP SQL, which is simply a different operational session for the operating system. The proprietary nature of the system software arguably enhances system security.

Operating system is HP’s proprietary NonStop Kernel DBMS handled by NonStop SQL.The system software treats all its hardware resources as objects and is thus entirely message driven. This then allows application software to be deployed using client / server architecture providing shared data processing between the central server and the user workstation. The central trading system resides in the Stock Exchange premises, which is running 24 hrs in a day & 365 days in a year.

The application, which runs in DSE for trading, is called TESA (The Electronic Securities Architecture). TESA has two parts: MSA (Member’s Server Application) & TWS (Trader workstation). MSA is the “Gateway” between the traders and the Stock Exchange, which manages all the transactions and database operations between the traders and the Trading Engine. TWS is the Front-end Application closer to investors, where they can submit Buy/Sell orders for their desired securities

TESA (The Electronics Securities Architecture) is the Trading software (Based on HP proprietary O/S & DBMS) It has developed in view of Distributed Database system
In the client site it is being using SQL as local Database Trading Software is MSA & TWS .In STSD (Signal trader Single Database) system both MSA & TWS are running on a Windows 2k Professional /XP Professional workstation and for MTSD (Multiple trader Single Database) MSA install in a Windows 2k Server & the TWSs are in different Windows 2k Professional /XP Professional workstation-using members in house LAN

TESA software is built for the global securities markets. It uses fault tolerant computers, intelligent workstations and client / server design techniques. This provides co-operative processing, high message integrity, continuous operation and fully automatic recovery. This co-operative mechanism enables very high speed processing which is essential for today’s electronic markets.

TESA’s Application Programmatic Interface (API) is the gateway to the TESA system from the outside world. All external devices connect through the API. The API provides the translation between external devices and internal processes. This means that a new process does not need to be written to support each new device, only the API needs to be modified.

 The TESA application suite derives significant advantages from being implemented on the HP NonStop platform. The HP NonStop customers have benefited from these advantages.

        Fault Tolerance: One of the most important automation requirements for any stock exchange system is continuous system availability. With most systems Fault Tolerance is created at the application level. Fault Tolerance is a fundamental design feature of the HP NonStop architecture.

        Data Integrity: Data integrity is an integral feature of HP architecture. TESA employs standard HP tools to achieve exceptional data integrity.

        Scalability: The ability of an exchange to accommodate extraordinary increases in transaction volumes without loss of its Capital investment in automation is very important. The HP NonStop Server is massively scalable due to Parallel processors.

Client / Server: TESA’s Client / Server architecture enables an efficient allocation of computing resources and provides easily modified user-friendly interfaces. TESA workstations operate under Windows 2K/ XP professional and can function either as servers on a broker’s network or as workstation. These are used to perform trading and settlement activity by the brokers.

 Principal Functions of TESA

        Market Information: Supplying all market information needed to formulate the buy and sell decisions.

        Order Management: Accept, validate and store orders and quotes from broker workstations and / or systems.

        Order Execution: Automatically executes orders when buy and sell prices match.

        Trade Reporting: Trade execution reports are provided to each trade participant, to the settlement system and / or the depository and to the market.

        Index Calculation: Calculates and publishes market indices (DSE General Index & Weighted Average Index.)

        Market Access: Provide exchange members with efficient affordable GUI-based tools for accessing the market.

Four types of market at DSE

      Public Market: In this market instruments are traded in normal volume.

      Spot Market: Instruments are traded in normal volumes under corporate action if any.

      Odd lot Market: Odd lots of all Instruments are trade in this market.

      Block Market: Instruments are traded in bulk volume.

TESA conducts trading in-5-phases.

        Enquiry: In this session Brokers can logon to the system. No order will be submitted in this session. No trade will be executed. Only previous orders can be withdrew in this session

        Opening: The Opening is a pure, single-price auction. All buy and all sell orders are compared and calculate the open-adjust price. No trades will be executed in this session

        Continuous Trading: During this phase, participants enter orders and immediate execution or for inclusion in the book. Automatic matching and execution takes place based on best price/ first in, first out trading rules

        Closing: Closing prices are calculated and disseminated to market participants

        Enquiry: Market will be closed in this session & other facilities like the previous enquiry session.

The Market Control Workstation allows the exchange administrative staff to control the operation of the market, e.g.

      Session Control: Opening and closing the market via interactive control or by preset timers.

      Validation Parameters: Setting and viewing parameters that control the trading engine validation e.g. tick size, Circuit Breaker, Circuit Filter, Market lot, Price protection Percentage.

      Messaging: Allows the dissemination of company announcement data and general market administrative massages.

Market Information is a real-time market data system. It collects, manages, generates and stores information relating to trade instruments and issuing companies. Market Information is responsible for,

        Collecting Real-Time Market Information: Bids, offers, last sale (i.e. most recent trade price and volume), book and other data are gathered via the Trading engine. It supports TESA’s automated and manual trading modules and can process the trades of external and off-market systems.

        Collecting company Information: All information supplied by the listed companies are maintained in the TESA database.

        Generating Market Statistics: TESA generates market indices on a real time basis. It generates other statistical information such as Price.

Research and Enquiry: this module provides brokers access to the local Broker Support and TESA databases for enquiries and research purposes.

• Public Order Book
• Broker Order Book

The multi-windows environment allows users to simultaneously view orders, market and trades. Broker Support offers Stock Exchange members two configurations; standalone and multi-user. Both configurations maintain a database consisting of information generated by the TESA Server and the local system.

GNI at current price : 6832.31 billionAnnual per capital GDP : US$ 621GDP growth rate at constant price : 5.88 per centAgricultural growth rate at constant price : 4.81 per centIndustrial growth rate at constant price : 5.92 per cent

Manufacturing Sector growth rate of GDP at current price

Large and Medium Scale : 5.65 per centSmall Scale : 6.59 per centService sector growth rate of GDP at current price : 49.67per centInflation rate (12 month average) : 7.69 per cent Domestic savings rate : 20.00 per cent National savings rate : 32.40 per centInvestment rate : 24.20per cent Exports : (2008-09) US$ 12816.11mn (July to Mar)Imports : (2008-09) US$ 19209.10 mn (July to Mar)

Trade Deficit : US$ 6392.99 mnForeign Exchange Reserve : US$ 6562.93 millionForeign Investment
Direct : US$ 900 mn (July to Apr)
Portfolio : US$ -123 mn (July to Apr)Bank rate : 5.0 per cent Board Money (M2 : 281,902.00 Tk.croresTotal No. of Limited Co.
Public Limited Co : 35,000
Private Limited Co. : 23,000Principle Industries : Jute, tea, textiles, garments, paper, newsprint, fertilizer, leather and leather goods, sugar cement, fish processing, pharmaceuticals, chemical industries etc.Traditional export items: Raw Jute, Jute manufacturing (Hessain, sacking, carpets), Jute products, tea, leather & leather products.Non-traditional export product items : Garments, frozen shrimps, other fish, Products, newsprint, paper, naptha, furnace oil, urea, etc.Principle imports : Rice, wheat, oil seeds, crude petroleum, raw cotton, edible oil, petroleum products, fertilizer, cement, staple fibers, yarn, steel industrial management capital and other goods etc.

(Source: Bangladesh Bureau of Statistics, Economic Trends of Bangladesh Bank, Bangladesh Economic Review 2009, UNESCO Institute for Statistics, Data Centre, June 2007. & www.cia.gov)

The economy of Bangladesh is a developing market-based economy. Its per capita income in 2008 was est. US$1,500 (adjusted by purchasing power parity). According to the International Monetary Fund, Bangladesh ranked as the 48th largest economy in the world in 2009, with a gross domestic product of US$256 billion. The economy has grown at the rate of 6-7% p.a. over the past few years. More than half of the GDP belongs to the service sector; nearly half of Bangladeshis are employed in the agriculture sector, with RMG, fish, vegetables, leather and leather goods, ceramics, rice as other important produce.

Remittances from Bangladeshis working overseas, mainly in the Middle East are the major source of foreign exchange earnings; exports of garments and textiles are the other main sources of foreign exchange earning. GDP’s rapid growth due to sound financial control and regulations has also contributed to its growth. However, foreign direct investment is yet to rise significantly. Bangladesh has made major strides in its human development index.

The land is devoted mainly to rice and jute cultivation of rice, fruits and produces, although wheat production has increased in recent years; the country is largely self-sufficient in rice production. Bangladesh’s growth of its agro industries is due to its rich deltaic fertile land that depends on its six seasons and multiple harvests.

Improving at a very fast rate, infrastructure to support transportation, communications, power supply and water distribution are rapidly developing. Bangladesh is limited in its reserves of oil, but recently there was huge development in coal mining. The service sector has expanded rapidly during last two decades, the country’s industrial base remains positive. The country’s main endowments include its vast human resource base, rich agricultural land, relatively abundant water, and substantial reserves of natural gas, with the blessing of possessing the world’s only natural sea ports in Mongla and Chittagong, in addition to being the only central port linking two large burgeoning economic hub groups SAARC and ASEAN.

East Bengal—the eastern segment of Bengal, a region that is today Bangladesh—was a prosperous region of South Asia until modern times. It had the advantages of a mild, almost tropical climate, fertile soil, ample water, and an abundance of fish, wildlife, and fruit. The standard of living compared favorably with other parts of South Asia. As early as the thirteenth century, the region was developing as an agrarian economy. It was not entirely without commercial centers, and Dhaka in particular grew into an important intrepid during the Mughal Empire. The British, however, on their arrival in the late eighteenth (18th) century, chose to develop Calcutta, now the capital city of West Bengal, as their commercial and administrative center in South Asia. The development of East Bengal was thereafter limited to agriculture. The administrative infrastructure of the late eighteenth and nineteenth centuries reinforced East Bengal’s function as the primary agricultural producer—chiefly of rice, tea, teak, cotton, cane and jute—for processors and traders from around Asia and beyond. After its independence from Pakistan, Bangladesh followed a socialist economy by nationalizing all industries, proving to be a critical blunder undertaken by Bangladesh’s leaders. Education policies of the British dating back from colonial era deprived education to millions of Bangla peoples setting them back by decades. Some of the same factors that had made East Bengal a prosperous region became disadvantages during the nineteenth and twentieth century’s. As life expectancy increased, the limitations of land and the annual floods increasingly became constraints on economic growth. Preponderance on traditional agricultural methods became obstacles to the modernization of agriculture. Geography severely limited the development and maintenance of a modern transportation and communications system.

The partition of British India and the emergence of India and Pakistan in 1947 severely disrupted the former colonial economic system that had preserved East Bengal (now Bangladesh) as a producer of jute, rice and other agro commodities for the rest of British India. East Pakistan had to build a new industrial base and modernize agriculture in the midst of a population explosion. The united government of Pakistan expanded the cultivated area and some irrigation facilities, but the rural population generally became poorer between 1947 and 1971 because improvements did not keep pace with rural population increase. Pakistan’s five-year plans opted for a development strategy based on industrialization, but the major share of the development budget went to West Pakistan, that is, contemporary Pakistan. The lack of natural resources meant that East Pakistan was heavily dependent on imports, creating a balance of payments problem.  Without a substantial industrialization program or adequate agrarian expansion, the economy of East Pakistan steadily declined. Blame was placed by various observers, but especially those in East Pakistan, on the West Pakistani leaders who not only dominated the government but also most of the fledgling industries in East Pakistan.

Since Bangladesh followed a socialist economy by nationalizing all industries after its independence, a slow growth of experienced entrepreneurs, managers, administrators, engineers, or technicians underwent. There were critical shortages of essential food grains and other staples because of wartime disruptions. External markets for jute had been lost because of the instability of supply and the increasing popularity of synthetic substitutes. Foreign exchange resources were minuscule, and the banking and monetary system was unreliable. Although Bangladesh had a large work force, the vast reserves of under trained and underpaid workers were largely illiterate, unskilled, and underemployed. Commercially exploitable industrial resources, except for natural gas, were lacking. Inflation, especially for essential consumer goods, ran between 300 and 400 percent. The war of independence had crippled the transportation system. Hundreds of road and railroad bridges had been destroyed or damaged, and rolling stock was inadequate and in poor repair. The new country was still recovering from a severe cyclone that hit the area in 1970 and causes 250,000 deaths. India, by no means a wealthy country and without a tradition of giving aid to other nations, came forward immediately with massive economic assistance in the first months after the fighting ended. Between December 1971 and January 1972, India committed US$232 million in aid to Bangladesh, almost all of it for immediate disbursement.

Bangladeshi leaders slowly began to turn their attention to developing new industrial capacity and rehabilitating its economy. The static economic model adopted by these early leaders, however—including the nationalization of much of the industrial sector—resulted in inefficiency and economic stagnation. Beginning in late 1975, the government gradually gave greater scope to private sector participation in the economy, a pattern that has continued. Many state-owned enterprises have been privatized, with banking, telecommunication, aviation, media, jute including a range of other vital sectors have been privatized. Inefficiency in the public sector have been improving however at a gradual pace, external resistance to developing the country’s richest natural resources, and power sectors including infrastructure have all contributed to slowing economic growth.

In the mid-1980s, there were encouraging signs of progress. Economic policies aimed at encouraging private enterprise and investment, privatizing public industries, reinstating budgetary discipline, and liberalizing the import regime were accelerated. From 1991 to 1993, the government successfully followed an enhanced structural adjustment facility (ESAF) with the International Monetary Fund (IMF) but failed to follow through on reforms in large part because of preoccupation with the government’s domestic political troubles. In the late 1990s the government’s economic policies became more entrenched, and some of the early gains were lost, which was highlighted by a precipitous drop in foreign direct investment in 2000 and 2001. In June 2003 the IMF approved 3-year, $490-million plan as part of the Poverty Reduction and Growth Facility (PRGF) for Bangladesh that aimed to support the government’s economic reform program up to 2006. Seventy million dollars was made available immediately. In the same vein the World Bank approved $536 million in interest-free loans.

Bangladesh historically has run a large trade deficit, financed largely through aid receipts and remittances from workers overseas Foreign reserves dropped markedly in 2001 but stabilized in the USD3 to USD4 billion range (or about 3 months’ import cover). In January 2007, reserves stood at $3.74 billion, and they increased to $5.8 billion by January 2008, in Nov 2009 it surpassed $10.0 billion according to the Bank of Bangladesh, the central bank. In addition imports and aid-dependence of the country has systematically been reduced since the beginning of 1990s.

This is a chart of trend of gross domestic product of Bangladesh at market prices estimated by the International Monetary Fund with figures in millions of Bangladeshi Taka. However, this reflects only the formal sector of the economy.

Mean wages were $0.58 per man-hour in 2009.

Efforts to achieve Bangladesh’s macroeconomic goals have been problematic mostly due to various factors including the country’s large population, corruption within the government, power shortages etc. The privatization of public sector industries has proceeded at a slow pace—due in part to worker unrest in affected industries—although on June 30, 2002, the government took a bold step as it closed down the Adamjee Jute Mill, the country’s largest and most costly state-owned enterprise. The government also has proven unable to resist demands for wage hikes in government-owned industries. Access to capital is impeded. State-owned banks, which control about three-fourths of deposits and loans, carry classified loan burdens of about 50%.

The IMF and World Bank predict GDP growth over the next 5 years will be about 6.5%, well short of the 9-10% needed to lift Bangladesh to Mid Income Nation level, within that time period. The initial impact of the end of quotas under the Multi-Fiber Arrangement has been positive for Bangladesh, with continuing investment in the ready-made garment sector, which has experienced annual export growth in excess of around 20%. Downward price pressure means Bangladesh must continue to cut final delivered costs if it is to remain competitive in the world market. Foreign investors in a broad range of sectors are increasingly frustrated with the politics of confrontation, the level of corruption, the slow pace of reform and privatization and deregulation of the public sector and the lack of basic infrastructure e.g. roads. While investors view favorably recent steps by the interim government to address corruption, governance, and infrastructure issues, most believe it is too early to assess the long-term impact of these developments.

Map showing the growing areas of major agricultural products.

Most Bangladeshis earn their living from agriculture. Although rice and jute are the primary crops, maize and vegetables are assuming greater importance. Due to the expansion of irrigation networks, some wheat producers have switched to cultivation of maize which is used mostly as poultry feed. Tea is grown in the northeast. Because of Bangladesh’s fertile soil and normally ample water supply, rice can be grown and harvested three times a year in many areas. Due to a number of factors, Bangladesh’s labor-intensive agriculture has achieved steady increases in food grain production despite the often unfavorable weather conditions. These include better flood control and irrigation, a generally more efficient use of fertilizers, and the establishment of better distribution and rural credit networks. With 28.8 million metric tons produced in 2005-2006 (July–June), rice is Bangladesh’s principal crop. By comparison, wheat output in 2005-2006 was 9 million metric tons. Population pressure continues to place a severe burden on productive capacity, creating a food deficit, especially of wheat. Foreign assistance and commercial imports fill the gap, but seasonal hunger (“monga”) remains a problem. Underemployment remains a serious problem, and a growing concern for Bangladesh’s agricultural sector will be its ability to absorb additional manpower. Finding alternative sources of employment will continue to be a daunting problem for future governments, particularly with the increasing numbers of landless peasants who already account for about half the rural labor force. Due to farmers’ vulnerability to various risks, Bangladesh’s poorest face numerous potential limitations on their ability to enhance agriculture production and their livelihoods. These include an actual and perceived risk to investing in new agricultural technologies and activities (despite their potential to increase income), a vulnerability to shocks and stresses and a limited ability to mitigate or cope with these and limited access to market information.

Many new jobs – mostly for women – have been created by the country’s dynamic private ready-made garment industry, which grew at double-digit rates through most of the 1990s. By the late 1990s, about 1.5 million people, mostly women, were employed in the garments sector as well as Leather products specially Footwear (Shoe manufacturing unit). During 2001-2002, export earnings from ready-made garments reached $3,125 million, representing 52% of Bangladesh’s total exports. Bangladesh has overtaken India in apparel exports in 2009, its exports stood at 2.66 billion US dollar, ahead of India’s 2.27 billion US dollar.

Eastern Bengal was known for its fine muslin and silk fabric before the British period. The dyes, yarn, and cloth were the envy of much of the premodern world. Bengali muslin, silk, and brocade were worn by the aristocracy of Asia and Europe. The introduction of machine-made textiles from England in the late eighteenth century spelled doom for the costly and time-consuming hand loom process. Cotton growing died out in East Bengal, and the textile industry became dependent on imported yarn. Those who had earned their living in the textile industry were forced to rely more completely on farming. Only the smallest vestiges of a once-thriving cottage industry survived.

Other industries which have shown very strong growth include the chemical industry, steel industry, mining industry and the paper and pulp industry.

Bangladesh’s textile industry, which includes knitwear and ready-made garments along with specialized textile products, is the nation’s number one export earner, accounting for 80% of Bangladesh’s exports of $15.56 billion in 2009. Bangladesh is 3rd in world textile exports behind Turkey, another low volume exporter, and China which exported $120.1 billion worth of textiles in 2009. The industry employs nearly 3.5 million workers. Current exports have doubled since 2004. Wages in Bangladesh’s textile industry were the lowest in the world as of 2010. The country was considered the most formidable rival to China where wages were rapidly rising and currency was appreciating.

After massive labor unrest in 2006 the government formed a Minimum Wage Board including business and worker representatives which in 2006 set a minimum wage equivalent to 1,662.50 taka, $24 a month, up from Tk950. In 2010, following widespread labor protests involving 100,000 workers in June, 2010, a controversial proposal was being considered by the Board which would raise the monthly minimum to the equivalent of $50 a month, still far below worker demands of 5,000 taka, $72, for entry level wages, but unacceptably high according to textile manufacturers who are asking for a wage below $30. On July 28, 2010 it was announced that the minimum entry level wage would be increased to 3,000 taka, about $43.

The government also seems to believe some change is necessary. On September 21, 2006 then ex-Prime Minister Khaleda Zia called on textile firms to ensure the safety of workers by complying with international labor law at a speech inaugurating the Bangladesh Apparel & Textile Exposition (BATEXPO).

The stock market capitalization of the Dhaka Stock Exchange in Bangladesh crossed $ 10 billion in November 2007 and the $30 billion dollar mark in 2009, and USD 50 billion in August 2010. Bangladesh had one of the best performing stock markets in the world during the recent global recession, due to relatively low correlations with developed country stock markets.

Major investment in real estate by domestic and foreign-resident Bangladeshis has led to a massive building boom in Dhaka and Chittagong.

Bangladeshi exports in 2006

The Bangladesh Garments Manufacturers and Exporters Association (BGMEA) has predicted textile exports will rise from US$7.90 billion earned in 2005-06 to US$15 billion by 2011. In part this optimism stems from how well the sector has fared since the end of textile and clothing quotas, under the Multifibre Agreement, in early 2005.

According to a United Nations Development Programmed report “Sewing Thoughts: How to Realize Human Development Gains in the Post-Quota World” Bangladesh has been able to offset a decline in European sales by cultivating new markets in the United States.

“[In 2005] we had tremendous growth. The quota-free textile regime has proved to be a big boost for our factories,” said BGMEA president S.M. Fazlul Hoque told reporters, after the sector’s 24 per cent growth rate was revealed.

Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) president Md Fazlul Hoque has also struck an optimistic tone. In an interview with United News Bangladesh he lauded the blistering growth rate, saying “The quality of our products and its competitiveness in terms of prices helped the sector achieve such… tremendous success.”

Knitwear posted the strongest growth of all textile products in 2005-06, surging 35.38 per cent to US$2.82 billion. On the downside however, the sector’s strong growth came amid sharp falls in prices for textile products on the world market, with growth subsequently dependent upon large increases in volume.

Bangladesh’s quest to boost the quantity of textile trade was also helped by US and EU caps on Chinese textiles. The US cap restricts growth in imports of Chinese textiles to 12.5 per cent next year and between 15 and 16 per cent in 2008. The EU deal similarly manages import growth until 2008.

Bangladesh may continue to benefit from these restrictions over the next two years, however a climate of falling global textile prices forces wage rates the centre of the nation’s efforts to increase market share.

Prior to the Wage Board’s announcement of its recommended minimum wage of $24, Tk1,604, in 2006, the rate had remained unchanged at Tk950, about $15, for more than 12 years. Although the government may allow up to three years for the new wage to be implemented, and inevitably there will be compliance issues as manufacturers drag their feet, it seemed politically untenable for wages to remain at those levels given the unprecedented industrial unrest.

In response to the Wage Board’s initial draft recommendation of a minimum wage of Tk1,604 to be increased to Tk1,800 after eight months, the BGMEA declared over 50 per cent of factories would be ruined within three months. While this claim is no doubt an exaggeration, the capacity of Bangladesh’s textile industry to absorb a significant wage hike as margins become tighter is a key question which hangs over the future of the industry. Bangladesh’s textile sector is concentrated in export processing zones in Dhaka and Chittagong. These zones, which are administered by the Bangladesh Export Processing Zone Authority, aim to offer “a congenial investment climate, free from cumbersome procedures’ according to Bangladesh Export Promotion Bureau’s website.

They offer a range of incentives to potential investors including 10 year tax holidays,  duty free import of capital goods, raw materials and building materials, exemptions on income tax on salaries paid to foreign nationals for three years and dividend tax exemptions for the period of the tax holiday.

All goods produced in the zones are able to be exported duty free, in addition to which Bangladesh benefits from the Generalized System of Preferences in US, European and Japanese markets and is also endowed with Most Favored Nation status from the United States. Furthermore, Bangladesh imposes no ceiling on investment in the EPZs and allows full repatriation of profits. The formation of labour unions within the EPZs is prohibited as are strikes.

Bangladesh’s exports to the U.S. surpassed $1.9 billion in 1999. Bangladesh also exports significant amounts of garments and knitwear to the EU market.

Bangladesh also has significant jute, leather, shrimp, pharmaceutical, and ceramics industries. Bangladesh has been a world leader in its efforts to end the use of child labor in garment factories. On July 4, 1995, the Bangladesh Garment Manufacturers Export Association, International Labor Organization, and UNICEF signed a memorandum of understanding on the elimination of child labor in the garment sector. Implementation of this pioneering agreement began in fall 1995, and by the end of 1999, child labor in the garment trade virtually had been eliminated. The labor-intensive process of ship breaking for scrap has developed to the point where it now meets most of Bangladesh’s domestic steel needs. Other industries include sugar, tea, leather goods, newsprint, pharmaceutical, and fertilizer production.

The Bangladesh government continues to court foreign investment, something it has done fairly successfully in private power generation and gas exploration and production, as well as in other sectors such as cellular telephony, textiles, and pharmaceuticals. In 1989, the same year it signed a bilateral investment treaty with the United States, it established a Board of Investment to simplify approval and start-up procedures for foreign investors, although in practice the board has done little to increase investment. The government created the Bangladesh Export Processing Zone Authority to manage the various export processing zones. The agency currently manages EPZs in Adamjee, Chittagong, Comilla, Dhaka, Ishwardi, Karnaphuli, Mongla, and Uttara. An EPZ has also been proposed for Sylhet. The government has given the private sector permission to build and operate competing EPZs-initial construction on a Korean EPZ started in 1999. In June 1999, the AFL-CIO petitioned the U.S. Government to deny Bangladesh access to U.S. markets under the Generalized System of Preferences (GSP), citing the country’s failure to meet promises made in 1992 to allow freedom of association in EPZs.

Sylhet is fast becoming a major center of retailing in Bangladesh, with many shopping centers being built by expatriates to serve fellow expatriates visiting Sylhet and the emerging middle class. Many of these developments hark back to Britain.

Bangladesh has made significant strides in her economic sector since her independence in 1971. Although the economy has improved vastly in the 1990s, Bangladesh still suffers in the area of foreign trade in South Asian region. Despite major impediments to growth like the inefficiency of state-owned enterprises, a rapidly growing labor force that cannot be absorbed by agriculture, inadequate power supplies, and slow implementation of economic reforms, Bangladesh has made some headway improving the climate for foreign investors and liberalizing the capital markets; for example, it has negotiated with foreign firms for oil and gas exploration, better countrywide distribution of cooking gas, and the construction of natural gas pipelines and power stations. Progress on other economic reforms has been halting because of opposition from the bureaucracy, public sector unions, and other vested interest groups.

The especially severe floods of 1998 increased the flow of international aid. So far the global financial crisis has not had a major impact on the economy. The World Bank predicted economic growth of 6.5% for current year. Foreign aid has seen a decline of 10% over the last few months but economists see this as a good sign for self-reliance. There has been 18% growth in exports over the last 9 months and remittance inflow has increased at a remarkable 25% rate.

 Having affected by the worst financial crisis in 2008 the economy of Bangladesh registered 5.88 per cent growth during the year 2008-09 as compared to 6.2 per cent in 2007-08. Bangladesh economy maintained steady growth over the last few years but in 2008-09 it has been the victim of global financial meltdown 2008. But the financial market of the country has remained unaffected, as it is isolated from the global financial markets. The foreign portfolio at the country’s premier bourse stood near about 2 per cent, which has been the major reason that Bangladesh capital market has not been affected. On the other hand, Bangladesh Bank took prompt and time-bound measures to safeguard the banks and other financial institutions from the crisis. Actually, financial crisis of 2008 has started denting Bangladesh economy in the fiscal year 2009-10, as export earning has started declining. Manpower export has declined but amount of remittance inflow has made new record US$ 9.76 billion in 2008-09.

But amid many formidable obstacles the economy of Bangladesh has witnessed mixed reactions in financial and economic indicators. Like many other countries Bangladesh government, after assuming power on January 06, 2009, also adopted stimulus package worth of Tk 3,400 crore and also Tk 5,000 core  as fiscal stimulus in the budget 2009-10 to save the different sectors of the economy. The central bank in line with the government instruction has also reduced the interest rate on bank loan, which will also help the country’s trade and commerce related activities. The government has placed due importance in the budget for 2009-10 fiscal year to the development of the capital market. Government’s Measures including recent initiatives to off-load shares of 26 companies (govt. owned portion) will definitely help increase the growth and depth of the capital market.

The Global Stock Market

SAARC Countries:

Colombo Stock Exchange

CSE Milanka

1631.34

2721.64

235

4285.90

1022.6

6.53*

4.72*

13.25

Dhaka Stock Exchange

DSE GEN

2795.34

3010.26

276

15138.51

9687.67

18.42

2.48

17.00

Karachi

KSE 100

5865.01

7177.64

652

23500.00

350.00**

–

–

16.45

Bombay Stock Exchange

SENSEX

9647.31

14493.84

4921

647204.80

309178.7

13.77

1.78

54.99

Regional:

Philipines

PSE Composite

1872.85

2437.99

246

52030.6

17216.60

–

–

36.12

Bursamalaysia

KLSE Composite

876.75

1075.24

976

189239.20

94693.50

–

–

101.35

Singapore

STI

1761.56

2333.14

767

264974.40

261282.20

–

–

164.23

Stock Exchange of Thailand

SET

449.96

597.48

525

103128.20

116967.50

–

–

42.03

International:

Hongkong

Hang Seng

14387.48

18378.73

1261

1328768.50

1629259.90

–

–

641.39

Tokyo

TOPIX

859.24

929.76

2390

3115803.50

5586327.10

–

–

71.07

London

 FTSE 100

4434.17

4249.21

3096

1868153.00

6473611.60

–

–

67.39

Nasdaq

Composite

1577.03

1835.00

2952

2396344.30

36445906.10

–

–

17.43

Deutsche Borse

DAX

4810.20

4808.64

832

1110579.60

3880942.40

–

–

33.48

Issued Capital & Debentures

 -Tk. mn 118437 214472 372156 457944-US$ mn 1711.52 3127.33 5409.24 6634.95% of Annual Growth  68.44 81.09 73.52 23.05 

Market Capitalization

 -Tk. mn 323367.94 742195.87 1059530 1312773-US$ mn 4672.95 10822.34 15400 19020.18% of Annual Growth  38.74 135.28 42.76 23.90Conversion Rate  69.2 68.58 68.80 69.02

Turnover of Listed Securities

Total Turnover        Volume in mn 797.77 2831.23 4605.38 3480.54Value (Tk. mn) 65079.11 322867.07 667964.82 565038.22Value (US$ mn) 1099.3 4707.89 9708.79 8186.59% of Annual Growth  0.38 396.11 106.89 -15.41 

Daily Average Transaction

 Volume in mn 3.5 11.95 19.43 27.84Value (Tk. mn) 285.43 1362.31 2818.42 4520.31Value (,US$ mn). 4.82 19.86 40.97 65.49% of Annual Growth  13.58 377.28 106.89 60.38 

Initial Public Offering(IPO)

 NO.of Public Issues 7 14 12 4Size of Public Offer        ~Tk. mn 1433.95 4638.13 3043.41 337.00-US$ mn 24.22 67.63 44.24 4.88% of Annual Growth  13.29 223.45 -34.38 -88.93

Size of Pre IPO Placement

-Tk. mn 146.72 1540.00 800.00 60.00-US$ mn 2.47 22.46 11.63 0.87% of Annual Growth  0.56 949.62 -48.05 -92.50 

Public Subscription

 -Tk. mn 15241.93 37937.06 37821.71 15477-US$ mn 257.46 553.18 549.73 224.24% of Annual Growth  < (3.50) 148.90  -0.30 -59.08

Over Subscriptions Times

-Value (Tk. mn) 10.62 8.18 12.43 45.84% of Annual Growth  (14.90) (22.98) 51.96 268.79

After a great shock of the global financial crisis of 2008 stock markets across the world started rebounding. But the economy of Bangladesh was isolated from the world economy, it was not affected by world depression rather it maintains its growth. Market Capitalization The total market capitalization of the Dhaka Stock Exchange Ltd. rose to Tk 1,241.34 billion on June 30, 2009 against Tk 931.03 billion on June 30, 2008 showing a 33.33 per cent increase. On June 30, 2009, the market capitalization to GDP ratio rose to20.19 per cent against 17.06 per cent on June

2008.

The graph indicates that market capitalization of listed securities of DSE increased significantly to Tk 1,241.34 billion till June 30, 2009 from Tk 931.03 billion of the corresponding period of the previous fiscal year showing a Tk 310.31 billion rise. The market capitalization stood at Tk 2 lakh 16 thousand 752 crore 67 lakh and 8 thousand (25 January, 2010).

During 2008-2009 the total annual turnover of securities at DSE stood at Tk 893.79 billion against Tk 543.29 billion of 2007-08 registering 64.52 per cent rise. A total of 5,757. 86 million securities were transacted during 2008-09 against 3,761.11 million of 2007-08 recording a 53.09 per cent rise.

In terms of value, Banking Sector continued its leading position contributing 22.15 per cent to the DSE turnover in the financial year of 2008-2009, while fuel and power sector bagged the second position accounting for 16.85 per cent of the total turnover. Pharmaceuticals, engineering, insurance and investment sectors followed the rally with 13.99 per cent, 7.95 per cent, 6.86 per cent and 6.33 per cent contribution respectively. Corporate bond (only one bond-IBBL Mudaraba Perpetual Bond is listed with the DSE) contributes 7.07 per cent to the total turnover.

 During the year under review DSE had maintained 3 different indices of different methods to reflect market behavior in three different composition namely DSE General Index (DGEN), All Share Price index (DSI) and DSE-20 Index (DS20). DSE General Index stood at 3,010.26 on June 30, 2009 against 3,000.50 on June 30, 2008 registering an increase of 0.33 per cent. DGEN reached its peak of 3,029.24 points on July 02, 2008 and came to its lowest level on April 9, 2009 at 2408.67 points. The index ‘DGEN’is now considered the benchmark price barometer for DSE. DSE General Index is an index comprising of A, B, G & N categories of Securities.

The All Share Price Index (DSI) stood 2520.15 on 30 June, 2009 against 2,588.03 on June 30, 2008. The highest DSI was 2602.83 on July 02, 2008 while the lowest was recorded on April 09, 2009 at 2001.88.  DSI is determined on the basis of price movement of individual stocks of all categories (A, B, G, N & Z). DSE-20 index is made up of 20 listed companies since January 01, 2001. The DSE 20 index closed at 2453.73 on June 30, 2009 against 2545.17 on June 30, 2008. It reached to its highest level to 2666.76 points on July 27, 2008 and fell down to 1841.74 points on April 5, 2009. The left side graph shows the index movement pattern of fiscal year 2008-2009 (DGEN, DSI & DSE-20) and the right side graph shows the pattern for the last five years.

A total of 15 companies floated securities worth Tk. 8629.00 million in 2008-2009, out of which 15 companies had followed fixed price method having public offerings worth of Tk 2630.41 million. Two companies which making its debut through Direct Listing. Subscription of Tk. 46587.28 million was received against 15 IPOs worth Tk 2630.41 million oversubscribed by 17.71 times.

During 2008-2009, 17 companies with paid up capital of 18068.84 million were listed with DSE against Tk. 7264.96 million in the 2007-08 fiscal year. There were 443 listed securities with the total paid-up capital worth Tk 457944.00 million till June 30, 2009 as against 378 with total paid up capital of Tk. 284,380 million on June 30, 2008.

The number of listed companies declaring dividend increased in 2008- 2009. Out of 299 listed companies & mutual funds, 194 listed companies & mutual funds declared dividends ranging from 2.00 per cent to 240 per cent. In 2008-2009, out of 282 listed companies, AGM of 248 companies were held, as against 232 companies out of 271 listed companies in 2007-2008. In case of announcing bonus and right shares the securities and its onlookers have witnessed upward trend. In 2008-09 period a total of 101 & 4 companies announced Bonus and Right Shares respectively against 71 & 5 in 2007-08 respectively.

 A total of 31 companies came under CDS in the year ended June 30, 2009 as against 32 in the previous year. The total companies under CDS stood at 179 with the market capitalization of Tk. 974,348.33 against 150 companies with market capitalization of Tk 741,288.96 million accounting for 97.33 per cent of the total market capitalization.

The Dhaka Stock Exchange (DSE) is one of the best performing stock markets in the world in recent years. During the 4-year period since January 2006, the DSE general index has increased by more than four-fold to more than 5,800 in recent weeks.

The DSE gained further momentum with the Grameen Phone IPO in November 2009. Along with the price index, the market capitalisation has also increased rapidly, from $3.4 billion in January 2006 to $34.2 billion today.

The strong market performance also attracted an increasing number of small investors to the market, with the number of new Beneficiary Owners’ (BO) accounts surging to high levels.

All these positive Developments have opened up the potential for the stock market to become a real alternative to mobilize funds for investment, moving away from the traditional dependence on the banking system. However, while welcoming these developments, we also observe a number of disturbing phenomena, which, if unattended, may seriously undermine the sustainability of this positive trend.

It is generally well accepted in economic and financial literature that both banking and stock market developments play important roles in output expansion, capital formation, and productivity gains, even after controlling for many other factors associated with long-run economic performance of an economy. Beyond the macro-economic relationship, even micro-economic studies of finance and growth, and firm-level data also find that financial development disproportionately boosts the growth performance of industries that are naturally heavy users external finance.

The banking sector, which dominates the financial sector in Bangladesh, has served the economy very well, and its coverage is broadly comparable with other developing countries. However, equity markets which generally serve as the second most important pillar of the financial sector have significantly lagged behind in Bangladesh. The recent increase in investor interest in the Bangladesh capital market, as reflected in terms of market capitalization and turnover, has significantly changed this situation; the capital market is gaining its position as a sizable source of investment financing after the banking sector, which is a welcome development.

Market developments and sustainability depend on market fundamentals, and the fundamental strength of the market essentially comes from financial strength of the listed enterprises. Strong regulatory environment created and maintained by the regulatory bodies (like the SEC) and participation of institutional investors and professional market analysts help orderly market operations.

The problem comes when market prices overshoot fundamentals in a big way, transactions become speculative, and market becomes unstable in terms of prices, turnover, and volatility. Such developments are not new in Bangladesh; we experienced it in the boom and bust of 1996 (see box).

]The global landscape is also littered with such boom and bust episodes, the recent ones being: the crash of the US stock markets in 2000 (NASDAQ tumbling from 5,100 to less than 1,600); Japanese stock market crash of 1989 with Nikkei tumbling from 31,000 to less than 10,000; the crash of GCC (Saudi Arabia, UAE, Kuwait, and Qatar in particular) stock markets in 2005; and more recently the crash of Chinese stock markets in 2007.

We must keep in mind that a sharp rise in stock prices does not necessarily mean formation of a bubble. Sometimes stock prices may rise sharply across the board when some things change fundamentally in the economy or in the economic outlook, as happened in the case of Spanish and Irish stock markets on the eve of their joining the EU. Several East European (former Soviet Bloc) countries also experienced surges in their stock markets because of their anticipated integration with the EU. Furthermore, no two bubble episodes are exactly the same across countries or across time. Each episode had its own features and unique background.

While we do not necessarily view Bangladesh markets as having reached a bubble stage at this point, if the rise in stock prices continues at the same pace as it has been during August 2009 through February 2010, the market valuations may reach bubble proportions within a short time.

The common characteristics that are generally associated with a stock market bubble episode are also visible in several ways in Bangladesh today. Some of these characteristics include: exuberant demand manifested through weak correlation between economic values and prices, high price volatility, acceleration in margin lending for stock market investment, narrow market leadership, structural weaknesses like weak and sometimes inconsistent signals from the regulatory regimes.

Existence of exuberant demand has been quite visible during the August-February period, although a bit tempered by some regulatory measures in recent weeks. Record high levels of market turnover and new records of the DSE general index week after week are certainly pointing to market exuberance. Only time can tell whether the exuberant market conditions are/were irrational or not. The DSE index grew by 98 per cent during this period from 2,941 in August 2009 to more than 5,800 in February 2010. Even after correcting for the error in the index, which was made by the DSE at the time Grameen Phone IPO was launched due to its inappropriate/ incorrect reflection on the index at its launching date, the increase was in excess of 4,700 or 60 per cent (Figure 1). It is certainly difficult to rationalize this surge, coming on the back of a steady increase in the index since April 2004, in terms of economic fundamentals.

Reflecting the increase in the price index, market capitalization (total market value) of all companies listed in the DSE increased to Tk 2,366 billion (equivalent to $34.2 billion) at its recent peak in February, compared with Tk. 1,307 billion ($18.9 billion) in August 2009. To put this increase in market capitalization in proper perspective, DSE market capitalization was only Tk 97 billion ($1.7 billion) in December 2003, immediately before the beginning of the current bull-run (Figure 2).

Stock market activity in terms of turnover, which measures the total amount of sales of all stocks during a day, also recorded a remarkable upward trend. The daily average turnover increased from only Tk. 140 million in December 2003 to Tk. 12 billion in January 2010 and further to Tk 13.2 billion in February (Figure 3): A 100-fold (10,000%) increase in a six-year period! The surge is certainly impressive, but also a matter of concern.

The increase in market turnover happened in an environment where supply of stocks, as reflected through the number of listed companies, remained almost unchanged except for the launching of the Grameen Phone IPO in November 2009. The pressures in stock prices and the rapid increase in turnover are obviously coming from the demand side. An army of new retail investors armed with fresh funds, is primarily responsible for this price pressure and market turnover.

The number of new Beneficiary Owners’ (BO) accounts increased by 115,000 in January from 58,000 in December 2009. In February, the number of new BO accounts increased further by 180,000. To put the increase in proper perspective, during the 1996 episode, the total number of small/retail investors was reported to be 25,000, one-seventh of the additions to BO accounts in the month of February!

New investors have been pouring in huge amounts of money into the stock market through these BO accounts. About 10,000 new investors, bringing on average Tk 100,000 (an assumption) would add Tk 10,000,000 into the market every day when the market is open. Foreign investors on the other hand, are rapidly withdrawing from the capital market in order to realise their capital gains, as happened during the 1996 episode (Table 2). Domestic institutional investors like mutual funds are also reported to be following their foreign counterparts, in some cases holding more than 90 per cent of their assets in cash, waiting for a market correction before coming back to the market. However, the portfolio size of institutional investors in Bangladesh, at well below 2 per cent of the market capitalisation despite impressive gains of recent years, is still very small and thus could not have played the kind of stabilising role that institutional investors like mutual funds could have played (see Table 3).

The strong demand from the retail investors, not matched by a corresponding increase in supply of stocks, has caused the price earnings (P/E) ratio to rise beyond rational levels in many cases. The P/E ratio, defined as the ratio of price per share to the annual earnings per share, is a widely used and time-tested indicator to measure share valuation. In simple terms, the P/E ratio can be interpreted as “the number of years of earnings to pay back purchase price,” ignoring the time value of money. It is also true that a high P/E ratio may also imply higher growth potential for a company’s share, justifying higher investor interest to hold that share in their portfolio. The high P/E ratio for Bangladesh market may accordingly reflect, at least in part, a higher growth potential for the Bangladesh economy.

These considerations notwithstanding, P/E ratios of many non-bank DSE listed companies have become overvalued. The weighted average market P/E ratio has risen to almost 30 in recent weeks from 17.5 in August 2009, meaning it will take 30 years on average for an average share to give back (through dividends) its purchase price to the investor. It is widely known that some companies that are not even properly managed are being traded at P/E ratios well above 75!

The example of Grameen Phone (GP) is also worth mentioning. The company was listed in the DSE only 5 months ago, and its Tk. 10 shares (face value) are currently trading at Tk. 340 and rising further! The day after GP announced a Tk 6 dividend per share, newspapers and press releases issued loudly announced that as a 60 per cent cash dividend. The next day, GP shares jumped by 8 per cent. In reality, the amount of dividend at current market value (of more than Tk. 340) was less than 2 per cent, but an illusion was created that it was 60 per cent. By announcing a dividend of Tk. 6, GP has de facto got more than Tk. 24 increase in its share price.

At P/E ratio of more than 135, is it not insane to invest in the company? I agree that GP is the largest listed company at the DSE, and is a fairly well managed one with significant growth potential. However, its track record of profitability is not that good and more importantly, with the coming of Bharti Airtel in Bangladesh (with Warid), it will be facing much tougher competition in the domestic telecom market in the coming years. Certainly not a good outlook for justifying a P/E ratio of more than 135!

The SEC has been sending mixed signals about market developments. Until early March, SEC had taken a number of steps to contain inflow of funds into the over-heated market and help it calm down, including tightening of conditions for margin loans. First, SEC set a limit on the equity-to-loan ratio at 1:1.5 and restricted such lending only for stocks with P/E ratio not exceeding 75. Subsequently, SEC further tightened the criteria by lowering the loan ratio to 1:1 in shares which have P/E ratios lower than 50. This policy directive essentially required investors to pay 50% of the share price in cash and shares with P/E ratio over 50 can be purchased only with cash.

These were right moves and the market started to respond to such actions: the DSE index declined from its peak of 5,828.4 on February 17 to a low of 5,338 on March 15; daily market turnover also slowed down from a high of Tk. 13.2 billion in February to Tk. 8 billion in March (Figure 3); and the DSE index became range bound moving within a relatively moderate band of 5,300-5,800.

However, as some demonstrators started agitating against the market correction, in a surprise move the SEC eased the margin lending condition by increasing the equity-to-debt limit 1:1.5 on March 15. Yielding to pressures from demonstrating investors definitely sent a wrong signal to the market.

The stock price development is also a manifestation of the general inflationary trend visible across the economy. As the economy has been passing through a liquidity overhang in recent months, inflationary pressures are building up all across the economy: general inflation as measured by the consumer price index (CPI) increased to 9 per cent in January from a low of 2.25 per cent in June 2009; real estate prices are all time high; land prices are high across the country; and the surge in the stock price index is the topic of discussion in this paper. With broad money (M2) expanding by more than 20 per cent last fiscal year and once again this year, fueled by inflow of worker remittances, there is enough liquidity to create the general inflationary environment. The budgetary provision to allow whitening of undisclosed money through investment in the stock market and real estate has also contributed to the asset market inflation in Bangladesh.

Increased investment by commercial banks, and bank lending for investment in stocks, lured by high return on such investments, have also greatly contributed to the high market valuation and volatility. It is widely reported that a sizable part of the increased bank profitability is attributable to the gains from such investments. Measures should be taken by Bangladesh Bank to minimize the exposure of banks to the stock market in order to safeguard depositors’ interest.

Increasing supply of stocks would surely help meet the growing market demand for stocks. Recently introduced book building method (BBM) for new IPOs is certainly a positive development and should encourage private corporations to consider floating of IPOs as part of their expansion program, since IPO pricing under the BBM would reflect issuer and investors expectations. This new method would also allow institutional investors to carry out due diligence since they would have to take up shares at prices they bid in the bidding process. High price earnings ratios would certainly be a big incentive for established companies to consider public floating of their shares. While we do not believe that bringing loss-making public entities to the stock market should be the right solution, if the government can bring the profitable enterprises to the market with scope for management change, that would help increase supply of quality stock.

Mutual Funds (MFs) can also play an important role in institutionalisation of capital markets of Bangladesh by increasing supply of professionally managed funds, providing liquidity, reducing the scope for market manipulation, and increasing institutional investor market depth. Although the MF sector has gained some momentum in Bangladesh, the size of MF industry in Bangladesh at less than 1 per cent of GDP and less than 2 per cent of market capitalisation is very small.

In contrast, the size of the thriving MF industry in India is 12.5 per cent of GDP. Certainly the MF industry has a long way to go from its current state of infancy. The strong interest among the private sector investors and sponsors to launch new MFs, as reflected in the pipeline of about Tk. 40 billion (0.65% of GDP), if allowed to materialize in a phased manner, will be a positive move toward institutionalization of the capital market in Bangladesh. A broader and deeper MF industry should be able to play an important role in price discovery and valuations, and reduce scope for market manipulation.

Current unsettled market environment is certainly not conducive for market development and for small investors. All indicators are pointing to the conclusion that the stock prices are generally over valued and a market correction to bring prices in line with economic fundamentals of the companies would be desirable for future market development. When foreign and domestic institutional investors are pulling out of the market and holding large cash reserves for future investments, it is not the time for new and uninformed investors to join the market.

The investment guru Warren Buffet has rightly characterized stock market frenzy in the following manner in 2000: “The line separating investment and speculation is never bright and clear … becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money.” It is thus imperative on the part of policy-makers to send clear warning signals highlighting the heightened risks in order to protect ordinary investors.

Today’s stock market is not as immature as it was in 1996. Nevertheless, when we see small investors erecting road blocks and burning tires whenever stock prices come down marginally, we have to believe that this market is being driven by mob frenzy.

When the great scientist Sir Isaac Newton lost a bundle with the bursting of the South Sea Bubble, he observed that: “I can calculate the movements of stars, but not the madness of men.” If the madness in Bangladesh stock market continues for a few more months, the bubble would become much bigger and it would explode like it did in 1996. We may still have time, but the policy-makers would have to act now and in a concerted manner.

During the second half of 1996, the DSE all share index increased by 139 per cent, a robust growth by any measure, fueled by the herd mentality of the non-professional retail investors and a huge influx of funds. Participants in the overheated market were aggressively chasing a few available stocks. The hike in market capitalization and market turnover were also aberrant as the number of listed companies and available shares of good companies remained almost unchanged in this period (Fig 2). During June to November 1996, the DSE all share price index increased more than three-fold from 959 to 3065 or by 220 per cent!

The newly-elected government of that time, initially misinterpreted this formation of the stock market bubble as fundamental strength of the economy and a manifestation of people’s confidence in the new government. However, policy-makers’ enthusiasm was short-lived and was soon replaced by concerns about the demise of the bubble and the impending market crash. When the market index more than doubled in one

The Stock Market Debacle of 1996

month to 3,000 in October 1996, efforts were made to stabilize the market, but it was too little and too late. As the bubble burst in November 1996, the DSE general index collapsed to its post-peak lowest level of 957 in April 1997, stabilizing at about the same level where it was some 10 months back (see Fig 1). By the end of April 1997, the DSE price index plunged by almost 70 per cent from its peak of November 1996.

During this bubble period only few traders and market manipulators who had knowledge and inside information gained, while general investors paid heavily. The bear market that started with the busting of the bubble lasted for seven years, the DSE general index rarely crossing the 1,000-point mark during this period. The market started a recovery from April 2004, when it was somewhat under priced with the average price-earnings ratio at about 10.

During 1992-95, purchase of shares by foreign investors exceeded the amount of share sale and repatriation (Table 3). After 1995-96, in anticipation of a major market correction, the trend reversed and share sale and repatriation exceeded share purchases for most of the years. During the period of 1995-96 and 1996-97 there was a massive outflow of foreign investment (more than Tk 6 billion a year) as against Tk 0.6 billion investments by foreign investors during the corresponding period.

Table 5 exhibits formations and demises (longevity) of the bubbles in various stock markets around the world. Using normalized data, by assuming peak values of all indeces equal to 100, we notice DGEN index rose and fell most sharply and the bubble of 1996 was much short lived compared to other stock markets bubbles. This presentation also explains the severity of the losses to ordinary stock holders in the bubble episodes in various stock markets. Data clearly reveals that stock holders at the DSE suffered most compared to other countries since prices changed radically and too quickly in the DSE during the 2nd half of 1996.

With a very small number of newly listed securities, the bubble that formed in 1996 was because of excessive pressure from the demand side. Investor confidence was initially boosted by the restoration of political stability, but later they became highly speculative. According to a Bangladesh Bank analysis, the prevalence of a big kerb market (number of small investors reached over 25,000) provided wider scope for rumors to affect share prices through infiltration into the kerb market by the agents of the sponsors and member-brokers. Inadequate infrastructure, such as lack of appropriate settlement system, information inefficiency and weak regulations provided scope for some groups to manipulate demand and the market. Moreover, there were questions about the transparency of the stock market members, especially brokers and sellers.

After bringing uncomfortable memories of 1996 to many minds over the last few months, the bull run in Dhaka Stock Exchange (DSE) seems to be in abeyance, at least for now. At the time of writing, DSE had fallen by about 1 per cent since the end of February.

While there have been reports of angry reactions of retail investors expecting sharp price rises, a modest price correction is a preferable outcome than continuing froth in the market eventually ending in a more severe bust. Of course, such a bust is still very much possible. We are by no means out of the woods yet. But with luck, we will have avoided a collapse. Either way, focus should now turn to factors that fuel these episodes, and what, if any, can policy do to avoid them.

Chart 1 explores this. In this chart, the horizontal axis shows number of months since the beginning of the bull run, while the vertical axis shows the DSE indexed to that beginning. Back then, DSE started rising from January 1996. In November 1996 (that is, 11th month of the run), DSE peaked at 395 per cent of its January value. Now, the market is indexed to March 2009, when the global asset markets reached the post global financial crisis trough. Since then, DSE had risen by nearly 125 per cent by February 2010 (that is, the 12th month of the bull run).

Chart 2 compares DSE with other regional markets. While DSE’s performance was relatively modest compared to those of our neighbours for much of the past half decade, DSE far outpaced other regional markets in the closing months of 2009.

Both these charts show that while the recent bull run may have had the hallmark of bubble in its acceleration, the price rises have not been as stratospheric as those witnessed in 1996, or what Ho Chi Minh City experienced in 2006 or Shanghai went through in 2007.

There are two reasons why Bangladeshi stocks might be attractive for global investors seeking emerging market bargains. First, with only a small proportion of stocks held by foreigners, Bangladesh remains a hidden opportunity for international investors. And second, Bangladesh weathered the global financial crisis relatively well, with respectable growth expected in the next half decade (Chart 3).

Regional growth outlook has been revised upward since then, but detailed country forecasts won’t be available until later in April.

Industry level price-earning ratios can provide further insight. All else equal, a high price-earning ratio means the stock has a high growth potential. But if price-earning ratio rises very quickly in the absence of any new information, then that might point to a bubble. Four industries — cement, information technology, services and real estate, and textiles — have seen price-earning ratio sky-rocket during the bull run.

There are anecdotes of an emerging housing boom that might be driving the real estate stocks. A housing boom, along with the expectation of an infrastructure boom in the coming period, may be driving the cement stocks. Over the past decade, per capita cement consumption has trebled, further buoying the sector’s medium-term outlook. One can argue that various “Digital Bangladesh” initiatives may well have been boosting IT stocks. And textiles may have benefitted from the resilience shown by the export sector.

But these positive outlooks notwithstanding, stories of price-earning ratios reaching 70 or higher suggest nothing but “irrational exuberance.”

Considering various factors, one major market commentary optimistically noted last November: “The relative resilience of the other issues in the marketplace is encouraging and DSE 5,000 from the current level of 4,169 seems a realizable target by mid-2010.”

DSE crossed 5,500 in February, and was still around then at the time of writing. Returning to 5,000 by middle of the year would require a correction of 9 per cent or so over the next quarter — a modest adjustment all things considered. If we are lucky, we will avoid a bust this time round. But unless a range of regulatory, monetary, supply-side and socio-cultural issues are addressed; we will soon see another frothing episode. And we may not be lucky next time.

Are there regulatory failures here? Have there been insider trading and other such efforts to drive up the market to unrealistic heights?

The Security and Exchange Commission is the agency in charge of regulating, and preventing illicit manipulation of, the share market. The SEC has taken steps to calm the market — for example, conditions for margin loans have been tightened. However, it is vitally important that the SEC is seen as a credible and competent institution. And that credibility has been tarnished recently when this technocratic institution has been used to achieve partisan political ends in the DSE election.

While restoring the credibility of the SEC is crucial, there may well be other factors at play here. Mansur and Haque (2009) eloquently point to the excess liquidity that may be fuelling up an asset price bubble:

Obviously when there is a lot of liquidity in the system, and money being fungible, there is no way to prevent people from borrowing on one account (for the officially stated purpose of trading, housing, agriculture and other uses) and investing in the stock market. As surging flood water cannot be contained by a putting a small/weak dam downstream and water simply bypasses or overwhelms/washes away the barrier, money keeps pouring into the stock market ignoring the SEC signals lured by quick capital gains.

While much has been made of the strong remittance flows during the global recession, it is not clear whether we understand why remittance held up in 2009. Similarly, we may not fully appreciate the unintended consequence of the strong remittance inflows. Strong remittance inflow underpins capital inflow into the country that is putting upward pressure on taka. If the taka is allowed to appreciate, it may hurt the manufacturing sector (exports-oriented or imports-competing) in a classic “Dutch disease” manner. But by pegging taka to the dollar, and thus allowing it to depreciate against the Indian rupee, the Bangladesh Bank may be inadvertently fuelling food price inflation.

And the dollar peg at an undervalued rate means the central bank is accumulating foreign reserves. Unless the surplus reserve is “sterilized” by the central bank selling instruments, money supply will rise. Money supply has been rising at an annual rate of around 20 per cent for the past year and a half — the longest period of that rate of growth in the past quarter century (Chart 4). If there is excess liquidity in the economy, the impact should be visible in the goods market as well as the asset market. Indeed, non-food inflation has jumped to 6.5 per cent in the year to January, compared with a rate of 3.7 per cent six months earlier.

The problem is compounded by two additional factors. First, the 2009 budget’s provision to “recycle black money” released a large amount of cash into the economy that went into the stock market. Second, merchant banks and merchant banking divisions of non-bank financial institutions have become among the most active members of DSE.

If excess liquidity is the problem, then is a tightening in monetary condition — through a modest appreciation of taka or more direct measures — the only solution?

Not necessarily, at least as far as the asset market is concerned. The underlying problem in the Bangladeshi asset market might be that there are not enough instruments for people with savings to invest in. Perhaps, instead of borrowing overseas in foreign currency to fund infrastructure projects like the Padma bridge, the government could issue infrastructure bonds. And given high borrowing rates faced by businesses, perhaps the time is right for a corporate bond market in Bangladesh.

The lack of instruments to invest in ultimately points to a deeper problem Bangladesh faces: a relatively low invest-to-GDP ratio. Private investment accounts for less than 20 per cent of Bangladesh’s GDP. It is difficult to envisage sustained 7-8 per cent economic growth unless investment rises relative to GDP. Rahman and Yusuf (2009) argue that infrastructure bottleneck and regulatory burden are the binding constraints on investment and economic growth in Bangladesh. Until these supply-side constraints are addressed, any rise in savings (such as through a remittance boom) is likely to drive up goods and asset inflation instead of adding to the economy’s productive capacity.

And finally, there are socio-cultural factors that have caused asset bubbles and financial crises around the world over the past eight centuries. As a bitter investor or one such bubble is alleged to have said: More money has been lost because of four words than at the point of a gun. Those words are: This time is different.

Whether it is in tulip during 17th century Holland, American houses a few years ago, or the DSE, such bubbles seldom end well, particularly if the investors run up debts to fund their investment. The data are not available to judge whether the retail investors being hurt by the market correction are highly leveraged or not. And social scientists are only beginning to appreciate the herd mentality that drives these manic episodes that end in panics. Perhaps it is unrealistic to expect our policymakers to grapple with socio-cultural issues that bedevil authorities in advanced capitalist economies. But we can definitely aim for better regulatory, monetary, and supply-side policies.

In a financial market, single most important fact that instantly affects the price trend of security is “Information”. Any security market in thee world that functioning properly would be sensitive to the information regarding the stock company issued itself, In fact sensitivity to information is a pre requirement of an efficient market.

In the situation we are working with, there are two kind of information exist in the market.

It is kind of colossal task to bring present market situation under certain and rational theory but we can characterize the market since it may facilitate the task within a range.  Primarily we can simply refer this as the effect of “Demand & Supply”

The diagrams above diagram we divide market in terms of information & its affect on investor expectation, Since the investors take there investment decision on the basis of there expectation there behavior to the market or particular security can be predict as the information available in the market.

We already specify the kind of information exist in the market and its effect  we are presenting the hypothesis that the market become increasingly volatile and sensitive at the presence of Demand & supply effect then the absence of it, so the effect of Demand & Supply become intensive at the presence of Numeric Information then Qualitative information.

Since the presence of Qualitative information, investor can assume with higher certainty that how much asset can be ensured for each stock so only fact that generate risk is “Growth” for there investment. In fact, growth also can be assumed by the information of Demand level of company product, Sales growth, Affiliation, Merger, Expansion & Management Efficiency.

Since small investors investment decision can easily influenced by the larger fund movement information, they don’t have the access to information’s without the disclosure by company itself. SO in investment decision they mostly depend upon Rumor & Havoc created by larger fund movement.

In this regard the investment of the smaller investor becomes largely vulnerable in absence of Qualitative information. Numeric information is relatively easy to produce and flow for purpose. This kind of market has grater probability of manipulation. Manipulation can be happen to single stock, particular Industry or entire market. In this market the quality of stock and its prospect become insignificant rather the Demand and Supply Effect take place intensively.

The effect of Qualitative information eradicated by the presence of numeric information so the situations facilitate the abnormal growth of the market. In this case, most of the time the market primarily maintain steady growth so it seems that market gain stability but that stability actually creates a cosmetic expression before potential investor so that they become interested for investment an catalyze the bubble much largely(Graph-2).

Although Demand & Supply effect can take place in the presence of Qualitative information the effect or the response of the investor fluctuates within a limit.

In the presence of qualitative information in the market, Investors never be likely to invest at higher price then the Qualitative information suggest. The intension of saving and gain from company payout create a stability in the market (Graph-1).

Since we are considering the effect of demand and supply on the market is harmful, there is some fact work for this phenomenon.

As:-

• Liquidity
• SupplyRange

Holding security means holding a part of ownership of the company so any inconsistency of the owner behavior will affect the company worth, It may be not applicable for single investor but single investor with significant investment can affect.

As the instruments are highly flexible as the means of liquidity, investors can response instantly and rapidly to any event within there concern. In the presences of numeric information, entire market adopt rapid and unified notion so the investors’ expectation also turned into numeric so they run for better opportunity as early as possible. This mutually behavior of the investors’ brings havoc and specifically multiplies as time flow until the final finishing end up by great fluctuation.

In this fact interaction of supply & demand within the security market resulting in inconsistency with Qualitative Information’s indication.

Particular company issues certain amount of share in the market for general investors, so if we consider share as a commodity we can assume that:-

• Demand-œ
• Supply-∞
• Price- œ

For a particular point of time which is far longer then the general commodity. Since the circulation of new share is subject to time consuming procedure and legal jurisdiction and share is a kind of debt for company, circulation of share certainly become impossible. Management also likely to hold significant portion of share in there control to manage and improvise there decision. This fact facilitates scarcity of share in the market so the Demand & Supply effect take place for another time.

The effect of demand & supply rutted many stage before the fund flow in the stock market. In general perspective we like to explain this effect as the decompiled ratio between the “Circulated Fund”& “Circulated Stock”

From broad view, by the increase of average earnings, increase leaving standard so people step to earn more money any way. As fund is available to bank and people both, interest rate fall down so people not likely to put fund in the bank for interest rate. In this situation people often looking for alternative and choose stock market meanwhile stock market swollen as existing investor bring more fund in the market. As new investor attracted by the higher trend stock market it just multiply the phenomenon.

Excessive fund availability motivate people invest in the stock market intensively and without concern this behavior bring kind of inflation effect on the security market. In this situation investor with large fund invest on any stock available in the market so investor in this situation has less good option to choose as large fund force them to invest anywhere .Often this situation force them to buy bad stock or good stock at higher price then the goodness of the company.

This “Go for Anything” notion creates a phenomenon that investor both buyer and seller transact in higher rate then the quality of the stock, so only thin can describe this act as the scarcity of stock on this particular time. Option to choose for investment turns investor conscious about the quality so their expectation turned to qualitative expectation.

In case of Bangladesh, foreign remittance facilitates banks to reserve large amount of idle money so they lend the fund to relatively safe stock market investor or unproductive housing project to reduce the cost of account, this phenomenon fuel the letter market fall out.

Investor’s expectation explains and sometime can predict their behavior to the particular stock or market. Their expectation depend upon his/her know-how about the stock and available information to them.Considering all of this fact we have found two types of expectation investors hold about their investment.

Numeric expectation, this expectation run investor to gain as early as possible so that they can catch another option as early as they can and gain better opportunity.

      Relatively high sensitivity to change

      Extreme liquidity can be observed in the market.

      High and abnormal transaction in amount

      Abnormal rise of the price without any substantial information.

      Numeric information exists in the market.

All of this facts turned market in inefficient manner and change stability of the market on higher price level.

Qualitative information, Investor consider qualitative information and maintain logical price combination when invest.

     Price Combination: –    Asset/Stock + Growth (Expected)

A/S ratio is the single most important fact the investor should consider. This information is relatively easy to obtain and help investor decide how much they should invest for the stock.

So that the risk associated with stock investment concentrated within a range whether the growth is positive of negative. Investor can assume this growth fact with higher certainty by knowing the information of:-

      Sales Growth

      Management Efficiency

      Expansion

      Profitable Merger

The co-existence of both qualitative expectation and numeric happens often but the response of the investor at that case is rational & consistent with information.

      Investor is ready to hold their investment for company payout at the end of the period.

      Steady transaction

      Good Quality Company performs well.

      Liquidity exists but good share has high liquidity.

The pre requirement to do such manipulation is holding huge amount of stock and own fund as large. It works as dumping the stock price. Manipulator can affect the market by there buying and selling decision so this process of manipulation is mechanize and difficult to identify.

Manipulator can primarily sale small portion of their investment at lower rate then other(Graph-1-Point-A) so the price trend downward notion & market dumping take place(Graph-1-Point-A to B). This act produces panic to other investor and motivate them to sale their share at lower rat, in this point manipulator buy large amount of good share lower rate (Graph-1-Point-B to C).

That kind of investor sale small portion of there investment at higher rate to himself(Graph-2- Pont A), so this sale produce upward notion of price trend (Graph-2-Point-A to B)in the market and many investor buy that share at higher rate to sale it at higher rate, at this point the demand of that share rise and manipulator take this chance and sale their larger portion of share at higher rate(Graph-2-Point-B to C).

This approach works by initiate supply shock when the market overheated or overprices. As we described before, in an inefficient market run on investors numeric expectation grow from the numeric information and their behavior drive by the mass trend of the price, this approach intend to circulate just opposite shock by numeric function and qualitative function.

By qualitative function, company has to disclose qualitative information as A/S ration, EPS or any other information that can effect on the stock price. This function let investor know about the quality of the stock and help them to made correction of their expectation. This approach would neutralize the market and bring corrective wave in it. This function already applied in different country under the jurisdiction of respective security exchange regulatory authority.

Sometime qualitative information discloser or margin imposer not work enough to naturalize the market so we are looking for much sharp approach to do so, such one what we called Numeric approach.

This approach also intends to produce supply shock but far more intensively. To implement this approach government have to impose jurisdiction on the company to hold certain amount of stock for market stability purpose so that as the authority asked the company, they can circulate certain amount of stock in the market at the price equal to the sum of A/S and growth. A/S and Growth are qualitative information company have to disclose to the authority and market within certain interval.

 In this approach of stabilization, Since the investor know that share for investment can be available at lass price then market, they hold the investment decision & the party intend to manipulate the market will not able to sale there stock at higher rate since the qualitative information are available in the market that company can largely affect the market & no one going to buy the stock at higher rate since stock are available at (A/S + Growth) price.

So the price of the share start to decrease at the price around (A/S+ approximate growth-Investor who want to hold share for Dividend or premium-turned to qualitative expectation) ratio.

In good stock market manner, Investor should bat on the growth rate of the company so the risk behind the stock investment should be the deviation between expected & actual growth arte.

Real positive information can influence the market price as, Profitable affiliation of the company with any other party, any circumstance that facilitates company for higher profit.

But the implementation time of this technique need greater assessment, as the amount of stock government asked to preserve for circulation. It may be influenced by the industrial characteristic and value.

• Marker Capitalization =

*Before Circulation= Average Price X Number Of stock Outstanding

*After Circulation= (Average Price X Number of Share Outstanding)

                                  + ( A/S X Circulated Stock)  

                                  Circulated Stock + Previously Outstanding Stock

• Ratio of Circulation=  (A/S)/ Highest Market Price

• Number of Circulation= Ratio Of Circulation X Number of Stock Company Hold for Circulation
• Index= Current Market Capitalization/Devisor(1000-Randomly Selected)

In this approach as we can see in (Graph-1. Point A), the price is running far higher at the rate inconsistent with the sum of A/S and Growth ratio. So as the legislative option regulatory authority asked company to circulate 25% of stock in the market at the price if A/S ratio ( Graph-2.Point A) and as a result market response by immediate fall of price level and the market index also response at higher sensitivity (Graph-2- Point B).After the implementation we can see that the index will not fluctuate rather then hold a steady level(Graph-2.Pont B to C). So panic will not take place as we see after market correction generally.

The supreme facility of this approach is the effect of this circulation is certain and safe from the view of market stability and panic.

In the present unstable situation DSE must have to be conscious about its efficiency. On the basis of the above study some recommendations for Dhaka Stock Exchange are given below:

• DSE should adopt modernize and scientific method as Book-Building Method, scientific method of price discovery of shares, which will ensure fair prices of securities in the capital market.
• To expedite the process of automated trading through ensuring more transparency and accountability.
• Technical capacity as ICT should enhanced so that investors can do transactions uninterruptedly.
• DSE should take initiative to speed up the data transfer capacity among the partner around the country.
• DSE should take initiative to implement On-line trading so that investors can have access to securities trading from across the world, which will also help the expansion of capital market in a broader dimension.
• DSE should initiate brokerage houses in all the district level towns in Bangladesh.
• DSE should implement highest professionalism around the country by decentralization of skilled employee.
• Co-ordination between DSE, Central Bank, Finance Ministry and among other important financial body should facilitate.
• DSE should comply with the international standard of index  so that foreign investor can understand the calculation and can build confidence on investment.
• Training Programmers for investors, representatives of member houses  and relevant stakeholders are also being arranged on regular basis.
• DSE should create long tern future plan to achieve the national economic goal.
• DSE should update its trading facility so that investor can understanf the financial measure and indicator clearly and accurately.
• DSE should take initiate to disclose information necessary to investor and reach closure to investor as they collect the information easily and timely.
• DSE should step down to reduce time period of transaction settlement and to ensure more transparency and accountability.
• DSE has been putting all-out effort to bring dynamism and more speed in the activities of Research, Monitoring,
• DSE should operate through Listing, Surveillance and other vital departments, which will directly contribute to the further time-bound expansion of the capital market.

• DSE should build mutual understanding among some important international entity as foreign stock exchange.

• DSE should maintain strong control over the company listed to prevent market mechanism.
• DSE should equalize the initial value of stock for better understanding of investor.
• DSE should modify the current index calculation method since it proved to be highly sensitive.
• DSE should conduct surveillance operation more carefully and sincerely.

The education or study/training is then effective when it is related with practical. Students are very much practical oriented in the department of science because they are laboratory room oriented. In the business world the study must be related with practical field. The principles, operations we read and memorize from various books, we should know whether it is implemented in practical field or not. There is no alternative to make the business study effective. Though the books recommended in the syllabus of BBA were written according to the operation of generally recognized industries but in implementation of those theoretical principles, procedures are not same in every industry. Especially in the environment of Bangladesh a lot of deviation is seen. Why this deviation, how to overcome from that deviation, try to find out the reason and try to give solution and recommendation.

In the organizational environment we feel very cozy to work in that type of convenient ambience. The premises expedite us for enhancing our knowledge as well as give us a proper safeguard about upcoming future circumstances.

The Security market experienced heavy expansion as the national and international investor invest intensively  in  the market but in this year and last of the previous year DSE index crash at furious rate and many small investor loose their investment value. Specialist assumes this phenomenon as the creation of few large investor on purpose. This situation brings challenge to DSE and we expect that DSE can overcome the causality of this loose as early as possible.

At the very end we expect that after all of this turmoil, DSE can bring faith of the investor and become a healthy place for investment, to do this DSE should become far more modernize, technologically sound, safe, and flexible.

• Annual Report: Dhaka Stock Exchange- 2008-09

• Standard & Poor Index Mathematics. David M. Blitzer. Managing Director & Chairman of the Index Committee

• Sundharam, K.P.M. & Varshney, P.N., Banking Theory, Law and Practice, New Delhi: Sultan Chand & Sons, New Delhi, 1996.

• Debnath, R.M., (2004), “Business of Banking”, pp: 177-183, 200. Lotus Publishers, Dhaka.

Websites:

• www.dsebd,org
• www.wikipedia.com
• Ø  www.nli-research.com
• www.investopedia.com