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BLOGS AND LINKS ON SHARE MARKET CRASH AND REMEDIES

1. http://www.bdstock.com/blogs.php?id=40

Stockmarket conundrum (Author: AF Nesaruddin)


Posting Date:2011-02-20

After the Bangladesh stockmarket debacle in 1996, the market recovered gradually and had been growing steadily until 2008. In view lower rates of interest on bank deposits, tax-free income benefit, overseas remittance, fair rate of return on investments and lack of sufficient avenues for investment by individuals, investors were encouraged recently to invest more in the stockmarket. The market became reasonably stable until 2008. In 2010, the share price index started rising and it became abnormally high in late 2010 creating an alarming situation and a concern among the experts. From the first week of December, there was repeated falls in the stock prices and in the process, many investors incurred huge losses and market is yet to be stable. Ultimately, highest level of the government had to intervene to turn the situation to a tolerable level from the disaster. Among other issues, the government also formed an investigation committee to detect the market manipulation, if any. Now the questions are why it happened, how it happened, who are responsible and how to bring the manipulators, if any, into books and protect such untoward happening in future for steady growth of the capital market. As already indicated, the government has already formed an investigation committee with specific terms of reference and we are looking forward to the findings of the committee. So, I will refrain myself from commenting in this regard. Among other issues, it was observed that in recent times, initial public offerings (IPOs) were priced at a very higher level specially under book building method. With the high price of any IPO, investors try to come to a conclusion that price of existing shares in the same sector is undervalued and this perception may mislead them to buy at higher price. That is how market price of shares increased apart from manipulations, if any. In other words, when the price of an IPO is approved by the Securities and Exchange Commission (SEC), then a clear message is going to the market that the SEC has accorded approval after the required due diligence and scrutiny. So people specially the small investors can rely upon such valuation and judicious decision. For any reason, if the price is fixed at a higher side, among other things, it has apparently two direct impacts: a) investors are exposed to high risks of losing capital as well as insignificant rate of return on their investment, and b) price of shares in the same sector attracts higher price for no apparent reasons.

It is a common knowledge that both quantitative and qualitative fundamentals are considered for buying shares in the stockmarket. Future potentials are of course very important for valuing business and shares but this should not be the major criterion in valuing shares on IPO ignoring other fundamentals. Besides, in an uncertain market scenario like ours, this kind of approach should not be considered as major criteria. Further, in our country, it is unfortunate that many of the sponsors of listed companies could not discharge their obligations properly towards small investors and in few cases, investors have been cheated and SEC's actions were not enough to change this culture to a remarkable level. In such a situation, pricing of IPO obviously deserve special attention of the SEC for a stable, growth oriented and healthy capital market. Revaluation of fixed assets and restating net assets value (NAV) has become a common phenomenon in recent time to attract the high price for IPOs. In the absence of realisation of gain, in no way, it helps to increase and growth of business. This is merely a satisfaction of the owners to satisfy themselves as to the tangible value of the business and to impress upon the new comers (investors) indicating the NAV. It has been noticed that before going for IPO, the auditors are changed. Change of auditors is not unusual and not always bad. The intention behind the change is important. If the change is aimed at ensuring quality, it is fine. Otherwise, the reason for change of auditors should strictly be reviewed including pre-change period financial performance of the company and qualifications (observations) made by previous auditors. Book building method is apparently a sophisticated and widely used concept but unfortunately, this method is being misused with some motive. It needs adequate efforts by regulatory agencies to customise it for implementation in Bangladesh context. It must be taken into consideration that demand-supply gap is already in existence and there is huge demand of good shares in the capital market in Bangladesh. There are a number of companies outside the capital market having strong fundamentals and very good track records. Care should be taken to ensure entry of these good and potential shares into the market. At the same time, restrictions should be imposed and risky shares should be less privileged for IPO so that small shareholders do not lose money eventually. The SEC seating on the driver's chair should ensure this before they place it to general public for subscription. Experts also feel that there are rules and regulations but the question is whether these are applied and enforced properly and judiciously. We appreciate that price of shares in the secondary market is difficult to control as it depends on demand and supply, rumours and unusual expectations of the investors. But SEC as the regulatory agency for capital market has a greater role to play in taking active regulatory steps and preventing manipulation of inflated IPO share price before it goes to public. In addition, SEC has no doubt a great role to analyse the nature of recent IPOs -- how it was priced, how valuation of shares was done, whether the management has been able to achieve the business results as projected and whether the issuers have been using the money raised for the intended purposes as declared. Similarly, pending applications for IPOs also deserve such scrutiny so that it cannot be approved at higher price without the solid grounds and

fundamentals. Finally, without leaving it to the market, considering the peculiarities of Bangladesh capital market and level of knowledge of new and small investors, SEC may also like to formulate a policy guideline and take regulatory steps for introducing a blended price of IPO at the bidding stage under book building method considering current business performance and earnings per share, realistic business forecast and also NAV focusing less on future forecast. The writer is a chartered accountant and a partner of Hoda Vasi Chowdhury & Co.

2. http://www.reuters.com/article/2011/01/23/bangladesh-stocksidUSSGE70M00T20110123

Bangladesh waives circuit breaker in share trading


* Trading at two bourses will resume Tuesday DHAKA, Jan 23 (Reuters) - Bangladesh will probe the recent series of collapses in share prices that have triggered violent protest by investors and forced trading to halt, Finance Minister Abul Maal Abdul Muhith said on Sunday. The minister said that from Tuesday trading would be held with no circuit breaker, to restore investors' confidence. The circuit breaker limit of 225 points for the benchmark index of the Dhaka Stock Exchange .DGEN was imposed on Wednesday, an official measure aimed at calming a market that has been volatile for weeks. "A committee will be formed in 15 days to investigate the recent crash in the share markets," Muhith said. Police used batons and fired tear gas to break up violent protests by hundreds of Bangladeshi stock investors on Thursday, when prices collapsed again, halting trading for a fourth day this month. [ID:nSGE70J095] The benchmark Dhaka index .DGEN has lost more than 29 percent since Dec. 5, when it hit a high of 8,918.51 points.

Share prices nearly doubled in 2010, encouraging new investors into the market. The number of individual investors has risen to more than 3 million from fewer than 500,000 in 2006. But banks and other financial institutions, some of which had invested 75 percent of their deposits in the stock market in the past, are holding back on further investments, adding to small investors' unease. (Reporting by Ruma Paul; Editing by Anis Ahmed and Will Waterman)

3. http://www.nub.ac.bd/recent-stock-market-crash-in-bangladesh-wrong-signalsfrom-responsible-quarters-since-the-ctg-caused-the-asset-price-bubble/

M. Shamsul Haque*(The writer is professor finance and Vice Chancellor, Northern University Bangladesh) Stock markets are great financial institutions for economic growth provided they are managed properly. Billions of dollars worth of capital can be raised from millions of investors, small and large with voluntary participation. Some well founded theories have been established by scholars after studying the operation of stock markets in the developed world. One of the famous hypotheses is that stock markets are information efficient as they operate on the basis of information available fast and cheap for those who want them. It says that stock prices in the market contain all information about it as prices only change when new information is available. For the last few years certain developments in markets can be traced to rapid rise in the demand for stocks with inevitable consequence. These are as follows: 1. Banks and other financial institutions including MFs have increased their participation directly n the markets and also through loaning money to BO a/c holders for trading on margins. They and also many brokerage houses have been allowed to open brokerage houses in divisional and district hqrs making it easier and attractive to trade in shares. As a result the number of BO accounts shoot up to 33 lakh from below five lakh. These BO

a/c holders also acted as intermediaries of their friends and relations from all corners of the country as they were given promises of higher returns compared with savings a/cs in banks and bonds. Behaviorally human beings are attuned to act in a manner that is called as herd mentality like cattle. The lure of making a fast buck always attracts people and like in 1996 they rushed in thousands. 2. The upsurge began a year or so back when Grameen Phone offered a large IPO (over 4000 crore) with much higher values over the face value of Tk. 10 only. Even then the issue was only about 10% of the total capital of Grameen Phone. When trading began with such higher value and it was included in the DSE index for the entire capital value of Grameen there was a big jump in the index about 1000 points. So the faulty index gave wrong signal to investors and the upward rise never stopped there after. 3. When the index reached 6000 or so from under 3000 journalists asked the finance minister about it and he quickly dismissed that the market was not overheated. Around the same time some foreign firms set their feet into the market and created further push up. Since there was no capital gain tax on the earnings and no restrictions were placed by Bangladesh Bank on transferring their capital plus gains they took advantage of super returns and transferred money out of the country by buying dollars from the curb markets. 4. The book building method was allowed to raise prices of IPOs by using faulty accounting practices and many low earning companies took advantage of the system in private placements and then going to market with much higher valued IPOs without due regard to P/E ratios. Some fifty or so companies were waiting to join the game as the president of DSE charged about weak accounting in a press conference just the day before the mayhem. In a country where accounting figures are regularly changed to suit purposes of the business firms and audits are done to satisfy mere formality use of book building method of price discovery was not appropriate and manipulation were common. 5. During the last two weeks of the crisis BB supplied Tk.200+200 crore to ICB to hold prices up by buying shares. That gave investors signal that more such bail out funds would be forth coming. That did not come and the market collapsed in a free fall due to failure in the circuit breaker on the last day before it was closed for four days at a stretch. Much larger bailout funds could be given but then that would have other adverse effects. 6. By all these and other means a bubble was created and the small investors were sucked into the spiraling up prices in the markets while government functionaries were claiming super confidence of the people on the government. Like the laws in physics bubbles are expected to burst at some time. That is what happened and the lives of millions of people have been ruined like a weapon of mass destruction. 6. Because the money that was pumped into the market from all over the country it will create a crisis in confidence for these and other people to come forward to invest again and it will have adverse effects on consumption as well. Economic growth will also be affected and job opportunities for millions will not be forth coming as were expected. The stock market crash in 1930 took 10 years in the USA to recover at the beginning of the Second World War. Similar crash in 2008 slowed down the US economy and unemployment rate is still above 10% now

despite bail- out packages of billions of dollars. BD also needs huge bail out program to rescue the small investors but where will the money come from. And again it raises the issue of moral hazards in economics when govt support is offered to rescue people in crisis. That may set a pattern for the people and provide a basis for another bubble after a few years. . Conclusion: Combination of wrong information to the investors, illegal participation of banks and institutions in the stock markets, weak accounting functions are at the core of the crisis that saw billions of Tk wiped out. Nothing short of a judicial enquiry by the high court will be sufficient to address the crisis, compensate the innocent victims and restore confidence of the investors in the market and those in charge of economic governance in BD.

4. http://www.thedailystar.net/newDesign/news-details.php?nid=172300

Monzur Hossain

Should the central bank play some role in bursting asset bubbles? This is a contentious issue that has been discussed for a long time. Some argue in favor of the view that central banks should burst bubbles. But, in their view, monetary policy should respond to asset bubbles in a cautious and moderate manner in order to avoid economic distortions. Some others argue against the role of central bank in bursting bubbles. They say bubbles generally arise out of some combination of irrational exuberance, jumps forward in technology and financial deregulation, for which the connection between monetary conditions and the rise of bubbles is tenuous. However, the central bank is at the centre point in this debate. The recent crash in the stock market in Bangladesh is also associated with some policies of the central bank. The aim of this article is to analyse the following two aspects: (i) whether the monetary policy response was appropriate to the rise and the recent collapse of the bubble, and (ii) whether the behaviour of financial institutions was optimal to the policy response. Commercial banks have been involved heavily in the stock market business in the last few years. Allowing merchant banking has exaggerated the situation. They became the key player in the stock market. Undoubtedly, any policies to control

banks' exposure to the stock market could have significant impact on the capital market. Monetary easing during last two or more years (money supply was more than 22 percent during the period) could have helped stock market remain buoyant during these days. Perhaps, Bangladesh Bank (BB) was not much aware about banks' exposure to the stock market. Because, surprisingly, banks profit from share business seemed to be negligible according to their income statement or balance sheet although there is a wide perception that banks are making handsome profits from investing in shares and debentures. Proper data on their exposure to the capital market remained unknown, which I think is a failure from the part of the central bank as a supervisory agency. Moreover, almost all policies to minimise the exposure of banks were taken in the second-half of 2010, when the stock index had reached an alarming level. For example, the situation worsened when it was made mandatory for all banks to maintain their investment in the stock market equivalent to 10 percent of their total deposit and to comply by December, 2010, when in reality, the ratio was much higher than this level. Increasing the cash reserve ratio (CRR) was a double debacle for the banks. Naturally, big players had to sell huge volumes of shares due to liquidity constraints, which caused share prices to decline. This also casts doubt on the reported amount of excess liquidity in the banking sector in BB's published reports. Withdrawal of banks' large investments from the stock market appears to be the main reason for the recent crash in the capital market in Bangladesh. Now the question is, whether BB had any good reason to stop banks from substantially investing in the share market this time? There might have been a few reasons behind the decisions, such as (i) to contain inflation, (ii) to channel more credit to the real sector, and (iii) to protect the interest of the bank depositors by limiting them from risky investments. If BB did so to control the supply of money due to rising inflation trends, I would rather say that the issue was not analysed properly. The money that was running behind stocks had some multiplier effect in accumulating more stocks. Thus, it appears not to contribute to inflation to that extent, as it was not channelled

directly to food prices or other non-food prices -- that are the main components of inflation. Whether investing in the capital market crowds out private investment in the real sector is also not clear -- perhaps this is also not a very strong reason. Credit given by the merchant banks seems to be negligible compared to market capitalisation or even to daily transactions. The third one might be reasonable, but this does not require any hard measure like the one that has been undertaken. Soft landing (measures) was expected to reduce banks' investment in the capital market to 10 percent of total deposits. Commercial banks should have been given more time for gradual adjustments. In addition, the CRR was not raised at an appropriate time. From these viewpoints, BB's policy does not strongly justify their action against banks' investment in the stock market. This reminds us of the Bank of Japan's (BoJ) policy in bursting a bubble in the early 1990s, which caused prolonged economic recession and one of the biggest banking crises. Although the action of BoJ was to burst the real-estate asset price bubble, it had caused a crash in the Japanese stock market also. The main efforts to stop the bubble included monetary tightening, new regulation on administering real asset prices and adoption of the Basel Accord of capital adequacy requirements in 1989. After the bubble burst in early 1990, a decade of the crisis starts with the first failure in 1992 (as many as 180 banks up to 2003 failed according to the statistics by Deposit Insurance Corporation, Japan). As a result, the bank assumed a huge burden of non-performing loans, deflation and recession. The then monetary policy of BoJ is still criticised. If the monetary policy (ultra-easing interest policy) is supposed to contribute to the creation of the bubble, was it appropriate to stop the bubble within a short period of time, especially when banks made collateral-based investments in the real-estate sector? Some have argued that the asset price bubble and monetary policies at that time in Japan were mainly responsible for the crisis. The lessons that can be learned from the Japanese experience that central bank's role to burst bubbles must

depend on the degree of efficiency of the financial sector and the speed to burst the bubble must be based on the overall economic situation. It is now important for Bangladesh to investigate the degree of involvement of commercial banks in the stock market before and during the crash as well as synchronization of BB's policies. The worry is that BB is skeptical about their role, which is clear from statements of the governor as well as posting of news items in their web. Without being skeptical about their role, BB should try to analyze their policies and formulate a long-term policy framework for banks involvement in the capital market by taking lessons from other similar cases and analyzing the overall economic situation.

5. http://en.wikipedia.org/wiki/2011_Bangladesh_share_market_scam

2011 Bangladesh share market scam


From Wikipedia, the free encyclopedia Jump to: navigation, search The 2010-11 Bangladesh share market scam is an ongoing share market turmoil in the two Bangladeshi stock exchanges, DSE and CSE. Millions of small investors have lost all their investments due to the market crash.[1] The crash is deemed to be a scam[2] and exacerbating due to government failure.

Background
The stock market was in turbulence throughout much of 2009, with the long bullish trend starting to turn grim.[3] The bullish trend was initiated by the end of the two-year political crisis and re-emergence of democracy via the December 2008 polls,[4] and was largely unaffected by the BDR Mutiny.[5] The market was heavily aided by the entrance of Grameenphone into the

capital market, when the index rose by 22% over a single day on November 16, 2009.[6] Share prices continued to fluctuate, reaching the annual high in mid-2009[7] before plummeting by the end of 2009,[8] with retail investors threatening a hunger strike.[8] The market continued to be turbulent throughout 2010, with the DSE hitting it's all-time high revenue[9] and the largest fall in a single day since the 1996 market crash,[10] within the space of a month.

[edit] The slump


By the end of 2010, it was well known that the capital markets of Bangladesh well overvalued and overheated.[11][12] The central bank had taken measures to cool the market down and control inflation by putting a leash on the liquidity.[13] The conservative monetary measures adversely effected the capital market, with the market falling once on December 13 by 285 points,[11] over 3% of the DGEN Index which stood at around 8,500 points. The capital markets suffered a second fall on December 19, with the index falling a further 551 points, or about 7%.[13][12][11] This 7% fall in the Dhaka Stock Exchange's index on a single day was the largest fall in the 55 year history of the Exchange,[13] surpassing the fall of the 1996 market crash.[13] This fall was deemed 'normal' by analysts, who believed the market was overvalued.[11] Investors took to the streets with protests. Random objects like wood and papers were set on fire in front of the DSE office in Motijheel[13][14] Immediate measures were taken by the regulatory body Securities and Exchange Commission, which, together with the Bangladesh Bank, laxed its earlier conservative measures to pacify the fall.[12] As a result, the market ameliorated the next day by 1.9%.[14]

Within December 2010 and January 2011, the DGEN index fell from 8,500 by 1,800 points, a total 21% fall,[15] with masterminds of the crash making about BDT 5,000 crore ($ 667 million) out of the scam.[15] The market fell by 5% on June 12,[16] before taking a 4% plunge on October 11,[16] sending the market into further turmoil. The fall finally triggered small investors to go on a fast-unto-death on October 16 after forming the Bangladesh Capital Market Investors' Council .[17] Opposition politicians declared their solidarity with the protesters.[17] The market stood at around 5,500 index points in October 2011[18] from 8,900 only a year ago.[19] Protests continued throughout the months, the most recent ones taking place in front of the DSE office in November 2011, with protesters sitting in throughout nights.[20][21]

Probe
A probe committee was formed to investigate the stock market crash on 24 January 2011, [2] with former Bangladesh Bank Governor Ibrahim Khaled heading the four-man high-powered committee.[2] The committee provided their findings after three months, on April 7. It identified an array of chicanery performed by some 60 influential individuals that resulted in the recent market crash.[30] The committee interviewed all members of both the DSE and CSE, and consulted journalists and analysts before presenting their report.[2] The committee found various irregularities, including the existence of omnibus accounts, that allowed some market players to make exorbitant profits at the expense of the retail investors.[30] Among the 60 identified primarily included chairman of Beximco and the mastermind of the 1996 market crash Salman F Rahman, former DSE president Rakibur Rahman, SEC chairman Ziaul Khandaker, SEC member Mansur Alam and BNP politician Mosaddek Ali Falu.[30] The report mentioned that progovernment business tycoons, including Salman and Rakibur, exerted influence within the SEC by influencing the appointment of its members.[30] The report ended with recommendations to

reform the SEC drastically[15] and asked the government to publish the names of the influential players and to remain cognizant in countering their influences.[30] The report resulted in the dismissal of SEC chairman Ziaul along with other SEC members accused.[31] However, the Finance Minister AMA Muhith stated that the State would neither disclose the names of the accused officially nor take punitive measures without further investigation,[32] although no dates for fresh probes have been declared.

Bailout
The market stabilisation fund (MSF) was conceived by the Bangladesh Association of Banks (BAB) in late October 2011 as a method to increase liquidity in the market and increase share prices, worth BDT 50 billion ($ 667 million).[33] Banks have reportedly kept buying shares despite suffering from liquidity crises themselves, and not selling any shares.[34] However, share indices kept plummeting throughout the time period.[35] However, prices rose by 7% ahead of the Prime Minister's emergency meeting about the market.[36]

6. http://www.thedailystar.net/forum/2011/February/market.htm 7. http://www.thedailystar.net/newDesign/news-details.php?nid=208274 8. http://www.thedailystar.net/magazine/2011/02/01/economy.htm 9. http://www.thedailystar.net/newDesign/news-details.php?nid=181148 10. http://www.thedailystar.net/newDesign/news-details.php?nid=183623 11. http://www.thefinancialexpress-bd.com/more.php?news_id=92946


http://www.thedailystar.net/forum/2010/april/bull.htm http://www.dailysun.com/index.php?view=details&type=daily_sun_news&pub_no=265&cat_id =1&menu_id=3&news_type_id=1&news_id=55454&archiev=yes&arch_date=03-07-2011 http://www.thedailystar.net/law/2006/10/01/fmr.htm http://www.economist.com/node/147304

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