Find out reasons contributing to falling stock prices

In developed countries, entrepreneurs typically rely on the capital market to meet long-term capital needs. However, the capital market in our country is struggling to develop properly. For various reasons, both entrepreneurs and investors are not very enthusiastic about raising capital through the capital market. Instead, they tend to seek their desired capital from the banking sector. Yet, the capital market is the most suitable place for long-term funding.

A common feature of the capital market is the constant fluctuations in prices. This rise and fall are what make the capital market attractive and interesting. However, if there is a continuous decline in prices or irrational price increases, it raises concerns. Recently, there has been a significant decline in the share prices of various companies, which has worried investors and market participants. Reports indicate that on October 28, a total of 397 companies' shares and units were traded on the Dhaka Stock Exchange (DSE), of which prices rose for 105 companies, fell for 246 companies, and remained unchanged for 46 companies. The DSE's main index, DSEX, decreased by 66.86 points from the previous day, dropping to 4,898 points.

Within 30 minutes of trading at the DSE, the DSEX index dropped by over 60 points. Prior to this, on October 26, the index fell by nearly 150 points, dropping below the 5,000 mark. On October 28, the index reached its lowest level in 37 months. The last time the DSEX index fell to 4,891 was on September 2, 2020.

This unusual behavior in the capital market has raised concerns among stakeholders. Small investors are increasingly becoming frustrated, leading to protests against the ongoing price declines. The Bangladesh Capital Market Investors Association and the Bangladesh Investors Unity Council have organized separate protest programs and human chains. Meanwhile, to investigate the reasons behind the recent and persistent price declines, the Bangladesh Securities and Exchange Commission (BSEC) has formed a high-powered investigation committee. This committee will identify the causes of the ongoing decline. However, the continuous drop in prices in recent days cannot be deemed a normal occurrence. There may be hidden factors at play.

For companies experiencing continuous price drops, no correlation with their performance can be found. If there were disruptions in other indicators of these companies, it could be assumed that it would impact their share prices. However, that is not happening. Therefore, there are ample reasons to suspect that there might be other underlying causes for this persistent decline. Once the investigation committee's report from the BSEC is available, clearer insights can be provided on the matter.

I personally believe that the current state of the stock market is primarily due to a lack of internal good governance within the stock market itself. There are questions about the authenticity and accuracy of the audit reports produced by various companies listed in the stock market. When these companies issue new shares, they often inflate the amount of dividends, leading to increased share sales. However, in reality, the company may not be making as much profit as claimed. Eventually, it may turn out that the company is actually incurring losses. Loss-making companies never pay dividends, and when shareholders do not receive the expected dividends, they become disheartened and may sell off their shares.

Many believe that there is currently a crisis of confidence among investors in the stock market. They are becoming doubtful about whether their invested money will return with profits. As a result, many are selling their shares. Some investors, driven by speculation, are also selling their shares. There are allegations that certain groups are spreading various rumors in the stock market to further their own agendas. This situation needs to be thoroughly investigated.

The biggest scandals in our country's stock market occurred in 1976 and 2010. During those times, many small investors lost everything when they invested in the capital market. While many may have forgotten the 1996 stock market scandal, the events of 2010 are certainly still fresh in people's minds. An investigation committee was formed to investigate the causes of the stock market scandal at that time, and it made several recommendations. However, those recommendations were not implemented, and no appropriate actions were taken against those responsible for market manipulation.

One of the main weaknesses of our capital market is the lack of shares from fundamentally strong companies. When I was the finance advisor to the caretaker government, I personally took initiatives to bring several good companies to the stock market. However, such efforts are not being observed much now. There needs to be a concerted effort to bring reputable and fundamentally strong companies into the stock market. Initiatives must be taken to list companies that have a good reputation and generate strong profits. If good companies are brought into the market, investor confidence will increase, and they will see the potential for earning adequate profits by investing in the stock market.

In our country, there is a common misconception among entrepreneurs and industrialists. They believe that if a company's shares are listed on the stock market, the family control over the organization will diminish, and they will have to face various forms of accountability. This negative mindset needs to be addressed. To do this, we must engage in personal discussions with them. During my time as the finance advisor to the caretaker government, I personally worked to bring several significant companies to the stock market. I successfully convinced Grameenphone to agree to be listed, although they were listed after 2008. I also facilitated the listing of Berger Paints and a large company in the energy sector. Initiatives can be taken to bring various state-owned enterprises to the stock market.

There is potential to bring various state-owned enterprises to the stock market. In the previous government, there were discussions about listing shares of 26 state-owned enterprises, but ultimately, there was no progress in this regard. When it comes to bringing state-owned companies to the stock market, the employees of those companies may create obstacles. To address this, a certain number of shares could be reserved for the employees. They would be able to purchase these shares. Since the employees would gain ownership of their company through these share purchases, they are unlikely to create any obstacles. If necessary, arrangements could be made for loans to help employees buy shares in their own company.

In our country, entrepreneurs often seek long-term loans from banks. The biggest drawback of bank loans is that once a loan is taken, repayments with interest must start after a specified period, regardless of whether the project is implemented or not. The bank will collect loan installments with interest after the due time. However, when financing is obtained by selling shares in the capital market, there is no immediate obligation to repay installments. Shareholders will only receive dividends if the implemented project operates profitably. Even if the project does not perform well, loan installments to the bank must still be paid. On the other hand, when a company raises funds from the capital market, it is only required to pay dividends to shareholders if the project is managed profitably. When a company intends to be listed in the capital market, its performance should be thoroughly assessed before granting permission for listing.

There are some entrepreneurs in our country who do not want to bring their companies to the stock market. They may lack transparency and wish to avoid accountability. Being listed on the stock market requires them to be accountable to shareholders at the annual general meeting. Some entrepreneurs prefer to obtain financing from banks rather than the stock market. This is especially true for those who are socially and politically influential, as they generally prefer to collect financing through bank loans. They believe that they can avoid repaying the loan and still receive various benefits without returning the borrowed amount.

When taking a loan, collateral must be provided to the bank against the specified loan amount. It is possible to obtain an unusually large loan by overvaluing the collateral. When the bank tries to sell that collateral, it often cannot find a buyer. Sometimes, properties are mortgaged to the bank whose ownership is questionable. During my time as the chairman of the board at Sonali Bank, a loan proposal came in where land was proposed as collateral. Upon inspection, it was found that the ownership of the land was not clear. The land was proposed to be mortgaged to the bank based on a "bayanama" (a deed of agreement with the receipt of earnest money), but a bayanama cannot serve as a legal document for transferring ownership. Additionally, the land was underwater. Therefore, the loan proposal was rejected.

Some banking laws need to be rationally reformed or changed. Recently, Bangladesh Bank issued a rule stating that if one project of a group of companies defaults on a loan, the other projects of that group will not be considered ineligible for bank loans. The previous rule was that if even one company within the group defaulted, the other projects in that group would not receive any loans from the bank. The newly reformed law is not logical and should be subject to change.

AB Mirza Azizul Islam: Economist and Former Finance Advisor to the Caretaker Government
Transcription: M A Khaleque