Dhaka Stock Exchange Collapse of 2010—2011

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5 March 2016

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Dhaka Stock Exchange (Generally known as DSE) is the main stock exchange of Bangladesh. It is located in Motijheel at the heart of the Dhaka city. It was incorporated in 1954. Dhaka stock exchange is the first stock exchange of the country. As of 18 August 2010, the Dhaka Stock Exchange had over 750 listed companies with a combined market capitalization of $50.28 billion. 1.1 History

First incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June 1962. Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in 1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh, on 16 September 1986 DSE was started. The formula for calculating DSE all share price index was changed according to IFC on 1 November 1993. The automated trading was initiated in 10 August 1998 and started on 1 January 2001. Central Depository System was initiated in 24 January 2004. As of November 16, 2009, the benchmark index of the Dhaka Stock Exchange (DSE) crossed 4000 points for the first time, setting another new high at 4148 points. In 2010, the index crossed 8500 points and finally crashed in the first quarter of 2011. 1.2 Formation

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 238 members. Market capitalization of the Dhaka Stock Exchange reached nearly $9 billion in September 2007 and $27.4 billion on Dec 9, 2009. 1.3 Management

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

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)
1.4 Trading time
The Dhaka Stock Exchange is open for trading Sunday through Thursday between 10:30am – 2:30pm BST, with the exception of holidays declared by the Exchange in advance. In the month of Ramadan, the exchange is open for trading between 10:30am – 1:30pm BST. 2. Previous major crash – Stock market crash in 1996

The number of BO account holders in 1996 was only 300,000 and most of them were new in the market. At that time it was not easy for investors to detect the fake shares from the genuine ones. Because during the crash of 1996, paper shares used to be sold in front of DSE.There was no automated trading system, surveillance was not strong enough, and there were no circuit breakers as well as international protection. From 1991 to the end of 1995, DSE General Index price gained by 139.3 per cent and reached 834 point.

But in 1996, the market experienced a dramatic change and pushed the price index up by 337 percent. DSE General Index recorded a high growth from July and stood at 3648.7 points on 5th November 1996. Besides, Chittagong Stock Exchange experienced the same change and grew by 258 percent. Chittagong Stock Exchange index increased from 409 to 1157 points in 1996 within a one year’s time. But the steps taken by the government did not work. The index lost over 233 points on November 6, 1996. After the bubble burst, DGEN index dropped to its lowest point and stood at 957 in April 1997. It stood at around the same point, where it was 10 months before and DSE General Price Index lost almost 70 percent from its highest point in November 1996. Then the index continued to decrease for the next 7 years until April 2004. During this long period, DGEN Index seldom crossed 1000 point. In short this can be described by using a graphical presentation.

Figure 1. Scenario of Share price index points of Dhaka Stock Exchange

3. Cause of market crush in 2010-2011
The stock market crashed again in 2010-2011. The major causes are as follows- 3.1 Margin Calls & Illiquidity crisis
When investors pay a part of future market contracting by cash or selected instruments in an account with a broker which is called Margin. To make sure obligations of investor when contract expired, more Margins is necessary if value of the contract decreases. The process is called Margin call. On “Black Monday”, price movement of future contracts created record amount of Margin calls for firms which were about 10 times the average size. Collected payments are paid to investors whose position had gained. Some investors lost their ability to enter new positions due to Margin calls and some needing to extend credit to make the payment. As investors were unable to pay margins, brokers placed emergency margin calls with exposed options positions which were assumed to be liquidated due to failure of meeting margin calls. It occurred repeatedly which possibly made selling pressure in the market and markets were not able to handle these sell orders.

3.2 Program Trading
Summit Financial Advisors has stated that many analysts accused program
trading, especially portfolio insurance as a major reason for the crash. In this trading, computers automatically order large stocks trades when certain market trends prevailed. Analysts blamed that the program trading blindly sold stocks when prices declined on 19th October.

3.3 Derivative Securities
Investors not only invested in actual stock market but also in index options and futures markets. Option and future market are called derivatives as the value derives due to change of stock prices. The Brady Commission which was commissioned to examine the reasons of the crash found that the failure of stock mar-kets and derivatives markets to operate in sync was an important factor that contributed to the severity of the crash.

3.4 Role of market regulators and their employees
The role of SEC to control & monitor capital market, working in favor of manipulators, approving unethical proposal and issuing wrong directives which lead to unexpected market conditions deteriorated the image of SEC. Investigation report mentioned some names of corrupt employees of the market regulators who were directly or indirectly responsible in the market manipulation. There is a job overlapping between SEC and exchanges. Such as, DSE & SEC both organizations have surveillance department for the same job but there is no co-ordination. Listing committee of DSE & CSE examines listing application of company but SEC doesn’t do it properly and approve it. Placement of Mutual fund & IPO at a price lower than the market value has become a new method of bribery for powerful employees of regulators. There is another accusation that these senior level employees received placement by using other`s name which is very difficult to identify. The report admits that SEC doesn’t have enough employees for example; qualified accountant, financial analyst and researcher to control and monitor the market. Rahman & Moazzem (2011) identified in their study that Dhaka stock exchange is becoming more volatile but the regulators are unable to defend it. They also suggested increasing manpower and quality of professionals in SEC.

3.5 Demutualization of Exchanges
There are both elected & nominated members in DSE and CSE. Basically, elected members run the administration due to less interest & relation of nominated members. As a result, the players of the capital market act as controllers. Meanwhile, controllers are inactive during unethical activities due to conflict of interest. In the investigation report it was said that different stake holders of capital market and civil society support & demand for demutualization of exchanges. The meaning of Demutualization is separating controlling functions from controller’s functions, empowering controller and taking decisions without being motivated by the market players. 3.6 Investment of bank in the capital market

In 2009 & 10 banks and financial institutions invested huge amount of deposit money in the stock market. As a result share prices sky rocketed until December 2010. When Bangladesh Bank restricted more than 10 percent investment of deposited money, increased CRR and SLR ratio, created liquidity crisis and market crashed.

3.7 Pre-IPO & IPO process
Investigation committee considered that due to Pre-IPO & IPO manipulation share prices sky rocketed and that is the main reason for the share market crash. Manipulators illegally & unethically created a Kerb market in Pre-IPO stage. Without recommendation by the listing committee application for IPO was accepted. SEC did not examine abnormal asset revaluation and indicative price. As a result in Pre-IPO or IPO stage placement process and placement trade Kerb market overvalued share prices. This eventually generated liquidity crisis in the capital market.

3.8 Uniform face value of share
During the meeting between investigation committee and different stake holders of share market, a most important reason for abnormal climbing of index was indicated to uniform face value of share at Taka 10. Splitting share does not change revenue or asset of a company and should not affect the share price. But Small investors showed their utmost inter-est to buy split share with their small investment and consequently pushed the price up. Up to 62 listed companies split their shares in 2009 & 2010. So, it abnormally increased liquidity of the market and brought notable change in market capitalization. Investigation report shows that MC increased 655% of companies those adopted share uniform and MC increased only 46% of those that did not adopt. From July 2009 to December 2010 the role of total MC were 81.5% of companies which adopted share uniform and only18.5% those that did not adopt.

3.9 Placement trade / Kerb market
Before issuing IPO, Issue manager or Issuer Company sell shares to their nominated person and that is called Private placement or pre-IPO placement. Private placement is risky because it doesn’t have accounting discloser. In the developed countries there are some fixed rules but in Bangladesh SEC didn’t have proper rules for it. As a result some manipulators used it as a tool of price manipulation. Investigation committee found that in most of the cases placement was offered at less than the IPO price.

Though aim of public offering is participation of public but placement doesn’t make sure it. Eight companies issued convertible preference share in 2009 & 10 in which average 69% went for placement. So, participation of the public was hindered and that created placement trade or Kerb market. Some companies distributed 50-90 percent of their paid up capital in private placement. However, when a company raises too much paid up capital through private placement, the number of free-floating shares decreased. That’s why the difference between demand & supply push share prices up. Moreover, non-listed companies created liquidity crisis as huge investment was stuck up with these companies. Placement created new process of trading outside of the share market and that is illegal. By taking chance of placement many small companies raised capital from illiterate and un-informed investors with their artificial financial reports. 3.10 Omnibus account

Investigation report found Omnibus accounts of ICB and merchant banks as another major reason behind the stock market debacle. Every branch of merchant bank operates only one omnibus account. There could be 3-10 thousands BO Accounts under the omnibus account which are not under the surveillance of SEC. So, information of individual accounts and its transaction are kept only with merchant banks. As investigation reports shows that this kind of account made a lot of illegal transactions. It publishes name of 30 big players including ICB for a lot of suspicious transactions and says most manipulators traded from the omnibus accounts. It was also reported at least Taka 2.5 billion has been traded from hidden or omnibus accounts.

3.11 Asset revaluation & Rumor
By taking chance of weak asset revaluation method companies have overvalued their asset. In this process dishonest auditors generated artificial audit reports. So, calculating of NAV on overvalued asset indicates wrong signal. Some companies issued Bonus shares against unrealized gain of revalued asset price which is a faulty accounting practice. There is rule to maintain provision against “deferred tax” during asset revaluation to pay tax in future, but companies are not following it. Investigation reports pointed some companies which got NAV more than 100% to 3,472% after asset revaluation. 3.12 Book building method

It’s a procedure of determining price of IPO at which it is offered. The fair price is determined by the demand of a security from institutional investors and their indicative price. The main aim of introducing this method in Bangladesh stock market was to attract more firms for enlisting in the stock exchanges through fair share pricing. However, it was found as an instrument of manipulating market prices. Investigation report reveals that during the price discovery/bidding stage investors manipulated share prices for placement with too high price. High price was maintained only for the lock-in period and then investors offloaded their shares. As a result they pulled out a lot of profit within a short period and after that the share price did not increase. In this process corrupted Issuer and issue manager manipulated the price.

3.13 Serial and artificial trading
Some manipulators created artificial active trading environment among themselves through bulk transaction and increased share prices. Moreover serial trading and price manipulation by many buy-sell orders through different accounts and broker houses which overheated the market.

3.14 Issue of Right and preference share
Right Share is issued at a discount price to existing shareholders. SEC took 4/5 months to take the decision of right issue proposal which is mysterious. Meanwhile companies inform the market about Right issuance and increased the share price. Moreover, issuance of Right share increase number of share which should decrease share price but it did not hap-pen. Investing in Preference share is safe to get a fixed percentage of profit. To make the share attractive companies keep an opportunity to convert it and in that case it is called Convertible Preference Share. Companies issued preference share for only 2-3 months even for 1 month which is not common in other countries. The faults with convertible preference share were its time period (short), convertible process and private placement. Investigation committee found that SEC did not have proper guidelines for Right and Preference Share issuance.

3.15 Suspicious transaction of top players
Investigation report reveals some names of individual and institutional investors as top buyers and sellers during abnormal increase and decrease of index in different time periods. The transactions of these investors were suspicious and affected the market heavily and liable for abnormal rise and fall.

3.16 Block placement
There was a lot of suspicious block trading of mutual funds. Some investors got enormous amount of placement time to time.

3.17 Direct listing
With the approval of SEC few companies have been directly listed in the stock exchange. These companies come to the market with inflated share prices. Investigation report mentioned that indicative prices of these companies were determined even 58 times more than EPS and 9 times of NAV. Though share prices of these types of directly listed companies have been artificially determined, but SEC or exchanges did not investigate the reason of abnormal price.

4. Impact of the crash
Bangladeshi stock market experienced through inefficient and irrational fluctuation of DGEN Index in the year 1996 and 2011 . During 2010, the bullish market turned bearish with the exchange losing 1,800 points between December 2010 and January 2011. DGEN Index climbed at point 8918.51 on December 05, 2010 which was overvalued in all aspect. Then the market crashed at point 4877 in November 2011.

Figure 3: Daily DGEN index of January, 2011

Figure 4: Showing the Movement of DSE General Index from June- ’10 to May- ‘11 Impacts of the crash were:
As a result of the market crash, millions of investors have been rendered bankrupt. Because of free fall of share prices, Investors came out in the street again and started protesting against free fall of share prices and chanted slogans against market regulators. Random objects like wood and papers were set on fire in front of the DSE office in Motijheel. Investors came out in the street with processions and demonstrated against free fall of Share index in both bourses as well as suspension of trading. Investors from different parts of the country such as, Chittagong, Comilla, Narsingdi, Narayanganj and Jessore brought out processions and clashed with law en-forces in some places as well. Investors blamed the speculators and regulators for the bubble that finally burst. Economy faced liquidity crisis. Authoritites and government took steps to handle the crisis. But stock market of Bangladesh had already got the adjective of “the worst stock market in the world”. And an ongoing market turmoil is still going on.

5. Measures taken to stabilize the stock market
Since the collapse of the market in December 2010, a number of initiatives were undertaken by Ministry of Finance (MoF), Security and Exchange Commission (SEC), Bangladesh Bank, Government and Dhaka Stock Exchange (DSE)/ Chittagong Stock Exchange (CSE) to stabilize the market. 5.1 Steps taken by government-

The government took a number of measures to inject money in the market. This included Tk. 600 crore worth of funds distributed to the state-owned banks and Investment Corporation of Bangladesh (ICB), and formation of a mutual fund titled Bangladesh Fund with an initial resource of Tk. 1,500 crore. Under the national budget of FY2011-12, government announced a number of incentives to recover the capital market situation. Some of these were re-introduction of tax rebate facilities, tax-free facilities for mutual funds, time extension for non-bank financial institutions (NBFIs) to adjust their investment in stock market (revised timeline is December 2013), and adjustment of single borrower exposure limit by the commercial banks (revised timeline is December 2013). All these budgetary measures have direct and indirect implications for raising fund for the ailing capital market. A probe committee was created by the government to identify the reasons, people and solution regarding the problem of the stock market. The Probe Committee and the MOF came up with a list of 36-point measures which were to be implemented in three phases (i.e. immediate, short and medium-term). 5.2 Steps taken by SEC-

Security & Exchange Commissions applied a lot of directives to keep the market under control in 2010. SEC changed directive of margin loan ratio by increasing it from 1:0.5 to 1:1 on 13th December and later it was again hiked to 1:1.5 & 1:2 because of free fall of share prices. Actions were taken against persons found guilty for their fraudulent activities, investigation of allegations against the SEC officials who indulged in market manipulation, examination of assets of some of the companies alleged to have been involved in illegal trading, and initiation to probe allegations against several companies was also done. Criminal investigation against a number of companies and persons which was supposed to be carried out by the Anti-Corruption Commission (ACC) was started but without much visible progress. SEC under its new management has also prepared a 29-point work plan.

Of these, eight activities were identified as ‘top urgent’, three as ‘urgent’, 14 as ‘short term tasks’ and four as ‘medium term tasks’. The MoF along with SEC and other stakeholders prepared the much-hyped Market Rejuvenation Package. This 21-point package focuses on greater participation of banks and other financial institutions in the stock market, besides
setting up a ‘special scheme’ to provide support to small investors who lost their capital. 5.3 Steps taken by Bangladesh Bank-

Bangladesh Bank pushed money into the market as liquidity support. Banks have reportedly kept buying shares despite suffering from liquidity crises themselves, and not selling any shares.

6. Outlook for the future
To protect the share market of Bangladesh, the regulatory body should take some effective measures. It should introduce some monitoring systems to protect the price manipulations of the share. Provisions should be made to provide all the financial data to the investors so that they can get a proper idea about the company. The market should be free from fake certificates. The government should offer income tax rebate on the income of share market and encourage the banks and non banking institutions to come to the market directly. Some incentives package for the investors like getting financing at a low cost has to be offered to bring back the investors in the market. Market stabilization fund must be introduced so that it can help to meet up with crisis situation.

Since Bangladesh is heading toward the developing nation, capital market can be the engine of growth for its economy if market becomes structured and efficient. Around the world well reputed stock markets like – New York Stock Exchange, London Stock Exchange, Shanghai Stock Exchange, Tokyo Stock Exchange, Australian Securities Exchange, Dubai Stock Exchange and so on, are regulated and running efficiently that provides significant contribution to their individual economy. Because, stock market is knowledge based game rather than a place of gambling; there must be rational win-lose situation always. But Bangladeshi stock market experienced through inefficient and irrational fluctuation of DGEN Index in the year 1996 and 2011 which resembles the place of gambling. To sum up, from our study, we have found that, there are problems like – Big Gap between the Demand and Supply of stock, extraordinary over pricing of stock, market manipulation, lack of knowledge about the stock market mechanism among the general investors, price distortion, inefficient regulations, political unrest, etc. These caused the steepest downward fall of DGEN Index in the financial year 2011. As a result, about millions of investors lost their capital which turned them empty within few months. Security and Exchange Commission (SEC) of

Bangladesh and government should take the short term and long term initiatives to stabilize the market. They should encourage more public limited companies to offer more share to meet the current demands. Income tax rebate, Injection of Market Stabilization Fund, Mandatory holding certain percentage of share among the board of directors, short term incentives packages should be introduced to get back the confidence among the existing investors. Regulatory bodies of Bangladesh stock market must educate the current and potential investors about the market mechanism and provide them the accurate information so that investors trade their shares carefully. Unless, appropiate corrective measures are well formulated and implemented, Bangladeshi stock market will be facing this irrational downward again in the near future. 7. ARAMIT from 2010- 2013

From the graph we see that, before the crash market price was above tk 450. And in the time of market crash from December 2010- January’11, the price of aramit started to fall and reached tk 436 at the end of January 2011. After that the market fluctuated and hit its lowest of tk 192.6 on february 2012. The current market price as of 24th February,2013 is tk 216.

Profit Status:
Based on Annualized EPS of 2012 (Q3):

Current Price Earning Ratio (P/E)
(Based on Continuing operation)

Based on audited EPS of 2011
Current Price Earning Ratio (P/E)
(Based on Continuing Operation)

Reference :
1. http://www.cpd.org.bd/pub_attach/WP95.pdf
2. http://publications.theseus.fi/bitstream/handle/10024/47195/saha_sangit.pdf?sequence=1 3. http://www.dsebd.org/displayCompany.php?name=ARAMIT
4. http://en.wikipedia.org/wiki/2011_Bangladesh_share_market_scam 5. http://en.wikipedia.org/wiki/Dhaka_Stock_Exchange
6. http://www.similarsites.com/goto/bdstock.com?pos=2&s=10

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