University of DhakaDepartment of Finance

MBA Program (Evening)

F 508: Managerial Economics

Capital Market: Contribution to National Economy

Submitted by: Submitted to:Shah Mokdhum Siddiquei Professor M. NasiruddinStudent ID: 20009 Course Teacher

Letter of Transmittal

December 14, 2011

Professor M. Nasiruddin

Course Teacher

University of Dhaka

Subject: Request to Accept Term Paper

Dear Sir,

I am very pleased to submit the term paper on “Capital Market”. I have prepared this assignment

as the partial fulfillment of the course entitled Managerial Economics (Course Code: F 508).

I have tried my best to prepare this assignment perfectly. Nevertheless, this paper has been

suffered by time and cost limitation.

I will be obliged, if you kindly accept this assignment. I am ready to make you clear regarding

any confusion or further clarification from this paper.

Sincerely yours,

--------------------------------------------

Shah Mokdhum Siddiquei

Student ID: 20009

Program: MBA (Evening)

Semester: Fall -2011

Department: Finance

Objectives

Financial markets facilitate the flow of funds in order to finance the investment by individual, corporations and governments. Financial institutions are the key players in financial markets. Hence, an understanding of capital markets and financial instruments traded in the market are the major focus of the Finance.

The principle objectives of the study are:

• To know the current position of the Capital Market of Bangladesh

• To know the current position of the Dhaka Stock Exchange and Chittagong Stock Exchange

• Prospects and Opportunities of Dhaka Stock Exchange and Chittagong Stock Exchange

• Whether the Bangladesh Capital Market is emerging or not

• Factors which has decreased investment opportunity

• Pattern of IPO flow in Bangladesh Capital Market

• Find the regulatory drawbacks

Introduction

In Bangladesh, the banking sector plays a leading role in intermediating savings into investment. However, excess reliance on the banking system can cause risk to the financial sector, because such reliance creates a mismatch between assets and liabilities as the banking system typically functions by mobilizing short term deposits to finance long term projects.

For this reason, it is necessary to develop capital market as an alternative channel for intermediate function. Capital market is beneficial not only because it provides access to surplus savings of investors, including small orders but also because they do not incur fixed repayment obligation as is the case with bank financing. Also, an orderly and transparent capital market enables the small savers to participate in the fruits of economic development.

Capital Market: Definition

Capital market is the market for long term funds where securities such as ordinary shares, preference shares, debenture and bonds etc are traded. The sources of money for these transactions are private investors, insurance companies, pension funds, banks, etc. It is arranged by issuing houses and merchant banks.

Security: Definition

According to Security and Exchange Ordinance, 1969, Security includes

• Stock

• Transferable shares

• Scrips

• Notes

• Debentures

• Debenture Stock

• Bond etc., but does not include currency notes and instruments maturity of which is 12 months and less

Capital Market: Functions

• Transaction savings into investment

• Intermediate between buyers and sellers

• Provide liquidity to promote capital turnover

• Provide price discovery to facilitate independent valuation and monitoring of issuers

Instrument available in Capital Market

There are some instruments available in capital market. They are:

• Government bonds-government notes and bonds

• Government agency debts

• Municipal bonds

• Corporate bonds

• Asset backed securities

• Preference shares/stocks

• Ordinary shares/common stocks

• Unit trust/close end mutual fund

• Derivatives

• Loan Etc.

However, there is only equity and debts securities markets in our capital market and no derivatives markets exist. Both instruments are traded in the exchanges, which is fully automated. Total number of traded securities is 322 where equity and debt are the only traded issues in our capital market. The instruments are:

• Common Stock 257

• Preferred Stock 1

• Mutual Funds 14

• Debenture 8

• Treasury Bond 42

• Total 322

It is the presence and sophistication of their capital markets that distinguishes the industrial countries from the developing countries, in that this facility for raising industrial and commercial capital is absent.

Capital Market in Bangladesh

Bangladesh capital market is one of the smallest in Asia, but the third largest in the region. It has 232 listed securities with Tk.91 billion issued capital and Tk.639 billion market capital. The capital market comprises:

• Two full-fledged automated stock exchanges; Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE)

• Securities and Exchange Commission (SEC)

• A Central Depository System; Central Depository Bangladesh Limited (CDBL)

Bangladesh Capital Market History

The first bourse, East Pakistan Stock Exchange Association Limited was set up back on 28 April 1994 that started formal trading in early 1956. The stock association turned in to a limited company on 23rd June 1962, and was renamed as Dacca Stock Exchange Limited on 13 may 1964, in which trading ran till early months of the war of independence in 1971. However, the post independence Government did not promote the capital market during the

first five years, and it was activated only again in 1976 with 9 issues on board ( a lot of blue chip shares were delisted such as Adamjee Jute Mills there by severely affecting the capital market). In 1995, a second bourse, the Chittagong Stock Exchange, was set up with sophisticated logistic support and modern management.

An all Share Price Index was introduced on 16 th September1986 to disseminate market information to the general investors. There was no regulatory body for capital market. The Controller of Capital Issue Issues, a body with the Ministry of Finance used to look after the regulatory affairs of the listed issues, in a limited regulatory wield. Following a policy shift on privatization introduced in the early 1990s, the government opened capital market to foreign investors in 1992 and formed the Securities and Exchange Commission (SEC) in 1993 as the capital market regulator.

Members of the capital market

• Securities and Exchange Commission:

• The Securities Exchange Commission (SEC) was established on June 08, 1993 under the Securities and Exchange Commission Act, 1993 under the Securities and Exchange Commission is composed of five members: one chairman, four full time members. The Commission is a statutory body and attached to the ministry of Finance. Commission Members including the Chairman are appointed by the government and have overall responsibility to administer securities legislation. SEC is the supreme regulator of the capital market.

The functions of the SEC are:

• Regulating of the business of stock exchange commission and securities market

• Registering and regulating market intermediaries

• Registering and regulating collective investment scheme including all forms of mutual funds.

• Regulating substantial acquisition of shares

• Promoting investor education and training of all intermediaries in the securities market.

• Prohibiting fraudulent and unfair trading practices;

• Compiling, analyzing and publishing indices on the financial performance of any issuer of securities.

Stock Exchanges: Dhaka Stock Exchange (DSE) & Chittagong Stock Exchange (CSE)

Stock markets are the complex of institutions and mechanisms whereby the intermediate term funds and long-term funds are pooled and made available to business, the government and individuals and where by instruments already outstanding are transferred.

a) Non-securities segment, operating through primary and secondary markets.

b) Securities segment; operating through primary and secondary markets.

Functions of the Stock Exchange are:

• Providing market place for trading of securities

• Maintaining an orderly market

• Maintaining self-discipline among the members

• Mediating dispute among the members, investor and members

• Adopting, administering and enforcing rules of fair practices

• Restriction of dealing in securities

• Setting listing requirements

• Regulating corporate disclosure

The two prime bourses in Bangladesh are Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). They are both operating as self –regulatory organization (SROs). They are primarily responsible for market surveillance and for rule enforcement with respect to their members. As SROs, both the exchanges have their bylaws that establish listing requirements, approve, suspend or remove listing privileges of companies. The exchanges also monitor listed companies and ensure compliance with legal regulatory provisions. Dual listing is compulsory at present.

Dhaka Stock Exchange (DSE)

The necessity of establishing a Stock Exchange in the 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 thought for the formation of a Stock Exchange in East Pakistan. On the 13th March 1953, in a meeting at Eden building, under the chairmanship of Mr. A. Khaleeli, secretary Government of East Bengal, commerce, labor and industries department decided that East Pakistan should have an independent Stock Exchange. The location of the exchange 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 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 was 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."

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.

Chittagong Stock Exchange (CSE)

The Chittagong Stock Exchange was established on February, 1995 in the commercial capital Chittagong as the second Stock Exchange of Bangladesh. Within less than three years of formation Chittagong Stock Exchange started computerized screen based trading system and it has enabled CSE to execute the trade from three major cities in Bangladesh Dhaka, Chittagong and Sylhet. Recently its trading network has been further extended to three other major cities, Rajshahi, Barishal and Cox’s Bazar. It also provided internet trading facilities from May 30, 2004. It serves over the counter facilities (OTC) as well which started from July 04, 2004. Chittagong Stock Exchange is one of the most technologically advanced Stock Exchange in South Asia. From the very beginning it is trying to keep pace with changing environment and serve the investors possibly the best way.

Chittagong Stock Exchange is self-regulatory organization. It has its own operating rules, which are approved by Securities and Exchange Commission. Being a Stock Exchange, its main business is to provide its share trading and settlement facilities to its brokers. It’s a non-profit organization and the profit of the bourse is using for its day-to-day development activities. Its main revenue comes mainly from commission, listing fees and contract fees.

Central Depository System Bangladesh

The Central Depository System (CDS) involves electronic book entry to record, registered and transfer securities. Change in ownership of securities takes place without physical movement of certificates and without the necessity of printing transfer instruments under the CDS. The process by which physical certificate are converted into electronic form for credit to the investors account in the depository is known as dematerialization. The automation of transactions has been accelerated through central depository system with the establishment of CDBL.

Current Scenario of Capital Market

Today, the capital market is overcoming the bad state because of a number of reasons. Improved technology and structuring of government’s monetary and fiscal policies has improved the situation. Central bank has brought transparency to the banking sector which has improved the performance and enabled a healthy return of the banking sector. This has welcomed retailed investors, institutions and foreign investors to join our capital market. Power and pharmaceutical sector has outperformed the expectations of general investors resulting in increased fund injection into our capital market. Automation and introduction of central depository helped our capital market to grow considerably. The regulatory body, namely Security and Exchange Commission, is continuously facilitating our capital market with its international standard surveillance and monitoring. This has prevented fraudulent and manipulative activities.

Recommendation

The major drawbacks of our capital market are lack of instruments and liquidity. To take care of the lack of instruments issue, we can also introduce Future and Option Market and help our already existing bond market to improve, hence leaving the investors with more instruments. Introduction of these products will further broaden investment horizon, bring enhanced depth and liquidity to our market and attract global customers.

We have a bond market but compared to other countries it is very weak. We have to attract private and public sector companies to issue more bonds and thus increase liquidity on our bond market to keep the rising flow of demand for shares. Also we have to popularize government bonds.

Although we have some mutual funds (MF) currently trading in the secondary market, there is scope for higher demand for such products, since MF provides the clients the opportunity to reduce investment risk. We should enlighten the investor more this mutual funds issue for this reason.

With the help of the two bourses, Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) we should welcome hedge funds from different parts of world to invest in our capital market. Also, to attract domestic and foreign savings through its equity and bond markets the government must exert considerable efforts to develop a fair and efficient capital market. They should try to increase market intermediaries who have adequate resources and expertise. There should be balanced focus on money and capital market.

For resolving liquidity issues we can try to attract more companies to the market. Big companies under power and telecommunication sector will float shares in near future to meet the demand of investors in the stock market.

Cash management and adaptation of international auditing standards can also play a significant role in overcoming the drawbacks of our capital market. With the help of efficient and online cash management our cumbersome settlement procedure could be improved. If international auditing standard is adopted, more transparency in the financial activities and reporting would be achieved. This would draw the attention of general investors and gain than confidence to invest in every sector. Its need is more important in the case of online central depository system, as guaranteed clearing agent for settlement is obvious for market development.

Initiatives should be taken regarding the market interest rate and tax differentials. Tax differentials of different fixed income instruments and saving certificates should be eliminated. Distortion of market interest rate should be addressed.

Media can play a good role in the development of the capital market in playing ‘information’.

And ‘watchdog’ roles. Regarding ‘information role’ the media should report on how the capital market is generally performing and what the government’s day to day policies are regarding the capital market. Media should focus on writing positive stories about good companied and exposing companies with bad performance record. As a watchdog, media can constantly expose any malpractice within any company, report on the activities of the senior executive of the big players in the capital market and report on overall performance of investors.

Conclusion

Capital market in Bangladesh is yet to play its potential role as an instrument for financing long term investment. However, the hangover of a prolonged downswing is gradually being overcome. Though there are some political unrests and a change of the government, the situation in the capital market is quite calm. The prices of most good securities have come to a comfortable position for the investors and there has been participation from the side of the regulators and market players. A number of actions are undertaken to add depth to the market, increase variety of instruments that meet diverse investors’ preferences, further promote orderly trading, enhance professional competence of market intermediaries and facilitate expeditious issuance of securities at reduced cost. Online disclosure dissemination, book building method of IPO flotation needs special attention. Finance Ministry’s decision of off loading government stakes in multinationals through the capital market should be implemented. In a sum, Bangladesh capital market is now prepared to contribute to the country’s economic development. It is hoped that policy makers, issuers of securities, market intermediaries and investors will participate in complete realization of its potential. If CSE and DSE takes responsibility for market development, both the exchanges will contribute to increase turnover.