M. Shamsul Haque*
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:
- 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.
- 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.
- 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.
* The writer is professor finance and Vice Chancellor, Northern University Bangladesh .
