A nation's economic development is often reflected by development of its capital market. As a component of this market, the stock market plays an important role in industrial development through supply of capital. The importance of institutions like the stock exchanges cannot be overemphasised for the development of capital market.
A THEORETICAL OVERVIEW OF CAPITAL MARKET: Savings does not necessarily take the form of capital formation unless it is channelled to further the existing productive capacity. The capital market provides a platform on which savers and investors can transact in long-term securities, including transactions in the debt and equity issues of business. Private capital formation is the addition to the stock of capital goods less depreciation of the goods already on hand, and the capital market is a network of institutions and mechanisms through which intermediate and long-term funds are pooled and made available to businesses, governments and individuals. As capital market deals with instruments representing long-term funds, it involves capital in the economic sense. Some instruments are issued as debt documents to channel long-term funds towards investors. These signify some kind of obligation by the debtors to the creditors and are sometimes called securities. A security is the evidence of any property right, and key securities are all types of bonds, common and preferred stocks, and convertible issues.
The capital market is vital to the long-run growth and prosperity of the business sector, since it provides channel through which required funds can be raised. In essence, capital market facilitates the transfer of funds from savers to investors and in so doing enhances the economic vitality and growth. Because of the lengthy maturities of securities, the existence of secondary markets like stock exchanges is important, because it allows investors and financial institutions to alter the liquidity, composition and risks of their portfolios in response to newer information on changes in market condition. Both organised and over-the-counter forms of security exchanges form the backbone of capital market by providing the framework and procedures needed to realise the goals of savers and investors. By requiring the disclosure of certain corporate financial data, an efficient market system allows investors to assess the risk-return trade-offs involved in a transaction and move funds towards comparatively more promising investments.
DHAKA STOCK EXCHANGE AND ITS FIRST DECADE: Although 'Dhaka Stock Exchange' was originally established during the pre-independence era, its functioning remained suspended after liberation of the country until 1975 due to the socialist policies pursued by the then government. However, following the change in government, the first stock market operator of Bangladesh 'Dhaka Stock Exchange' was reactivated in 1976 with the listing of nine companies having a paid-cup capital of Taka 137.5 million. Its declared aim was to facilitate economic growth and rapid industrialisation of the country, and the stated objectives were: (1) develop as a centre for sale and purchase of shares and other securities; (2) encourage savings and capital accumulation; (3) accommodate capital accumulation by ordinary limited companies through sale of shares, and provide opportunities to small investors for investments in profitable securities.
If the performance of the Dhaka stock exchange between 1976 and 1987 is evaluated, it is found that the exchange could expand its business in a gradual and sustainable manner during the period. While only nine securities were listed with the exchange in 1976, their numbers increased to 103 until December 1987. The capital also increased from Taka 137.50 million in 1976 to Taka 3436.50 million at the end of 1986. There were monthly transactions of shares amounting to only Taka 260 thousand in 1985, the amount rose to Taka 14.80 million in 1987. On an annual basis, the transactions increased from Taka 32.20 million in 1985 to Taka 177.60 million in 1987. Market capitalisation of share rose from Taka 146.70 million in 1986 to Taka 3436.50 million in 1986. Table I shows the growth pattern of Dhaka Stock Exchange in its first decade (1976-86).
EXPERT VIEWS ON THE FIRST DECADE OF DSE: The present writer conducted a questionnaire survey among people related to the stock market and experts on the first decade's performance of Dhaka Stock Exchange (DSE) in 1988.
It was gathered from the stock market sources that the market was being controlled by a few individuals who had the means of increasing or decreasing the prices of shares at will. Through connivance with this coterie, some companies sold their shares by artificially increasing prices. Later, these same coteries of companies were buying back those shares at prices far less than the face value by not showing profits or disclosing only losses. Many innocent people, who bought shares in the hope of profit, were incurring heavy losses due to these trickeries. There were instances of some shares being sold three times above their par value even before commercial production of an enlisted company started.
When a company floats shares, its face value is supposed to be determined by evaluating all assets and liabilities. Therefore, the only criterion for a rise in share prices is change in price in line with the actual income earnings per share of relevant companies. That is what fair trading amounts to. But that did not hold well in the case of DSE and it was even found that the share price of a company rose by 300 per cent when its output had increased only 50 per cent. Due to these fraudulent practices, expansion of the stock market did not take place at the desired rate. The coterie interests were upheld and a handful of individuals were making fortunes out of nothing.
Non-declaration of dividends and non-disclosure of annual profit and loss account also became a custom for many companies listed with the DSE. About 50 per cent of the companies listed with the DSE followed this custom. Even those which declared dividends and profit-loss account resorted to dilly-dallying tactics in making payments. On the other hand, some newly floated companies made delays in announcing allotment of shares. There were many companies in the stock market whose products had substantial demand in the market and earned lots of profit. But they showed losses every year by manipulating the balance sheet and thereby deprived the shareholders from genuinely earned returns.
On the one hand, the Dhaka Stock Exchange, which was founded to uphold the interests of the shareholders, and on the other, the Controller of Capital Issues (CCI, predecessor of SEC or Securities and Exchange Commission established in early 1990s) on whom lay the responsibility of overall control and management of the stock market, both failed to operate in an appropriate and efficient manner. After observing the overwhelming interests shown by the investors, some sick and unprofitable companies also started floating shares in the stock market. The CCI was allowing this floatation to go ahead without making proper verifications. As a consequence, participation of small savers became very limited and instead, the market was being controlled by a handful of individuals. Because of these factors, fraudulent practices were getting an upper hand and the desired expansion of the stock market was not taking place.
It was also observed that the stock market prices during the first decade of DSE did not necessarily reflect the state of health of enlisted companies. The 1988 survey showed that although strong correlations could be established between market prices per share (MPS) and earnings per share (EPS), that did not hold good in individual cases. The rationale behind this was, the deviants smoothened each other out on a larger scale, but were quite visible when considered singly. The problem was aggravated as substantial communication gap existed between the prospective clientele and concerned companies regarding facts and figures. The clientele groups appeared to be largely ignorant about the theoretical cum practical aspects of the stock market and its dynamics.
The 1988 survey found that the clientele groups were generally misinformed about the market. All these factors provided the brokers with opportunities for resorting to manipulations and thereby draw undue but rich dividends from the market.
In most countries of the world where stock markets operate, systems have been developed to reduce this communication gap. Firms are at work in the developed markets for providing expert advice to the investors and keeping them up to date with relevant facts and figures. Latest data showing financial positions of relevant companies and trends in the market are also readily available. But this was badly missing during the first decade of Dhaka stock market and the problem was further compounded due to the unpredictable and unreliable nature of the country's lone stock exchange as well as its controlling authority.
A former editor of Bangladesh Quarterly, Dr. Helal Uddin Ahmed stood first in MBA with major in finance from the IBA of Dhaka University, and earned master's degree in government financial management from the University of Ulster, UK.