Dhaka Stock Exchange Collapse of 2010—2011 Essay

Dhaka Stock Exchange ( Generally known as DSE ) is the chief stock exchange of Bangladesh. It is located in Motijheel at the bosom of the Dhaka metropolis. It was incorporated in 1954. Dhaka stock exchange is the first stock exchange of the state. As of 18 August 2010. the Dhaka Stock Exchange had over 750 listed companies with a combined market capitalisation 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 release war in 1971 the trading was discontinued for five old ages. In 1976 trading restarted in Bangladesh. on 16 September 1986 DSE was started. The expression for ciphering DSE all portion monetary value index was changed harmonizing to IFC on 1 November 1993. The machine-controlled 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 clip. puting another new high at 4148 points. In 2010. the index crossed 8500 points and eventually crashed in the first one-fourth 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 ) ordinance 1994. The issued capital of this company is Tk. 500. 000 which is divided up to 250 portions each pricing Tk. 2000. No person or house can purchase more than one portion. Harmonizing to stock market regulation merely members can take part in the floor and can purchase portions for himself or his clients. At present it has 238 members. Market capitalisation of the Dhaka Stock Exchange reached about $ 9 billion in September 2007 and $ 27. 4 billion on Dec 9. 2009. 1. 3 Management

The direction 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 organic structures and relevant organisations. The Chief executive officer is the twenty-fifth ex-officio member of the board. The undermentioned organisations are presently keeping places in DSE Board: Bangladesh Bank

ICB
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 clip
The Dhaka Stock Exchange is unfastened for trading Sunday through Thursday between 10:30am – 2:30pm BST. with the exclusion of vacations declared by the Exchange in progress. In the month of Ramadan. the exchange is unfastened for trading between 10:30am – 1:30pm BST. 2. Previous major clang – Stock market clang in 1996

The figure of BO history holders in 1996 was merely 300. 000 and most of them were new in the market. At that clip it was non easy for investors to observe the bogus portions from the echt 1s. Because during the clang of 1996. paper portions used to be sold in forepart of DSE. There was no machine-controlled trading system. surveillance was non strong plenty. and there were no circuit surfs every bit good as international protection. From 1991 to the terminal of 1995. DSE General Index monetary value gained by 139. 3 per cent and reached 834 point.

But in 1996. the market experienced a dramatic alteration and pushed the monetary value index up by 337 per centum. DSE General Index recorded a high growing from July and stood at 3648. 7 points on 5th November 1996. Besides. Chittagong Stock Exchange experienced the same alteration and grew by 258 per centum. Chittagong Stock Exchange index increased from 409 to 1157 points in 1996 within a one year’s clip. But the stairss taken by the authorities did non work. The index lost over 233 points on November 6. 1996. After the bubble explosion. 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 about 70 per centum from its highest point in November 1996. Then the index continued to diminish for the following 7 old ages until April 2004. During this long period. DGEN Index rarely crossed 1000 point. In short this can be described by utilizing a graphical presentation.

Figure 1. Scenario of Share monetary value index points of Dhaka Stock Exchange

3. Cause of market crush in 2010-2011
The stock market crashed once more in 2010-2011. The major causes are as follows- 3. 1 Margin Calls & A ; Illiquidity crisis
When investors pay a portion of future market catching by hard currency or selected instruments in an history with a agent which is called Margin. To do certain duties of investor when contract expired. more Margins is necessary if value of the contract decreases. The procedure is called Margin call. On “Black Monday” . monetary value motion of future contracts created record sum of Margin calls for houses which were approximately 10 times the mean size. Collected payments are paid to investors whose place had gained. Some investors lost their ability to come in new places due to Margin calls and some needing to widen recognition to do the payment. As investors were unable to pay borders. agents placed exigency border calls with exposed options places which were assumed to be liquidated due to failure of run intoing border calls. It occurred repeatedly which perchance made selling force per unit area in the market and markets were non able to manage these sell orders.

3. 2 Program Trading
Summit Financial Advisors has stated that many analysts accused plan
trading. particularly portfolio insurance as a major ground for the clang. In this trading. computing machines automatically order big stocks trades when certain market tendencies prevailed. Analysts blamed that the plan trading blindly sold stocks when monetary values declined on 19th October.

3. 3 Derivative Securities
Investors non merely invested in existent stock market but besides in index options and hereafters markets. Option and future market are called derived functions as the value derives due to alter of stock monetary values. The Brady Commission which was commissioned to analyze the grounds of the clang found that the failure of stock mar-kets and derived functions markets to run in sync was an of import factor that contributed to the badness of the clang.

3. 4 Role of market regulators and their employees
The function of SEC to command & amp ; supervise capital market. working in favour of operators. O.K.ing unethical proposal and publishing incorrect directives which lead to unexpected market conditions deteriorated the image of SEC. Investigation study mentioned some names of corrupt employees of the market regulators who were straight or indirectly responsible in the market use. There is a occupation overlapping between SEC and exchanges. Such as. DSE & A ; SEC both organisations have surveillance section for the same occupation but there is no co-ordination. Listing commission of DSE & A ; CSE examines naming application of company but SEC doesn’t do it decently and O.K. it. Placement of Mutual fund & A ; IPO at a monetary value lower than the market value has become a new method of graft for powerful employees of regulators. There is another accusal that these senior degree employees received arrangement by utilizing other`s name which is really hard to place. The study admits that SEC doesn’t have adequate employees for illustration ; qualified comptroller. fiscal analyst and research worker to command and supervise the market. Rahman & A ; Moazzem ( 2011 ) identified in their survey that Dhaka stock exchange is going more volatile but the regulators are unable to support it. They besides suggested increasing work force and quality of professionals in SEC.

3. 5 Demutualization of Exchanges
There are both elected & amp ; nominative members in DSE and CSE. Basically. elected members run the disposal due to less involvement & A ; relation of nominative members. As a consequence. the participants of the capital market act as accountants. Meanwhile. accountants are inactive during unethical activities due to struggle of involvement. In the probe study it was said that different interest holders of capital market and civil society support & A ; demand for demutualization of exchanges. The significance of Demutualization is dividing commanding maps from controller’s maps. authorising accountant and taking determinations without being motivated by the market participants. 3. 6 Investment of bank in the capital market

In 2009 & amp ; 10 Bankss and fiscal establishments invested immense sum of sedimentation money in the stock market. As a consequence portion monetary values sky rocketed until December 2010. When Bangladesh Bank restricted more than 10 percent investing of deposited money. increased CRR and SLR ratio. created liquidness crisis and market crashed.

3. 7 Pre-IPO & A ; IPO procedure
Investigation commission considered that due to Pre-IPO & A ; IPO use portion monetary values sky rocketed and that is the chief ground for the portion market clang. Manipulators illicitly & A ; unethically created a Kerb market in Pre-IPO phase. Without recommendation by the listing commission application for IPO was accepted. SEC did non analyze unnatural plus reappraisal and declarative monetary value. As a consequence in Pre-IPO or IPO phase arrangement procedure and arrangement trade Kerb market overvalued portion monetary values. This finally generated liquidness crisis in the capital market.

3. 8 Uniform face value of portion
During the meeting between probe commission and different interest holders of portion market. a most of import ground for unnatural mounting of index was indicated to uniform face value of portion at Taka 10. Dividing portion does non alter gross or plus of a company and should non impact the portion monetary value. But Small investors showed their extreme inter-est to purchase disconnected portion with their little investing and accordingly pushed the monetary value up. Up to 62 listed companies split their portions in 2009 & A ; 2010. So. it abnormally increased liquidness of the market and brought noteworthy alteration in market capitalisation. Investigation study shows that MC increased 655 % of companies those adopted portion unvarying and MC increased merely 46 % of those that did non follow. From July 2009 to December 2010 the function of entire MC were 81. 5 % of companies which adopted portion unvarying and only18. 5 % those that did non follow.

3. 9 Placement trade / Kerb market
Before publishing IPO. Issue director or Issuer Company sell portions to their nominative individual and that is called Private arrangement or pre-IPO arrangement. Private arrangement is hazardous because it doesn’t have accounting discloser. In the developed states there are some fixed regulations but in Bangladesh SEC didn’t have proper regulations for it. As a consequence some operators used it as a tool of monetary value use. Investigation commission found that in most of the instances arrangement was offered at less than the IPO monetary value.

Though purpose of public offering is engagement of public but placement doesn’t make certain it. Eight companies issued exchangeable penchant portion in 2009 & amp ; 10 in which mean 69 % went for arrangement. So. engagement of the populace was hindered and that created placement trade or Kerb market. Some companies distributed 50-90 per centum of their paid up capital in private arrangement. However. when a company raises excessively much paid up capital through private arrangement. the figure of free-floating portions decreased. That’s why the difference between demand & A ; supply push portion monetary values up. Furthermore. non-listed companies created liquidness crisis as immense investing was stuck up with these companies. Placement created new procedure of trading outside of the portion market and that is illegal. By taking opportunity of placement many little companies raised capital from nonreader and un-informed investors with their unreal fiscal studies. 3. 10 Omnibus history

Investigation study found Omnibus histories of ICB and merchant Bankss as another major ground behind the stock market fiasco. Every subdivision of merchandiser bank operates merely one omnibus history. There could be 3-10 1000s BO Histories under the omnibus history which are non under the surveillance of SEC. So. information of single histories and its dealing are kept merely with merchant Bankss. As probe studies shows that this sort of history made a batch of illegal minutess. It publishes name of 30 large participants including ICB for a batch of leery minutess and says most operators traded from the omnibus histories. It was besides reported at least Taka 2. 5 billion has been traded from hidden or omnibus histories.

3. 11 Asset reappraisal & A ; Rumor
By taking opportunity of weak plus reappraisal method companies have overvalued their plus. In this procedure dishonest hearers generated unreal audit studies. So. calculating of NAV on overvalued plus indicates incorrect signal. Some companies issued Bonus portions against unfulfilled addition of revalued plus monetary value which is a faulty accounting pattern. There is regulation to keep proviso against “deferred tax” during plus reappraisal to pay revenue enhancement in future. but companies are non following it. Investigation studies pointed some companies which got NAV more than 100 % to 3. 472 % after plus reappraisal. 3. 12 Book edifice method

It’s a process of finding monetary value of IPO at which it is offered. The just monetary value is determined by the demand of a security from institutional investors and their declarative monetary value. The chief purpose of presenting this method in Bangladesh stock market was to pull more houses for enlisting in the stock exchanges through just portion pricing. However. it was found as an instrument of pull stringsing market monetary values. Investigation study reveals that during the monetary value discovery/bidding phase investors manipulated portion monetary values for arrangement with excessively high monetary value. High monetary value was maintained merely for the lock-in period and so investors offloaded their portions. As a consequence they pulled out a batch of net income within a short period and after that the portion monetary value did non increase. In this procedure corrupted Issuer and issue director manipulated the monetary value.

3. 13 Consecutive and unreal trading
Some operators created unreal active trading environment among themselves through bulk dealing and increased portion monetary values. Furthermore consecutive trading and monetary value use by many buy-sell orders through different histories and agent houses which overheated the market.

3. 14 Issue of Right and penchant portion
Right Share is issued at a price reduction monetary value to bing stockholders. SEC took 4/5 months to take the determination of right issue proposal which is cryptic. Meanwhile companies inform the market about Right issue and increased the portion monetary value. Furthermore. issue of Right portion addition figure of portion which should diminish portion monetary value but it did non hap-pen. Investing in Preference portion is safe to acquire a fixed per centum of net income. To do the portion attractive companies keep an chance to change over it and in that instance it is called Convertible Preference Share. Companies issued penchant portion for merely 2-3 months even for 1 month which is non common in other states. The mistakes with exchangeable penchant portion were its clip period ( short ) . exchangeable procedure and private arrangement. Investigation commission found that SEC did non hold proper guidelines for Right and Preference Share issue.

3. 15 Leery dealing of top participants
Investigation study reveals some names of single and institutional investors as top purchasers and Sellerss during unnatural addition and lessening of index in different clip periods. The minutess of these investors were leery and affected the market to a great extent and apt for unnatural rise and autumn.

3. 16 Block arrangement
There was a batch of leery block trading of common financess. Some investors got tremendous sum of arrangement clip to clip.

3. 17 Direct listing
With the blessing of SEC few companies have been straight listed in the stock exchange. These companies come to the market with hyperbolic portion monetary values. Investigation study mentioned that declarative monetary values of these companies were determined even 58 times more than EPS and 9 times of NAV. Though portion monetary values of these types of straight listed companies have been unnaturally determined. but SEC or exchanges did non look into the ground of unnatural monetary value.

4. Impact of the clang
Bangladeshi stock market experienced through inefficient and irrational fluctuation of DGEN Index in the twelvemonth 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 facet. 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 clang were:
As a consequence of the market clang. 1000000s of investors have been rendered bankrupt. Because of free autumn of portion monetary values. Investors came out in the street once more and started protesting against free autumn of portion monetary values and chanted mottos against market regulators. Random objects like wood and documents were set on fire in forepart of the DSE office in Motijheel. Investors came out in the street with emanations and demonstrated against free autumn of Share index in both Bourses every bit good as suspension of trading. Investors from different parts of the state such as. Chittagong. Comilla. Narsingdi. Narayanganj and Jessore brought out emanations and clashed with jurisprudence en-forces in some topographic points every bit good. Investors blamed the speculators and regulators for the bubble that eventually burst. Economy faced liquidity crisis. Authoritites and authorities took stairss to manage the crisis. But stock market of Bangladesh had already got the adjective of “the worst stock market in the world” . And an on-going market convulsion is still traveling on.

5. Measures taken to stabilise the stock market
Since the prostration of the market in December 2010. a figure of enterprises 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 stabilise the market. 5. 1 Stairss taken by government-

The authorities took a figure of steps to shoot money in the market. This included Tk. 600 crore worth of financess distributed to the state-owned Bankss and Investment Corporation of Bangladesh ( ICB ) . and formation of a common fund titled Bangladesh Fund with an initial resource of Tk. 1. 500 crore. Under the national budget of FY2011-12. authorities announced a figure of inducements to retrieve the capital market state of affairs. Some of these were re-introduction of revenue enhancement discount installations. tax-exempt installations for common financess. clip extension for non-bank fiscal establishments ( NBFIs ) to set their investing in stock market ( revised timeline is December 2013 ) . and accommodation of individual borrower exposure bound by the commercial Bankss ( revised timeline is December 2013 ) . All these budgetary steps have direct and indirect deductions for raising fund for the ailing capital market. A investigation commission was created by the authorities to place the grounds. people and solution sing the job of the stock market. The Probe Committee and the MOF came up with a list of 36-point steps which were to be implemented in three stages ( i. e. immediate. short and medium-term ) . 5. 2 Stairss taken by SEC-

Security & amp ; Exchange Commissions applied a batch of directives to maintain the market under control in 2010. SEC changed directive of border loan ratio by increasing it from 1:0. 5 to 1:1 on 13th December and subsequently it was once more hiked to 1:1. 5 & A ; 1:2 because of free autumn of portion monetary values. Actions were taken against individuals found guilty for their deceitful activities. probe of allegations against the SEC functionaries who indulged in market use. scrutiny of assets of some of the companies alleged to hold been involved in illegal trading. and induction to examine allegations against several companies was besides done. Condemnable probe against a figure of companies and individuals which was supposed to be carried out by the Anti-Corruption Commission ( ACC ) was started but without much seeable advancement. SEC under its new direction has besides prepared a 29-point work program.

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 bundle focuses on greater engagement of Bankss and other fiscal establishments in the stock market. besides
puting up a ‘special scheme’ to supply support to little investors who lost their capital. 5. 3 Stairss taken by Bangladesh Bank-

Bangladesh Bank pushed money into the market as liquidness support. Banks have reportedly kept purchasing portions despite enduring from liquidness crises themselves. and non selling any portions.

6. Mentality for the hereafter
To protect the portion market of Bangladesh. the regulative organic structure should take some effectual steps. It should present some monitoring systems to protect the monetary value uses of the portion. Commissariats should be made to supply all the fiscal information to the investors so that they can acquire a proper thought about the company. The market should be free from bogus certifications. The authorities should offer income revenue enhancement discount on the income of portion market and promote the Bankss and non banking establishments to come to the market straight. Some inducements bundle for the investors like acquiring funding at a low cost has to be offered to convey back the investors in the market. Market stabilisation fund must be introduced so that it can assist to run into up with crisis state of affairs.

Since Bangladesh is heading toward the developing state. capital market can be the engine of growing for its economic system if market becomes structured and efficient. Around the universe good 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 expeditiously that provides important part to their single economic system. Because. stock market is knowledge based game instead than a topographic point of chancing ; there must be rational win-lose state of affairs ever. But Bangladeshi stock market experienced through inefficient and irrational fluctuation of DGEN Index in the twelvemonth 1996 and 2011 which resembles the topographic point of chancing. To sum up. from our survey. we have found that. there are jobs like – Big Gap between the Demand and Supply of stock. extraordinary over pricing of stock. market use. deficiency of cognition about the stock market mechanism among the general investors. monetary value deformation. inefficient ordinances. political agitation. etc. These caused the steepest downward autumn of DGEN Index in the fiscal twelvemonth 2011. As a consequence. about 1000000s of investors lost their capital which turned them empty within few months. Security and Exchange Commission ( SEC ) of

Bangladesh and authorities should take the short term and long term enterprises to stabilise the market. They should promote more public limited companies to offer more portion to run into the current demands. Income revenue enhancement discount. Injection of Market Stabilization Fund. Mandatory keeping certain per centum of portion among the board of managers. short term inducements bundles should be introduced to acquire back the assurance among the bing investors. Regulative organic structures of Bangladesh stock market must educate the current and possible investors about the market mechanism and supply them the accurate information so that investors trade their portions carefully. Unless. appropiate disciplinary steps are good formulated and implemented. Bangladeshi stock market will be confronting this irrational downward once more in the close hereafter. 7. ARAMIT from 2010- 2013

From the graph we see that. before the clang market monetary value was above tk 450. And in the clip of market clang from December 2010- January’11. the monetary value of aramit started to fall and make tk 436 at the terminal of January 2011. After that the market fluctuated and hit its lowest of tk 192. 6 on february 2012. The current market monetary value as of 24th February. 2013 is tk 216.

Net income Status:
Based on Annualized EPS of 2012 ( Q3 ) :

Basic
Current Price Earning Ratio ( P/E )
( Based on Continuing operation )
12. 65

Based on audited EPS of 2011
Current Price Earning Ratio ( P/E )
( Based on Continuing Operation )
15. 15

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