Bangladesh's equity capital market: a blueprint for sustainable economic growth

Bangladesh's economy has witnessed remarkable growth over the past few decades, but its stock market remains underdeveloped relative to the size of the economy. Bangladesh has a market capitalisation-to-GDP ratio of 10.47%—lowest among regional peers. Despite having approximately 288,000 companies registered with the Registrar of Joint Stock Companies and Firms (RJSC), only 360 companies are listed on the DSE's mainboard with only 100 listings since 2014. Even amongst those, only a handful are attractive to value investors.

Boston Consulting Group (BCG) has forecasted that Bangladesh is on track to become a US$1 trillion economy by 2040 if the country grows at an average rate of 5%. Yet, the capital market is still far from playing a key role in driving this economic growth. As reforms are underway in the capital market, a holistic roadmap focusing on three fronts—Supply Side, Demand Side, and Regulatory Framework—can help achieve this transformation.

Supply side: encouraging corporates for equity financing

In today's high-interest rate environment, equity financing can be an attractive alternative for businesses to raise long-term capital without worrying about fluctuating interest rates. Corporates with strong fundamentals should be encouraged to turn to the stock market to partially finance their business expansion rather than relying fully on bank loans. However, obtaining a term loan is significantly faster than raising funds through a flotation currently. To shift this paradigm, flotation approvals need to be streamlined.

Bangladesh Securities and Exchange Commission (BSEC) should make it mandatory for MNCs and JVs with foreign ownership to get listed by introducing criteria based on revenue, profit, and/or shareholders' equity. Extending similar listing criteria to large local corporates would further deepen the market by bringing in high-performing companies across sectors.

The narrowing tax gap between listed and non-listed companies is a pressing issue. In FY2024-25, the tax gap between the two categories was brought down to just 5%, which used to be 10% from FY2006-07 till FY2019-20 and 7.5% from FY2020-21. This minimal gap fails to incentivise listing as companies must meet extensive regulatory requirements. While the reduction of capital gains tax for individuals would benefit the demand side, a wider tax gap is necessary to attract corporates to the capital market to strengthen the supply side.

Demand side: ensuring quality supply

Bringing fundamentally strong companies to the capital market will naturally boost investor confidence and support sustainable long-term growth. The successful listing of companies like GP, ROBI, WALTONHIL show that demand follows the availability of fundamental companies. About 150,000 and 130,000 new BO accounts were opened respectively during GP and Robi's flotation subscription. Currently, the top 20 stocks account for more than 50% of total market capitalisation on the DSE; this narrow concentration highlights a limited supply of quality stocks, raising concerns about the depth and diversity of investment opportunities.

Globally, retail investors trust professional portfolio managers to manage their investments. In Bangladesh, discretionary portfolio management services offered by merchant banks and mutual funds by asset managers need to be promoted more to retail investors. These products should be endorsed to provide managed exposure to the stock market with diversified risk, bolstering market liquidity. While many retail investors are drawn to short-term speculative capital gains, there should be investment education to promote disciplined long-term investing.

Regulatory framework: a call for policy reforms and stronger oversight

The primary role of the Commission is often misunderstood in Bangladesh, with success being positively correlated to the movement of the DSEX; a rising index value means success and a declining one means failure. However, the focus of the Commission should be towards sustainable market development, emphasising accountability and transparency that attracts fundamentally strong companies to the primary market while ensuring investor protection in the secondary market.

The existing BSEC (Public Issue) Rules, 2015 require amendments to align with global best practices. This includes streamlining the regulatory review process, simplifying documentation while ensuring stringent due diligence, and significantly reducing approval timelines. To optimise the price discovery mechanism in flotations, valuation models should be tailored to the nature of the issuer's business, following globally accepted methodologies and backed by proper justification from the issuer and eligible investors (EIs). Reintroducing the Dutch auction system during the bidding process is essential to prevent mispricing. Moreover, the securities should be offered to the general public at the cut-off price determined through bidding by EIs, eliminating the currently required mandatory 10% discount. Additionally, quota for institutional investors during securities distribution should be increased from the existing 25% to 50% to encourage greater institutional participation, a practice seen in developed markets.

To enhance transparency in the Commission's approval process, an online dashboard should be introduced, allowing real-time tracking of applications for flotations, Rights Issues, Preference Shares, Bonds, Sukuk, REITs, or any other securities filed with the BSEC.

Greater flexibility should be given in utilising flotation proceeds, particularly permitting companies to use up to 100 per cent for debt repayment, which would reduce finance costs and increase profits, all else being equal.

The author is the founding Managing Director and CEO of UCB Investment Limited (UCBIL).

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.