Improved oversight, yet stock pipeline remains very dry

Infograph: TBS

For the first time in years, Bangladesh's capital-market regulator is no longer calling stakeholders to urge them to buy or not to sell particular stocks. That change, market participants say, is the most significant improvement since the fall of Sheikh Hasina's government on 5 August last year.

Merchant bankers, brokers and asset managers say the past 12 months have brought other positive developments, including steps to introduce structural changes aimed at curbing corruption and market manipulation, which were once rampant. They also welcomed the government's move to offload shares of state-owned companies and its holdings in multinational firms.

But a persistent problem remains: a shortage of quality stocks. Stakeholders say the Bangladesh Securities and Exchange Commission (BSEC) has been slow to reform three key sets of rules governing initial public offerings, margin loans and mutual funds – changes seen as necessary to bring fresh listings.

"Basically, we've to increase the pipeline of new stocks," said Rupali Chowdhury, president of the Bangladesh Association of Publicly Listed Companies.

One asset-management CEO estimated that there are fewer than 10 stocks worth investing in. No company has launched an IPO in the past year, and market participants say they do not expect any for at least six more months, as the regulator reviews its listing rules, which take more time.

Abul Kalam, spokesperson of the BSEC, told TBS, "The commission has been active in restoring discipline in the capital market by addressing the irregularities that occurred in the past. Enforcement actions have been strengthened, and punitive measures have been taken against manipulation to ensure that market discipline is not disrupted."

Bangladesh's capital market lags far behind its real economy, with a market cap just 12-13% of GDP compared to over 100% in India and 150-200% in developed markets. While governance has improved and enforcement against manipulation strengthened, a chronic shortage of quality stocks and legal barriers continue to deter institutional investors.

He said, "The current commission is not engaging in any undue interference in regulating the capital market. It is working solely under the policy of ensuring compliance with the law, punishing wrongdoers and protecting the lawful. The market-reform task force is working to implement the recommendations it has made to amend the existing laws and regulations." 

Kalam's remarks were echoed by brokers and merchant bankers. Saiful Islam, president of the DSE Brokers Association (DBA), said the market is now more disciplined than before. "A clear message has been sent – manipulation will not be tolerated," he said.

Nazrul Islam, general secretary of the Bangladesh Merchant Bankers Association (BMBA), told TBS that previous commissions controlled the market in ways that went beyond their legal mandate. "This commission is not controlling the market, and that is a very positive development. The market is running at its own pace."

He noted that no IPO has been launched in the past year, which has restricted supply. "The laws and regulations should be reformed to bring more fundamentally strong companies to the market."

How capital market remains underutilised

Despite a turbulent past five years – marked first by the Covid-19 pandemic in 2020, then the Russia-Ukraine war that disrupted global supply chains and drove up commodity prices, and more recently domestic political uncertainty – Bangladesh's economy has continued to grow, albeit at a slower pace. That growth, however, has not been mirrored in the country's capital market.

Bangladesh's economy is now valued at more than $450 billion and is on track to reach half a trillion dollars within the next two years. Yet as of Aug. 7, the market capitalization of the Dhaka Stock Exchange stood at just $58.66 billion, or about 12–13% of GDP. By comparison, the ratio is 131% for India's listed domestic companies and around 20% in Pakistan.

Some of Bangladesh's largest conglomerates—such as Meghna Group of Industries, Abul Khair Group and City Group—each operate dozens of companies and post annual turnovers of $3–$4 billion. Yet none of their businesses are listed on the stock exchange, as they prefer high-cost bank financing over raising funds through the capital market. Businesses cite unfriendly regulations and an unfavourable stock-pricing formula, among other factors, for their lack of interest in the market.

Taskforce proposals to bear fruit in long term

Following the fall of the Awami League government last August, Bangladesh's securities regulator formed a five-member task force to overhaul the country's capital market. The group, set up in October with 17 terms of reference, was tasked with improving governance and boosting market activity.

By 30 June, the task force had delivered five reports on what it called "low-hanging fruit," including changes to IPO rules, margin lending, mutual funds, IT regulations and corporate governance. Three reports have been made public. But members avoided recommendations that would require parliamentary approval, such as amending the Demutualisation Act or introducing a share buyback law.

"This commission has focused on urgent and achievable issues," said Al Amin, an associate professor at Dhaka University and task force member. "If adopted, these reforms could lay the foundation for long-term market improvement. But high government bond yields are still drawing institutional investors away from equities."

Market participants say the changes have yet to make an impact. "The recommendations remain on paper, so the market hasn't seen much change," said Saiful Islam, president of DBA. He pointed to unresolved issues such as missing investor funds at two asset managers and a stalled review of demutualisation, calling them critical to restoring confidence.

"This was a big opportunity to improve the market, but it hasn't been realised," Islam said. 

Abul Kalam of BSEC said the investigation committee has already submitted all its reports, based on which enforcement actions are being taken.

At the same time, changes are being made to rules and regulations based on the reports submitted by the task force. Some laws will be amended in line with the task force's recommendations, and draft amendments will be published to seek public opinion before adoption. 

Legal barriers to investment

In developed countries, institutional investors are allowed and encouraged to invest in the capital market, but in Bangladesh, the law itself discourages such investment.

He said that around the world, pension funds and insurance companies are incentivized to invest in the capital market, whereas in Bangladesh, legislation discourages them by classifying such investments as risky. "So, how will institutional investment come? As a result, institutional funds are flowing into the banking channel instead. The banking sector has become the main source of investment. This situation needs to change," he said.

Crores in fines imposed over market manipulation

The current commission has imposed fines exceeding Tk1,000 crore on nearly two dozen companies for share manipulation during 2021 and 2022.

Although actual fine recovery by April remained minimal, market insiders view the strict enforcement as a positive step toward restoring market discipline and ensuring a level playing field. They say the commission's tough stance sent a clear message that manipulation would not be tolerated and that action was taken against offenders.

The hefty fines took a toll on the market, as some manipulative groups became inactive. After the government change, economic stagnation and rising treasury bond yields created a new fund shortage in the capital market. Continuous selling pressure on shares caused significant declines in the benchmark index and market capitalization.

However, over the past month, the market has shown signs of recovery, with both the DSEX index and market cap increasing. From 6 August, the DSEX gained 786 points over four consecutive days.

On 19 August last year, the DSEX stood at 5,775 points – the day former banker Khondoker Rashed Maqsood joined the commission. By May 27, it had fallen below 4,700 points, the lowest in five years. Although it has been recovering in recent weeks, the index closed at 5,354 points on 27 July this year.

Dismissal of 21 BSEC officials

There are serious allegations that market manipulators had been operating in collusion with a section of corrupt officials within the BSEC. The Anti-Corruption Commission (ACC) also recently raided the BSEC office, probing into irregularities surrounding IPO approvals, falsified financial statements, and other suspected corrupt practices.

Since taking charge, BSEC chairman Maqsood has initiated several enforcement actions, but these efforts have been met with resistance inside the commission itself. The tension peaked after the temporary suspension of an executive director, triggering widespread protests by BSEC employees demanding the chairman's resignation, along with other demands.

In March, the protests intensified, culminating in the commission's offices being locked down for an entire day by agitated staff. Following this unrest, 16 of the protest leaders faced legal action.

In April, the commission suspended 21 officials temporarily. Though the investigations and hearings into their conduct have recently concluded, no final decisions have been announced yet.

Meanwhile, investor frustration boiled over in the capital's Motijheel, where demonstrators held rallies, submitted memorandums, and even staged a coffin procession, all demanding the resignation of the chairman and urgent reforms to restore trust in the capital market. But the chairman did not bow down to the pressure.