How Shibli’s whim weakened stock exchange

Infographic: TBS

The country's capital market intermediaries have been struggling to survive, as at least 90% of non-institutional brokerage firms turned to losses in 2024 due to low turnover, which squeezed their trading capacity and weakened the stock exchange.

The stock exchange trade volume, a key income source for intermediaries, continued to dip since the Bangladesh Securities and Exchange Commission (BSEC) imposed a floor price in 2022 when Shibli Rubayat-Ul Islam was its chairman.

At least 80% of intermediaries experienced a drastic fall in profits in 2023 as a result of the floor price, which lowered the average daily turnover to Tk500 crore from over Tk1,000 crore, highlighting a deepening crisis of confidence among both foreign and local investors.

The low turnover persisted in 2024, turning most intermediaries into losses, with many struggling to even pay employee salaries.

Infographic: TBS

The loss-making brokerage firms and merchant banks, which play a major role in trading through their own portfolios, lost their capacity to invest, further weakening the stock exchange's performance.

Although the highest amount of funds – nearly Tk4,000 crore – was raised through IPOs (Initial Public Offerings) of 50 companies during the Shibli regime from 2020 to 2024, it failed to boost the index. This was because financially weak companies were allowed to raise funds, leading to losses for general investors.

The DSE board issued negative reviews against at least 22 IPOs on the grounds of weak financial performance, but the BSEC, under Shibli's leadership, approved all of them, ignoring the concerns of the primary regulator.

The entry of new companies during his tenure neither improved the market's contribution to the economy nor attracted greater investor participation. Instead, it further worsened the financial health of the stock exchange and market intermediaries.

Shibli held at least 17 roadshows across 11 countries – UAE, the USA, Switzerland, the UK, Qatar, Japan, South Africa, France, Germany, Belgium, and China – to attract foreign investors.

In February 2021, Shibli Rubayat Ul Islam initiated a series of group foreign trips with a roadshow in Dubai, which compelled many BSEC-regulated entities to incur significant expenses.

More than a dozen firms had to spend over Tk50 crore in total over the past three and half years to sponsor the 17-18 events in 11 countries.

However, his efforts were entirely in vain, as foreign investor participation declined significantly during his tenure due to the floor price policy, lack of governance, and the listing of weak companies.

The share of foreign trade in total turnover dropped to less than 1% by the end of 2024, compared to over 3% when Shibli assumed office in 2020. Similarly, the market capital-to-GDP ratio fell to 6.6% by the end of 2024 – the lowest in South Asia – down from over 18% in 2020, according to the DSE.

59 Brokerage licenses on political considerations

Despite the market already being saturated with 250 brokerage firms, Shibli issued 59 additional brokerage licenses during his tenure, reportedly on political considerations.

However, the inclusion of new licensees failed to attract more investors. Instead, the number of both local and foreign investors declined each year due to fund erosion caused by the floor price restriction.

The floor price, the minimum price at which a stock can be traded, was imposed on all shares in July 2022 by the Shibli-led commission and was lifted for most stocks in January 2024, 18 months after the restriction was introduced.

The price movement restriction significantly reduced trading activity, bringing down the daily turnover to nearly Tk600 crore from above Tk1,000 crore traded before the restriction. This caused financial losses for retail investors and market intermediaries.

BO accounts declined

During Shibli's tenure, the number of BO (Beneficiary Owner) accounts declined by nearly nine lakh, reflecting a mass exodus of investors from the market. The total number of BO accounts, which stood at 25.7 lakh in 2019, continuously declined from 2020 onward, reaching 16.8 lakh by the end of 2024, according to the DSE.

During the Shibli regime, not a single foreign investor entered the market. Instead, nearly 900 foreign investors exited, reducing the total number to 2,599 by the end of FY24, down from 3,479 in FY20, according to the DSE annual report.

The performance of the country's stock exchange in 2024 was worse than even crisis-stricken Sri Lanka, according to the DSE. While Sri Lanka's major price index rose by 50% during the year, the DSEX – the main price index in Bangladesh – declined by 16%, DSE data shows.

The market capital-to-GDP ratio stood at just 6.6% at the end of 2024, the lowest in South Asia, despite Bangladesh having the highest number of market intermediaries relative to its market size in the region.

The total number of market intermediaries in the two stock exchanges – DSE and CSE (Chittagong Stock Exchange) – was 589. In comparison, Pakistan had 240 intermediaries with a market capital-to-GDP ratio of 12.4%.

Vietnam operated with 117 intermediaries while achieving a market capital-to-GDP ratio of 45%, and Indonesia had 195 intermediaries with a ratio of 53.9%.

India, with the highest market capital-to-GDP ratio in the region at 135%, operated with 5,169 intermediaries, according to the DSE.

Shibly's renewed tenure despite poor show

Despite the poor stock market performance and widespread allegations – including resorting to autocratic practices, facilitating market manipulators, and approving companies with weak fundamentals to raise funds from general investors – Shibli Rubayat's tenure as chairman was renewed for another four years upon the expiration of his initial term in April last year.

However, he resigned on 10 August following the fall of the Awami League government on 5 August last year.

"In many countries, capital markets play a vital role during crises by helping revive the economy and the banking sector, such as converting default loans into equity," said Mominul Islam, chairman of the DSE.

In contrast, in Bangladesh, the floor price policy over the past two years discouraged both foreign and local investors, weakened the stock exchange, and reduced the market's contribution to GDP, he said.

Mominul Islam attributed the low investor confidence to a lack of governance and the approval of poor-quality IPOs. He also criticised the issuance of new brokerage licenses based on political considerations.

He emphasised that the stock exchange cannot become vibrant if market intermediaries remain financially weak.

How market intermediaries turned to losses

BRAC EPL Stock Brokerage, a subsidiary of BRAC Bank and the third-largest firm on the DSE with a 3.54% market share in 2023, experienced a 47% drop in net profit that year.

The brokerage firm has faced declining profits since 2022, when its profit fell by 70% from Tk25.7 crore, continuing to decline to Tk4.1 crore by the end of 2023.

With a dominant market share of more than 51% in foreign portfolio investments, the firm also recorded a 50% year-on-year decline in turnover growth in its foreign business in 2023, reflecting a significant drop in foreign investor confidence.

The firm turned to losses in 2024, although its financial statement for the year has not yet been released.

Speaking to TBS, Saiful Islam, director of BRAC EPL Stock Brokerage, said his firm recorded losses in 2024 after two consecutive years of declining profits due to low turnover.

Saiful Islam, who is also the president of the DSE Brokers Association (DBA), said that 90% of non-institutional brokerage houses operating independently incurred losses in 2024 after experiencing significant profit declines for two consecutive years.

On the other hand, some institutional brokerage firms, which operate as subsidiaries of banks or non-bank financial institutions, remain profitable. However, their income primarily comes from other activities rather than brokerage operations, he said.

"Commission income from turnover is the core business for market intermediaries," Saiful explained. "But they are now relying on interest income from funds deposited with financial institutions and investment income to stay afloat."

He said it is not feasible for market intermediaries to remain profitable with an average daily turnover of Tk500 to Tk600 crore. The primary issue, he added, is the excessive number of market intermediaries relative to the market size.

"The weakened financial health of intermediaries has rendered them incapable of actively participating in trading, further deteriorating the stock exchange's performance," he said.

Saiful also highlighted the issue of turnover tax, which is deducted in advance. "This makes intermediaries weaker, as they are paying taxes even when incurring losses," he noted.

Explaining the issue, he said that a brokerage firm can charge a maximum of 25 paisa per Tk100 transaction. However, they must pay 0.05% advance tax per Tk100 transaction, along with transaction charges to the DSE and a corporate tax of 27.5%. As a result, the net income from brokerage commissions is reduced to a maximum of 15 paisa per transaction after taxes.

He pointed out that brokerage firms incurring losses are still required to pay taxes on turnover. This increases the effective tax rate when turnover volume decreases, as operating costs remain fixed.

"My firm experienced an effective tax rate of up to 60% due to low turnover," he said.

He criticised the regulator for not addressing this issue with the government to protect intermediaries. "Instead, they are focused on approving poor-quality IPOs and issuing new brokerage licenses," he added.

He said many non-institutional brokerage firms are in negative equity but are not reflecting it in their balance sheets out of fear of losing their licenses. "They are injecting money from their own pockets," he added.

"If market intermediaries were to maintain proper provisions, most of them would be in loss," he noted.

However, institutional intermediaries are in a comparatively better position as they receive financial support from their parent companies, he said.

Minhaz Mannan Emon, managing director of BLI Securities, said his firm also incurred losses in 2024 after experiencing a significant profit decline in 2023.

Emon, who is also a director of the DSE, said most intermediaries suffered losses in 2024 due to the low turnover over the past two years caused by the floor price policy.

He further noted that, although 59 new licenses were issued during Shibli's tenure, none of them are currently active.

According to the rules, new Trading Right Entitlement Certificate (TREC) holders must begin their business within six months of receiving the certificate, but no action was taken even after they failed to meet this condition, he added.

Despite a significant decline in brokerage commission income, IDLC Securities saw only a slight 9% decrease in net profit in 2023 compared to the previous year, thanks to other income sources.

Income from brokerage commissions dropped by 44% during the year, with the major portion of income coming from its investment in securities.

IDLC's financial statement shows that it has an investment of Tk126 crore in securities, which helped it overcome the shock of the significant drop in brokerage commission income.

Fall in income from transactions turns to operating loss for DSE 

DSE experienced its first operating loss in fiscal year 2024 due to a significant decline in income from its core revenue component, transaction fees, amid low turnover.

However, the exchange made a profit thanks to income from non-operating items such as interest income, rental income, and dividends, according to DSE's annual report for 2023-2024.

By the end of FY24, DSE reported an operating loss of Tk20.5 crore as income from transaction fees declined by 20.2%, leading to a significant drop in operating revenue.

The share of transaction fees in total operating revenue fell to 30% in FY24, down from 47% in FY21.

DSE charges a 0.025% transaction fee on the trade value, which is recoverable from both the buyer and the seller.

Net profit for DSE declined by 23%, falling to Tk61.2 crore in FY24, down from Tk80 crore in FY23.

Despite the decline in profit, DSE declared a 3.95% dividend in FY24, higher than the 3.67% declared in FY23.