Investors left holding the bag as stocks stick to floor prices

The Dhaka Stock Exchange (DSE) on Wednesday failed to even make its list of top ten gainers as only nine shares gained price on the trading day.

Out of 400 listed stocks, more than 319 were non-tradeable due to being set at the floor price, which means investors could not exit by selling these shares.

Infographic: TBS

This scenario reflects how the country's stock market is in dire straits at a time when most of the major markets in the region such as India, Japan and China have performed well amid easing of the global crisis after oil prices cooled down.

Responding to the standstill in the market, the Bangladesh Securities and Exchange Commission (BSEC) on Wednesday partially relaxed the floor price for 168 stocks.

According to the new development, the share price of these 168 stocks can fall by 1% from the closing price of the previous day. Which means share prices of the 168 scrips can go down by 1% a day.

Even if traders are ready to move for a lower price than that, it cannot be adjusted to less than 1%, a negligible sum.

Normally, a stock or mutual fund can go up or down by up to 10% a day, while the 168 scrips from now on can fall by 1% a day and rise by up to 10%.

As the floor did not allow stock prices to reflect the current pessimism, many investors preferred holding onto cash or park the amounts in fixed income instruments, instead of exposing themselves to a downside risk, in case of floor withdrawal before the market gains back its strength.

The country's stock market has been suffering a severe liquidity crisis as investors could not participate in trading due to the price limit set on shares by the regulator to halt the free fall of the price indices.

The BSEC on July 28 set the floor price which will be calculated with the closing prices on July 28 of this year and the preceding four days. The share price of a company cannot go below that price but can go up.

The floor price is the lowest price at which a stock can be traded. So, investors cannot sell shares at floor price.

As a result, the market saw no buyers as the share price was retained artificially.

On the other hand, investors who already invested in stock are now stuck as they could neither sell nor switch to other stocks due to having floor price.

In this situation, market indices remained stable above 6,000 but majority shares became untradeable.

The daily average turnover came down to Tk300 crore, falling from above Tk1,000 crore before setting the floor price.

A catastrophe

Investors who invested with margin loans are in worse shape as they could not sell their shares while brokers kept charging interest every day on the loans.

The investors who poured borrowed money are paying 12-16% interest on margin loan amounts amid no return from the stock portfolio.

Along with investors, intermediaries are also in trouble as they could not realise their loaned money from investors and even could not give margin calls when required because of the floor price.

To mitigate this, the Bangladesh Bank recently extended the time limit for banks to adjust their over exposure as banks could not sell shares.

Stock investors have been bearing the burden of negative equity for more than a decade as brokers were not allowed to go for forced selling against margin accounts during the capital market crash in the year 2010.

That temporary suspension of forced selling against margin loan accounts was to hold back selling pressure artificially which ultimately not only ruined investors but many intermediaries also as nearly 27,000 investment accounts are still in negative equity of nearly Tk5,000 crore.

Now in 2022, the floor price has created a pathway to another catastrophe for investors as they could not sell their shares due to this new formula to halt the free fall of the price indices when they are in dire need for cash.

Internationally left behind

The Dhaka bourse is losing investors amid deteriorating market performance despite global stock markets being in an upward trend and boosting investors' confidence.

Sensex, the Indian stock benchmark, bounced back to its historic high recently following a sharp fall over the first half of 2022.

Sensex gained nearly 6% this year up to 20 December when the DSE broad index DSEX lost nearly 8% during the same period.

Stock market expert Abu Ahmed, a professor emeritus of economics in the University of Dhaka, said the regulator made a big mistake repeating the floor price restriction after the indices rallied a lot from the 2020 bottom.

Ahmed said in 2020 the money market was significantly liquid and interest rates kept declining while stocks were at their multi-year lows.

On the other hand, in 2022 the global money market and also the local money market kept tightening due to high inflation.

"That the same weapon would work all the time, regardless of the situation, should not be expected," he said.

The market might have a ground to bounce back riding on the lucrative blue chip stocks if the prices could correct spontaneously amid no floor, said Abu Ahmed, adding that Now everyone is apprehensive of the immediate downside or illiquidity in the market.

While commenting on the market situation, Centre for Policy Dialogue Research Director Khondaker Golam Moazzem said such ad hoc measures like floor price, fund injection etc to pump up stocks are more utilised by market cartels instead of benefiting the retail people as the market's good governance, quality IPOs are still being questioned.