OTC returnees’ magic in DSE

Four companies that made a comeback to the Dhaka Stock Exchange's (DSE) main trading board from the over-the-counter (OTC) market on 13 June are stunning the market with their rally in stock price.

To any rational person, it is nothing less than a magic that the once forgotten company Paper Processing & Packaging Limited gained 1224% in the DSE over less than a period of three months.

Having its resurrection plan from the OTC market approved by the regulator, the company's shares began trading in the main market on 13 June this year and it opened and closed at Tk17.6 in that very session, in continuation of its previous price at the OTC market.

The market took 23 sessions to meet some sellers as they were reluctant until the stock price crossed Tk130.

Over the first 22 sessions, the stock was hitting the specific day's ceiling called upper circuit breaker that does not allow a stock to go up by more than 10%, or even less for expensive scrips, in a day.

The stock closed at 233 on Tuesday to generate more than 12 times return for the investors who accumulated Paper Processing and Packaging's shares from the OTC market.

"Magical indeed, as the company did not improve 12 times in the meantime," said Khairul Bashar Abu Taher Mohammed, the chief executive officer of merchant bank MTB Capital Ltd.

He thanked the companies' low-cap nature that helped reduce the number of floating shares which is synonymous to supply in the market.

Floating shares are the portion of company shares, mainly held by general investors, which can be sold any time without prior declaration.

What went so wrong on their way to the OTC market, and now what is so right is a curious case to many, including Taher Mohammad who served the local investment bankers' forum, the Bangladesh Merchant Bankers Association (BMBA).

"Nothing wrong with price gains, but the concern is if it relates to the company fundamentals—asset base, earnings and the potential for growth in sales and profits—or merely due to market factors."

Not only Paper Processing and Packaging, its sibling Bangladesh Monospool Paper Manufacturing Company along with two textile companies Tamijuddin Textile Mills and Monno Fabrics came back to the main market on 13 June and each demonstrated unusual price gains since then, more or less.

Monospool underperformed its sister concern in stock return with 325% gains over the same period, but significantly outperformed the market-leading listed companies like Bashundraha Paper Mills, which only gained by around 30% over the same period.

Bashar Abu Taher Mohammad said may be the small cap companies are coming back in business, posting good earnings and that is driving the stock price higher, but should that widely outperform the proven businesses in the bourses, investors should think before jumping into.

Tamijuddin Textile Mills shares gained 1165% in the last three months.

Generally speaking, maybe they have assets, maybe they are posting profits to pay dividends, the regulators should assign a third eye if there is any motivated or false disclosure to match fundamentals with the stock pricing that can allure investors, Bashar said.

Another factor Bashar did not overlook and that is a lack of price discovery in the OTC market where buyers and sellers seldom encounter and the extremely inefficient market might have left the companies improvement unaddressed.

"As the stocks were trading much below their fair price, they shot up in the main market and the percentage gains look too astonishing," believes Abdullah Al Mamun, a floor trader at Al Muntaha Securities, a Motijheel brokerage firm.

However, both the market professionals are advising their clients for caution if the price gains are due to any groups' manipulation. 

Regulatory surveillance should be strong to make sure that is not happening, because it is only the regulators who can find out malpractices and violation of securities laws, said Mamun.

The Bangladesh Securities and Exchange Commission's Executive Director and spokesperson Rezaul Karim told The Business Standard on Monday the regulator is deeply monitoring the developments in the secondary market and if anybody is found to have violated securities law and regulatory directions, they will come under punishments.

He, however, also said if price movement is not an outcome of manipulation or ill practices the regulator cannot dictate price in the market.

OTC market at the bourses of Dhaka and Chattogram was built more than a decade ago for the listed companies which fail to remain in operation, do not care about shareholders' basic rights or did not transform their shares into electronic format.

Many of the OTC firms returned to the main board ensuring their regular business operations, profits and general meetings and most demonstrated significant price gains after reappearance in the regular public market, but such a sharp jump was not observed before.