Stocks tumble below 6,100 mark as forced selling intensifies
Since the securities regulator removed the floor price from all but 35 stocks from 21 January, six dozen stocks fell by more than 25%, while 40 fell by more than 30%
DSEX, the broad-based index of the Dhaka Stock Exchange (DSE) tumbled by 1.2% to 6,079 yesterday as too many stocks recently freed from the floor price restriction after nearly 18 months were falling free.
As stock prices kept falling, the market caught forced selling problems from the leveraged accounts and that kept adding to the selling pressure in the market for the last three consecutive sessions, according to stockbrokers.
Since the securities regulator removed the floor price from all but 35 stocks from 21 January, six dozen stocks fell by more than 25%, while 40 fell by more than 30%.
The market in the first three sessions without floor showed a better than expected resilience, thanks to the long term value investors who poured fresh funds into some of the fundamentally strong large cap stocks, said Saiful Islam, president of DSE Brokers Association (DBA).
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Besides, many more of the non-blue chip stocks previously stuck at floor prices despite their fundamental deterioration over the eighteen months did not attract buyers until falling to a deserving price.
According to analysts, the initial market momentum that raised a hope for recovery did not sustain after Tuesday as 23 more stocks made free for falling in a matter of two days.
Optimism started to fade amid the prevailing interest rate and energy price hike worries, and sellers took control of the market, they added.
"We don't have specific information on how much of the sell pressure was due to the forced selling from leveraged accounts, or how much is due to investors' voluntary selloff," said DBA president Saiful Islam.
He said, the market opened and remained with a decent balance between buyers and sellers until the first half an hour and selling pressure kept intensifying before the closing bell that indicates forced selling.
When an investor borrows from their broker or merchant bank against their own equity to maximise gains in the market, the lender has the legal right during bear run to sell off shares from the account to protect its own money before the investors' equity turns negative.
The Bangladesh Securities and Exchange Commission (BSEC) Executive Director and Spokesperson Rezaul Karim said, "In several meetings with stakeholders the regulator requested brokers not to aggressively force."
Several stockbrokers and merchant bankers told The Business Standard, seeking anonymity, it is heartbreaking to wipe out the investor accounts.
But refraining from minimising losses on time historically resulted in even bigger losses, both for the parties and the market overall, they said.
Unofficial regulatory orders for no forced selling after the 2010 market crash caused a gigantic negative equity problem in the brokerage and merchant banking industries.
For instance, a brokerage official said, seeking anonymity, the leveraged accounts already struggling with a poor equity backup, got further weakened and it was their job to protect the firm's money lent to the clients, especially when the held stocks fell free by 30%-40%.
In the downturn for the last three trading days, forced selling kept intensifying, he added.
Neither the floor price, nor the optimistic words by the regulators or some industry stakeholders ultimately helped the investors who could not exit because of the floor earlier and now their stocks are falling free.
"Floor price imposition was a mistake by the regulator and it caused a long term damage to the market," said Faruq Ahmed Siddiqi, former chairman of the securities regulator.
Floor withdrawal after so many months was inevitable, he said, adding that the regulator should have observed the strength of the market for a few weeks before removing the floor from the 23 scrips in the second tranche, especially when the money market was still tight and interest rates were in an uptrend.
Stocks themselves attract buyers when they fall to a lucrative price level, he also said, adding there should never be any further regulatory interference in the market.
Did 'institutional support' work?
CEO Forum representing top 30 broker, merchant banks owned by banks and non-bank financial institutions in a meeting before the opening bell on 21 January had a consensus for not selling the falling shares from their institutional accounts.
Instead, they decided to buy shares from the market alongside tolerantly handling the leveraged accounts on the verge of forced selling.
Sayadur Rahman, president of the forum told TBS on Sunday, the promised support mainly helped stabilise undervalued or fairly valued blue-chip stocks as institutional funds need to ensure their return potential.
His firm, EBL Securities and its parent firm Eastern Bank, together poured Tk50 crore into stocks in January.
Abu Ahmed, a former professor of economics at the University of Dhaka, said "No institution or high net worth individual investor comes to the market for buying overpriced stocks."
The artificially held prices for a large number of stocks were not justified due to their deteriorated fundamentals and they were falling sharply and dragging the indices down, he said.
