Propping up the capital market: The right year to make a giant leap

For the first time in its 28 years of establishment, the Bangladesh Securities and Exchange Commission (BSEC) has taken the initiative to attract investment from foreign and NRB investors. It has introduced a flagship Dubai-based roadshow, "Rising of the Bengal Tiger: Potentials of Bangladesh Capital Markets Investors" this February. Simultaneously, the commission plans to introduce four new financial products (sukuk, ETFs, green bonds and derivatives) to diversify the capital market and improve market depth. Such initiatives and the dynamism shown by the BSEC is great news for the capital market and a step in the right direction.   

Dubai roadshow should be a precursor to more in other locations

The roadshow in Dubai is a welcome development for two reasons:

Firstly, Bangladesh lags behind peer countries in selling itself as a viable investment destination. Yet, it has a large population with a fast-growing economy where many macro fundamentals like debt levels are better than many peer nations. The opportunities that exist across the different asset classes – including public equity, private equity, venture capital, the fixed income asset class – can all be promoted to the right-minded investors located abroad. 

Secondly, roadshows are a great way to establish a dialogue between foreign investors and the BSEC. Both parties will be able to understand the priorities of each other and thus can make the investing process much smoother. The learnings from this roadshow can be applied to future roadshows in cities such as New York, Singapore or London where a much larger number of emerging market-focused funds are located. The experience gained from this roadshow in terms of creating the right panels, choosing the best speakers, marketing the event, building global partnerships, etc can be effective in other respects too.

New products will deepen the market but a priority list can help

The new financial products the BSEC is planning for can help bring a different set of investors in the capital market who have different risk/return preferences. However, in my opinion, it would be good to prioritize some of these products over others considering the necessity and maturity of our participants.  

Sukuk is by far the most important as Islamic minded individuals have very little options to choose from. The same problem exists for Islamic Banks as well. Introduction of Sukuk can solve a big problem and therefore, the probability of a successful launch is significantly higher. Listing of the Sukuk can also help attract new investors in the capital market. 

Next comes ETFs. ETFs are an affordable way to give exposure to the stock market. In my view, the BSEC should consider launching multiple ETFs at once instead of just one based on the broad DSEX index. ETF created on DS30 and DSES (for Shariah-compliant investors) might provide a better risk-adjusted return to investors.    

Green bonds are of major importance to a country like Bangladesh as we are vulnerable to climate change. However, I am keeping it lower down the priority list as our investors are yet to be familiar with plain vanilla corporate bonds. Green bonds add an extra leg of complexity in terms of ensuring that the proceeds are indeed going to green projects.  

Lastly, we have derivatives. Derivatives such as forwards, futures, swaps and options are also complex instruments. Before moving to these, the natural first step should be the implementation of the short-selling guidelines that the SEC has already worked on.  

Further expectations from the regulator

As previously mentioned, the steps taken by the BSEC are highly commendable. Good decisions, however, tend to raise expectations. 

We believe that there is a scope to look into the IPO valuation methods. Some of the methods like the average price of similar stocks are outdated as it takes no consideration of the number of shares or fundamentals such as Revenue or Earnings. A comprehensive review of the valuation methods shown in prospectuses will be good for all stakeholders. Additionally, there is a new generation of companies which tend to leverage technology. These companies are often very fast-growing and disruptive. And they sometimes show accounting losses. Creating access for a select group of such technology driven start-ups to get listed can also be highly beneficial. 

Another area where there also has been progress but scope remains for improvement is on quality of financial statements and minority investor protection. The SEC has rightly identified and clamped down on areas such as sister company loans. 

Finally, the responsibility to develop the market cannot solely fall on the stock market regulator. All other stakeholders including brokerages, merchant banks, asset managers and commercial banks have to step up from their respective positions. 

2021 gives us a unique opportunity as the stock market remains vibrant. This is the right year to make a giant leap with all the positive tailwinds behind us.

The author is a Managing Partner at EDGE Research & Consulting Limited