A tale of two capital markets

The day before the announcement of the budget for FY25, both the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) plunged down, primarily due to a price fall of large-cap securities. 

Earlier on 19 May, the DSE hit a three-year low, with 16-month lows, five-month lows, and so on becoming a regular picture for the premiere bourse of the country. 

The stock market has consistently been experiencing volatility, despite the regulator's repeated meetings with stakeholders to bring in new investment. The results of these meetings have yet to reflect upon the indices. Since February, indices have mostly been in decline — the market experienced a decline on 32 out of 51 trading days, until 24 April. 

Meanwhile, our neighbour India has been able to create one of the best-performing markets globally over the last two decades. The Indian stock market is on track to become the world's seventh largest, after markets in the US, China, the EU and Japan.

The Bombay Stock Exchange (BSE) Sensex, a benchmark index for Indian equities, has witnessed a meteoric rise. From around 2,500 points in 2004, it soared to over 63,000 points by June 2024, signifying a staggering growth of over 2,400%. 

The National Stock Exchange of India's (NSE) Nifty 50, another key index, rose from around 1,200 points in 2004 to over 19,000 points by June 2024, reflecting a growth of over 1,500%. 

The total market capitalisation of listed companies in India grew to a staggering $5 trillion by 2024.  

This performance can be attributed to several key factors, including index performance, long-term returns, market capitalisation growth, foreign investment inflows, and increased investor participation.

The number of retail investors in the Indian stock market has grown significantly, reflecting increased confidence and participation. Investors in the Indian market have enjoyed substantial long-term returns, surpassing those of many other major global markets, while in our country, investors have to protest on the streets for market regulation. 

You would find little confidence and trust on the Bangladeshi stock exchange among the common citizens. Why are there such glaring differences between the confidence of investors in two neighbour's markets? 

Is the stock market suffering because of structural problems? Or is the condition of the stock market an indication of economic indicators slowly getting weaker? 

Investors still have cold feet 

The Bangladeshi stock market has been marred by several high-profile cases of fraud and insider trading over the last three decades, which have eroded investor confidence. 

These created the perception that the stock market is risky and fraught with uncertainty. While in India, we see millions of ordinary middle-class stock investors, this is not so common in Bangladesh. 

"When the interests of our investors are not protected, it exposes the vulnerabilities of our system," said Al Maruf Khan, FCA, the director of Grant Thornton Bangladesh and the former president of the Chittagong Stock Exchange. 

"Even when an investigation is conducted, it is questioned for its authenticity. This damages the perception of the stock market." 

The quality of IPOs is also a significant concern. The presence of financially questionable and dubious-intentioned companies attracts scrutiny, causes capital erosion for investors, discourages good companies, and ultimately hinders market growth. 

"Such companies syphon off money from common investors, damaging their confidence," said Maruf. "They do not pay dividends regularly. Their books are not satisfactory. They come here to gamble. 

"Also, we have to rely on defective data. Many old, unsuccessful companies are refurbished and presented in the market with new shareholders. It is not right. Those who were behind the failed companies have not been barred from the market, nor the auditors or the merchant brokers. If you do not exclude these unsuccessful companies from the market, they will produce more and more new unsuccessful companies," he added. 

"The irregularities and poor decisions in the market and the lack of punishment for any of these instances mean people are losing the confidence to invest. Even many listed corporate companies lack good governance," said Maruf. 

"Most of them are deceiving investors in various ways; increasing reserves year after year and not paying dividends, even after incurring large profits. As a result, people's long-term investments are not as profitable as they should be, and the BSEC is not displaying the resolve that is required to rectify this situation," he added. 

Weak banks, ineffective gatekeeper

Apart from the stock market itself, the weak financial and banking sector is also fuelling the problem. 

Firstly, Bangladesh has an overabundance of banks in comparison to the size of its GDP, all competing for a limited pool of good companies. This pressure leads banks to lend aggressively, making IPOs less attractive for strong corporations. 

Secondly, due to the general lack of confidence in the banking sector, due to the recent liquidity crisis and lingering default loans, there is a lack of enthusiasm among common people to invest in the stock market through the banks' brokerage houses. To them, the overall health of the financial sector is declining. 

Another issue is that of flawed gatekeeping. The Bangladesh Securities And Exchange Commission's (BSEC) role as the sole gatekeeper for IPOs has granted it significant power, but also raised concerns about its ability to effectively vet companies. 

Experts have long said that the BSEC's current penalty system for IPO misconduct is weak and ineffective. It emboldens companies and sponsors to engage in unethical practices with minimal consequences.

"The penalty for misconduct is not strong enough to deter the wrongdoers," Al Maruf Khan added. "There is no point hoping that the regulations will be upheld if the penalty is strong enough." 

According to the Securities And Exchange Ordinance, 1969, Section 24, various offences, including insider trading and funds misappropriation, carry a maximum punishment of five years imprisonment and a minimum Tk 5 lakh fine. 

Lessons from India 

Meanwhile, neighbouring India has been able to create one of the best-performing markets globally over the last two decades. From just around four crore retail investors in March 2020, the number increased to 14 crore in 2024 — a result of improved access to trading platforms, financial literacy, and increased disposable incomes. 

This growing investor base has added to the market's depth and liquidity. Additionally, mutual fund inflows were positive for the 38th consecutive month in April. 

A key factor in the strong equity inflows is the contribution from systematic investment plans (SIPs), which reached an all-time high in 2024, reaching ₹20,371 crore in April from ₹19,270 crore in March. 

"The Indian capital market's biggest achievement was making it a trusted place of investment for millions of average Indians. Each month, they invest part of their savings in various investment schemes like mutual funds," said Asif Khan, CFA, co-founder of EDGE Ventures Limited. 

Regulatory bodies like the Securities and Exchange Board of India (SEBI) have implemented stringent disclosure norms and governance standards, ensuring transparency and accountability in corporate India. This has made the Indian market more attractive to both domestic and international investors.

The adoption of technology has facilitated faster and easier trading for investors. Innovations such as electronic trading platforms, mobile trading apps, and online brokerage services have made the stock market more accessible to a broader audience. This has not only increased participation but also improved the efficiency and liquidity of the market.

Obvious solutions, but no application

To resolve this persistent dire state, regulators and stock exchanges must first collaborate to create a predictable and streamlined IPO approval process, attracting quality companies.

"There is no shortcut to improving our capital markets," said Asif Khan. 

"First, we need to realise that a strong capital market is absolutely essential to growing our economy. Second, we have to work on our IPO rules to allow good, strong companies to get listed," he explained. 

"We also need to get our economy back on track and avoid frequent changes to rules and regulations," Asif added. 

"Finally and most importantly, we need to improve our governance with a particular focus on minority investor protection." 

Maruf also called for better governance. 

"Whether it is policy changes in the market or decisions regarding listed companies, there needs to be research and discussion that place the most importance on the interests of investors," he said. 

"The Anti Corruption Commission (ACC) needs to act more effectively as well. Their role has been questioned before, and that is unfortunate," he added, "The conflicts of interest among various stakeholders like ACC, BSEC or other institutions should be resolved." 

He also said that more well-known and successful companies need to be brought into the market, adding that regulators have to play a pro-active intermediary role in this regard. 

Just like India, common people in Bangladesh are willing to invest in the stock market. The problem is the lack of confidence. 

"People invest their hard-earned savings in scams like MTFE or land scams. Had there been a strong, reliable stock market like India, they could invest in it," said Asif Khan, "The authorities should take note of it and try to improve the situation."