Bsec’s Market Intervention: Saving index from fall does little good
The Bangladesh Securities and Exchange Commission (BSEC) has taken many steps in the past decade to safeguard the index from falls, albeit without considering the long-term impacts.
These measures ultimately left a dent on the market and investors' confidence.
The main moves were stopping forced sales against margin loans in 2011, extending tenures of closed-end mutual funds in 2018, setting floor price last year and making phone calls to brokers and merchant bankers regularly to stop sales of big volume.
Index-saving intervention is an unfortunate necessity in the country, said AB Mirza Azizul Islam, a former caretaker government finance adviser.
Presence of retail investors is comparatively high in the market and they have a tendency to sell shares, even if it means incurring a loss, when the index goes down and criticise the regulator, he said.
So the BSEC tried to preserve the index though this is not expected in a free market system, said Islam, who is also a former BSEC chairman.
The regulator should keep to a middle-of-the-road policy, where it will try its best to refrain from its endeavours of impacting the nature of the free market but will try to protect small investors, he said.
The economist advised investors to be aware that the BSEC would not be able to do more to safeguard the index and so to invest realising the risks of the market.
Many training programmes are now available at market-related organisations but investors are not paying any heed to those, Islam added.
One stock broker dealing with a huge amount of foreign portfolio investment expressed annoyance at the fact that whenever he attempted to sell a big volume of shares, the high authority of the stock market regulator rang him up to tell him to hold on to shares.
They are insistent, citing that the market situation has to be realised and so sales should not be opted for, said the broker preferring anonymity.
"If I cannot sell shares, why will I buy them?...I'm here to do business, not to save the index from a fall," he said.
"Is it the BSEC's duty to save the index?" he asked.
The market regulator needs to change its mindset, he said, adding that if foreign investors face any hurdle in selling shares, they would be reluctant to come over.
Prof Abu Ahmed, a stock market analyst, also said the BSEC should not bother itself with the movement of the index, be it a plunge or surge, rather it should work for ensuring good governance and strong fundamentals.
If strong fundamentals and good governance prevails in the stock market, the index will surely bounce back because some people will attempt at making investments if they see that the index is at a low level, he said.
"They have no right to deter brokers from selling shares," he said.
Moreover, the BSEC should keep an eye out over whether sponsors of listed companies are reducing their stakes without making declarations, he said.
They should bring good companies to the market instead of taking up any endeavour to intervene in the market, said Ahmed, who is a former chairman of the economics department of the University of Dhaka.
The BSEC intervened in 2011 in a bid to prevent stock brokers and merchant banks from going for forced sale.
It came about after most stock brokers and merchant bankers provided margin loans to general investors to buy stocks while the market was bullish in 2010.
When the market started to plunge, the brokers and merchant bankers started to sell stocks from investors' accounts to adjust the credit, as the borrowers had failed to repay the loans. The practice is called forced sale.
Almost all the general investors along with the regulator stopped the lenders from doing so, assuming that the action would expedite the slump and investors would incur losses.
"The consequences of deterring the forced sale were so devastating that we were scared to execute forced sales," said a merchant banker, adding that nonetheless the regulator could not prevent the index from falling.
As the shares bought with margin loans were not sold and the prices collapsed, most investors did not get a single penny in return from their investment, he said.
Brokers and merchant bankers continue to suffer from the losses stemming from the margin loans, although a decade has passed, he said.
The loss from the margin loans amounted to more than Tk 11,100 crore. Some brokers and merchant bankers booked their losses and some others are yet to follow suit.
The institutional investors still cannot invest in the market because of the losses, said the merchant banker.
The BSEC set the floor price of all stocks on March 19, 2020 with a view to stopping the index from plummeting further amidst the pandemic, bypassing the market forces.
The floor price was calculated based on the average price of the preceding five days.
For the instillation of the floor price, the BSEC's status at the International Organization of Securities Commissions came under threat, the resultant of which could be a big blow for the Bangladesh market.
In the meantime, the regulator decided to relieve 66 companies of the floor price in the first phase.
"When you obstruct the free movement of the stock price determined by the market forces, the market would definitely go down," said the stock broker.
Just as the floor price was lifted for the 66, almost all the companies plunged, according to Dhaka Stock Exchange.
"It was seriously eroding the confidence of foreign investors because they always prefer a market kept uninterrupted," he said.
It creates a psychological barrier for the foreign investors, he added.
"It is proven that the BSEC's mechanism to save the index is not effective for the long term," said an asset manager.
"Our market remains in a bullish trend for a long time due to such steps from the regulator," he said.
"You can't keep a stock price at a certain level artificially. If you try to do so, it would spook investors' confidence and sow the seed for a market crash," he said.
Markets have been falling around the world due to the pandemic and this is normal as the profits of listed companies of most sectors are set to decline in the current year because of a collapse in demand.
"However, the index will rebound on its own when the index falls to its lowest level. So, the regulator's intervention in the pricing mechanism is totally unexpected," he said.
"Our investors need to realise that an artificial pricing cannot make their pocket healthy. It only results in an overvalued portfolio," he said.
In 2018, another step was taken by the BSEC in the name of saving the index from a fall. It had provided fund managers a 10-year tenure extension of their closed-end mutual funds.
At a time when investors were waiting for the funds to mature within a few months and yield a lump sum profit, they were told the terms had been changed, that too without their consent.
Closed-end mutual funds are investment funds that gather a fixed amount of money, normally for a decade, from a number of investors and reinvest them into stocks, bonds and other assets.
A foreign investor filed a lawsuit against the BSEC, questioning how it could take such decisions regarding mutual funds that were set up specifically with investors' money.
However, these changes were made based on an extremely fragile logic—it was claimed that the sale of shares in the liquidation process of the mutual funds would have a negative impact on the market, said another asset manager.
"Now the question is, when these shares are sold 10 years later, will the market not feel the same negative impacts?" he asked.
Moreover, if investments in the capital market do yield profits, it is extremely rare for that profit to be taken out of the market and used up, he said.
Instead, investors tend to reinvest that money into the market again, he added.
"We have started to run in the direction opposite to that which was followed previously on the market intervention strategy," said BSEC Chairman Prof Shibli Rubayat Ul Islam.
Now the BSEC is working towards the creation of a healthy market free from interruption and manipulation, for which the floor price of some has been lifted in the first phase, he said.
"To do so, a healthy environment is needed, so we are strengthening the IT base in the market," he said.
"We are working to ensure secondary trading of bond and eradicating the bad players and anomalies from the stock market," he added.
"For a healthy environment in the market, we have taken many steps regarding the junk stocks too," he said.
"We hope people will soon get a market of their expectations because most of our tasks have already been completed," the BSEC chairman added.