Junk, over-valued stocks the real winners of new floor price

Junk and some over-valued stocks were the real winners of the capital market regulator's move on Thursday to set a new floor price to thwart a meltdown in the bourse amid the heightened coronavirus fears.

The Bangladesh Securities and Exchange Commission (BSEC) has set the floor price of all stocks by calculating their last five days' average prices.

As junk and over-valued stocks were not excluded from the newly-fixed prices, gamblers behind these stocks gained the most.

Some 11 junk stocks, out of a total of 50, were still trading at more than Tk 20. In a sharp contrast, 52 out of the 113 "A" category companies were trading at below the Tk 20-mark.

The companies that have failed to provide dividends, hold annual general meetings or have shuttered their factories are considered junk stocks.

With the new floor prices, the junk stocks' prices will also not be allowed to go down from the last Thursday's opening prices, which is why the gamblers are grinning now, said a stock broker.

Not only the junk stocks, some other over-valued stock prices will remain high, he said.

Some 17 companies' price-earnings ratio is more than 100, according to data from the Dhaka Stock Exchange.

When the P/E ratio is more than 100, the stock price is considered alarmingly over-priced, according to analysts.

Normally, stock prices soar to such levels when gamblers are involved, the broker said, adding that such stocks should be excluded from the new lowest price set by the regulator.

Stock investors should remain cautious while buying over-valued and junk stocks, said AB Mirza Azizul Islam, a former chairman of the BSEC.

"If investors don't buy the stocks, they will remain untraded," he said.

The BSEC took the step to set the floor price as many stock prices were falling irrationally, said Islam, also a former adviser to the caretaker government.

However, many analysts fear the new floor price may leave the market illiquid as the price is not market-driven.

Illiquidity refers to the state of a stock, bond, or other assets that cannot easily be sold or exchanged for cash without a substantial loss in value.

The new floor price set by the BSEC is way higher than the market demand, so the number of transactions may fall and many investors may not be able to sell their shares, the analysts said.

The regulator cannot set the price of a stock; rather, the market should determine it on the basis of demand and supply, said Mizanur Rahman, a stock market analyst.

"If the regulator thinks the market is not running well, it can halt trading. But what the BSEC has done is insane," said Rahman, also a professor of the accounting and information system department of the University of Dhaka.

The new policy will leave the market illiquid because the newly set price is not market determined, Rahman said.

Now only the government or state-run companies may buy shares, he said, while calling for putting emphasis on the implementation of the central bank's rescue package announced earlier in February.

Bangladesh Bank announced a special package that would allow banks to form a Tk 200 crore-fund by taking financial support from the central bank for investing in the stock market.

Still, a number of banks didn't avail the package.

The fear triggered by the coronavirus pandemic has wiped out 18.41 per cent off DSEX, the benchmark index of the Dhaka bourse, since the maiden cases in Bangladesh were announced on March 7.

Against the backdrop, the BSEC came up with an unprecedented policy to set a floor price such that the stock cannot drop below that price.

As buyers have no appetite for the stocks, the newly set price will ultimately reduce the transaction volume, which was seen on last Thursday's trading, said another stock broker, adding that a number of stocks failed to draw buyers.

"This is how investors will be impacted. Their confidence will be dented," Rahman said.

The step will not have any positive impact on the market save for a short-term rise in the index, said a merchant banker, preferring anonymity.

"Whose brainchild is this? Either it has been issued without necessary due diligence or there might be some unknown motive," he added.

A top official of the BSEC said on condition of anonymity that they have done it at the government's behest.

"And it is for the time being. After a certain period, it might be abolished," he added.