Drawing large investors to stocks still a tall order

When a sector offers opportunities to make a good profit and there is a conducive climate to invest, investors -- large and small and local and foreign -- don't need to be told to channel investments there. Money flows in automatically. It is common when it comes to investment in the free market economy.

But this is not the case in the stock market of Bangladesh where manipulation is rampant, good stocks are scarce, regulatory oversight is weak, and unscrupulous traders often get off scot-free -- enough to frighten big investors sitting on a huge amount of funds away.

Therefore, retail investors dominate the market, controlling 80 per cent of the market capitalisation. This has deepened the volatility of the market since many individuals lack adequate knowledge about the market, behave like day traders, and are reactive to local and global developments and panic-driven.

Institutional investors account for 20 per cent of the market value at the Dhaka Stock Exchange (DSE), the premier bourse in the country, against the global average of 41 per cent.

In India, institutional investors make up 55 per cent of the turnover at the National Stock Exchange. It is 35 per cent on the Karachi Stock Exchange in Pakistan.

The dominance has rightly prompted the Bangladesh Securities and Exchange Commission (BSEC) to move to raise the stake of institutional investors such as banks, stock dealers, and asset management companies. It has written to them to increase their investments.

In recent times, the regulator also held roadshows abroad in a bid to raise the participation of foreign and institutional investors in the markets.

But will the BSEC measures bring any meaningful change to the market? Perhaps not.

This is because, analysts say, the investment environment is not conducive because of multiple factors.

One of the major weaknesses is that there is a question about the credibility of the financial reports of listed companies. And one may find one fine morning that the financial position of a company has changed overnight due to the misrepresentation of the real scenario of the firm in its financial reports.

It has happened several times in the past where companies overstated prospects and profits before listing with the exchanges. But after they went public, the profits slumped and investors suffered losses.

It is also seen that some listed companies report higher profits year after year, keeping their share prices buoyant. But they hardly pay out cash dividends to shareholders.

Similarly, there is a group of companies that make money and pay out a handsome dividend every year but their share prices don't move upwards to a significant degree.

Owing to such a mismatch, institutional and other investors who make investment decisions based on data, facts and research feel discouraged to pour funds.

The most disturbing trend in the markets is low-performing companies, junk stocks, and the shares of even shuttered factories with no guarantee whether they would be able to make a comeback sometimes are sold like hot cakes as investors chase speculative issues.

Thus, the exchanges are treated as a board for speculators. But one can't expect an influx of foreign and institutional investors with such a reputation.

So, until rampant manipulation is curbed, the equity market will continue to be seen as a speculative market rather than an investment destination.

Frequent policy intervention linked to the listed companies from other regulators also affects the performances of the firms, spooking investors' confidence.

For instance, foreign investors were hurt after the Bangladesh Telecommunication Regulatory Commission declared Grameenphone a significant market power (SMP), owing to its major share in terms of subscribers and revenue, in 2019 without any discussion with the BSEC and assessing its impact.

As an SMP, among other restrictions, the leading mobile phone operator finds it difficult to secure permissions to offer better packages to its customers. This restricts its growth and deprives users.

The telecom regulator's move has played a big role in dampening the confidence of foreign investors and they went for massive selloffs.

This was not the first incidence of a lack of coordination among the regulators hitting companies.

In 2015, the Bangladesh Energy Regulatory Commission slashed the distribution charges for Titas Gas, wiping more than Tk 3,000 crore in the market value of the state-run utility in just five months.

Another challenge facing the market is since the number of sound stocks is low, investors' scope to park funds is largely limited.

The number of companies at the DSE and the Chittagong Stock Exchange with significant investment from foreign and institutional investors is just 30.

The number of listed companies at the DSE is 349, excluding mutual funds and bonds, whereas the Bombay Stock Exchange has 5,254 listed companies and 576 companies trade at the Karachi Stock Exchange.

There is a dearth of investible products at both exchanges in Bangladesh since they are mainly equity-based.

Large investors might pay heed to the instruction of the BSEC and park some investments. This might send the index to a higher level. But this might not help make the market vibrant in a sustainable manner because the regulator is not addressing the real problems confronting the market.

The stock market is mostly dependent on the banking sector and the regulator always asks them to raise their participation.

But banks should not invest heavily in such a risky business and the stock market is not their core business either. What is even more important, they are doing business with depositors' money.

So, the BSEC should target life funds and pension funds as they are huge in size and have the leeway to keep funds invested for a longer period.

For example, the size of the country's life insurance fund is about Tk 50,000 crore and most of them are invested in government bonds.

Therefore, the BSEC needs to create an environment that can pull big funds to the market. In order to do so, analysts say, the regulator should strengthen monitoring to eliminate manipulation.

It sometimes seems that the BSEC does not want to go after rogue players since any stern measures against them may cause the market to fall. But it should not be worried about index movement. Rather, it should focus on improving good governance because if the market falls primarily for an intensified focus on governance, it will ultimately bounce back with the strong presence of institutional investors.

The BSEC should also deepen collaboration with the Financial Reporting Council to ensure the fair representation of companies' financial health in their statements.

Restoring investors' confidence, attracting more foreign and local investors through the improvement of corporate governance and bringing in good stocks are going to be a tall order for the BSEC. But that is what one expects from the regulator if you want to make Bangladesh an attractive investment destination.