Capital Market woes

Photo: Amdadul Huq/Drik News

Knowing that I am a banker and can very much appreciate price earning ratio, earning per share, direct listing, book building or more importantly underlying fundamentals of a stock, a lot of my golfing friends at Kurmitola Golf Club would ask me what to buy or what to hold on to or sell. The story tells me; almost one out of three persons in this target market has got something to do with investment in traded stocks.
Almost a year ago, a filmmaker asked me about increasing his investment in "pre Initial Public Offering (IPO) private placements" without even knowing when the IPO would be placed for approval of the regulator or floated, and requested me to help him invest more in upcoming private placement opportunities as he thought he should concentrate more on capital market rather than "box office hits."
Though I spent almost 10 years in global market environment with two leading British and Australian banks before joining a US banking giant, the very issue of "maintaining the firewall philosophy" didn't allow me to explore investment opportunities in Dhaka traded stocks during the last 10 years, when the Beneficiary Owner (BO) account came into being.
Yes, I could have done this with approval from Hong Kong and New York, but like many I decided to drop this mainly to avoid conflict between my personal interest and the company's interest in an emerging country. However, upon request I would "donate knowledge" on investing in fundamentally strong stocks, especially in the infrastructure and financial sectors. However I can't claim that my suggestions were very fruitful. I was dumbfounded to see more money being put on junk shares rather than the ones with good fundamentals.
My friends took me as mediocre when they got my advice regarding Khulna Power (most profitable and reliable private sector power plant, and with increasing their capacity too), Brac Bank (the fastest growing SME bank in the country), Eastern Bank (gone through a rigorous change process and now making good money) or Prime Bank (strong bank with growing capital base), which didn't turn out to be rewarding for them.
During my India stint, I saw that almost one out of two colleagues had an individual portfolio to manage. And that is exactly what an intelligent person is supposed to do. It was good to see more and more individual investors in Bangladesh getting engaged in the capital market and, more importantly, the lower-income group generating surplus cash despite the inflationary effects. But one should also remember that bad investment choices are only as good as never-earned income.
The capital market is the engine of growth for an economy. It performs a critical role as an intermediary between savers and companies seeking additional financing for business expansion. It was very encouraging to see that the capital market of Bangladesh is growing and the market cap reaching as high as $54 billion, with a daily turnover of around $300 million.
However, the story doesn't end here. As the market grows we compromise on the moral side with random regulatory failures. In absence of a tight-packed or dynamic guideline, the manipulators kept on playing their cards like in the mid-nineties. One does not know what will get a merchant bank or asset management company license approved, or is it a crime to invest a large sum in private placements? The regulators didn't do anything forward-looking, other than riding on day- to-day transactions. They didn't even learn anything from the neighbours or do anything aggressive to address the supply-side constraints.
As mentioned, there are firms listed in the stock exchange that have historically strong financials, stable earnings, more or less quality management, and new projects that are expected to drive their future growth. These firms also operate in the most lucrative industry or business segments -- power, telecommunications and the like. Stock price embeds, among others, public confidence in management, forecast of future earnings of the firm, governance and of course perception. But that logic does not seem to be working here.
Despite talk about lack of confidence and mismanagement, perceived "no prospects," weak governance, etc., prices are going up, even for some state-owned enterprises. Now the enquiry committee is telling us that there were deliberate efforts from a section of operators to command the market their way, in absence of definitive tools applied by the regulators. They were either blind or incapable. Accountants, and even "price sensitive information advertisements," were used to hike up prices of junk shares, especially where the volumes traded or IPO amount was small.
AK Khan & Company invested larges sum in Grameenphone pre-IPO because there is no law or guideline to bar them from investing in private placements. GEM funds made a lot of money from small investments, because investment in BD Thai shares (which jumped many-fold in a short time) came out to be very attractive. Since they invested in secondary shares, no "lock in period" was applied on them (though there were issues with regard to their ultimate ownership and business model), and that has been the case everywhere.
I am sure the enquiry committee could see who were allowed to float shares on "Direct Listing" basis at the fag end and how the tight-packed "Book building" method was abused by the issuers in connivance with institutional investors. "Too much money exchanging hands" was hard to avoid by someone having some stake in the process of issuance, approval, pressure group or sleeping partners.
We have burnt our fingers. The worst affected are the small investors, though everybody seems to be stuck somewhere and are searching for an exit route. There has been too much simplification and narrow discussions. Investment in capital market is never bad, having a BO account can be a symbol of intelligence, or a "must have" for any enterprising person.
Making money is a forward march towards national wealth creation, provided we are focused on the "how" side of this. Appropriate guidelines with progressive enforcement can help us to move on. However, we have to play the game properly.

The writer is a Banker and Economic Analyst.
E-mail: [email protected]