Bsec’s Market Intervention: Saving index from fall does little good
The Bangladesh Securities and Exchange Commission (BSEC) has taken many steps before decade to safeguard the index from falls, albeit without taking into consideration the long-term impacts.
These measures eventually left a dent available 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 this past year and making phone calls to brokers and merchant bankers regularly to avoid sales of big volume.
Index-saving intervention can be an unfortunate necessity in the united states, said AB Mirza Azizul Islam, a former caretaker government finance adviser.
Presence of retail investors is comparatively saturated in the market plus they tend to sell shares, even if this means incurring a loss, when the index goes down and criticise the regulator, he said.
Therefore the BSEC tried to preserve the index though this is simply not expected in a free of charge market system, said Islam, who's also a former BSEC chairman.
The regulator should maintain a middle-of-the-road policy, where it'll try its best to avoid its endeavours of impacting the type of the free market but will attempt to safeguard small investors, he said.
The economist advised investors to be aware that the BSEC wouldn't normally manage to do more to safeguard the index and so to get realising the risks of the market.
Many training programmes are now offered by market-related organisations but investors are not paying any heed to those, Islam added.
One stock broker working with a huge amount of foreign portfolio investment expressed annoyance at the fact that whenever he attemptedto sell a big volume of shares, the high authority of the stock market regulator rang him up to simply tell him to hold on to shares.
They are insistent, citing that the market situation should be realised therefore sales shouldn't be chosen, 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.
"Could it be the BSEC's duty to save lots of the index?" he asked.
The market regulator must 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 currency markets 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 currency markets, the index will surely bounce back because some persons will attempt at making investments if indeed they see that the index reaches a minimal level, he said.
"They have no to deter brokers from selling shares," he said.
Moreover, the BSEC should look out over whether sponsors of listed companies are reducing their stakes without making declarations, he said.
They should bring good companies to the marketplace instead of taking on any endeavour to intervene on the market, said Ahmed, who's a former chairman of the economics department of the University of Dhaka.
The BSEC intervened in 2011 in a bid to avoid stock brokers and merchant banks from choosing forced sale.
It came into being after most stock brokers and merchant bankers provided margin loans to general investors to get stocks as the market was bullish in 2010 2010.
When the market began to plunge, the brokers and merchant bankers started to sell stocks from investors' accounts to modify the credit, as the borrowers had didn't repay the loans. The practice is named forced sale.
Almost all the overall investors combined with the regulator stopped lenders from doing so, let's assume 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 however the regulator cannot prevent the index from falling.
As the shares bought with margin loans weren't sold and the costs collapsed, most investors didn't get yourself a single penny in exchange from their investment, he said.
Brokers and merchant bankers continue to have problems with the losses stemming from the margin loans, although ten years has passed, he said.
Losing from the margin loans amounted to a lot more than Tk 11,100 crore. Some brokers and merchant bankers booked their losses plus some others are yet to follow suit.
The institutional investors still cannot invest in the market due to the losses, said the merchant banker.
The BSEC set the ground price of most stocks on March 19, 2020 with a view to stopping the index from plummeting further amidst the pandemic, bypassing the marketplace forces.
The ground 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 which could be a large blow for the Bangladesh market.
For the time being, the regulator made a decision 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 marketplace would definitely decrease," said the stock broker.
Just as the ground price was lifted for the 66, almost all the firms plunged, according to Dhaka Stock Exchange.
"It had been seriously eroding the confidence of foreign investors because they always prefer market kept uninterrupted," he said.
It generates a psychological barrier for the foreign investors, he added.
"It is proven that the BSEC's mechanism to save lots of the index is not effective for the future," said a secured asset manager.
"Our market remains in a bullish trend for a long period because of such steps from the regulator," he said.
"You can't keep a stock price at some level artificially. If you make an effort to do so, it could spook investors' confidence and sow the seed for market crash," he said.
Markets have already been falling all over the world due to the pandemic which is normal as the profits of listed companies of most sectors are set to decline in today's year as a result of a collapse popular.
"However, the index will rebound alone 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 an artificial pricing cannot make their pocket healthy. It only results within 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 looking forward to the funds to mature within a couple of months and yield a lump sum profit, these were told the terms have been changed, that too without their consent.
Closed-end mutual funds are investment funds that gather a set amount of money, normally for ten years, from numerous investors and reinvest them into stocks, bonds and other assets.
A foreign investor filed a lawsuit against the BSEC, questioning how it might take such decisions regarding mutual funds which were set up especially with investors' money.
However, these changes were made based on an exceptionally 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 can be purchased a decade later, will the marketplace not feel the same negative impacts?" he asked.
Moreover, if investments in the administrative centre market do yield profits, it is extremely rare for that profit to be studied out from the market and consumed, he said.
Instead, investors tend to reinvest that money in to the market again, he added.
"We have started to run in the direction opposite compared to that which was followed previously out there intervention strategy," said BSEC Chairman Prof Shibli Rubayat Ul Islam.
Now the BSEC is working towards the creation of a wholesome market free from interruption and manipulation, that the ground price of some has been lifted in the first phase, he said.
"To do so, a wholesome environment is necessary, so we are strengthening the IT base available in the market," he said.
"We are working to make sure secondary trading of bond and eradicating the bad players and anomalies from the currency markets," he added.
"For a healthy environment available in the market, we've taken many steps regarding the junk stocks too," he said.
"We hope persons will soon get yourself a market of their expectations because most of our tasks have already been completed," the BSEC chairman added.
