Study on Causes of Stock Market Crashes and Subsequent Policy Prescriptions in Bangladesh

April 04, 2011 1

Study on Causes of Stock Market Crashes and Subsequent Policy Prescriptions in Bangladesh

Analyst Team
Mahmudul Bari Arif Khan Noman Ahmed Khan Md. Farjad Siddiqui Qazi Mussadeq Ahmad N. M. Al Hossain Syed Abu Redowan

Disclaimer
This material is produced by Mindspring Research (Mindspring), an independent research firm registered with Registrar of Joint Stock Companies and Firms, Bangladesh. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities, or to enter into any other agreement. Projections of potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain. Past performance is not indicative of future results. The information and any views expressed in this document are given as at the date of writing and subject to change. While the information has been obtained from sources believed to be reliable, Mindspring do not represent that it is accurate or complete and it should not be relied on as such. Mindspring and its employees accept no liability for any direct or consequential loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. It is being furnished to you solely for your information, and by accepting this report you agree to be bound by the foregoing limitations.

Table of Contents
Executive Summary ..vi 1.0 Introduction ................................................................................................................................................... 1 1.1 Objective of The Study.............................................................................................................................. 2 1.2 Methodology ............................................................................................................................................. 2 1.2.1 Sources of Data .................................................................................................................................. 3 1.3 Background of Stock Exchanges in Bangladesh ...................................................................................... 3 2.0 Stock Market Crash in 1996.......................................................................................................................... 4 2.1 Causes Behind The Bubble Formation ..................................................................................................... 6 2.2 Calendar Chronicles in 1996 ................................................................................................................... 13 2.4 Causes Behind The Plunge...................................................................................................................... 18 3.0 Stock Market Crash in 2010........................................................................................................................ 22 3.1 Beginning of Bubble ................................................................................................................................22 3.2 How The Liquidity Comes Into Market .................................................................................................. 23 3.2.1 The Bangladesh Bank Policies ......................................................................................................... 24 3.2.2 The Government Policies ................................................................................................................ 27 3.3 How The Liquidity Used In Manipulation ..............................................................................................29 3.3.1 The Corporate Announcements & SEC Policies ............................................................................. 29 3.3.2 The Government Policies ................................................................................................................ 36 3.4 Beginning of Bear .................................................................................................................................... 38 4.0 Evaluative Remarks of 1996 and 2010....................................................................................................... 39 5.0 Recommendations ...................................................................................................................................... 40 6.0 The Way Forward ........................................................................................................................................ 45 7.0 Conclusion.................................................................................................................................................... 47 References ......................................................................................................................................................... 48

List of Figures & Tables

Figure 1: DSI Index : 1995 - 1997 ........................................................................................................................ 5 Figure 3: Y2Y Interest Rate Level ........................................................................................................................ 8 Figure 2: National Savings & Budget Deficit in FY 1995-96 .............................................................................. 8 Figure 4: Y2Y Return of DSI ................................................................................................................................. 9 Figure 5: Calendar Chronicles in 1996.............................................................................................................. 17 Figure 6: How the Bubble Formulated in 2010 ...............................................................................................22 Figure 7: Excess Liquidity .................................................................................................................................. 23 Figure 8: Growth Rates of Domestic Credit & Broad Money (Year on Year) ................................................ 23 Figure 9: Banks That Exceed Exposure Limit ................................................................................................... 24 Figure 10: Growths of Domestic Credit & Broad Money ................................................................................ 26 Figure 11: Growth of Net Sales of NSD Certificates (Y-o-Y)............................................................................ 27 Figure 12: DSE General Index : 2009 - 2011 .................................................................................................... 38 Figure 13: DSE Turnover : 2009 - 2011............................................................................................................. 38

Table 1: Stock Market Size, 1990 - 2010 ............................................................................................................ 1 Table 2: Macro Economic Variables in Year 1996 ............................................................................................. 5 Table 3: % Price appreciation of selective companies during 1996 bubble .................................................... 7 Table 4: Right Share Offerings in Year 1995 .................................................................................................... 11 Table 5: Right Share Offerings in Year 1996 .................................................................................................... 11 Table 6: IPO Offerings in Year 1996 ................................................................................................................. 18 Table 7: Foreign Portfolio Investment ............................................................................................................. 20 Table 8: Revised Interest Rates on NSD Certificates....................................................................................... 27 Table 9: List of Companies That Used Book Building ...................................................................................... 31 Table 10: List of Companies That Have Privately Placed Shares .................................................................... 32 Table 11: List of Companies That Used Direct Listing ..................................................................................... 33 Table 12: Revision of Margin Rules From Feb 2010 to Feb 2011 ................................................................... 34

Acronyms

BB BO CDBL CSE DGEN DSE DSI DVP GDP GR ICB IPO M Cap MoF MPS NBFI NSD NYSE OTC P/E SEC SOB SOI SRO

: Bangladesh Bank : Beneficiary Owner Account : Central Depository Bangladesh Limited : Chittagong Stock Exchange : DSE General Index : Dhaka Stock Exchange : DSE All Share Index : Delivery Versus Payment : Gross Domestic Product : Growth Rate : Investment Corporation of Bangladesh : Initial Public Offering : Market Capitalization : Ministry of Finance : Monetary Policy Statement : Non Bank Financial Institutions : National Savings Directorate : New York Stock Exchange : Over The Counter : Price Earnings : Securities & Exchange Commission : State Owned Banks : State Owned Insurance Companies : Self Regulatory Organization

Executive Summary
Since the ending part of 2009, indices of the both of Bangladesh Stock Exchanges started to climb at a supersonic pace that made the consensus market observers to rethink about its rationality. During mid 2010, alarm of sudden hurtles started to form among analysts, but no one was convinced about precise timing. Later part of 2010 observed the same bullish inclination, while in early December ahead of implementing several strict regulatory measures by FIs, first major struck was observed. Since then consecutive sharp fall in benchmark index crafted ruthless market panic and made the situation worse. Market started to experience a completely different scenario when every market parameters like index level, transaction volume, register of gainers spicily plunged. A long debated topic then revived that accelerate the extent of market panic- Is another 1996 going to repeat? Obviously 1996 market scam deserve its own worth as Historical scandal in terms of index fall and subsequent time needed to restore investors confidence. From November 16th peak of 3627, DSI lost over 80% within just five months and it took long 8 years to cross 1000 level. Loads of experienced market observers compared 2010-11 scam with that of 1996 because of similarity in pace of rise and steepness in fall. So this research attempts to detect the respective basic drivers of bubble formation and subsequent slump of both 1996 and 2010-11 market scams. Throughout the details, researchers endeavor to analyze the respective market structure, investors consensus, Regulators confidence, macroeconomic strength to reach operational conclusion. Most importantly, market structure in 1996 and 2010 vary substantially. During 1996 the primitive market structure like manual ordering and settlement, Delivery Versus Payment (DVP) system, non-existence of central depository, paper share, Existence of kerb Market contributed to make the market upset. In contrast, piled up excess liquidity in banking sector as a sequence of global turmoil and domestic macroeconomic imbalances, policy debate at the Government and regulators level opened up the way of market unrest despite relatively mature market structure in Year 2010-11. Besides that, some common factors like violation of ethical codes by some issuers, corporate insiders, untimely rigid policy, gap of perceived confidence of regulators, governments poor interpretation and actions during bubble formation, lack of coordination among regulators has commendable impact behind both scams. On the ground of factual findings, it can be summarized that exact nature of these two hurtle is not precisely same in terms of extent of fall and time to recover!

1.0 Introduction
The 1990s are often generalized as a decade of good times in Bangladesh as it came under the rule of democratic government. There had been lots of prudential deregulations in the financial sector, including privatization of nationalized banks, allowing banking in the private sector, interest rate liberalization. But until mid 1996 Bangladesh securities market failed to attract investors, both local and international. Things suddenly changed in the later half of 1996 and the market experienced an unprecedented bullish run. Unfortunately, it was very short lived and the market crashed. This crash is the hallmark event frequently said to have brought about these economic hard times. After that economic policies including tax holidays and increased the merchant banking were taken for contributing the recovery of economic misery because of stock market crash. The stock market crash Table 1: Stock Market Size, 1990 - 2010 began in beginning of November, and Market Market Market continued to fluctuate for the next two Year capitalization capitalization Capitalization weeks. Politicians and financiers (billion Taka) to GDP Growth expected the market to self-correct, 1990-91 11.485 1.40% but it did not, and the effects lasted 1991-92 10.397 1.10% -9.5% for years. 1992-93 12.29 1.30% 18.2% After 14 years, the market 1993-94 18.098 1.80% 47.3% experienced the same pulse in 2010; 1994-95 80.657 5.10% 345.7% after having gained by about 80% 1995-96 315.149 18.90% 290.7% during the year 2010, Dhaka Stock 1996-97 124.134 6.90% -60.6% Exchange has shown an 1997-98 91.637 4.60% -26.2% unprecedented nose-dive. An abrupt 1998-99 81.324 3.70% -11.3% crash of the market sparked violent 1999-00 120.69 5.10% 48.4% protests from the investors. After the 2000-01 70.7 2.79% -41.4% recovery of 1996-crash; investment in 2001-02 63.13 2.31% -10.7% the stocks has been popular business 2002-03 69.2 2.30% 9.6% among the educated middle class of 2003-04 136.64 4.10% 97.5% Bangladesh who were left frustrated 2004-05 222.04 5.99% 62.5% with the sudden loss to their capital. 2005-06 215.42 5.18% -3.0% They were finding ways and means to 2006-07 475.86 10.18% 120.9% exit from the market in order to 2007-08 931.02 17.06% 95.6% minimize the losses. The government 2008-09 1241.34 20.19% 33.3% of Bangladesh may be under pressure 2009-10 2700.74 39.01% 117.6% to intervene in order to protect the hard earned money of the small investors from being lost due to this unusual crash of the stock market.
Source: Statistical Yearbook of Bangladesh & the Securities and Exchange Commission (Quarterly and Annual Reviews)

The analysts expressed their opinion in the media that the immediate reason for this crash was the policy of the regulators of the market who laid down a limit for investment by the

banks and other financial institutions in the stocks. In addition, there may be more reasons that ensured the panic amongst the investors to sell shares for minimizing their loss. Therefore, this research report tries to investigate the reasons of the two market crashes and critically analyzes the policies that were taken by the different regulatory bodies of our country.

1.1 Objective of The Study

Stock market debacle is not a completely new phenomenon in Bangladesh. Frankly speaking, 1996 scam created such a negative impression in participants mind that it took a long 8 years to back the market on bullish trail. However, during year 2009-10 market again showed sky rocket pace which made the consensus market participants predict another major collapse. In December 2010, their trepidation became reality that left millions of small investors into another market paradox. After consecutive sessions of major fall associated with extreme intraday volatility, possible repetition of another 1996 became talk of the bourses. But Statistical facts suggest creditable difference in market structure and economic strengths between 1996 and 2010-11. This particular Research effort endeavors to detect the economic reality behind the two market scams by analyzing relevant facts with analytical prowess. The prime reason of this Research was to ensure the long run smoothed sustenance of our capital market with other relevant objectives of: Identifying the basic nature of the two market scams. Identifying critical grounds behind the bubble formations. Identifying the vigor and pace of bubble explode. Recommending possible course of action to avoid same slip in future. Evaluating and assessing the way forward for our capital market.

1.2 Methodology
The procedure that followed to conduct this research can be divided into the following stages: Stage I Identifying the Key Issues: This was done based on the objectives of the report and discussions among the team members. Stage II Collecting Information: Information were collected from different sources, mainly from newspapers and reviews published by regulators. Because of time constraint only secondary sources of information were used in this research. Stage III Processing & Analyzing Information: Analysis of information done in two ways. The qualitative information were analyzed chronologically. The quantitative information were analyzed using statistical tools i.e., mean, median, CV. Stage IV Preparation of Report: The researchers finally prepared the report based on their analysis of data and their findings.

1.2.1 Sources of Data

The secondary sources are as follows: National Public Library (Newspapers) DSE Library SEC Library Bangladesh Bank Bangladesh Bureau of Statistics Literature Research Newspaper

1.3 Background of Stock Exchanges in Bangladesh

There are two stock exchanges in our country. A brief description about these two stock exchanges are given below: Dhaka Stock Exchange: The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities are regulated by its Articles of Association rules & regulations and bye-laws along with the Securities and Exchange Ordinance, 1969, Companies Act 1994 & Securities & Exchange Commission Act, 1993. At The Time Of Incorporation The Authorized Capital Of The Exchange Was Rs. 300000 Divided Into 150 Shares. Of Rs. 2000 each and by an extra ordinary general meeting adopted at the extra ordinary general meeting held on 22.02.1964 the authorized capital of the exchange was increased to Tk. 500000 divided into 250 shares of Tk. 2000 each. The paid up capital of the exchange now stood at Tk.460000 dividend into 230 shares of Tk. 2000 each. However 35 shares out of 230 shares were issued at TK. 80, 00,000 only per share of TK. 2000 with a premium of TK. 79, 98,000. Although incorporated in 1954, the formal trading was started in 1956 at Narayanganj after obtaining the certificates of commencement of business. But in 1958 it was shifted to Dhaka and started functioning at the Narayangonj chamber building in Motijheel C/A. On 01st October 1957 the stock exchange purchase a land measuring 8.75 Kattah at 9F Motijheel C/A from the government and shifted the stock exchange to 9F Motijheel C/A. Chittagong Stock Exchange: The Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 from Chittagong City through the cry-out trading system with the promise to create a state-ofthe art bourse in the country.

Founder members of the proposed Chittagong Stock Exchange approached the Bangladesh Government in January 1995 and obtained the permission of the Securities and Exchange Commission on February 12, 1995 for establishing the country's second stock exchange. The Exchange comprised of twelve Board members, presided by Mr. Amir Khosru Mahmud Chowdhury (MP) and run by an independent secretariat from the very first day of its inception. As legal entity CSE is a not-for-profit public limited company. All of its 129 members are corporate bodies. It has a separate secretariat independent of policymaking Board. The Board comprises of brokers and non-brokers directors with equal proportion to ensure the transparency. The Board constituted Committees to delegate such functions and authority as it may deem fit. There is an independent secretariat headed by a full time Chief Executive Officer. CSE activities are regulated by its own regulations and bye laws along with the rules, orders and notification of the SEC.

2.0 Stock Market Crash in 1996

Dwelling the pattern of market performances over 1980s and 1990s would provide some insight into the nature of shocks that happened in 1996 period. The first ever market downturn experienced by Bangladesh was in 1989 which continued until 1991. The DSE All Share Price Index fell from 533.6 in 1988 to 498.2 in 1989, 349.1 points in 1990 and finally 296.2 in 1991. So the total percentage of fall was about 44% that was not dubbed as market crash because of relatively longer duration. Two important points are that over mid to late 1980s Bangladesh economy suffered double digit inflation associated with worldwide economic downturn following 1987 market crash. Due to high domestic inflation, exchange rate was highly overvalued. And finally anti autocratic movements, all these factors contributed toward that slump. However, from 1992 onwards, the market begins to pick up again and it rose from 369.5 in June 1992 to 959.1 in June, 1996 that means 160% rise in four years. From July 1996 to November 16 1996 DSI surged 213.75% and crashed by declining 38.21% within December 22. Since then it fell further 29.31% in March 4, 1997 than December 22 level. So the total decline within 4 months was 56.32%!

Figure 1: DSI Index : 1995 - 1997 4000 3500 3000 2500 2000 1500 1000 500 0 698.93 749.85 Period 3648.75 Mar-95 Jun-95 Sep-95 Dec-95 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 SD 16.15 23.71 22.70 24.74 22.73 47.72 225.41 577.24 305.77 72.24 87.66 79.18 CV 1.97% 3.15% 2.92% 2.88% 2.86% 5.47% 17.99% 21.68% 17.56% 6.43% 9.31% 9.50% Range 62.02 84.67 96.11 72.39 81.16 166.31 722.54 1959.87 1375.61 339.80 363.24 273.67

Source: Monthly Review, Dhaka Stock Exchange

The third massive market scam was in 2010-2011 when market gained 92.07% just within 11 months and finally fell around 41.66% within next 3 months periods. But this percentage term might fail to detect the actual extent of crash. Considering absolute numerals states that during 11 months rise index gained 4275.12 points and slumped 3715.43 points over 3 next three months. So the speed of fall substantially outperformed that of rise, as have been for most of the historical records. The first shock was due to high domestic inflation and world recession; the second was not due to the similar factors at all. The inflation rate from early to mid 1990s was very low between 2-5%, exchange rate was stable, external reserve was growing substantially, thus the economy was performing well. An abridged key statistics of major economic indicators are following [1] Table 2: Macro Economic Variables in Year 1996 GDP ($b) Exchange Rate 36.6 39 39.4 40.2 40.3 Interest Rate 9.25 8.5 6 5.5 6 Inflation Nation Savings(% of GDP) Budget deficit (% of GDP)

1991 1992 1993 1994 1995

20.8 20.4 20.9 21.6 22.4

7.22 4.28 -0.03 3.61 5.78

10.5 12 12.9

-5.4 -5 -5.3

Source: Bangladesh bank On the basis of these favorable economic states, the price shock in 1996 seems to be due to some other complex factors that drove the market wild and eventually crash [2].

2.1 Causes Behind The Bubble Formation

Malpractices of Brokers and Members in conjunction with some large firms by using faulty settlement mechanism
The impartial investigation committee formed in 1996, accused some influential brokers and companies. The committee identified 8-10 brokers with the alliance of several big fishes created artificial demand drives. Some events were identified while shares only transected in books but were no associated actual transfers. Through Ready or Delivery versus Payment (DVP) systems numerous transactions were either not settled at all or settled after specified 4 days [3]. We will dedicate a details discussion later on the full mechanism behind these systems. Majority of the similar types of fraudulent transactions were committed between early October and mid November 1996, most tempted periods of 1996 market scam. The investigation committee also reported several DSE council members who jointly worked behind unprofessional conduct in the market in conjunction with already mentioned brokers and companies. In most cases investors from Kerb market were used in manipulation.

Violation of Professional and Ethical Code of Conduct by Brokers that deprived investors from should be treatment
Abusage of authority by brokers was another decisive cause. DSE had 195 members, 40 of whom were operationally inactive in that time. With an annual fee of BDT 10,000 only membership turned into monopoly which didnt allow fresh entrants. The transparency and accountability, supposed hallmarks of stock market of anywhere, seem to be ignored by large [4]. On many occasions it was found that the broker instead of complying with clients order for buying shares conducted his own business with the clients money. Clients also complained that during the price collapse, brokers bought on behalf of them (clients) at decreasing price and then showed the same scripts at previous higher price on books. Most perilously, as stock exchanges were not directly involved in ordering and settlement process, brokers inscribed fake high price on buying side of the book which pursued many uninformed investors to believed it as true and placed buying order around that fake price. All these violation of code of conducts by brokers certainly assisted in the formation of the bubble [5].

Structural design of the DSE that failed to spot Agency Relationship and created conflict of interest among multi role played by Brokers and Members
The structural design of the DSE operating body was also identified behind the manipulation. Basically stock exchange is oligopolistic in nature where a bunch of brokers is

expected to follow strict fairness and sense of honesty [6]. In DSE, Directors of listed companies were allowed to act as brokers, obviously which highly persuade malpractices like inside trading. Another crucial point is that DSE does not have a class of brokers known as market makers in NYSE. These market makers are responsible for stabilizing the market during both abnormal price hike and depression by taking the opposite position in transaction. Director broker of the DSE acted for their own interest instead of to be the true market maker.

Acute shortage of fundamentally sound scripts made the investors passion run behind scrap securities
Short of fundamentally sound scripts has always been a crucial problem in Bangladesh market. When market zeal reached sky high, psychological irrationality compound every piece of information irrespective of real worth. This fanaticism geared the investors money run behind some scrap issues and put the whole market prospect into questions. Table 3: % Price appreciation of selective companies during 1996 bubble Name of Company Zeal Bangla Company Ambee Pharmaceuticals Rupon Oil & Feeds Ltd Swan Textile Bangladesh Monospool National Oxygen % Price Change 603.22 440.50 287.60 137.50 83.21 59.62

Source: DSE Database From any perspective, this sizeable return was abnormal. And the fundamental strength of these firms was much wicker than most comparable entities. The ultimate output of this speculative game was unknowledgeable investors with these scrap holdings purchased at abnormally high price from the manipulators and got locked.

Widespread use of DVP system in transaction settlement that was totally suboptimal in nature from any perspective
One of the most dominant mechanisms used in price distortion was Delivery versus payment (DVP) System that was bulk in nature, shown to dealt but not actually settled. Some estimates suggested that these failed DVP deals was around BDT 2 billion, certainly a substantial amount at any measure in 1996 price level! The main danger was whether such DVP transaction executed or not, set a price, that provide wrong signal about actual demand or supply around a specific script thus distort price. Some DSE councilors admitted these gross failures of DVP deals subsequently eroded the confidence of both foreign and

local investors [7]. It was reported during the bubble formation in September to November 1996 some influential brokers-members alone traded among themselves about 30% of total shares transected on DSE. In value terms their trade amounted to BDT 2 billion out of total amount BDT 7.07 billion. And most of the deals were under the coverage of DVP where price was fixed outside the trading floor. Under the relevant rules, the buyer and seller had to declare the intention to settle the deal through DVP method. Declaration had to be on the trading floor mentioning time and day. But in no case this time limit had to exceed the general settlement periods of T+4 codified by Bangladesh rules. Matter of fact was that either technically or intentionally large participants failed to strictly follow the code.

Cutback of bank deposit rate made relative rate of return from equity market more attractive to investors in general.
On September, 1996 deposit growth rate was only 8% against historical average growth of 15%. Since 1993 bank interest rate was only around 6% which was average 10.21% over year 1985-1992. This reduced bank yield associated with augmentation in national savings and stable budget deficit made the marginal savers to rush toward capital market for bagging handsome profit opportunity [8]. Figure 3: Y2Y Interest Rate Level 12 10 8 6 4 2 0 1987 1989 1991 1993 1995 Interest Rate(%) 15 10 5 0 -5 -10 Nation Savings(% of GDP) Budget deficit (% of GDP)
1993 -5.4 1994 -5 1995 -5.3 10.5 12

Figure 2: National Savings & Budget Deficit in FY 1995-

12.9

Besides that, the market wide return gauge DSE All share index (DSI) generated a splendid average yearly return of 40% from year 1990-96 periods and 18% from 1990-1995 periods. As this return series includes numerous extreme values, if we take Median as the measure of representative gauge, it was 6%. Remind one very important notion, DSI return series doesnt encompass periodic earnings distribution (dividend) by firms that are also considered as component of total return from equity investment. So in all respect equity market yielded much better return than that of bank deposits on risk unadjusted basis. If we take risk mathematics on this comparison, conclusion might change. But the burning question is that whether our market participants have resistance or competency to inject risk appetite on investment decisions?

Figure 4: Y2Y Return of DSI

1996 1995 1994 1993 1992 1991 1990 -100% 0% 100% 200% DSI Return(%)

Corporate Insiders used material non public information to take undue advantage over public in general
The independent committee formed to investigate the probable reasons behind the 1996 scam accused the malpractices by some companies insiders who pursued a policy of inducing public interest in respective share(s) through making news in the press which came in the form of announcement of the company later on. In most cases main parties, either as buyers or sellers, were the sister concerns and associates. Besides that significant portion of the total shares traded of the same entities were accomplished through selective 3-4 trade houses. It was observed large portion of securities sold through these houses via DVP couldnt be traced directly in DSE record. Even statements submitted by several foreign banks proved the disagreement between actual shares sold and record kept for the same in DSE. The chronicle of malpractices has yet to end! Firm insiders sale shares to outsiders bypassing both of the stock exchanges, while they even showed reluctance to reply SEC inquiry in this regards. Besides that the committee found that in foreign fund account an amount of BDT 2820 million remained unsettled for long, which directly violated Section 17 of Securities & Exchange Ordinance, 1969 thus a clear sign of manipulation.

Lack of modernization like electronic trading, zero involvement of DSE in settlement, existence of Kerb Market etc had great deal of impacts on bubble creation
Prior to originating Central Depository Bangladesh Ltd (CDBL), shares certificates were mainly in paper format that were defenseless in terms of physical sustenance, forgery, mismatch of sellers signature, return of certificates without registering in the name of buyer etc. it took around 40-60 days after buying to register in the name of buyer [9]. So in all cases the traded shares were not the part of legally issued capital of respected companies

or alternatively these certificates just were printed sheets of paper, some of which regularized later by backdated issues and return of allotment. A printing press of counterfeit shares certificates was detected and more or less everyday kerb market trader has to deal with these inconvenient situations [10]. Another major infrastructural drawback was noninvolvement of Stock Exchanges on trade settlement process. By using this discretion, stock brokers and dealers intentionally booked fake higher bid quote on buying side of order book that pursued retail investors to bid in a price inconsistent with fundamental strength [11].

Existence of informal Kerb market which neither compiled with any regulation nor formal trading procedure
Here was an informal Kerb Market outside both of stock exchanges which was completely informal in nature that it didnt abide any regulations. This market started in the early of the morning and continued till past dusk. The bidding process was basically outcry system that persuaded participants to ask for sale immediately after buying a particular script(s). As, most of the participants possessed very slight to no knowledge about stock market fundamentals; zeal and associated price hike was quite abnormal. Alongside absence of any price ceiling forced a BDT 500 script leaped to BDT 2500 within a single day. In most cases bidding price was substantially higher than formal trade floor that persuaded even brokers to buy from trade floor and instantly sell the same in Kerb market and bagged abnormal arbitrage opportunity. Still price discrepancies made some traders to buy script(s) from Dhaka in morning and sell it Chittagong in the same evening [12].

Opportunity tapping attitude of issuers that inscribed substantially overvalued IPO and secondary issue
One of the mere responsibilities of SEC is to establish fairness in respect of IPO and Right issuance that ensure full protection of investors interest. Key issues that need to scrutinize are timing, purpose and most vitally pricing. In some instances of early 1997, SEC seems overlook general investors interest in the favor of issuing firm(s). One such case was the right offer of Alpha Tobacco Manufacturing Co Ltd which consist three very unique features. Firstly, the offer was made without issuing any offer document. Secondly, full and fair disclosure regarding past and prospective performance, and utilization of right issuance fund were not depicted. Thirdly, the right offer was made at an abnormally high premium of BDT 240 against BDT 10 face value, thus an astonishing 2400% premium! The previous highest premium for IPO was 800% for Square Pharmaceuticals and 1100% for Apex Foods and Beximco Pharmaceuticals that was fairly backed by their NAV, Earning based value etc, except the case of Apex Food. But the market of Alpha Tobacco as on January 5, 1997 was BDT 201, obviously much lower than the intended right offering price. In addition to that last audited NAV was BDT 39.69 and earnings based value was determined to BDT 139 based on market PE of 20 multiple. So by considering all these valuation numbers the offer price of Alpha was obviously unjustified. The SEC, at that time, completely failed to carry

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out its surveillance duty and no specific guidelines were found for stopping such a malpractice. Later within January 31 the market price of the share come below BDT 185. The following tables depict the Right Share register that was offered during the period 1995 & 1996. Table 4: Right Share Offerings in Year 1995 Company Name Islami Bank NBL Shine Pukur Ashraf Textile ACI Lexco Quasem Drycell GQ Ballpen Bonus Ratio 1:1 1:3 125:1 1:2 2:5 1:1 1:1 1:2 Right Premium 100 10 120 10 90 Issue Price 1000 200 100 20 130 100 20 100 Dividend (%) Average Price 2013.15 119.32 94.97 28.63 131.23 819.53 23.47 149.99

7.5:100 1:4

10

22 55

Table 5: Right Share Offerings in Year 1996 Company Name Apex Food Apex Tanerry Chittagong Cement Tripti Industries Orion Infusion Alpha Tobacco Delta Millers Chic Tex BCIL Raspit Food Olympic Industries Tripti AMCL Bonus 1:1 1:2 Ratio 1:1 1:1 1:2 1:2 1:2 1:3 1:1 3:5 1:1 1:1 3:2 1:1 1:1 Right Premium Issue Price 1100 1200 475 575 1000 1100 125 225 100 240 250 100 10 200 300 100 200 500 600 125 225 100 200 Dividend(%)

20 17 15

1:3

1:2

Sources: Mazhar M Islam, Texas A&M University.

As the share prices of most of the issues surged abnormally to an all time high during 1996 bullish, some companies deliberately took the opportunity and offered right share at very high premium, mostly were not justified by dividend pattern. Moreover average one year prices that also include September to November abnormal hike were not in the line, if that abnormal hike were deducted. Keep reality on mind one investor quoted I had received the letter of Right offer from the company few days back and threw it away as I can now buy the same from the exchange at much lower rate [13].

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Lack of proper investing knowledge and behavioral irrationally of most investors drove the bubble to become bigger
When such irrationalities are dominant, stock prices might deviate from their fundamental values for long periods. Rising stock prices mostly creates over optimism. If investors simply extrapolate from past returns to predict future return, a stock might become high priced for no reason other than the fact that its price has increased in the past. Each new investor is somehow convinced that the upward swing in prices will continue infinitely and even buying stocks at abnormally high prices is justified by the prospect of short term gain. Precisely our investors positive market psychology was not created from fundamentals but was the result of collusive bulk trading of shares by a few large brokers [14]. Sometimes, these transactions were not executed as per the DSE rules.

Faulty measures taken by the regulators

Dhaka Stock Exchange: September to October 1996 stock markets were very heated and index, transaction and market capitalization level were abnormal. Normally in the developed stock market, such sharp amplification without any true economic backup would have been followed by at least temporary suspension of trading of overheated scripts. But the DSE didnt take any action in the shape of suspension of trading or investigation into the anomalous augmentation in trends. DSE Chairman himself admitted in the press that DVP deals shouldnt be accused as price manipulators, rather dubbed as scope for maneuvering in the market. Securities & Exchange Commission: Both SEC and DSE have been operated as Self Regulatory Organization (SRO) while it is obviously unwise to draw an explicit and rigid line between the government and SROs. Best practice is to conduct frequent communication, coordination and consultation between them and take necessary measures, if necessary. In a meeting organized by FBCCI, the Finance Minister reportedly announced that SEC would be reorganized with new recruitments in policy making level and allegations of price manipulation and inside trading would be probed. In this regards government took some steps like 1) formation of a non judicial enquiry committee, 2) two professional members of SEC were removed in the face of allegations against them and 3) two new members were appointed. But were these steps appropriate or adequate to solve the problems? Subsequently it was proved that government steps were not effective in the short run with the aim of sharpen the efficiency of SEC. Ultimately the result was that the SEC failed to protect the interest of the investors, why only two policy makers were suspended? What about the responsibility of SEC Chairman, who was also the Chief Executive Officer? Government: In the time of bubble formation many in the government bagged the credit in the short lived optimism despite its backless situation from real economy. Tremendous interest shown by the public in the market was certainly a positive sign for industrialization of Bangladesh. This interest should be restored by the government itself by stabilizing the market, ensuring transparency in operations and cumulatively, guarantee an environment

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with proper code of conducts and ethics practiced by the investment related professionals. The Ministry of Finance should be very active and cautions in formulating policy related to both money and capital market so that interrelated variables do affect each other.

2.2 Calendar Chronicles in 1996

This relevant section tries to portray day by day proceedings in both stock exchanges during the most tempted moment of November and December 1996. This discussion covers retail investors action, regulators endeavors, government response, malpractices by brokers, members and corporate insiders which would facilitate the understanding of 1996 scam. November 2nd: Huge volume of trading, but it was limited to some selective issues like Bata Shoe, Beximco Pharma, Chic Textile, Monno Ceramic, SP Ceramic, Eastern Housing, ACI and Ashraf Textile. The market index gained 171.17 points from the previous day and ended the day with 3157.46 points. November 3rd: Bank rate and floor rate of deposits were increased to raise the flow of deposit. This rise was obviously to pursue depositors to supply fund that would enable banks to continue their normal lending business. Why banks normal lending operation was interrupted? It can be explained from two perspectives. Firstly, deposit GR decreased to 8% as on 19th September that enjoyed historical average GR of 15%. A high official from BB denied this capital market rush besides that Banks is running out of liquidity. Lending rate was not allowed to augment that means % spread remained around 8%. BB Governor himself claimed that savings from banks are not going to capital market. The market continued its bullish run and the index reached 3352.10 points which is 194.64 points higher from previous level. November 4th: Acute supply shortage in trading floor in addition to price ceiling. But uninterrupted price hike in Kerb Market that made Tk. 500 shares to jump to Tk. 2500 within a single day. Nevertheless, thousands of investors bid the hike at this abnormal price. Situation was like that, immediately after buying a certain scripts traders were asking for the same! This so called out market continued till night that started in 9 am. As it was November, large companies bonus and right issues were announced that add incremental fuel to market zeal. Even market overreacted with the notice of AGM and EGM. The index value was 3587.69 with a substantial gain of 235.59 points from the previous day. November 5th: BB stopped loan against share certificates, previously which was 40% of equity that can be taken by any eligible client. Besides deposit shortages, two IPO pressurized overall bank liquidity that pursues investors to withdraw more fund from banks. As a consequence, some banks failed to honor depositors claims on timely manner and a bank official informed that they were in liquidity crunch. In contrast, BB informed that banks had ample liquidity as banks were investing in BB bills and not fully exploiting BB discounts windows. BB further informed that surplus on banking system stood BDT 13 billion. He identified banks rush to unofficial kerb market as the possible reason of liquidity crunch.

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Another private bank official also attributed the same reason and additionally fund tied up as culprit for present crisis. The rise of the index slowed because of the new measure by BB and index gained only 61.06 points and reached 3648.75 points. November 6th: Bangladesh Bank restricted commercial banks from providing fresh loan against share certificates with the aim of make banks fund unencumbered. In that point of time the combined loan fund granted to capital market was near about BDT 300-350 million, though daily average transaction was around BDT 400-500 million. So portion of bank margin probably was not a commendable amount in total investable funds. In other extreme, out of total 130 members, some 50 stopped buying and started selling. Due to this arranged selling the so called price correction started. The index for the first time in this month experienced decline of 233.20 points and brought down to 3415.55 points. Members claimed that they are doing it to cool down the market. November 7th: Participants accused regulators for trying to cool down market with artificial measures rather supplying good fundamental scripts. Despite foreign investors keenness, local investors got panic with SECs attempts. November 10th : Dynamics of Kerb Market- This market opened in the early of the morning & remain operative till night. Basically share dealings were unauthorized, where no brokerage commission was needed. Most astonishing fact was that most shares were traded a higher price than that of formal floor. Generally in formal floor, it took 3 days to receive purchased shares from brokers, thus during these 3 days shares couldnt be traded. Kerb market was free from these restrictions. Shares can be sold immediately after purchase, as if it was truly an independent market free from all regulations. As substantial price differential existed, participants also follow the general rule- buy from formal floor and immediately sell it in kerb market to capitalize abnormal instant gain. Concerning fact was that trade brokers were relatively more engaged with this arbitrage that created acute supply shortage in formal floor. Meanwhile, the index continued to fall because of the tightening measures taken by BB and ICB. The index lost 76.81 points on this day and ended with 3235.09 points. November 15th : Interest rate on savings and fixed deposits were increased. Huge arbitrage opportunity existed as there was more than 10% gap between floor rate and kerb market rate and price differential between two markets stood more than BDT 200. The government decided to offload some of its companys shares in the market to cool down the demand pressure. The index started to slowly rise again and it reached 3567.27 points. November 16th : As the price of most of the scripts were higher in kerb market than that of floor, member themselves sold shares in kerb market by buying from trade floor. In many cases, forged share certificates, allotment letters were found which were made to reap hefty profits as the market was abnormally high. The index recorded its second highest peak for this month which was 3627.02 points.

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November 20th: Brokers didnt take any buy order. Shortage of funds was started. The market seemed to have some corrections as the index continued to fall for the last 4 days and touched 3298.05 points, losing 328.97 points November 22th: Circuit breaker was set to 5%. Government decided to form a National Stock Exchange with automated facilities. A change in the policy making body occurred as the new BB governor, Mr. Lutfar Rahman Sarkar took the charge. Stoppage of bank loan facilities very adversely affected market confidences. Despite formal market was closed because of lack of Members Coram, informal kerb market was open. November 23rd: No foreign investors were buying, with excessive selling force in motion. BDT 5000 million was washed out to Mark and HR Textile IPO and Marks share were selling in forward basis. November 24th: Dhaka and Chittagong Stock Exchange ware booming again. The DSI index continued to rise for two consecutive days and it ended up with 3368.04 points. However, foreign investors were involved in selling shares. Turnover slowed down because investors were reluctant to sell shares with high capital loss that encumbered a substantial portion of funds. November 25th: Several investors didnt come to the floor to take delivery of ordered shares that make brokers fund to tie up. Huge chaos and procession took place in front of DSE building at Motijheel as the index again started to fall. At the end of the day the index dropped to 3317.58 points. November 28th : No cooperation among stock exchanges, SEC and Government in addition to lack of money supply because of halting bank loan. There was another surprising findings also. Participants blamed that brokers purchase shares on behalf of customers at lower rate during market slump and later handed the same in the name of previous higher price. Besides that as there was no participation of stock exchanges in settlement process, brokers inscribed fake buy order at higher price in order book to make the customers believe that these particular issue(s) has/have higher demand and pursue them to bid for the same. Retail investors showed protest and violent demonstration in front of DSE building accusing the brokers as the culprits. The index fell by substantial amount and dropped to 3033.37 points. November 29th: Margin loan facilities that were halted on 10th November, 1996 revived again at 1:0.40 ratios, while the ceiling for a single customer was BDT 1 million. ICB started to purchase shares as instructed by the government. These measures helped the index to gain 31.62 points on this day and the index touched 3064.99 points. December 2nd: Total BDT 10000 million was halted on the IPO of 6 companies and ICB came up with BDT 1250 million funds to stimulate buying side. The index continued to lose points and it ended with 2921.70 points.

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December 4th: Trading in formal market for less than half hour. Sell pressure was all around but it became very difficult to find buyers. Share buying by ICB and margin loan enhancement eventually failed to stabilize the market as the index again lost 67.28 points and reached 2718.90 levels. Experts identified some possible reasons for market slump: 6 IPOs with more than BDT 10000 million; credit crunch; lack of participation of institutional investors who have already grabbed around BDT 100000-150000 million profits from market; lack of proper stabilization measures from regulatory authorities. December 5th: Government stated price slide as logical correction and declared that they would come up with Contingency Plan only if index would fall around 1500 points as index went 2718 points just from 1000 within 2 weeks. Ministerial policy sometimes didnt work in the short run and further destabilized the market and investors confidence. The index fell 51.74 points again to reach 2667.16 points level. December 8th: Lowest ever transaction in history. Finance minister stated that he will go for action if index comes down to 1500 points, that he thought quite rational level. Index was at 2618.35 points after experiencing decline for six consecutive days. Meanwhile, Small Share Investors Forum started 11 point movement demanding kerb market legalization and quick delivery of refund warrants as well as share certificates. December 12th: The same share traded in floor at BDT 2500 was asked BDT 3600 in kerb market. Massive sale pressure continued. However, the index took a pause after six day falling and recorded a marginal gain. The index value was 2656.65. December 21th: Another record in lowest trading. Market slumped again after two days Bull Run. Basically economic downturn, banking year end and liquidity crisis were attributed to this slump. Index continued its falling trend and lost 176 points in the last 3 days. The index ended the day with 2514.15 points. December 26th: IMF prescribed some stringent measures to BB includes: adopting stringent monetary policy by squeezing loan supply in unproductive sectors, besides loan squeezing in banking sector; no loan to public sector firms more than BDT 2500 million; building foreign reserve to USD 2300 million within June, 1997 that was less than USD 2000 million in that time; keep the broad money GR within 8-10%; withdraw control over interest rate. The index value was 2269.51 losing 1357.51 points (37.43%) in just 30 days. December 28th: There were hardly any buyers. An investigation committee was formed in the face of questions about SECs fairness and capacity. The index reached 2241.83 points level by losing another 27.67 points.

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WEEK 1

WEEK 2

WEEK 3

WEEK 4

WEEK 1

WEEK 2

WEEK 3

WEEK 4

Bank rate increased BB stopped loan against share certificate

Participants accused the SEC for not taking proper measure

Shortage of fund started Brokers denied to take buy orders

5% Circuit breaker imposed Chaso & procession in DSE Margin loan ressurected

ICB came up with fresh fund Govt. dubbed massive fall as correction

Lowest ever transaction

Another record in lowest trading

IMF prescribed some stringent measures Very few buyers

NOVEMBER 1996 Figure 5: Calendar Chronicles in 1996

DECEMBER 1996

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2.4 Causes Behind The Plunge

Unplanned and untimely IPO that made substantial amount of money to lock in, thus created acute liquidity crisis
General rule is that firms indented to enter into market to collect growth fund in bullish onslaught. And as our market historically generated abnormal first day return for IPO with virtually no risk of losing, both nave and knowledgeable investors always perceive IPO as gold mine without any efforts. Being conscious about these market emotions, issuers also target such time when capital market become flooded with excessive money that pave their way to collect double digit time fund in comparison to actual subscription value. As on December 1996, 6 companies issued BDT 650 million while total applied amount was around BDT 12000 million. That means oversubscription of around BDT 11350 million. The following table shows the IPO over subscription details of these 6 companies: Table 6: IPO Offerings in Year 1996 Company Standard Ceramics Mark Industry MAK Enterprise HR Textile Excelsior Shoes BSRS Mutual Fund IPO Size (BDT) 43,950,000 270,000,000 83,750,000 100,000,000 100,000,000 50,000,000 Subscription(BDT) 2,254,395,000 3,750,000,000 1,760,000,000 1,480,000,000 2,100,000,000 660,000,000 Over subscription(BDT) 2,250,000,000 105,000,000 1,676,250,000 1,380,000,000 2,000,000,000 610,000,000 Over sub. Ratio 51.22 13.89 20.95 14.80 21.00 13.20

Basically 7-9 days were allowed to investors to deposit application money that was abnormally high than that of practices followed in regional markets like India, Pakistan, Singapore etc. In the same time issuing companies unduly delayed to issue refund warrant mostly that delayed for 1.5 to 2 months without providing any yield to investors. In this interim periods these issuing companies generated millions form interest income [15].

Brokers denied executing clients purchase order rather transecting fundamentally sound shares among themselves
After the slump began when the price of most fundamentally sound scripts were downward, knowledgeable investors tried to buy these scripts at relatively cheaply. But

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brokers made them wait for long after submitting buy order and most cases these order were not honored. Rather brokers transferred these sound scripts among themselves. Even ICB was made deprived from buying these stocks directly from formal trade floor [16].

Allowing liberal policies for foreign portfolio investment

With the aim of encouraging foreign investors to invest in capital market, government took some very liberal measures in terms of foreign portfolio investment, all of these were not equally innocent rather pave the way to free repatriation in time of slump. Some of these measures that accelerated market crash are followings: Free repatriation of capital and fully abolishing capital gain tax Withdrawal of all regulatory restrictions on international portfolio investors for investing in secondary securities market. Underwriting by foreign investors op to one-third of IPO and right issues. Withdrawal of ceiling on holding of international portfolio investors. Allowing foreign investors to participate in IPO and right issues without any regulatory restrictions [17].

Liberal policy pursued by government that made the fund transfer across border relatively easier
It was reported that during market zeal in October-November 1996 foreigners repatriated around US 110 million or BDT 4260 million from stock markets that was substantially higher than the inflow in same sector. And all of these funds were repatriated through formal banking channel. Besides that another several million funds are repatriated via informal/illegal channel by using hundi. These excessive fund outflows highly pressurized foreign reserve that stood US 1860 million in November 1996 against US 2070 million in June and US 2041 million in August, same year. In FY 1995-96 the level of net foreign investment was zero that was first deficit year is 1990s. In comparison to that, FY 1994-95 observed net FDI of US 60 million and Portfolio investment of US 610 million. In FY 199394, net FDI was US 160 million and Portfolio investment was US 530 million. The observed figure indicates that foreign investment situation become worse day by day [18]. Foreign portfolio investment scenario for the year 1993-94 and 1994-95 are shown below that will facilitate the comparison with year 1996 [19].

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Table 7: Foreign Portfolio Investment

Indicators Gross portfolio capital Inflow Gross portfolio Investment Gross Proceed of Securities Sold Capital gains Dividends Gross portfolio capital outflow

1994-95 3094.4 2982.7 1334.2 406.1 92.7 1388.9

1993-94 3196.6 3101.8 965.1 454.6 17.6 918.4

% Change -3.20% -3.84% 38.24% -10.67% 426.70% 51.23%

Source: SEC Annual Reports, 1993-96

Ministerial statement in the media broke investors confidence on market

After November 16 when the overall market experienced extreme sluggish trends in terms of index, activities slump, then Finance Minister stated on a press conference that this slump is just a price correction and he will dub it as real crash after coming below 1500 points. On the same day DSI was 2718.90 points which comes below his stated level just within two-half months [20].

SEC regulation did not improve the situation

On March 1997, SEC suddenly and most importantly silently halted the right of shareholders to transfer securities freely and unrestrictedly. This restriction didnt comply with the Section 8(3) of Securities & Exchange Ordinance 1969 and damaged investors confidence and seemed untimely action. SEC banned Kerb market activities and it contributed lot for reducing the efficiency in capital market operations. Now the critical thinking is that when Kerb market was forming outside the formal trading floor and thousand of unknowledgeable investors becoming engaged with their risk capital, where were all of these prudent (!) decisions? Rationally, if anyone treats anything as incorrect, he/she should come up with right attempt in right time before it do any severe damage, so timing is the decisive point. In contrast, SEC did it in such a moment when confidence restoration was much more essential than applying justice [21].

Collinear movement of all market participants

In an inefficient market, more or less all scripts irrespective of fundamental strength or dividend pattern showed approximate positive unit Beta (measure of responsiveness) with overall market movement. And this prototype remained the same in both market zeal and slump. Especially during massive fall, most fundamentally strong shares price went far below respective intrinsic value. Again during market acceleration gain was shared by all

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scripts, whether sound, bad or even fake. Even companies that have either no existence or productive capacity experienced windfall gain. These close co-movement of all scripts could be produced by lack of sufficient market knowledge possessed by general participants, who always tried to imitate the investment strategy adopted by so called reliable role model, irrespective of his/her actual motive. In a market with large bunch of naives everything could be possible even by modest knowledge possessor [22].

Tight monetary policy and bank liquidity crunch

On late December 1996, when market went through severe plunge associated with liquidity shortage, IMF instructed Bangladesh Bank to follow some stringent measures [23] that arguably worsen the situation. Among the suggestions were- contacting money supply in unproductive sector and banking sector, rebuild foreign reserve to US 2300 million from below US 200 million ceiling of BDT 2500 million on loan granted to public sector, withdraw control over interest and most importantly, squeeze broad money supply growth rate to 810%. All these factors restricted BB from pumping ample cash into economy and propelled long term capital market recession. But prior to these measures, on late October 1996, overall Banking sector running liquidity difficulties stem from lower growth in deposit and incremental withdrawal of funds ahead of some large IPOs. Surprisingly then BB officials denied these liquidity crunches and exclaimed stating that total excess fund was BDT 13000 million in Banking system with Banks reluctance to use BB discount window.
[24] [25].

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3.0 Stock Market Crash in 2010

This part of the report deals with the stock market crash in 2010. As mentioned earlier, after 14 years, our capital market once again experienced a huge capital influx followed by massive slump. A scrutinized analysis of this crash is covered in this part.

Figure 6: How the Bubble Formulated in 2010

Excess Liquidity
Low Growth of Real Economy Power Shortage Excess broad money Releasing funds for ADP

How The Liquidity Comes Into Market

Banks & NBFIs Over exposure Credit Diversion Deposit Rate Curtail Savings Certificate Interest Curtail Black Money Whitening Low taxes

How The Liquidity Used In Manipulation

Corporate Announcement Frequent Intervention by Regulators Manipulated Audited Accounts Right Share/Split Book Building/Direct Listing Private Placement Asset Revaluation

3.1 Beginning of Bubble

The creation of bubble started back from 2009. The worldwide financial recession in 2008 slowed the pace of world economy as well as the economies of major partner countries of our country. That was the time, when excess liquidity in banks was started to climbing up. The recession in 2008 caused the export to fall substantially. The demand for loanable funds also decreased due to ongoing energy crisis particularly power failure. Banks credit also declined due to lower import orders for capital machinery as well as falling trend of major commodities prices in the global market. Import orders for capital machinery plummeted by nearly 30% in the fiscal year ended on June 30, 2009.

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Releasing funds for ADP (Annual Development Programmes) projects also pushed up the liquidity in banks.

Figure 7: Excess Liquidity

Tk. in crore
40000 35000 30000 25000 20000 15000 10000 5000 0 0.00% 10.00% 5.00% 20.00% 15.00% 25.00%

Figure 8: Growth Rates of Domestic Credit & Broad Money (Year on Year)

Source: Monthly Major Economic Indicators, Bangladesh Bank

Another factor that affected the liquidity and inflation was the high growth rate of broad money (M2). During the last two years, the average growth rate of broad money was 19.96%. This was substantially higher than the average nominal GDP growth rate (12.63%) of the same period. This happened because of an unintended consequence of our exchange rate policy. The cost of keeping the taka undervalued has been the excess growth in money supply. The 7.33% excess supply of money contributed to drive up the inflation and excess liquidity. The excess liquidity reached its highest peak of Tk.347 billion in June 2009. Banks, in an attempt to reduce the cost of such excess funds, invested heavily in treasury bills and bonds. A substantial amount of fund also went to the capital market for making quick profits in the backdrop of rising inflation. Due to poor monitoring by regulator, 11 banks crossed their capital market exposure limit of 10%. For some the exposure limit went as high as 35%.

3.2 How The Liquidity Comes Into Market

The excess liquidity that formed in the economy found its way in capital market through various channels. As mentioned earlier, several policies set by the regulatory bodies also helped quick channeling of funds into capital market. These policies, categorized by the policy makers, are analyzed below:

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3.2.1 The Bangladesh Bank Policies

The policies involving the Bangladesh Bank that helped to transfer liquidity in capital market are discussed below:

Banks exposure on capital market

On mid October 2010, it was reported that overall Banking industrys capital market exposure as on August 2010 reached to some hazardous level. 12 banks were identified with capital market exposure exceeding 10% of respective total liabilities, a standard set by BB as on international best practice. Despite overall industrys exposure around 6.3% on capital market these 12 banks exposure range from 10-24%. Obviously this profiteering motive made the whole industry significantly diverge from their core lending-borrowing business that not only impair sustenance of banks but also dampened the overall real economic activities. Figure 9: Banks That Exceed Exposure Limit

IFIC MTBL Standard One Bank The City Shahjalal 0 5 10 15 20

th

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30

Source: The Daily Star, October 18 2010 However there existed differences between BB and banks about the exact definition of exposure. BB definition of exposure included own portfolio of shares on market price, share under lien, and share under custody. But banks had severe objection about the basis of valuing the exposure who tried to pursue BB that cost price might be a relatively fair value measure of exposure. BB denied this claim without any constructive discussion and referred international practice on their standings. Banks also added their dissatisfaction about including customers purchased share through banks beneficiary owner (BO).

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Situation Anatomy:

Simple economic consensus asserts that investors always value relative rate of return when comparing alternative investment opportunities. In a situation where cap was imposed on lending rate of prime productive sectors to stimulate real growth simultaneously with extremely abnormal high return prospect in capital market, how bank management could resist them from diverging operational core? Historically market participants of our country seldom input risk variables in investment decision model if high return prospect is perceived. Now it is BB who has to make sure that the rules of game is fair and consistent with professional code of conduct. That is to say BB is the definitive supervisor of banking industry and it is their mere responsibility to back the banking firms on track. Obviously the stated over exposure not happened overnight, rather it was a gradual process. If BBs respective department(s) inspect the banks capital market exposure on daily basis, certainly overexposure would detected before crossing the specified level. We think there should have some margin call type limit reminder that would automatically send warning message when 7-8% limit would crossed and send another final warning after exceeding 9.75% limit. Hopefully this automated warning system could prevent banks from substantially made the prospective core business perilous and vulnerable.

Lending cap & subsequent reduction of deposit rates

As Bangladesh was one of the countries that showed immunity from 2008 Global recession, interest rate was not substantially decreased in comparison to world market. With the aim of boosting industrial growth that showed 6% growth in comparison to 7% of last year, BB capped lending rate to 13% for five prime sectors like agriculture, real estate, term loan to small & medium industry, working capital to small & medium industry and trade finance. Despite this lending rate reduction, interest spread would remain above 5% without simultaneous increase in deposit rate. Mentionable here with a substantial asset base 3% spread is good enough to keep a bank profitable. More importantly, banks should concentrate on increasing client base that would automatically augment profit base with the help of economies of scale. But obviously they didnt think so compactly and immediately reduced deposit rates twice in a short period of five months [26].
Situation Anatomy:

Following 2.5% cut in corporate taxes for banks, interest rate was expected to reflect that cut. Rather banks elaborated the lending rate cap from previous 16 %+ rate as reduction in deposit rate. Relative rate of return concept discussed earlier forced the depositors to cash out even fixed deposit from banks and rushed toward capital market with excess fund.

Diversion of funds to capital market

Since the 2008 global recession that was followed by acute power and infrastructure crisis, overall economic activities slowed down. A large number of exports oriented and other industries were struggling to secure the minimal return on investment. Private investment

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during FY 2009-10 was BDT 1362.8 billion (19.7% of GDP), with the lowest level of growth in last 5 years [27]. This slowdown basically derived from power and gas shortages that forced export oriented sector to rely on costly source of power (petroleum) to keep the operation continuing. Certainly it pressurized margin ratios and in some extreme cases shut the operation as a whole. But the scenarios of credit disbursement depicted completely reverse image.

Figure 10: Growths of Domestic Credit & Broad Money

25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2005-06 Industry Growth 2008-09 Domestic Credit Growth

Some of such unethical fund diversion was detected by Bangladesh Bank Surveillance Team. One was the case of Loadstar Fashion, who borrowed BDT 420 million as Industrial Credit from EXIM Bank and diverted BDT 370 million to capital market. Another fund diversion detection was Cosmos Enterprise who diverted BDT 50 million by taking loan in the name of industrial credit [28].
Situation Anatomy:

It is the mere responsibility of central bank to track the dissemination and destination of loan portfolio that flow from banking sector to real economy. Obviously as a single entity it is so tough to BB to serve the whole purpose. Thats why banks have to provide cordial all out support to BB in this regard. But it is not very pragmatic without proper force or motivation in action. The BB governor said in the announcing of MPS of 2nd half in fiscal "Strict surveillance will be there to discourage expansion of bank loan in the wasteful and unproductive sectors to prevent inflationary pressure caused by excessive growth of domestic credit."[29] In July, the central bank in its MPS for the first half of FY 2010-11 aimed at bringing down private sector credit growth to 16% by next June from 24% of June last. As already mentioned BB must have to take proper feat to establish fair law of game and pursue banks to fully comply with it.

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3.2.2 The Government Policies

The policies involving the government that helped to transfer liquidity in capital market are discussed below:

Reduction of NSD certificates interest rate

After the introduction of lending cap on bank lending rates and subsequent reduction in bank deposit rates, the sale of NSD certificates increased substantially. In March 2010, the growth of net sales of NSD certificates reached 869% on year on year basis. The government in its 2010-11 fiscal budgets reduced the interest rate on its NSD certificates in an attempt to bring down its borrowing costs. The government also imposed an advance 10% tax deduction on the interest income. The table below shows the revised interest rates: Table 8: Revised Interest Rates on NSD Certificates Scheme 5 Year Bangladesh Sanchay Patra 3 Year (3 month interval profit) Post office fixed deposit 1 year Post office fixed deposit 2 year Post office fixed deposit 3 year Family savings certificates Revised Rate 10.50% 10.00% 8.00% 9.00% 10.00% 11.04% Previous Rate 12.00% 11.50% 9.00% 10.00% 11.50% NEW SCHEME (ONLY FOR FEMALES)

Source: Monthly Major Economic Indicators, Bangladesh Bank On an average, all rates were decreased by 1.50%. In June 2010, the inflation rate was 8.70% and the weighted average bank deposit rate was 5.95%. The low real interest rates from these popular investment sectors forced many savers to look for better alternative investment opportunities. At that period, the capital market was booming with increased turnover and higher rate of returns. As a result, a huge flow of funds switched to capital market which would otherwise invested in other sectors. This scenario can be sensed from the following graph. The growth of net sales of NSD certificates on year over year (Y-o-Y) basis experienced a sharp decline and became negative. In November 2010, the growth was -81.3%. Figure 11: Growth of Net Sales of NSD Certificates (Y-o-Y) 1000% 800% 600% 400% 200% 0% -200%

Source: Monthly Major Economic Indicators, Bangladesh Bank

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Black Money Provision

The present government in its first fiscal budget for 2009-10 kept a provision for whitening of black money. On payment of a nominal 10% tax the government allowed legalizing of black money for investments in any of the three categories; industries and BMRE projects, share market and purchase of apartments. The share market investment was subject to a two year lock-in-period. However, there were no specific guidelines. It is anticipated that, a huge amount of money flowed to the capital market at that time because of phenomenal gains that the sector was fetching. In fiscal 2009-2010, 296 persons took the opportunity and whitened Tk. 4.27 billion. But the actual figure was substantially higher than the recorded figure as there is no accurate mechanism of identifying and checking the entry of 'black money'. The National Board of Revenue (NBR) refuted the allegation that the offer of the tax administrator to whiten 'black money' has resulted in an overheated capital market. The government, however, scrapped this provision in its last fiscal budget for 2010-11.

Capital Gain Tax

Observing the rapid growth of capital market and record level of turnovers, the government in the last year budget imposed 5.0% capital gain tax on securities of sponsor shareholders and directors of banks, financial organizations, merchant banks, insurance and leasing companies, portfolio management companies, stock dealers and stock brokers. However, it kept the retail investors untaxed. The government also imposed for the first time a 3% tax on the premium value of shares. The government further increased tax at source on stockbroker commissions from 0.025% to 0.05%. From an analytical point of view these moves were taken at the very right time when the index was at 6153 points level. Exemption on capital gain tax encourages short-term speculative investments by the investors in the secondary stock market. As such, tax on capital gains would limit the free flow of funds. Most of the countries including India and Pakistan have tax on capital gains at varying rates. The provision for taxes on premium share value drew some criticisms. Capital market geniuses affirmed that such a provision is contrary to the basic principles of taxation, as the tax on the premium value of shares basically amounts to taxing the equity of a company, which goes against taxation principles. But the government remained strict to its decision.

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3.3 How The Liquidity Used In Malpractice

This part of the report deals with how the liquidity was used in influencing the stock prices. It also covers the policies that helped speculators in making profits.

3.3.1 The Corporate Announcements & SEC Policies

Corporate announcements play an important role in appreciation or depreciation of stock prices. Because of strong relationship between announcement and price, manipulators have used this as a weapon to change the price levels. All these types of announcements along with some SEC policies which gave opportunities to speculators are discussed below:

Right Share
A total of Tk. 20.145 billion (2014.5 crore) has been raised by 16 companies through announcing right shares between July 2010 and second week of December 2010. (During FY2009-10, only two companies raised capital through offering right shares which was amounted to be Tk.716.22 crore) [30] in response to the every right share announcement market zeal soared sky high that failed to take into consideration respective companies fundamentals and relative valuation parameters, actual purpose of issuing right shares and feasibility of stated projects. Basically banking institutions had some regulatory obligation to meet specified % of risk weighted capital within June, 2011 that pursued them to take the windfall opportunity of booming market and issue right shares to fill capital gap. With the wake of banking institutions other firms also came with seasoned offering most which pricing was not very justifiable. The basic traders psychology was to multiply their investing shares. They had no conception about what are they buying at what price and most importantly, after right adjustment what should be the price. Obviously SEC had lot to do to protect this scam by vigorously verifying issuers offering purpose and price the issue in the line with fundamental strength.

Bonus Share
Another corporate announcement that virtually had no fundamental backings was Bonus share offerings. Conceptually bonus share has no impact on shareholders value as it is a mere transfer of fund from retained earnings/reserve to capital accounts that leave book value of equity unchanged. But market participants responded as if they found an open gold mine gifted by companies management. Most sizzling zeal was seen with the announcement of 143% bonus share of UCBL that accumulated preceding 3 years bonus. On 13th June 2010, market price of UCBL was BDT 1620 that soared to BDT 3090 on 18th July then dropped to BDT 2690 within 15 days just before the actual announcement. After bonus announcement adjusted price was set to BDT 1210 [31] that started to jump again with the expectation of further bonus in next financials. This is just one of the many cases

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when firm insiders adopt the market vibe very well and utilized the same to boost market price.

Stock Split
With the so called aim of accelerating velocity of securities transfer, regulators decided to convert more or less all scripts face value to BDT 10. On May 10, 2010, the SEC issued a notification saying that the commission would take initiatives to approve the face value split of shares of the companies, which would complete the required formalities. Mentionable here this purpose of liquidity augmentation only be served if number of shares in one lot was increased at a lower proportion than face value split, which was not true for many scripts. So splitting these stocks keep the liquidity completely unchanged. But situation was that every corporate announcement, irrespective of its merit, was rewarded with substantial price amplification. And issuers absolutely seized that opportunity as the wave of spilt news became a part of daily news. During 2010, the SEC gave consent to about 63 companies to split the face value of their shares. As mentioned, a split should cause no change in price other than the adjustment warranted by the split factor. Splits do, however, ensure substantial profit to market makers, i.e., brokerage houses. Due to the increased number of share trading and higher bid-ask spread brokerage, brokerage firms will be able to make larger profits when their customers buy and sell the stocks involved. Hence, to make tons of money, brokerage firms do recommend split stocks [32]. Before giving its decision, SEC didn't do any study about the impact of uniform face value on the capital market of Bangladesh. Experts have been criticizing this mechanism from the very beginning of its introduction, as a group of people made huge profits using it, though nothing was added to company fundamentals. But the SEC remained cling to its decision. Even the SEC urged the government to give its consent to its decision of stock split. But Finance Minister A M A Muhith refused the proposal. Finally the SEC postponed its earlier notification on February 02, 2011 in line with the government's decision and stopped giving approval to stock splits.

Assets Revaluation
Apparent vehicle of corporate wealth distribution among shareholders is cash dividend that is directly linked to periodical earnings prospects. In contrast asset revaluation is just a sort of accounting discretion that enable management to report corporate assets in market value rather accounting book convention which imply no other impact than increasing equity book value. Ideally it has nothing to do with shareholders value increment because, whether prior or post of revaluation, the similar piece of asset belongs to equity holders. Price of some scripts like Eastern Housing Limited increase at rocket pace that observed price movement from BDT 677 in July to BDT 1880 in September 2010 with the rumor rounding revaluation of huge land bank.

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Book Building Procedures

General consensus is that issuers always try to tap the bullish market onslaught by bringing their securities offerings to public market. And obviously book building has already dubbed the fairest method of initial price building in developed market. But look what we have done with that method! Primary distortion that our regulators failed to detect is the simplest agency relationship, that is to say most of the participants adhered in price building process are active merchant bankers who have their own dealings to facilitate other issuers to get best price from market. So for the sake of their own business all merchant banking participants tried to match their bids with indicative price irrespective of their own valuation models. Because they know very well where the real business lies. Besides that several other distortions like inadequate and non transparent accounts, erroneous pricing methodologies, lack of professional attitude from issuers etc all blundered the purpose of establishing a fair price. The short lock in period (15 days) in case of book building also made an easy come out for manipulators. Table 9: List of Companies That Used Book Building Company RAK Ceramics Khulna Power Company Ocean Container Mobil Jamuna M.I. Cement Indicative Price 40.0 162.0 121.4 127.0 93.0 Offer Price 48.0 194.0 145.0 152.4 111.6 % Change From Indicative Price 20% 20% 19% 20% 20% P/E Multiple At Offer Price 31.17 69.53 31.39 26.41 87.87 Face Value 10 10 10 10 10 Offer Price/Face Value 4.8 19.4 14.5 15.2 11.2 Price After 1 Month 170.1 203.2 258.6 Price After 6 Months 172.3 136.5 162.8

Yet to be traded Yet to be traded

The above table shows some key information about the 5 companies that used the book building method. All the companies had substantial high P/E multiple before hitting the market. Manipulation can also be sensed from the % Change From Indicative Price column. 20% is the maximum limit set by the SEC and all the companies got that maximum limit. The book building system is now temporarily suspended. The SEC is preparing a new guidelines for book building, attempting to restrict such malpractices. The SEC needs to ensure that the new guidelines should cover all the issues and at the same time encourage entrepreneurs to come into market.

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Private Placement
A huge amount of money is being siphoned off from the stock market by the name of private placement. It is also very shocking that there is no detailed guidelines by the SEC in this regard. Taking this as an advantage, a report shows that, 6 companies raised Tk. 15.72 billion through private placement even before going to IPO, charging astronomical premiums. It is also alleged that, many private placement holders sold their shares to ordinary people even before getting the IPO approval. The SEC cancelled the IPO proposal of one company after investigating such allegations. Almost all the companies that applied for IPO in 2010 used the private placement to raise funds. But they did not use any meaningful way to determine the offer price. They even did not disclose the full list of placement holders. The SEC needs to look into this matter on an emergency basis. The table below shows the companies that are yet to be listed even though they have privately placed their shares: Table 10: List of Companies That Have Privately Placed Shares

List of Companies
Orion Pharmaceuticals GMG Airlines Unique Hotel & Reseorts LankaBangla Securities STS Holdings Keya Cotton Summit Shipping

List of Companies
KYCR Coil Golden Harvest Fareast Knitting & Dyeing Ananda Shipyard PHP Float Glass Navana Real Estate

Source: Sheersha News, February 14, 2011.

Direct Listing
Direct listing was another hoax that the companies used for manipulation. This was first introduced in 2006 for government companies IPO. Later on, private companies also used this method. Shinepukur Ceramic was the first private company to use such system. Under direct listing, directors sell their portion of shares directly to investors. So the excess price that is received over the minimum fixed price goes directly to directors pockets. No money is received by the company. Also, in this system, there is no upper price limit. So manipulators had their own cartel start quoting the shares at astronomically high prices to lure unsuspecting investors. Strangely, the SEC allowed two companies in 2010 to go for direct listing even after discontinuation of this system for private companies.

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Table 11: List of Companies That Used Direct Listing

Company JAMUNAOIL KPCL MPETROLEUM OCL ACIFORMULA SPCERAMICS TITASGAS NAVANACNG DESCO POWERGRID

Listing Year 2007 2010 2007 2010 2008 2008 2008 2009 2006 2006

Face Value 10 10 10 10 10 10 100 10 100 100

Close Price At 1st Day 360.9 273.6 300 297.6 220 96 386 193.9 250 250

Close Price After 6 Months 165.7 136.5 158.1 162.8 161.3 102.9 524.5 267.6 394.25 487

% Change in Price (6 Months 1st Day) -54.1% -50.1% -47.3% -45.3% -26.7% 7.2% 35.9% 38.0% 57.7% 94.8%

The table above shows that, total 10 companies used direct listing during the last 4 years. Among them, 5 companies had experienced serious price deteriorations. Especially, all the companies that used direct listing in 2010 saw substantial fall in prices after 6 months.

Frequent Changes in Margin Loan Rule

As per Margin Rules 1999, the SEC is sole responsible for setting the margin loan ratio and associated guidelines. During 2009-2011 period, the SEC changed its stance regarding margin loans several times. As discussed below, the SEC brought various changes in margin loan ratios, criteria for margin loan eligible stocks and the margin loan valuation method. The impact of all these changes were mainly short lived and in many cases created huge confusion and criticisms. Perhaps the most changing policy of the SEC was regarding the margin loan ratio. During the last 12 months (Feb 2010 to Feb 2011) the SEC changed the margin loan ratio 5 times. Loan ratio varied from 1:2 to 1:0.5 during this time period. Such unprecedented frequent changes in loan ratio signaled the whimsical mentality of our regulator and represented the SEC as near sighted. It caused the market to fluctuate heavily, bringing losses to investors. It also seriously damaged SECs image as the regulator and investors confidence. At the starting of 2010 stock market bubble creation, on December 10, 2009, the SEC ruled that stocks having P/E ratio above 75 wouldnt be eligible for margin loans. Later, SEC changed the break even P/E ratio to 50. On 15th June, 2010, SEC further reduced the P/E ratio to 40. The rationality behind setting such break even P/E was unclear. Many experts believed that this action might falsely indicate that all the stocks having P/E ratios below the break even were fundamentally strong. It might also indicate a price ceiling/limit for the stocks which was quite irrational. However, the outcome of changing the break even P/E

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was very short lived. Huge flow of investors own funds and speculative demand minimized the impact of this action. Table 12: Revision of Margin Rules From Feb 2010 to Feb 2011

Date 02 February -2010 03 February 2010 16 March 2010 15 June 2010 08 July 2010 22 November 2010 13 December 2010 19 December 2010 10 January - 2011

Particulars Marginable stocks P/E reduced to 50 from 75 Marginable stocks P/E reduced to 40 from 50 Diluted EPS will be considered to calculate the marginable stocks P/E Source: DSE Website

Revised Loan Ratio Decreased to 1:1 Increased to 1:1.5 Decreased to 1:1 Decreased to 1: 0.5 Increased to 1:1 Increased to 1:1.5 Increased to 1:2

In August 2010, the SEC instructed the lenders to follow a Net Asset Value (NAV) based calculation for loan disbursement as well as maintenance. The NAV-based calculation forced a merchant banker or a stockbroker to provide loan on the basis of value of a stock as determined by adding the market value to NAV and dividing the sum by two [33].This policy created huge chaos as merchant bankers said it would not be possible for them to implement this policy under the existing market system by the given deadline. It was also anticipated that this new policy would lead to trigger sale to adjust the margin loans. This issue even went to court of law and the High Court issued a stay order. The SEC dropped this policy in 2011 amid massive fall in index. As said earlier, the impact of frequent changes in such crucial policy is not good in the long run development of a capital market. The regulator should have a long term vision along with short run prescriptions and act accordingly. This is being changed and the recent decision of the SEC to set margin loan ratio for 6 months is therefore much appreciated.

DSE Members Margin Deposit

Earlier, DSE members were able to cover 10% of member's margin by cash, pay order, FDR or other securities and remaining 90% through bank guarantee. The SEC revised this margin rule and increased the amount of members margin deposit substantially. The new rule was scheduled to be implemented from December 05, 2010. DSE members strongly protested the SEC directive saying that it would lead to unavoidable hassles in stock trading. They demanded to keep the member's margin deposit provision unchanged to avoid operational complexities.

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After the steepest ever one-day fall in stock prices and violent street agitation by small investors, the SEC along with other measures scrapped the revised margin deposit rule. It is widely considered that, the new rule implementation news contributed a lot in the recent slump of capital market.

Spot Trading of GrameenPhone & Marico BD

One of the most baffling actions of the SEC was transferring GrameenPhone & Marico BD to spot market from the public market. The SEC transferred them to spot market, saying abnormal hike in prices. These two companies remained in the spot market for a long time (almost 1 year) and shortly after the slump in December 2010, the SEC made GrameenPhone and Marico BD from the spot market to the public market without any clarification. They even failed to bring any specific charges against these companies regarding the previous unusual price hikes. The SECs action regarding these transfers was unexplained. The market lost 176 points in the first hour on February 18, 2010 as news filtered that the SEC had placed the two heavyweight shares in the spot market. Investors also lost confidence on their regulator because of this irrational behavior.

Circuit Breaker on Index

When the index experienced some massive falls and hit the 7140.29 points level (1778 points down in 32 days) in January 2011, the SEC imposed a circuit breaker on the DSE general index for the first time in an effort to rein in volatile trading. The circuit breaker was set at +/- 225 points and the SEC said trading at the CSE would also be suspended automatically for the day when DSE stopped its trading. On the first day of its implementation, January 19 2011, the circuit breaker came into effect just after 86 minutes, trading was halted after the index lost 226.91 points. On the next day, the trading again halted in just five minutes. Due to some technical difficulties this time the circuit breaker did not work accordingly and the index lost 587.04 points (8.49%). Such huge fall baffled the SEC and they took a decision not to open the market for the next 2 days. The situation proved that, the circuit breaker on index failed to create any positive development to bring normalcy to the market. In fact, it created more panic in the market. Every time the circuit breaker halted the trading more protests were seen on the streets as investors had no other things to do. For instance, on January 20, 2011 after the trading halt, the protestors vandalized several vehicles, ransacked a leading broker house and engaged in sporadic clashes with police that brought the activities of the capital's bustling financial hub Motijheel to a complete halt. Circuit breaker is a tool to put a break on a strong emotion and gives the authority some time to find out the real causes behind such strong emotion. Without addressing the real

35

causes a circuit breaker can only accelerate such emotion and delay the inevitable outcome. Having realized the failure the government decided to discontinue the index circuit breaker from January 25, 2011. The index circuit breaker remained active just for two days.

OTC Market
In Bangladesh, unlike developed countries, OTC market is a separate trading floor provided by a stock exchange to facilitate trading of unlisted and de-listed companies. Presently, shares of 69 companies de-listed from DSE are being traded in the OTC market. But the performance of the OTC market has been depressing. Many sale orders placed in the market soon after its launch in the middle part of 2010 are yet to be settled. The SEC move to introduce the OTC market, maybe, aimed at protecting the investors who easily fall prey to rumors and invest in junk shares. But in reality, it is a gross manifestation of failure on the part of the regulator and the bourses in monitoring and disciplining the market. This market has another significant implication. It will support many companies to come to the market and raise hefty amounts of money through IPOs, promising high returns on investments and then leave the market bypassing all the hassles of foreclosures and legal complexities. Salahuddin Ahmed Khan, Professor of the Finance Department at University of Dhaka and ex-CEO of the DSE said, "OTC market and the stock market cannot go together and the bourses should ensure accountability from the listed companies first.

3.3.2 The Government Policies

The policies set by the government concerning the capital market are critically analyzed below:

Share Offloading by Government Enterprises

In both 1996 and 2010 stock market crashes, one common issue was offloading of shares by State owned Enterprises (SoEs). In both periods, despite strong demands from stakeholders, the government failed to utilize the opportunity and offload shares. Slow bureaucratic process maybe the one of the causes of implementing this policy. In both periods, supply shortage of quality shares was a prime reason behind the overheated markets. A government could easily avail this opportunity and collect funds for its projects. In January 2010, the Finance Ministry set the June 2010 deadline to float shares of 26 state-owned companies, as part of a wide-ranging move to boost supply of fundamentally strong shares in the market. But this proposal got stuck in bureaucratic tangles. In November 2010, when the index crossed the 8500 level, the capital market stakeholders, including the SEC, DSE, CSE and investors demanded a swift execution of the

36

government proposal. This time, the government announced that shares of eight listed SoEs would be floated within next 15 to 20 days and the shares of 24 non listed SoEs would be floated by the year end. The market reacted to this negatively and the prices of the eight listed SoEs dropped substantially. But ultimately the government failed to keep its promises and the deadline passed, giving some people an opportunity to make profit. After the massive fall of index in December and January, on February 10, 2011 Honorable Finance Minister AMA Muhith held a crucial meeting with ministers and secretaries of the ministries and divisions that control a significant portion of shares of which were supposed to be offloaded by December, 2010. In that meeting, December 2011 has been set as the final deadline with no further extension. This decision was criticized heavily by experts. It seemed the government forgot that new scenario required new policy action. An over-flooded market requires supply of new shares. But supply of new shares can have a disastrous effect in a plummeting market with liquidity shortage. This news caused a free fall of index on February 13, 2011. The index fell 474.78 points on that day following the declaration. Finally, the government again changed its position and decided to postpone its earlier decision on February 15, 2011. "We have decided not to offload the shares of SoEs for the time being to help stabilize the market as some investors are now active in pulling down the share prices artificially", Finance Minister told reporters at his secretariat office. [34]

Change in IPO Floatation Guidelines

IPO floatation guidelines are crucial for the development of our capital market and for ensuring quality share supply. Because of its huge importance, the guidelines in our country are set by the Ministry of Finance in consultation with the SEC. The current guidelines have been modified 3 times in less than a year from November 2009. The first two changes created substantial amount of controversy as being too stringent and anti market. Many companies felt discouraged and sometimes puzzled by the rapid changes in the IPO rules. Tougher regulations set by the government also caused a fall in the flow of IPOs. Only 13 companies went public up to September 2010 against 18 companies hitting the market in 2009 [35]. Later, in October 2010, the government again changed the IPO rules under intense pressure for relaxation. The government reduced minimum amount of paid up capital to Tk. 300 million and set a uniform 10% minimum share offloading percentage for bigger companies instead of multiple percentage. The move was appraised by all the vested quarters and it was hoped that such timely decision would encourage big and financially healthy companies to come to market. In setting the IPO floatation guidelines the government should focus on simple rules with incentives to lure more companies to come to our small market. Quality control can be ensured by proper implementation of accounting rules and other regulations.

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3.4 Beginning of Bear

Figure 12: DSE General Index : 2009 - 2011
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

Period Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Feb-11 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

SD 89.15 173.73 63.77 529.65 346.37 291.72 235.81 459.99 742.74

CV 3.40% 6.56% 2.15% 13.89% 6.47% 4.96% 3.56% 5.70% 10.67%

Range 428.11 661.04 258.83 1412.29 1259.98 865.56 897.17 1695.03 2841.24

Jan-09 Apr-09

Source: Monthly Review, Dhaka Stock Exchange

From October 1st to December 5th, just within 2 months market return on DSE was 23.47% or roughly annual return of 140%! Trade activities also surpassed all historical records. With these abnormal patterns on mind in association of past evidences, most of the market analysts knew a market collapse was inevitable. But the perceived timing was unknown variable. Bangladesh Bank (BB) which manages the money market announced that in the face of rising inflation it would institute price controls on commodities. At last on December 8th ahead of some strict corrective measures formulated by the BB to Banks and NBFIs and with the arrival of IMF representative team in Dhaka, crash or so called correction began. On that day DGEN fall over 600 points within first hour of trade inception Figure 13: DSE Turnover : 2009 - 2011
35,000,000,000 30,000,000,000 25,000,000,000

Taka

20,000,000,000 15,000,000,000 10,000,000,000 5,000,000,000 0

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Source: Monthly Review, Dhaka Stock Exchange

and since then bear has been dominating. On subsequent periods, government and regulators took several desperate endeavors. But, despite these efforts, the market declined

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 along with the hard earned invested savings of millions of inexperienced, middle class investors. From December 8th to February 28th, DGEN lose 38.43%, while average daily trade was only BDT 1030 corer against BDT 2044 corer over July 1st to December 7th [1]. These substantial low activities parameter might be a composite of several factors including so called money laundering, excessive panic, dormant role of institutions, reluctance to sell with substantial loss etc. whatever the factor(s) are/is, reality is that several thousands of retail investors has lost their last penny.

4.0 Evaluative Remarks of 1996 and 2010

Manual Trading & Settlement Automated Market Cap. Tk. 2700 bn Tk. 316 bn FX Reserve $ 11.17 bn 1 9 9 6 $ 2.03 bn

No Central Depositor Yes M. Cap. To GDP

18.90% Inflation Rate 39.01%

4.43%

6.76%

Low No. of Analysts Moderate CV of Index

59.2% GDP Growth 26.9%

4.62%

5.83%

2 0 1 0

Paper Nature of Scripts Electronic Number of Scripts

192

Broad Money Growth

8.24%

251

22.44%

Source: Bangladesh Bank, Bureau of Statistics & DSE

During the initial phase of 1996 abnormal price hike, government misinterpreted the hike as public confidence on new government and expected macroeconomic prospects. Thus no effective timely measures were taken to hinder the bubble formation. Besides that primitive market structure opened up the way of abnormal speculative and arbitrary profit for large traders. Especially huge price gap for same scripts at a particular point of time between formal trading floor and informal Kerb market did a major portion of damage. As most of

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the traders in Kerb market possessed very little to no investing knowledge, price hiked in every moment irrespective of fundamental soundness. And rational risk less profit motive forced even trade brokers to buy shares from trade floor and instantly sell the same in Kerb market at higher price. Most interestingly, around 20-25% price differentials existed between DSE and CSE trade floor. Trade was settled via Delivery versus Payment (DVP) system that was attributed as prime vehicle of malpractice, where large amount of fake bulk trading created misperception about real demand and pushed the price sky rocket. When the market reached to its peak on mid November, government and regulators started to take hasty measures like reduced margin loan ratio, stopped loan against share certificates, imposed circuit breakers, increased Interest rate on savings and fixed deposits etc. Alongside then Finance Minister stated that he will take proper action only if index come down below 1500 points. All these factors crafted ruthless market panic and inscribed consecutive massive fall. In addition, system abuse was the common phenomenon in prosecution of stock trade in both DSE and CSE and general investors came to know this through news media which resulted more panic. In contrast, the macroeconomic situation in 2010-11 was fairly different than that of 1996. Over these long 14 years, RMG driven export and remittances becomes the most crucial pillar of Bangladesh economy. As a chain, our economy becomes highly correlated with global market. And as an emerging economy, 2008 global turmoils immediate impacts was economic slowdown that made liquidity pilling and then keep lagging impacts on our export and import demand. Besides that political instability in Middle Eastern region forced remittance growth negative in December 2010. Domestic high inflation, while food item inflation passed 10%, pushed down the foreign reserve. All these dynamics made excessive fund injection during late 2009 periods while several policy oversights can be attributed in misusing this excess fund and formed the bubble. Therefore, the basic drivers of 1996 and 2010-11 market scams were decisively different. Relatively mature market structure, competent investors class, close ties of capital market and economy, more effective and timely attempts from government and regulators make the expectations that two scams might be substantially different in terms of extent of fall and time to recover.

5.0 Recommendations
The alternative courses of action that is expected to fetch market harmony with a long run sustenance view in mind is directed toward inhibit the formation of market bubble. Because historical findings asset that it is relatively least costly to maintain the market order rather take hasty measures to correction after bubble forming. 1) Currently, our stock exchanges are non-profit cooperative organizations, owned by the exchange members who are usually stockbrokers. These are not demutualized which means the ownership, management and trading are controlled by the same

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group of people. As a result, conflicts of interests occur many times in executing operations hampering accountability and transparency. Ensuring good corporate governance in stock exchanges can help us from a lot of troubles. Looking back the stock market crisis in 1996 and 2010, it has been clear to all of us that stock market members are practicing very poor corporate governance. The enquiry committees also stated fraudulent activities of many members. In 2010, it is alleged that, the DSE purchased 37 bigha of land in Gazipur to construct holiday resort for its employees. To bring a change in this scenario the stock exchanges need to be demutualized. Transparency needs to be ensured. Demutualization will ensure sound corporate governance; reduce unauthorized influences by members and bring operational efficiency. The current government is very much determined to complete the demutualization process within its tenure. DSE formed a 10 member committee recently in this regard under immense pressure from the government. Some brokers are opposing the governments move but the government needs not to pay any attention to them. It should remain strict to its decision for the betterment of our capital market. 2) It is very much surprising that the SEC cannot monitor the trading activities of the individual accounts opened in merchant banks. This is because merchant banks use omnibus account to connect their clients accounts to CDBL. One omnibus account includes thousands of clients accounts. As a result, CDBL treats all the clients accounts as a single account. Therefore, only the total figures of buying and selling amounts can be retrieved from the CDBL. The use of omnibus account started from 2008. Considering the danger of such practices, the SEC issued an order to the merchant banks to convert the omnibus account into individual BO accounts and connect each clients BO directly to CDBL. But merchant banks failed to do so in absence of specific guidelines. Still they are using omnibus accounts. It is alleged that, manipulators used omnibus accounts to control the prices of shares in the 2010 stock market scam. Aggressive selling also took place in these accounts which could not be verified due to SECs monitoring inability. Believe it or not a big chunk of trading completed through these accounts of which the SEC has got not a single trace. The SEC needs to look into this matter as early as possible and establish monitoring on the trading activities of merchant banks' clients in whatever way possible. 3) SEC requires capacity building activities for efficiently regulating the market operation. It also requires more professional persons such as lawyers, chartered accountants, CFAs, capital market specialists etc to bring professionalisms in performing regulatory duties. There are 134 staffs in the SEC of which only 47 are officers. There are four persons currently working in the law department

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of the SEC to support the lawyers on different legal issues. Because of weak monitoring and surveillance system, the SEC failed to take decisions as regards the practice of insider trading in the market. Moreover, SEC has no surveillance software of its own; rather it uses the software of DSE and CSE to monitor the market. Besides that, when DSE needs to invest on improvement of its trading software, it was found that it invested in land purchase, to establish a resort, raising questions about its allocate priorities [36]. This lack of organizational and infrastructural shortcomings from the part of regulatory bodies should be alleviated for the sake of establishing better authority that can serve the best interest of investing community. 4) Diverge Capital Market Policy that governs the rules and establish fair law of game should be formulated with specific vision in mind rather promptly taken as immediate cooling machine. Our Policymakers failed to take concerted actions to impact the rise in any sustainable ways. Frequent change of policies and timing represented whimsical mental conditions that brought abrupt market panic on most of the case because of ample opportunity to misinterpret the changed rules. Imperatively after the panic resolved, market zeal multiplied that dashed it toward more uncertainty. Frequent change regarding margin rules, netting facilities, loan able scripts determination etc highly damage the icons of regulators in participants mind, probably they started to believe that regulators had no deals except formulating hasty decisions! So it is fair to expect that market regulators would act as market regulators not as market managers. 5) Central of all capital market scams is the lack of proper Corporate Governance practice. Neither institutional nor individual investors, as a whole, practiced their should be course of action. When central bank has explicit regulations of ceil the limit of capital market exposure to 10% of liabilities, how particular scheduled bank(s) thought about take the limit up to 35%! Another dire move was during rate tramp in call money market when some banks borrow fund at relatively lower rate to relend the same at higher rate, just like syndication in potato market! So central bank have to have proper surveillance program in motion that would monitor industry players day to day operation compelling them to adhere, if necessary. 6) Regulators have to formulate and implement proper action against alleged people relating to malpractices in the market. During 1996 fallout, investigation committee identified 45 stock brokers and individuals in this regards. But no one found liable to fine or any other punishment [37]. Legal actions against the people who, knowingly and deliberately violated the market rules and regulation, involved in so called malpractices discourage perform any sort of unlawful activity. 7) Surprisingly, our capital market hasnt its own judicial counter that is a must needed requirement with full fledged and exclusively market oriented Jury panel. This will provide the capital market with quick dispute resolutions. In addition, dispute maybe solved through mediations and to do this the capital market

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should have alternative dispute resolution. Normally, the capital market violations are forwarded to the honorable court of law which is very time consuming. For instance, debacle regarding AIMS 1st Mutual Fund dividend issue conflicted with pure Close End Mutual Fund concept. So strict conceptual structure should have established rather protecting issuers interest. Besides that among 45 accuses of 1996 scam most were granted advanced bail form High Court that partially hindered the way of subsequent action and ultimately forced another debacle. 8) Market regulators (SEC, DSE & CSE) could take intensive Investor Relation program and Regulations that would encourage retail investors to educate about minimal market fundamentals. In this regard SEC could make the training program arranged by brokerage houses for respective employees and clients mandatory. This is expected to protect the participants to blindly run behind baseless rumors by enabling them to judge what they are going to purchase/ sell at what price. 9) By regulation, explicit investment recommendation is banned in our market. But practically this regulation highly motivates everyone, irrespective of market knowledge, to informally recommend investment. If Eligible Research Firms are issued license from SEC to recommend about investment it would facilitate the superior knowledge to enter into investing decisions. Because then individual investors would rely on Analysts thesis rather chomping poison pill. Analysts would practice the best judgment for the sake of competition and future business. 10) One common tendency of our regulators is to sit in meeting to decide critical issues in trade hour. Particularly some very important change in margin loan ratios and determination of marginable securities was decided in meeting that started in trade hour. Besides that during market slump some coordination meeting among Bangladesh Bank, SEC and Bourses were held in the same manner. Now, what is the rationale behind talking so much about this issue? Historically observed, any decision regarding margin ratio and netting facilities contributed lot behind shaping investors emotion. So uncertainty created from the meeting during trade hour paved the way of rumor spread, manipulate investors pulse and finally crafted abnormal market volatility. This action might damage regulators image in participants mind and create an environment of negative confidence. So it would be prudent for regulators not to sit any critical meeting during trade hours. 11) The same old flaw still prevails! With the wave of market zeal the supply of new issues has not increased in line with the inflows of funds and growth in numbers of beneficiary-owner accounts, which rose 65 percent to nearly 3.4 million in one and a half years [38]. The market is uniquely retail-driven: too many investors are chasing too few stocks. Finance ministry took several important and sometimes bold actions to bring the government holding portion into the market, but failed to do in timely manner. It seems the old spirit of bureaucracy that also hinder all efforts in 1996 possess unlimited power! It is the regulators who have to encourage good

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fundamental firms to come with offerings to increase market resilience. This encouragement could take the form of more tax incentive, funding facilitation, social recognition etc that would deal a fair trade off between variables included. 12) At some points of time, SEC decided to convert all scripts face value into BDT 10 to augment the secondary market liquidity. But in a sluggish macro setup with huge excess liquidity and plenty of unknowledgeable speculative minded investors, what was the logic? That is to say splitting the scripts into smaller denomination reduced capital commitment and further encourages speculation. It is seen in developed market that many sub $1.00 stocks are thinly traded and especially those that trade for fractions of one cent, are targets for price manipulation. For example, an individual or organization buys up hundreds of thousands, or even millions of shares, and then uses web sites, faulty press releases, and e-mail blasts to drive interest to the company. Very often, faulty or misleading information is provided, resulting in investors buying shares in the underlying company. The increased demand pushes the price up, while the original individual or organization doing the pumping sells their holdings [39]. 13) DSE authority always claims that market performance gauge, DGEN and DSI, calculated with the line of international standard. But were the entry of some IPOs including GP in indexes accurate? As per standard index calculation methodology, IPOs should be included in index from its 2nd trading day, that is to say the 1st entry of respective IPO share(s) would be based on difference of 2nd day closing price and 1st day closing price as percentage of 1st day closing price. So the price return is based on pure market price since 1st entry. But here DSE index authority includes the respective IPOs from very 1st trading day that calculate price change as difference between 1st day closing price and IPO subscription price as percentage of IPO subscription price. Lets check the resulting conceptual damage done with DGEN and DSI. With the entry of GP, DGEN appreciated 764.88 points (22.61%) on 1st day [31]. This was not only because of erroneous price change calculation but also abnormally high trading volume (74, 30,400 shares against average 12, 20,162 shares over next 1 year) that caused distortion in DGEN because of towering impact of GP on our capitalization weighted Index. If the appropriate methodologies were followed, index not up surged to that extent. Because the 2nd day ending price of GP was BDT 171.10 against that of 1st day 177.3, whereas subscription price was BDT 70. So source of distortion is clear! Afterwards, several numbers of IPOs collected around BDT 4614 million from market that is roughly equal to that of GP. So mistake with same extent was done again. These erroneous index calculation conveyed artificial message about market bull run which attracted millions of unaware investors toward equity market and again pave the way of easy tactics of manipulation. We expect that our stock market authority would launch another conceptually corrected market gauge index that will serve as a unbiased indicator of whole market rather convey misinformation to retail investors. 14) In Bangladesh, the lack of coordination among the regulators is a critical issue. The relationships among the regulators are sometimes unreceptive. The

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policies set by them are also sometimes contradictory. The relationship between the SEC and the Ministry of Finance came into spotlight in regarding the stock split issue. The relationship between the SEC and the DSE is not smooth either. Ever since the creation of the SEC, these two regulators have been involved in lots of debates. The 2010 stock market crash, however, saw the most fragile relationship between the Bangladesh Bank and the SEC. The SEC blamed a Bangladesh Banks policy for the current liquidity crisis in stock market. The Bangladesh Bank termed this accusation as baseless and criticized the SEC for mismanagement of capital market. The relationship between the Bangladesh Bank and the DSE also heated up when the DSE president sent a letter to the BBs governor asking to explain the term 'fatka bazaar'. The governor on several occasions termed the capital market a 'fatka bazaar'. Our regulators need to understand that blaming each other during the time of downfall will only ruin their reputations. They should work collectively for the development of our economy. They should show respect to each other and assist each other.

6.0 The Way Forward

Matter of fact is that in the face of huge market volatility when small investors lost most of their capital in force selling spiral, the regulators are seemed not to bother with it. But with the wake of time, when situation getting worse everybody including Government, Bangladesh Bank, SEC foot down from their respective strict standing. Subsequently Bangladesh Bank extended the deadline for reducing market exposure of Banks, increasing single client loan limit; SEC increased loan margin ratio, cancelled loan ability bar; government issued fresh fund to ICB. But all these measures even failed to make the market propelling for consecutive 3 days. Lastly Government in conjunction with ICB, SOBs and SOIs, decided to build an Open end mutual fund of BDT 5000 corer that seems to act as tonic in market revival. Actual solution lies in the restoration of investor confidence that is not just a matter of fund establishment. Rather an all through concert that linked all parties related (government, regulators, institutional investors, individual investors) is badly necessary to back the market on right track. Because the long run economic growth and some very much current economic variables are directly linked with our equity market. That is to say, substantial amount of loanable fund has already diverted to capital market that are prone of substantial loss. If it, then Banks have to write off a huge portion of loanable fund that will certainly force the whole sector in more liquidity crunch and inevitably toward bank run. Another possible peril might be that to backs estimated loan loss banks would increase the loan reserve ratio. It would decisively squeeze the loanable fund and severely hinder economic growth. So to avoid these paradoxical macroeconomic chains of action, it is the government who has to formulate and feasibly implement the rescue mission.

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Besides that on last financials Banks and NBFIs generated a commendable portion of their earnings from capital market that have already established a benchmark on investors mind about immediate next earnings (1st quarter of FY 2011). If the capital market source would dry for these institutions, their next earnings would severely be affected and eventually reflect on market price. Note that banks and NBFIs comprise around 45% of total market capitalization. So if their price would dampen it will affect the whole market index. Our argument is not to grant a opportunity to capitalize high gain for market, we just want to state the importance of a smooth process to make the things change rather hasty decisions. Lastly lets take a critical assessment of current BDT 5000 corer fund on the basis of historical evidences collected from other developed and emerging markets. From an operational situation, the success and failures have occurred. Undoubtedly, the most successful example was of the Hong Kong Government in 1998, a successful international financial speculators sniper war. On August 1998, Soros and other speculators to launch a group of international impact of Hong Kong's linked exchange rate and Hong Kong stock market's "three-dimensional" attack. On the one hand, together with other deep-pocketed Soros's "predators" command HK's fund selling big hands, the impact of three years of practice in Hong Kong linked exchange rate, exchange rate against the U.S. dollar declined rapidly from the peak. At the same time, to August 14, 1998, the Hang Seng Index has dropped to almost 6500 points, was the lowest in recent 5 years, the Government decided to intervene in the stock market and futures market, spent 118 billion. Hong Kong dollar funds to buy stocks, speculators continue to short the stock, then sell the Government, the force plate. After 14 days, "Rush", the Government eventually repulses the speculators: August 28 Hang Seng Index to close at 7829, turnover of 79 billion Hong Kong dollars, a record single-day trading record of the historic high. Subsequently, the Hong Kong Financial Secretary to immediately incorporated in the Exchange Fund Investment Limited, responsible for managing the "market" operation to buy stocks. To 2001 for 32 months, the Hong Kong Government Exchange Fund has been used at that time give all withdrawn from circulation. Also earn more than 1100 million. In 2002, the Exchange Fund through the Tracker Fund of Hong Kong stocks will be smoothly transferred to the hands of the hands of the people of Hong Kong, the successful completion of the "rescue" the historic mission. Japan's stabilization fund is not ideal. In order to counter the Japanese government has the impact of international investment funds, the recent fall in the stock market ten years use of postal savings funds to buy shares into the market to reverse the decline in the stock market. But the effect is not obvious. Stabilization Fund to play the desired effect effectively, the key is stabilization fund in the stock market is facing a perfect market, the stage of the macroeconomic side market is good, and whether to support the stock market has an upward trend. If these conditions are not met, stabilization fund when to intervene, how to intervene would be a problem, will intensify mishandled the market are not standardized, self-repair and delay the development of market time. The result may be neither the purpose to stabilize the market, but also their stabilization fund will lose money. In 1998, China launched the pilot securities investment funds, trying to achieve a double objective: first, through the pursuit of the Fund's own investment portfolio for investors to maximize value-added benefits, the second is to take market stabilization function. At present the scale of new investment funds reached 550 billion yuan, but its stability during the

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operation of the function of the market and not show it. In fact, the investment fund set itself two goals are mutually contradictory. Because they mainly come from private investment fund income of the Fund, they pursue the goal of course is to maximize the return on, reflected in the fund managers who achieved their primary task is to maximize its own profit, their obligation to the broader market is not stable . Because of the limited size of the stock market, market competition is not sufficient to make fund managers use their financial advantage possible price manipulation, in addition to the existing evaluation criteria value of the fund mainly net asset value, the Fund regularly publish reports forced the fund manager's pursuit of the net book value maximization. Therefore, no matter how much investment funds to achieve the level of the scale can play a "stabilization fund" of the task, to stabilize the stock market; you must re-design a special fund [40]. So our government should have keep these success and failure factors into their respective planning to get a best possible way to rid.

7.0 Conclusion
Both Capital market scams of year 1996 and 2010-11 implied major economic loss, especially for individual small investors, that left abnormal return for few market manipulators. But the macro and micro economic setup during these two scams were substantially different, so do the basic drivers of bubble formation and smash. Mentionable here, during 1996 market structure and transaction settlement in both exchanges were somewhat in primitive level. The existence of informal Kerb Market that complied with no trading rule acted significant role behind market manipulation. Besides that lack of central depository, existence of paper share, opportunity of abnormal arbitrage gain, non participation of exchange in settlement process, manual trade order book; all these factors paved the way of manipulation. In contrast, market structure in 2010-11 was much more sophisticated and in the line with developed practices. But some critical regulatory decisional debacles, lack of consistency in timing and coordination among regulators in association with sluggish real growth opportunity with enormous excess liquidity in banking sectors force the market into abnormal height. Despite these diversions, some common factors like very poor ethical and corporate governance practices, juvenile investing attitude of institutional and individual investors, political power structure, excessive bargaining power of some handful participants, and non existence of particular capital market judicial bench played some pivotal roles behind both scams. All through the current research initiative, these structural and regulatory loopholes were tried to detect and formulate possible way out in some analytical fashions. The sole purpose was to serve our capital market toward long run sustenance by precisely indentifying core distortional factors. It is expected that these unbiased findings would serve the same.

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