C A P I T A L
M A R K E T
Introduction
Capital Market mainly refers to the Stock and Share market of the country. When banking system cannot totally meet up the need for funds to the market economy, capital market stands up to supplement it. Companies and the government can raise funds for long-term investments via the capital market. The capital market includes the stock market, the bond market, and the primary market. Securities trading on organized cap-ital markets are monitored by the government; new issues are approved by authorities of financial supervision and monitored by participating banks. Thus, organized capital markets are able to guarantee sound investment opportunities. This paper reveals the various aspects of the Capital Market in Bangladesh. Objectives
Capital market, being an essential element of today’s economy, demand s an intensive and special attention. The objective of this study is to look into every aspect of Bangladesh capital market and identify its various pros and cons along with some recommendations to overcome the existing problems. The specific objectives of this study are: 1. To give an overall idea about the capital market-its structures, functions, importance, etc. 2. To identify the current situations of our capital market of Bangladesh. 3. To compare the relative conditions of Bangladesh capital market to other countries of the world. 4. To sort out the problems associated with our capital market. 5. To suggest some practicable solutions to these problems. Methodology
Secondary data and information were used in preparing this seminar paper, and thesewere collected through teamwork by adopting the following processes: Visiting in person, the following organizations and respective key personnel: 1. Dhaka Stock Exchange (DSE) 2. Dhaka Chamber of Commerce (DCC) 3. Bangladesh Bank (BB) 4. Monetary Policy Department (MPD) Consulting books from different libraries of: 1. Bangladesh Institute of Development Studies (BIDS) 2. Dhaka Chamber of Commerce (DCC) 3. Bangladesh Bank (BB) 4. Other Books
Literature review
Keeping the objectives in mind of the present study, we had reviewed the existing literatures. The Capital Market Development in Bangladesh: problems and prospects (Mahmood Osman Imam, October 5, 2000), Capital Market: An Overview (Md. Hasan Imam, 2005), An Overview of Bangladesh Capital Market (AZM Nazimuddin, 2007), Emerging Stock market and the Economy: The Case of Bangladesh (Ahmed, M. Farid, 2000), Equity Market Performance in Bangladesh: An Evaluation Savings and Development (Ahmed. M. Farid, 1998), The Stock market and the Economy: The Indian Experience (Mookerjee. R., R., 1981), Foreign Portfolio Investment: Return. Growth, Determinants and Monitoring- A Critical Analysis (Nafisa H., 1998), Financial Deepening in Economic Development (Shaw. E., 1973), Fostering Investor Confidence in the Asian and Pacific Capital Markets (Tarumizu, K., 1993). Dhaka Stock Exchan Exchange ge Mont Monthly hly Revi Review, ew, (Sept (S eptemb ember, er, 2011), 201 1), Financ Financial ial Mark Markets ets and and Instit Institutio utions ns (Jeff (J eff Madura Mad ura,, 2008) 200 8) are some of the studies that helped us. However, although these studies offered various insights into the dynamics of the cur-rent capital market of Bangladesh, their extent of point of discussion are different and reviewed from different aspects. In this paper we have tried to compile and explain all the relevant information to make the paper successful.
C A P I T A L
M A R K E T
I N
B A N G L A D E S H
Definition
Capital market can be termed as the engine of raising capital, which accelerates industrialization and the process of privatization. In other words, capital market means the share and stock markets of the country. It is a market for long term fund. With the emergence of the need for infrastructural development projects, for setting up of new industries for entrepreneurial attempts-now there are more frequent needs of funds. Participants in the capital markets are many. They include the commercial banks, saving and loan associations, credit unions, mutual saving banks, finance houses, finance companies, merchant bankers, discount houses, venture capital companies, leasing companies, investment banks & companies, investment clubs, pension funds, stock ex-changes, security companies, underwriters, portfolio-managers, and insurance companies. Functions
The functioning of an efficient capital market may ensure smooth floatation of funds from the savers to the investors. To put it in a single sentence, we can therefore say that the increased need for funds in the business sector has created an immense need for an effective and efficient capital market. It facilitates an efficient transfer of resources from savers to investors and becomes conduits for channeling investment funds from investors to borrowers. The capital market is required to meet at least two basic requirements: a. it should support industrialization through savings mobilization, investment fund allocation and maturity transformation and b. it must be safe and efficient in discharging the aforesaid function. It has two segments, namely, securities segments and non-securities segments.
Classification of companies
The SEC classified firms in terms of A, B, G, N and Z categories that had not only guided retail investors to know weak shares but also helped reducing netting and gambling done by a few hidden consortia. “A” Category Companies:
Companies which are regular in holding the Annual General Meetings (AGM) and have declared dividend at the rate of 10 percent or more in a calendar year. (Mutual fund, debentures and bonds are being traded in this category).
“B” Category Companies:
Companies which are regular in holding the AGM but have failed to declare dividend at least at the rate of 10 percent in a calendar year. “G’ Category Companies:
Green field companies. “N’ Category Companies:
All newly listed companies except Greenfield companies will be placed in this category and their settlement system would be like B-Category companies. “Z’ Category Companies:
Companies which have failed to hold the AGM or failed to declare any dividend or which are not in operation continuously for more than six months or whose accumulated loss after adjustment of revenue reserve, if any is negative and exceeded its paid up capital.
Importance of Capital Market in the economy
The capital market is the market for long-term loans and equity capital. Developing countries in fact, view capital market as the engine for future growth through mobilizing of surplus fund to the deficit group. An efficient capital market may perform as an alternative to many other financing sources as being the least cost capital source. Especially in a country like ours, where savings is minimal, and capital market can no won-deer be a lucrative source of finance. The securities market provides a linkage between the savings and the preferred in-vestment across the business entities and other economic units, specially the general households that in aggregate form the surplus savings units. It offers alternative in-vestment windows to the surplus savings units by mobilizing their savings and channelizes them through securities into optimal destinations. The stock market enables all individuals, irrespective of their means, to share the increased wealth provided by competitive enterprises. Moreover, the stock market also provides a market system for purchase and sale of listed securities and thereby ensures liquidity (transferability of securities), which is the basis for the joint stock enterprise system. (The existence of the stock market makes it possible to satisfy simultaneously the needs of the firms for cap-ital and of investors for liquidity.) Especially at times when the banking sector of the country is facing the challenge of bringing down the advance-deposit ratio to sustainable level, the economy of the country is unfolding newer horizon of opportunities. Due to over-exposure level of the financial system the securities market could play a very positive role, had there been no market debacle. Due to the last market crash and follow through events, it will be difficult to utilize the primary market to raise significant volume of funds. Thus the greatest economic importance of securities market at this point can be understood from the opportunities being lost. Bangladesh having its target to become a middle income country must have significant level of rise in investment, which at the present state of banking system cannot be met. The securities market could play the key role in meeting these huge investment demands if the secondary market would remain stable. The capital market also helps increase savings and investment, which are essential for economic development. An equity market, by allowing diversification across a variety of assets, helps reduce the risk the investors must bear, thus reducing the cost of capital, which in turn spurs investment and economic growth. However, volatility and market efficiency are two important features which will ultimately determine the effectiveness of the stock market in economic development. If a stock market is inefficient due to insufficient informational supply, investors face difficulty in choosing the optima-al investment as information on corporate performance is slow or less available. The resulting uncertainty may induce investors either to withdraw from the market until this uncertainty is resolved or discourage them to invest funds for long term. Moreover, if investors are not rewarded for taking on higher risk by investing in the stock ma rket, or if excess volatility weakens investor’s confidence, they will not invest their savings in the stock market, and hence deter economic growth. The emerging stock markets offer an opportunity to examine the evolution of stock return distributions and stochastic processes in response to economic and political changes in these emerging economies.
Structure of Capital Market in Bangladesh
Bangladesh Stock Market
Amid all the formidable obstacles, our country’s securities market has been gaining momentum. Even in the bank drop of Global Financial Crisis 2008 when the stock markets in almost all the developed countries crashed and Government of those countries spent thousands of dollars to rescue the market. Both depth and dimension in Bangladesh capital market has been becoming gradually strong and securities market registered significant growth at the initial stage and later market fell a little bit. The reason is might be that the amount of foreign portfolio in Bangladesh securities market is more or less only 2%. But lack of supply of fundamentally sound share has been causing overheating situation and circumstance like overpricing has been causing phenomenon here in recent times. Transaction has risen from a daily Tk. 250 core 2 years ago to Tk. 2500 core now and DSE General Index has risen to record 8918 from 2400 two years back. But demand and supply should match at a certain point to the tune of bringing time bound balance in the securities market.
