An Insight into the Legislative Reforms for the Development of Bangladesh Stock Market

Abstract

Stock markets have a vital role to play in the economic development of a country. An efficient stock market helps to allocate financial resources to businesses efficiently. Businesses in turn use the capital to grow, generate employment and contribute to the national development. As a result, productivity improves and the overall economy benefits. Ensuring economic growth and development is a primary objective of all countries. Economists traditionally have looked at capital, labour and technology as the major factors driving economic growth. The long-term financing should be ensured through the country's stock market considering the interest of the economy. In Bangladesh, stock market, however, could not keep pace with the country's robust economic growth mainly because of the reluctance of the larger companies to be listed and give the people opportunity to invest in worthy firms. Gross domestic product (GDP) growth in Bangladesh has averaged 7.0 per cent in the last decade, but the growth of market capitalization is not in line with it. The healthy economic growth of Bangladesh has been lauded in international forums, but the stock market does not reflect the same. Over the last five decades, the journey of the Bangladesh stock market has not been smooth. The market remains at a nascent stage, with little or no diversified scope, dominated by retail investors lacking financial literacy. Stock markets around the globe are vital in determining transparency and efficiency for an economy. In the last two decades, the stock market of Bangladesh has undergone a drastic change. This calls for more stringent and vigilant regulation in Bangladesh. From the review of past studies on Bangladesh Stock Market, there appears to be a little or no outstanding research work on legal aspects of Bangladesh Stock Market. So, the title of the present study is "An Insight into the Legislative Reforms for the Development of Bangladesh Stock Market". This thesis is an attempt to study how the Bangladesh stock market has been developing during the last three decades. The development of stock market has been studied from the view point of the pertinent institutions which have been contributing to the development of the stock market. The stock market in Bangladesh is governed by certain Acts, Rules and Regulations. Major regulatory authorities of Bangladesh capital market consist of Bangladesh Securities and Exchange Commission [formerly Controller of Capital Issues (CCI)], Registrar of Joint Stock Companies and Firms (RJSC), Dhaka Stock Exchange Limited (DSE) and Chittagong Stock Exchange Limited (CSE). It is observed that Bangladesh securities market has failed to achieve any significant growth since its inception in 1954. This stagnation is attributable to a number of factors that include, inter alia, the existence of weak legal and regulatory frameworks, the absence of active market professionals, the predominance of individual investors, and a serious dearth of foreign and institutional investors. Legal and regulatory weaknesses are considered to have crit ically hindered the market’s potential growth. Some important laws are outdated, and the regulator has introduced some unrealistic reforms over the years. Most of the reforms accomplished concentrating on incentives to investors and issuers alike, but nothing significant has been done for investors’ protection. This study scrutinizes the Acts, Rules and Regulations and attempts to identify the loopholes therein and the roles of regulators behind the recent stock market crash and recommends for some inevitable legislative reforms for the development of Bangladesh stock market. To pursue the research goal, necessary information and data have been collected both from primary and secondary sources. Besides, diverse methodologies have been used to materialize the objectives of the study. Different analytical and empirical approaches have been explored for examining the existing legal frameworks, identifying the gaps and problems and providing suggestive measures thereto. In analytical study both qualitative and quantitative explorations are attempted. For suggesting the legislative reforms for the development of the Bangladesh stock market , it mainly focuses on qualitative analysis through relevant information, data, expert interview, and structured questionnaire. Besides, quantitative techniques are used to analyze Bangladesh stock market data from 1993 to 2020.For providing additional insight into the study; questionnaire survey and empirical analysis have also been conducted. To collect primary information, a well-structured questionnaire is used for data collection. The survey schedule contains both close-ended and open-ended questionnaires. The set of questionnaires was administrated to individuals pertinent to the Bangladesh stock market. For the survey, only 20 capital market pertinent experts have been restricted due to the COVID 19 pandemic. After collecting the questionnaires, the information on different aspects was systematically tabulated for analysis. Information was analyzed through tables and frequency distributions. The collected data were entered and analyzed using Statistical Package for Social Science (SPSS). Because of the fact that the samples were not random, statistical test could not be performed to test hypotheses. Therefore, findings have been presented on the basis of the analysis of data supported by tables and graphs. The regulatory move to control the situation was very slow. The regulatory authority took time to realize the possible impact of index crash on the entire economy. In late December 1996, the BSEC constituted an Inquiry Committee to investigate into the irregularities of stock market activities during July 1996 to November 1996. In March 1997, the Inquiry Committee prepared a lengthy report identifying a number of companies being in breach of specific provisions of securities market regulation and commented that such companies were guilty of fraudulent acts in relation to securities trading. The Inquiry Committee also identified some of the country's biggest brokers who were apparently involved in market manipulation. However, it is unfortunate that the Inquiry Committee Report failed to address the regulatory aspects in a comprehensive way. The Bangladesh stock market again saw an upsetting scenario in 2010 that was very similar to that one in 1996. There were allegations about capacity issues in the BSEC, internal control lapses and even moral turpitude of their staff. The government has taken cognizance, under unwavering public pressure, the Bangladesh Securities and Exchange Commission formed a four-member Inquiry probe committee under Section 21 of the Securities and Exchange Commission Ordinance, 1969 on January 26, 2011, to investigate share market scam. The appointments came as the government moved to establish order in the country's two bourses. The probe body was entrusted with 11 tasks that include finding out if any individual or group which had influenced the market or taken any undue advantages. The probe body's report has identified a few individual suspects by name. The committee found various irregularities, including the existence of omnibus accounts, which allowed some market players to make exorbitant profits at the expense of the retail investors. The report ended with recommendations to reform the BSEC drastically and asked the government to publish the names of the influential players and to remain cognizant in countering their influences. However, the then Finance Minister Abul Maal Abdul Muhith stated that the State would neither disclose the names of the accused officially nor take punitive measures without further investigation. Although no dates for fresh probes have been declared. Later, the report was published under the direction of Hon’ble High Court Division after omitting t he name of the culprits. The paramount causes identified by the Inquiry Committee are massive irregularities and immorality, involvement of stakeholders in unethical activities of direct listing in primary issue, revaluation of the share, placement to special person/organizations at face value or lower value etc., influencing the secondary market in circular trading, block trading, unusual transaction, etc. by a concerted group of persons/ organizations, irregularities or inconsistencies in issuance of stock share against right share, preference share, IPO-repeat-IPO, unrealized profit and in giving validation unethical works and negligence etc. The noteworthy recommendations of the inquiry committee were: to remove the involved officials, reformation of SEC, Stock Exchange Demutualization by preparing and implanting 'Demutualization Plan'; Co-ordination between Stock Exchange and BSEC; Financing by the bank in capital market; Bringing transparency in non-transparent in omnibus accounts; Prohibiting share transaction of government and concerned officers; Fixation of share value by fixed price procedure and book building procedure, Controlling serial trading and manipulation; Introducing uniformities of face value of share; Bringing fairness in issuance of right share/preference share; Strict monitoring and effective measures by Government etc. The debacle of 1996 and 2010-11 was a massive regulatory failure. BSEC lacks quality, professional manpower, competent accountants, financial analysts and legal experts. Instead of developing as a highly professional organization, it has grown into more of a bureaucratic body. There is also a persistent lack of coordination between the Ministry of Finance, Bangladesh Bank, Securities and Exchange Commission and other related organizations. This isolation of BSEC was, perhaps, a crucial factor for the regulatory failure in 2011. It is unfortunate that since the establishment of the Securities and Exchange Commission in 1993, the stock market has crashed twice. On both occasions, thousands of small and inexperienced investors lost everything they had. The stock market crash is not something unique and it happened in many other countries. But market collapses in other countries were normally linked to some internal or external economic shock or global recession. In the case of Bangladesh, it has not been so. Both the crashes were neither due to external economic factors nor internal economic malfunctions. These crashes were the results of poor governance, unbridled manipulations, undue influences, and unlimited greed. From the sequence of analysis of findings of the survey on the existing enactments and legislative reforms of Bangladesh stock market, presumption cannot be denied that growth of the stock market depends upon economic, political, stock market Acts, Rules and Regulations, the legal framework in a country and the legal stability that the Government can provide to the stock markets. Thus stock market development and ensuring stock market legal stability are correlated. Stock markets function in a regulatory regime and it is important that the regulators are professional, efficient and transparent. BSEC as the apex regulator for the stock market is yet to develop as an efficient watchdog competent to discharge its most important responsibilities of protecting the interest of the investors. BSEC lacks qualified professional manpower, competent accountants, financial analysts and legal experts. Instead of developing as a highly professional organization, it has grown into more of a bureaucratic body. There is also a persistent lack of co-ordination among the Ministry of Finance, Bangladesh Bank, Securities and Exchange Commission, Insurance Development and Regulatory Authority, National Board of Revenue and other related organizations. Swift IPO approval process and proper stock valuation of BSEC for IPO offerings hinder the supply of securities in the Bangladesh stock market. The major perpetrators behind stock market scams of 1996 and 2010 have not been specified by BSEC after stock market scams. The Book Building System and Price discovery System failed to protect the stock market scams in 2010. Stock Exchanges of Bangladesh i.e. DSE and CSE also failed to discharge their duties and take prompt initiatives for the protection of the investors. Information asymmetry and agency problems create hurdles in the development of Bangladesh equity-based stock market. Weak governance in listed companies and market intermediaries are also prevailing. Most of the IPOs were oversubscribed. Stock exchanges of Bangladesh are facing the problem of insufficient adaptation of technology advancements. From stock market scam inquiry reports, in many instances it is reflected that annual reports of the listed companies do not depict a proper representation of business reality. At present stock exchange members of Bangladesh can also act as the director of the corporation. Besides, Lack of market-based financing for easy availability of bank-based financing due to huge number of banks and their aggressive lending initiatives discourages converting private limited companies to a public limited company. Absence of professional asset/fund managers, institutional investors, and asset management companies is prevailing in Bangladesh. Syndication of institutional investors and brokerage houses is also hindering the development of the stock market in Bangladesh. Further, Dominant presence of poorly knowledgeable retail investors, lack of capacity in terms of awareness, knowledge and legal system, myopic investment mindset of the investors and irrational investment behavior of the general investors are prevailing in Bangladesh stock market. According to suggestion of Inquiry Report headed by Khandaker Ibrahim Khaled, the Supreme Court has given a direction to the Government to conduct further inquiry on the said scams to identify the real perpetrators behind those market manipulations to bring them under prosecution. The problems exist in the bottle-neck of the systems, loopholes in the laws and policy of the country and delay in, or even not being disposal of, the securities related cases. The crooks have been let to go off the hook again and again, and have naturally been encouraged to play the same game. There are some common inherent shortcomings of all these laws are lack of proper execution of the capital market regulations, deficient penalty, ineffective fine recovery system, no direct access to justice, absence of permanent prosecution unit, tribunal lacking cognizance power on complaint, want of original jurisdiction of tribunal, the comfortable savior of good faith clause, lacking special prosecution team, disregarding equality before law and equal protection of law, abuse of the defence ‘due diligence and without knowledge’ etc. Besides, there are vital specific loopholes in the legislations mentioned above. BSEC, not being participatory authority representing major regulatory bodies, faulty appointment procedure and tenure thereof, absence of concrete guidelines, weakness in kerb market regulating laws, incomprehensive provision for unclaimed dividend, and prohibition on buy-back of shares are some of paramount specific limitations of stock market legislations. Unexpected delay in the disposal of stock market related cases hinders the end of justice denying fundamental rights of speedy trial as ensured in the Constitution of Bangladesh. The delegated legislations made by the Commission are frequently changed that makes many contradictions and creates confusions. The role of Registrar of Joint Stock under the Companies Act, 1994 and the Financial Reporting Council under the Financial Reporting Act, 2015 are not proactive and vigilant enough to attract the worthy company to invest in stock market. By considering the observation and analysis of identified pertinent shortcomings in the thesis, necessary regulatory and legislative reforms of Bangladesh stock market have been tried to be recommended for a strong and steady stock market in Bangladesh. To overcome those difficulties and challenges, some effective recommendations have been produced on the basis of the evidence and illustrations available in the thesis for regulatory and legislative reforms of Bangladesh stock market. After all, the analysis of the Acts, Rules and Regulations, identification of the loopholes therein and scrutinizing the roles of regulators behind the recent stock market crash and recommendation for the legislative reforms for the development of Bangladesh stock market are sure to assist the policy makers and legislators to update the relevant laws, investigation of share scam cases and the matters ancillary thereto in need of the socioeconomic perspective of the 21st century.