TERM PAPER

ON
“Capital Market Contribution in Economic growth
Prospect of a Country in Bangladesh”
(This Term Paper is submitted For the Partial Fulfillment of the Degree of
Bachelor of Business Administration with a major in Finance)

Submitted To:
Ms. Fatema Afreen
Lecturer,
Finance Discipline,
Faculty of Business Studies,
Premier University,Chattogram.
Submitted By:
Jubayda Khanam
ID: 1603410109132,
34th Batch,
Finance Discipline,
Premier University, Chattogram
Date of submission: 31stAugust,2021.
 Letter of Transmittal
Date: 31st August, 2021.

To

The Supervisor,

Ms. Fatema Afreen

Lecturer,
Finance Discipline,
Faculty of Business Studies,
Premier University, Chattogram.

Subject: Submission of term Paper on “Capital Market Contribution in Economic

growth prospect of a country in Bangladesh.”

Dear Madam,

I have the gratification to inform you that I have accomplished my term paper on “capital
market contribution in economic growth prospect of a country in Bangladesh” that you have
assigned me as the part of my course of Bachelor of Business Administration. I have tried my
best to furnish the report with relevant data. This paper was worthwhile experience for me. I
have truly enjoyed my time attachment with this preparation of this report.

I shall be glad if you kindly accept this term paper and I am ready to explain anything to you
if you feel necessary.

Sincerely yours,

…………………..

Jubayda Khanam
ID: 1603410109132,
34th Batch,
Finance Discipline,
Premier University, Chattogram.
 Acknowledgement

Preparing such a report is always beneficial to a student like me who is near to

accomplish her graduation. First of all, I would like to show my gratitude to
Almighty Allah for his mercy to give me courage and patience to complete this
report. As a part of my completion of Bachelor of Business Administration
program, our department assigned me to prepare a term paper on “Capital Market
Contribution in economic growth prospect of a country in Bangladesh”. My
sincerest gratitude goes to my supervisor of my term paper, Ms.Fatema Afreen,
Lecturer, deptt of Finance, Premier University,Chattogram, for her inspiring
guidelines and help which made things easier to me. Her assistance and
encouragement made it possible to accomplish this report with in time. Finally, I
wish to thank my family, friends and our honorable teachers for their cordial
cooperation in preparing this report.
 Table of Content
PARTICULARS PAGES
Chapter 1 : Introductory Aspect 1
1.1 Background of the Study 2
1.2 Objectives of the Study 3
1.3 Methodology of the Study 4
1.4 Scope of the Study 5
1.5 Limitations Of the Study 6
Chapter 2 : Theoretical Aspect 7
2.1 Introduction 8
2.2 Types of Capital Market 8
2.3 Capital Market Instruments 10
2.4 Factors of Capital Market 11
2.5 Functions of Capital Market 12
2.6 Features of Capital Market 12
2.7 Participants of Capital Market 13

Chapter 3 : Practical Aspect 15

3.1 Capital Market in Bangladesh 16
3.2 Classifications of Capital Market 16
3.3 Bangladesh Stock Exchange Commission 18
3.4 Dhaka Stock Exchange 19
3.5 Chittagong Stock Exchange 22
3.6 Methods of Raising Funds From Capital Market 23
3.7 Contribution of Capital Markets in an Economy 24
3.8 Bangladesh Capital Market: The Prospects, Possibilities and Challenges. 25
3.9 The Potential of the Bangladesh Capital Market 27
3.10 Economic Development & Growth of Bangladesh Capital Market 28
3.11 Reasons Behind Undevelopment 33
3.12 Problems of Capital Market 33
3.13 Findings 35
3.14 SWOT Analysis 36

Chapter 4 : Conclusionary Aspect 42

4.1 Recommendations 43
4.2 Conclusion 44
Bibliography 45
References 45
 Chapter 1
Introductory Aspect

1
1.1 Background of the Study
Capital market is one of important instruments in term of investment because it gives a
big role to the wheel of economic sector. The growth of the company depend on the capital
market to raise their long-term funds. The importance of capital market shows the
development of the economics of the country. A good growth of the capital market condition
will increase the economic growth of the country also. Capital market is where government
and industry can raise long-term capital and investors can purchase and sell securities.

A strong and sound capital market provides financial system to operate in full force. A
country’s economic growth is largely affected by capital market condition as it is the major
source of long term funds for publicly traded companies. Capital market of Bangladesh
consists of two stock exchanges; Dhaka Stock Exchange and Chittagong Stock Exchange
which are still highly speculative and lacks transparency due to poor regulatory framework.
As a result the capital market during mid nineties and the starting of this decade witnessed a
turbulent period.

But through corrective regulations capital market is recovering and approaching to strong
position again. Presently capital market is contributing significantly to economy, where
market capitalization to GDP ratio was 19.7% last year. There are now 562 securities traded
in stock exchanges of 296 companies with number of debentures and government bonds.

2
1.2 Objectives of the Study
The important objectives of the report include:

Main Objective: The main objective of this study is to complete the Bachelor of
Business Administration as it is the compulsory part of completing Bachelor of
Business Administration.
Specific Objectives:
➢ To provide the theoretical & practical overview of capital market.
➢ To know about the contribution, growth & prospects of capital market.
➢ To know the reasons behind recent market failures.
➢ To know about the initiatives to improve capital market.

3
1.3 Methodology of the Study
As because of the pandemic situation of covid19, there is no field work on this term paper.
So, I do not use any primary data to prepare this term paper. Whole study is prepared from
home through different secondary source by the help of internet, books, journals etc.
Secondary sources are:

• Textbooks
• Journals
• Internet
• Website such as Bangladesh Bank, DSE, CSE,BSEC etc.

4
1.4 Scope of the Study
There are huge scopes to work in the area of this term paper. Considering the dead line,
exposure of the paper has been wide ranging. The study of “Capital market contribution in
economic growth prospect of a country in Bangladesh’’ has covered overall participation,
factors, problems, prospects, opportunities, growth, contribution of capital market. I have
chance to work on the financial sector used in economic world. By doing this term paper, I
able to know the importance of capital market in the economy. In this paper I elaborate the
theoretical overview of capital market and practical overview of Bangladesh capital market.

5
1.5 Limitations of the Study
While preparing this paper, I have faced some obstructions such as:

❖ Lack of detailed and proper information from the websites.

❖ Inexperience and time constraints are the limitations restricting this paper from being
more detailed and accurate.
❖ Secondary data has been collected from some sources, which might not be reliable or
accurate.
❖ Recent data and information on different activities was unavailable. Finding data and
information on most recent times are not easy to find.
❖ Last but not the least; a good study requires the analysis of as much data as possible,
which is not possible due to time constraints.
❖ Covering various aspects of the study might lead to inaccuracies and might not be up
to the expectations, I wished to be excused for it and learn from my mistakes.

6
 Chapter 2
Theoretical Aspect

7
2.1 Introduction
A capital market is a market for securities; both debt and equity, from where the business
enterprises and also the government can raise long-term funds by selling securities. It is
defined as a market in which money is provided for periods longer than a year while money
market provides funds for shorter period of one year. The capital market includes:

• The Stock Market (For equity securities)

• The Bond Market (For debt securities)
Financial regulators, such as the Bangladesh Financial Services Authority or the Bangladesh
Securities and Exchange Commission (SEC), governs the capital markets according to their
jurisdictions to ensure that investors are protected against fraud, among other duties.

Capital markets may also be classified as:

• Primary Market
• Secondary Market
In primary markets, new stock or debt issues are sold to investors through underwriting
process. While already securities of existing companies are sold and bought among investors
or traders, usually on a securities exchange, over-the-counter, or elsewhere. The goal of the
markets is to increase investor confidence by more active participation. The markets require a
free flow of information to run smoothly and efficiently and the internet can be used for up-
to- the minute trade information. The market is also act as a significant source of funds for
the business firms.

2.2 Types of Capital Market

Capital market is certainly where institutions as well as individuals trade financial securities.
Companies, organizations as well as individuals usually prepare to buy or sell securities in
various types of capital market primary and secondary to raise funds. Broadly capital markets
are divided into two major markets they are primary market and secondary markets.

2.2.1 The Primary Market

A primary market is a financial market in which new issues of a security, such as a bond or a
stock, are sold to initial buyers by the corporation or government agency borrowing the
funds.

The primary markets for securities are not well known to the public because the selling of
securities to initial buyers often takes place behind closed doors. An important financial in
situation that assists in the initial sale of securities in the primary market is the investment
8
bank. It does this by underwriting securities: it guarantees a price for corporation securities
and then sells them to the public.

2.2.2 The Secondary Market

A secondary market is a financial market in which securities that have been previously issued
can be resold.

When an individual buys a security in the secondary market, the person who has sold the
security receives money in exchange for the security, but the corporation that issued the
security acquires no new funds. A corporation acquires new funds only when its securities are
first sold in the primary market. Nonetheless, secondary markets serve two important
functions. First, they make it easier to sell these financial instruments to raise cash; that is,
they make the financial instruments more liquid. The increased liquidity of these instruments
then makes them more desirable and thus easier for the issuing firm to sell in the primary
market. Second, they determine the price of the security that the issuing firm sells in the
primary market. The investors that buy securities in the primary market will pay the issuing
corporation no more than the price they think the secondary market will set for this security.
The higher the security s price in the secondary market, the higher will be the price that the
issuing firm will receive for a new security in the primary market and hence the greater the
amount of financial capital it can raise. Conditions in the secondary market are therefore the
most relevant to corporations issuing securities. It is for this reason that books like this one,
which deal with financial markets, focus on the behavior of secondary markets rather than
that of primary markets

Secondary markets can be organized in two ways:

• Organize Exchanges: Where buyers and sellers of securities (or their agents or
brokers) meet in one central location to conduct trades. The Toronto Stock Exchange
for stocks and the Winnipeg Commodity Exchange for commodities (wheat, oats,
barley, and other agricultural commodities) are examples of organized exchanges. The
Montreal Exchange (ME) is another example of an organized exchange, offering a
range of equity interest rate, and index derivative products.
• Over-the-counter (OTC) market: In which dealers at different locations who have
an inventory of securities stand ready to buy and sell securities over the counter to
anyone who comes to them and is willing to accept their prices. Because over-the-
counter dealers are in computer contact and know the prices set by one another,
the OTC market is very competitive and not very different from a market with an
organized exchange.

9
2.3 Capital Market Instruments
2.3.1 Bonds
Bonds are long-term debt securities that are issued by government agencies or corporations.
The issuer of a bond is obligated to pay interest (or coupon) payments periodically(such as
annually or semiannually) and the par value (principal) at maturity. An issuer must be able to
show that its future cash flows will be sufficient to enable it to make its coupon and principal
payments to bondholders. Investors will consider buying bonds for which the repayment is
questionable only if the expected return from investing in the bonds is sufficient to
compensate for the risk. Bonds are often classified according to the type of issuer. Treasury
bonds are issued by Treasury, federal agency bonds are issued by federal agencies, municipal
bonds are issued by state and local governments, and corporate bonds are issued by
corporations. Most bonds have maturities of between 10 and 30 years. Bonds are classified by
the ownership structure as either bearer bonds or registered bonds. Bearer bonds require the
owner to clip coupons attached to the bonds and send them to the issuer to receive coupon
payments. Registered bonds require the issuer to maintain records of who owns the bond and
automatically send coupon payments to the owners. Bonds are issued in the primary market
through a telecommunications network.

2.3.2 Mortgages
A mortgage is a form of debt created to finance investment in real estate. The debt is secured
by the property, so if the property owner does not meet the payment obligations, the creditor
can seize the property. Financial institutions such as savings institutions and mortgage
companies serve as intermediaries by originating mortgages. They consider mortgage
applications and assess the creditworthiness of the applicants. The mortgage represents the
difference between the down payment and the value to be paid for the property. The
mortgage contract specifies the mortgage rate, the maturity, and the collateral that is backing
the loan. The originator charges an origination fee when providing a mortgage. In addition, if
it uses its own funds to finance the property, it will earn profit from the difference between
the mortgage rate that it charges and the rate that it paid to obtain the funds. Most mortgages
have a maturity of 30 years, but15-year maturities are also available.

2.3.3 Stocks
Stock is the principal way that corporations raise equity capital. Holders of common stock
own an interest in the corporation consistent with the percentage of outstanding shares
owned. This ownership interest gives shareholders those who hold stock in a corporation a
bundle of rights. The most important are the right to vote and to be the residual claimant of
all funds flowing into the firm(known as cash flows), meaning that the stockholder receives
whatever remains after all other claims against the firm s assets have been satisfied.
Stockholders are paid dividends from the net earnings of the corporation. Dividends are
10
payments made periodically, usually every quarter, to stockholders. The board of directors of
the firm sets the level of the dividend, usually upon the recommendation of management. In
addition, the stockholder has the right to sell the stock.

2.4 Factors of Capital Market

 Stock Exchange: Stock exchange is the main factor of capital market. Share, bond,
debenture, securities, and other financial instruments are traded in stock exchange.
 Investment Corporations: Investment corporations help industries for providing
long-term loan. These corporations by share, debentures etc. and finance in the
corporations to raise funds.
 Investment Trust: Investment trust collects individual savings from households and
lends it to the capital market. It is a good way for small individual savings to be
invested in the capital market.
 Commercial Banks: Commercial banks usually deal with short-term loans. But now-
a-days it disburses long-term loan also. So, commercial banks also participate in
capital market.
 Industrial Banks: Industrial banks are providing long-term loan for the different
industries. It plays a vital role in establishing new farms.
 Issue House: Issue house is another important factor of capital market. Issue house
helps corporation in issuing share and debenture and their efficient trading. Issue
house sometimes takes the charge to issue and sell the shares, bonds, debentures etc.
on behalf of the corporations.
 Government: Government is the key factor in capital market. Govt. regulates the
capital market. Govt. not only regulates but also provides money for industrialization.
Sometimes it collects money from capital market as well.
 Promoters: Promoters are themselves who established Joint Stock Company by
taking the duty of supplying initial capital. Promoters have great importance for
industrialization for any country.
 Managing agents: Managing agent is another factor of capital market. Managing
agents are taking responsibilities to do contract for providing long-term loan to the
company. Managing agents take charge of selling shares or taking risk of a company
which minimize the risk of a company.
 Specialized financial institutions: Some specialized financial institutions are also
played important roles in capital market. These institutes play specific roles in the
capital market and development of a country.
 Foreign Organizations: Some foreign organization also takes part in the capital
market and contributes a lot for the development of a country.
 Broker Houses: Broker house helps in trading financial instruments among the
investors and corporate organization. Broker house acts on behalf of both parties.
 Clearing Houses: Clearing house is another factor of capital market. It resolves the
dues among various financial institutions.
These are some factors of capital market that help to operate the market effectively and
efficiently and help to the development of capital market and country also.

11
2.5 Functions of Capital Market
Capital market is the mirror of a country's financial condition. It plays an important role for
economic development of a country. Some functions of a capital market are mentioned
below:

▪ Capital formation: Capital market collects individual savings to form the required
capital for the corporate body. It helps the proper utilization of financial resources of a
company for the development of economic condition of a country.
▪ Transaction: Capital market performs the transactions among the parties of a market.
Through which the savings go to the firm and thus the economic cycle circulates.
▪ Underwriting: Capital market takes the responsibility of collecting required capital
for the firms that massively helps the firm to start and sustain. Underwriter provides
security to the company for selling the shares.
▪ Lending: Through the govt. bond, note, capital market lend money for long-term. For
individual it provides loan also to buy land, machine, building etc.
▪ Development: Capital is the source collection capital of a company. It helps to
develop overall financial market of a country. Capital market acts for developing the
financial systems as a whole.
▪ Industrialization: Capital market directly helps in industrialization in home and
abroad. Foreign capital, necessary mechanism etc. are provided by the capital market.

From the above discussion we can say that from functions of capital market a country gets the
benefits and the proper utilization of financial asset is possible. It is needed to transfer
individual savings to the entrepreneurs to help in mass production.

2.6 Features of Capital Market

There are some specific and general features of capital market. The well-known features of
capital market are given below:

2.6.1 Users
Those who are using the capital marketing for raising their fund for the business such as,
individual, government, corporations, local government local authorities etc. are users of
capital market. All these users may directly or indirectly involve with capital market. Some
users of capital markets are follows:

• Business firms: Business firms are the main user of capital market. Firms; collect its
initial capital from the market. Interim need of funds is also met from the capital
market.
• The mass people: General people invest their savings in the capital market. All
categories of business are also required funds from capital market.
• Government: Government is one of the giant participants in the capital market.
Government collects fund by different instruments. Govt. bond, price bond etc sold at

12
 capital market. For public welfare govt. need huge amount of money which is met by
capital market. Government is also regulating the capital market.
• Foreign borrowers: Not only the home people but also the foreigners can collect
necessary finds from capital market. Foreigners can borrow by national corporate
bonds, stocks etc.

2.6.2 Instruments
There are some specific instruments used in capital market. Most of them are of long-term
character. By these instruments’ capital market provide both loan and equity capital.

2.6.3 Duration of Instruments

Instruments of capital money market are generally of short term and usually do not exceed
one year. But the instruments of capital market are long term in nature. The capital market
instruments are 5 to 10 years in general.

2.6.4 Confinement of Area

The capital market is not confined to a certain area. It is a market where a bank or an
insurance company can create time loan, corporate bond, and stock is converted, govt. issued
new bonds or through mortgages it collects money. Capital market is now worldwide. It is
now online base market.

2.6.5 Types of transaction

The transaction in a capital market may be direct or in open market. (When a savings or a
loan giving society grants a loan for a client it is called direct transaction. And when through
market stocks, bonds, debentures, securities, etc. are transacted; it's called open market
transaction.

2.7 Participants of Capital Market

Participants of capital market may be discussed in groups because of their similar activities.
Groups or clusters of the participants are discussed below:

• Loan Providers: These types of organizations provide loans to the capital market.
Others can take the loan from the loan providers such as savings organizations,
insurance organizations etc.
• Loan takers: A huge number of organizations want to take loan from the capital
market. Among them the following are prominent as Govt. organizations, corporate
bodies, Non-profit organizations, Small business, and Local authorities.
• Financial intermediaries: Financial intermediaries are media between loan providers
and takers. The financial intermediaries are Insurance organizations, Pension funds,
Commercial banks, financing companies, Savings organizations, Dealers, Brokers,
Jobbers, Non-profit organizations.
13
 • Service organizations: Service organizations help to run capital market perfectly.
These firms, in one hand help issuers or underwriters to sell their instruments with
high value and in other hand help sellers and buyers to transact easily. These are
mainly service organization-Investment banks, Brokers, Dealers, Jobbers, Security
Exchange Commission, Rating service, Underwriters.
• Regulatory organizations: Regulatory organizations are mainly govt. authority that
monitors and controls the capital market. It secures both the investors and
corporations. It strongly protects forgery in stock market. Regulatory organization
controls the margin also. Central bank, on behalf of govt. generally controls the
financial activities in a country.
With the above-mentioned participants are involved with the capital market among
transactions in capital market are done and regulated.

14
 Chapter 3
Practical Aspect

15
3.1 Capital Market in Bangladesh
A capital market is a market for securities (debt or equity), where business enterprises
(companies) and governments can raise long-term funds. It is defined as a market in which
money is provided for periods longer than a year, as the raising of short-term funds takes
place on other markets (e.g., the money market). The capital market includes the stock
market (equity securities)and the bond market(debt).Financial Regulators such as
Bangladesh Financial Services Authority or the Bangladesh Securities and Exchange
Commission (SEC) oversee the capital markets in their designated jurisdictions to ensure
that investors are protected against fraud, among other duties.
In the capital market some major institutions like Securities and Exchange
Commission(SEC), Investment Corporation of Bangladesh (ICB), commercial banks and
other banks like Bangladesh Shilpa Rin Sangstha and Bangladesh Shilpa Bank (both these
banks are now converted into Bangladesh Development Bank Ltd.-BDBL), Issue Houses,
Insurance Companies etc. mainly deal with long-term financing which covers the source of
funds and application of the same, while SEC works as the controlling authority of the said
market . Both the markets have a strong role to play in the Gross Domestic Product and
Gross National Product (GNP) of this country because of the financing for the personal and
institutional concerned and these markets are inter-dependent between each other.
The accumulated savings of the people in the money market are invested in the capital
market. In fact, two groups are keenly associated with the capital market and they are
investors and issuers. Both the parties participate in this market with a view to achieving
their targets. Actually, capital market acts as a bridge for financing for the industrial
development of a country like Bangladesh through the selling and purchasing of shares,
debentures, bonds, mutual funds, treasury bills, certificates & papers etc. and the turn-over
of capital market contributes to the GDP every year. Out of these dealings s loan from banks
and financial institutions, bonds and mutual funds etc. cannot be undermined share market
(stock market) plays a crucial role in the capital market, while the other contributions of loan
from banks and financial institutions, bonds and mutual funds etc. cannot be undermined.

3.2 Classifications of Capital Market

Capital Market can be divided into two parts:
3.2.1 Security Market
There are two types of securities markets:

A. Primary Market
The primary market is that part of the capital markets that deals with the issue of new
securities. Companies, governments or public sector institutions can obtain funding through
the sale of a new stock or bond issue. This is typically done through a syndicate of securities
dealers. The process of selling new issues to investors is called under writing.In the case of a
new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is
16
built into the price of the security offering, though it can be found in the prospectus. Primary
markets create long term instruments through which corporate entities borrow from capital
market. Features of primary markets are this is the market for new long term equity capital.
The primary market is the market where the securities are sold for the first time. Therefore it
is also called the new issue market (NIM).

In a primary issue, the securities are issued by the company directly to investors. The
company receives the money and issues new security certificates to the investors. Primary
issues are used by companies for the purpose of setting up new business or for expanding or
modernizing the existing business. The primary market performs the crucial function of
facilitating capital formation in the economy.

Methods of issuing securities in the primary market are:

➢ Initial public offering;
➢ Rights issue (for existing companies);
➢ Preferential issue.
B. Secondary Market
The secondary market is the financial market where previously issued securities and financial
instruments such as stock, bonds, options, and futures are bought and sold. It is the market for
existing securities that are currently traded between investors. It is also the market that
creates the prices and allows for liquidity. It can be classified in two ways:

i. Organized Exchanges: Organized exchanges have a central trading location where

securities are bought and sold through the auction process by brokers act as agents for
the buyer and seller. Securities usually trade at various trading posts on the floor of
the exchange. Dhaka stock exchange and Chittagong stock exchange are the two
organized exchanges in our country.
ii. Over-The counter (OTC) Market: OTC market is additional significant trading in
stock takes place which is a geographically dispersed group of traders linked to one
another via telecommunication systems. Its includes trading in all stocks not listed on
organized securities exchanges. It is not a formal organization. Any security can be
traded on the OTC market as long as registered dealer is willing to make a market in
the security. It is referred to as negotiated markets

3.2.2 Non-Securities Market

Non securities market is an alternative investment that is not traded on a public exchange as
stocks and bonds.

• Mutual Funds
• Fixed Deposits, Savings Deposits, Post Office savings.
• Insurance.

17
3.3 Bangladesh Stock Exchange Commission (BSEC)
The Securities and Exchange Commission (SEC) was established on 8th June, 1993 and exercises
power under the Securities and Exchange Commission Act, 1993. Later it was renamed as Bangladesh
Securities and Exchange Commission (BSEC). There are two stock exchanges (the Dhaka Stock
Exchange (DSE) and the Chittagong Stock Exchange (CSE)) which deal in the secondary capital
market under the governing of BSEC. The Chairman and Members of the Commission are appointed
by the government and have overall responsibility to administer securities legislation. The
Commission is a statutory body and attached to the Ministry of Finance.

Members perform the following functions:

a. Serve as the members of the Commission and supervise its management.

b. Provide policy direction to industry and staff and promulgate legally binding rules.
c. Act as an administrative tribunal for decisions on the capital market.
Mission of the SEC:

✓ Protect the interests of securities investors.

✓ Develop and maintain fair, transparent and efficient securities markets.
✓ Ensure proper issuance of securities and compliance with securities laws.
Commissions’ Main Functions:

 Regulating the business of the Stock Exchanges or any other securities market.
 Registering and regulating the business of stock-brokers, sub-brokers, share transfer
agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of an
issue, underwriters, portfolio managers, investment advisers and other intermediaries
in the securities market
 Registering, monitoring and regulating of collective investment scheme including all
forms of mutual funds.
 Monitoring and regulating all authorized self regulatory organizations in the securities
market.
 Prohibiting fraudulent and unfair trade practices relating to securities trading in any
securities market
 Promoting investors’ education and providing training for intermediaries of the
securities market
 Prohibiting insider trading insecurities.
 Regulating the substantial acquisition of shares and take-over of companies.
 Undertaking investigation and inspection, inquiries and audit of any issuer or dealer
of securities, the Stock Exchanges and intermediaries and any self regulatory.
 Organization in the securities market.
 Conducting research and publishing information.

It has two full-fledged automated stock exchanges namely Dhaka Stock Exchange (DSE)
and Chittagong Stock Exchange (CSE) and an over-the counter exchange operated by CSE.
It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC),
since, it implements rules and regulations, monitors their implications to operate and develop
18
the capital market. It consists of Central Depository Bangladesh Limited (CDBL), the only
Central Depository in Bangladesh that provides facilities for the settlement of transactions of
dematerialized securities in CSE and DSE.

Categories of Company:

Name of the Criteria for Selecting the Category

Category

A Category 1. Regular holding of AGM,

2. Declaration of dividend at 10% or more
B Category 1. Regular holding of AGM,
2. Declaration of dividend at less than 10%
G Category The Companies which did not yet
start the commercial operations;
Z Category 1. Failure in regular holding of AGM or
2. Non-payment of any dividend or
3. Excess of Accumulated loss over Paid up Capital or
4.Stopping commercial operation for more than six months;
N Category The companies which are newly enlisted with the Securities and
Exchange Commission and could not hold the AGM within Six months
from the enlisted date. Of course, this is a proposal to be categorized
under consideration.

3.4 Dhaka Stock Exchange (DSE)

Dhaka Stock Exchange (Generally known as DSE) is the main stock exchange of
Bangladesh. It is located in Motijheel at the heart of the Dhaka city. It was incorporated
in1954. Dhaka stock exchange is the first stock exchange of the country. As of 18 August
2010,the Dhaka Stock Exchange had over 750 listed companies with a combined market
capitalization of $50.28 billion.

3.4.1 History
It first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and
started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23
June 1962. Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the
liberation war in 1971 the trading was discontinued for five years. In 1976 trading restarted in

19
Bangladesh. In 16 September 1986 was started. The formula for calculating DSE all share
price index was changed according to IFC in 1 November 1993. The automated trading was
initiated in 10 August 1998. In 1 January 2001 was started. Central Depository System was
initiated in 24 January 2004. As of November 16, 2009, the benchmark index of the Dhaka
Stock Exchange (DSE) crossed 4000 points for the first time, setting another new high at
4148points.

3.4.2 Formation
Dhaka Stock Exchange (DSE) is a public limited company. It is formed and managed under
Company Act 1994, Security and Exchange Commission Act 1993, Security and Exchange
Commission Regulation 1994, and Security Exchange (Inside Trading) regulation 1994. The
issued capital of this company is Tk. 500,000 which is divided up to 250 shares each pricing
Tk. 2000. No individual or firm can buy more than one share. According to stock market rule
only members can participate in the floor and can buy shares for himself or his clients. At
present it has 230 members. Market capitalization of the Dhaka Stock Exchange reached
nearly $9 billion in September 2007 and $27.4 billion in Dec 9, 2009.

3.4.3 Objectives of DSE

• To develop a strong platform for the entrepreneurs for raisingcapital.
• To provide an investment opportunities for small and large-scaleinvestors.
• To develop a transparent market ensuring investorsinterest.
• To provide a fully automated trading, Clearing and settlement system to ensure
quick, easy, accurate and easily accessible to alltransactions.
• To attract non-resident Bangladeshis to invest in Bangladesh Stockmarket.
• To attract foreign institutional investors to invest in Bangladesh stockmarket.
• To collect, preserve and disseminate data and information on stockmarket.
• To develop a corporate culture through mandatory corporatemembership.
• To develop a research cell for analyzing status of the market andeconomy.

3.4.4 Rules & Regulation maintained by DSE

Companies Act,1994.
Securities and Exchange Commission Act,1993
Securities & Exchange Commission Act, 1993 (Act repelling controller
brokers)

20
3.4.5 Management
The management and operation of Dhaka Stock Exchange is entrusted on a 25 members
Board of Director. Among them 12 are elected from DSE members, another 12 are selected
from different trade bodies and relevant organizations. The CEO is the 25th ex-officio
member of the board. The following organizations are currently holding positions in DSE
Board:
• Bangladesh Bank
• ICB
• President of Institute of Chartered Accountants of Bangladesh
• President of Federation of Bangladesh Chambers of Commerce and Industries
• President of Metropolitan Chambers of Commerce and Industries.

3.4.6 Trading system of Dhaka stock exchange and its aspects

The stock market is one kind of capital market where the stocks are of the different
companies are traded. DSE, floor trading was started with open cry-out auction system. Now
trading has become automated, led by the DSE through the central depository. In the present
automated trading environment, bids/offers, depth, and required broker particulars are all
recorded and can be retrieved for future reference.

3.4.7 DSE Indices

From January 28, 2013 the DSE launched 3 new indices; The DSE Board Index (DSEX),
DSE 30 Index (DSE30) and DSE Shariah Index (DSES).

DSE Board Index (DSEX): DSEX is computed based on S&P Dow Jones Indices method
where mutual funds, debentures and bonds are not considered. DSE index value was 2951.91
points in January 2008 which abnormally rose to 8918.51 points in December 2010. But after
the share market crash it started with 4055.91 pints on January 2013 and reached to 5036.05
points towards the end of 2016 after little ups and down throughout the period and now
performing over that point in the first quarter of 2017 quite comfortably.

DSE 30 Index (DSE30): DES 30 was launched in January 2013 with 30 leading companies.
It started with 1460.30 points. It reaches 1770.82 points with an increase of 0.08% in the
fiscal year 2015-16.

DSE Shariah Index (DESS): DSES started on January 2014 with Islamic Shariah Complaint
Listed Companies. It started with an index of 941.28 points and towards the end of 2015-16
fiscal years it reaches to 1110.83 with 1% growth.

21
3.5 Chittagong Stock Exchange (CSE)
3.5.1 Background
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-of-the
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 and run by an independent secretariat from
the very first day of its inception.

CSE was formally opened by then Honorable Prime Minister of Bangladesh on November 4,
1995.

3.5.2 Objectives
• Develop a strong platform for entrepreneurs raising capital;
• Provide a fully automated trading system with most modern amenities to
ensure: quick, easy, accurate transactions and easily accessible to all;
• Undertake any business relating to the Stock Exchange, such as a clearing
house, securities depository center or similar activities;
• Develop a professional service culture through mandatory corporate membership;
• Provide an investment opportunity for small and large investors;
• Attract non-resident Bangladeshis to invest in Bangladesh stock market;
• Collect preserve and disseminate data and information on stock exchange.
3.5.3 CSE Indices
CSE has four Indices: CSE 30 Index (CSE30),CSE Selective Categories Index (CSCX),CSC
All Share price Index (CASPI), CSE 50 Index (CSE50),CSE Shariah Index (CSI).

CSE30: Its minimum market capitalization must be tk.200 million and it must be traded at
least 20% days in trading. It has paid dividend in any of the last 2 years.

CSCX:CSE launched a new index named CSCX comprised A,B,& G category companies.
The new index includes all but not the Z categories companies. This also excludes some
company’s scrip.

22
CASPI: Criteria of CASPI are:

• Active scrip will be considered.

• Mutual funds and debts securities will not be considered.
• Normal Public market trades will be considered.
• Index will be refreshed after three minutes.
• The selective index will consider the weighted Average price.
• No Changes will be allowed during the VECTOR session in the corporate level.
• After five consecutive trading days newly listed scrip will be included in the index.
• Index committee will review the index after every six month.

CSE50: CSE has revised its CSE50 index on the basis of the performance of the listed
companies. The stock Exchange revises this index twice a year.

CSI:132 listed companies were selected from 331 listed securities.

3.6 Methods of Raising Funds from Capital Market

Public Issue

In a capital market, company can borrow funds from primary market by way of public issue
of shares and debentures. To manage its issue a company can take the help of merchant
bankers. The cost of raising funds through public issue is high as compared to other methods.

Rights Issue

In capital market, rights issue means selling securities in primary market by issuing shares to
existing shareholders.

Private Placement

The capital issue is sold directly to a small group of investors. Mainly institutional investors
like insurance companies, banks, mutual funds, few private investors, etc.

Offers for Sale

In a capital market, the company sells the entire issue of shares or debentures to an issue
house or merchant banker at an agreed price, which is normally below the par value. The
shares or debentures are then resold by issue house / merchant bankers to be public.

23
Venture Capital

It is an important source of funds for technology based industries and new projects that find it
difficult to raise funds directly from capital markets. In the period of 3 to 5 years, the venture
capital tries to liquidate all its investment in the collaborative firm.

International Issues

Indian firms can raise funds from international markets through: Depository Receipts (GDR)
from worldwide markets, Foreign-Currency Convertible Bonds (FCCB), American-
Depository Receipts (ADR) from American markets. However, only large firms are in a
position to raise funds from global markets.

Bonds Issued by an Institutions

There are various types of bonds issued by financial Institutions. Bonds issued by financial
institutions are: Retirement bonds, Growth bonds, Regular income bonds, Index bonds, Step-
up liquid bonds etc.

Obtaining Term Loans

In capital market, companies can additionally raise long term cash by obtaining long-term
loans, mostly from financial institutions. Term loans are also referred to as ‘term finance.’

3.7 Contribution of Capital Markets in an Economy

 Provides an important alternative source of long-term finance for long-term productive
investments.
 Provides equity capital and infrastructure development capital that has strong socio-
economic benefits - roads, water and sewer systems, housing, energy,
telecommunications, public transport, etc.
 Providesavenuesforinvestmentopportunitiesthatencourageathriftculturecriticalin
 Increasing domestic savings and investment ratios that are essential for rapid
industrialization.
 Encourages broader ownership of productive assets by small savers to enable them
 benefit from Bangladesh’s economic growth and wealth distribution.
 Promotes public-private sector partnerships to encourage participation of private
sector in productive investments.
 Assists the Government to close resource gap, and complement its effort in financing
essential socio-economic development, through raising long-term project based
capital.
 Improves the efficiency of capital allocation through competitive pricing mechanism
for better utilization of scarce resources for increased economic growth.
 Provides a gateway to Bangladesh for global and foreign portfolio investors, which is
critical in supplementing the low domestic saving ratio.

24
3.8 Bangladesh Capital Market: The Prospects, Possibilities and
Challenges
The recent growth of capital market of Bangladesh was behind time. We have witnessed the
money market grow stable in this country over the last decade; our economy was starving for
a matured and stable capital market. The stability came through a variety of sources namely,
educated retail investors, institutional investors and last but not least the capital market
regulators.

As it is a market that involves both the sponsors and investors, the need for a healthy and
stable market became necessary. Through various forms of reforms and automation the
capital market of Bangladesh won the confidence of investors from all walks of life. It is a
fact that capital market outperformed money market by far in the last couple of years but that
was only possible due to the uniform and state of the are technology that has been used as the
platform of our capital market. In addition to that, the government facilitated our capital
market by structuring its monetary and fiscal policies in a pro-capital market manner. The
central bank (CB) played a thoughtful part in developing our capital market. It brought
transparency to the banking sector, which actually welcomed the retail investors to join the
capital market with high confidence. The performance and healthy return of the banking
sector worked as a crucial component to bring in institutions and foreign investors. Power
and pharmaceutical sector also outperformed the expectations of general investors; resulting
fresh fund injection into our capital market. Our emerging economy mostly invited the funds
from all over the globe. Market capital has shown amazing growth. Although current market
price earnings ratio is higher than that of the neighboring country but it is my belief that
considering the demand for lack of avenue to invest, the capital market of our country has a
bright and attractive future and untapped sector. Addressing the issue regarding our capital
market, 'liquidity' and lack of "instrument" would top the list of challenges that we have right
now. The major reason for the existence of the stock market is to provide liquidity of shares
and diversified instruments which helps increase market capitalization. It also helps investors
to gain more confidence and positively impact Gross Domestic Product (GDP) of our
country. Neighboring countries such as India and Pakistan have market capitalization of more
than 75% of their GDP. Comparatively, the Bangladesh capital market accounts for a far
lesser share of its GDP indicating ample scope for future intensification in this sector. Hence,
we should address the above to issues with utmost seriousness and with a future vision.

As we know, our economy is an emerging one; there is ample scope of growth of our capital
market. Our market cap, accounts for a lower share of our GDP in a comparative regional
perspective. With the help of upcoming issues (IPO) we are very optimistic that the market
capitalization is reach a higher level within a short span of time. Automation and introduction
of Central Depository helped our capital market to grow considerably. The regulatory body,
namely Securities and Exchange Commission, is continuously facilitating our capital market
with its international standard surveillance and monitoring. The continuous endeavor of the
SEC has resulted in our capital market to be free from fraudulent and manipulative activities.

25
Thus presence of the SEC has impacted significantly in the development of the market.
However, considering our market size, the SEC should employ more professionals from
private sector. Would bring more dynamism to the market.

The major drawbacks of our capital market are lack of instruments and liquidity. We can
address these two issues by attracting more companies to the market. In order to make the
market more attractive, the corporate tax bracket can be lowered in order to encourage
sponsors to list their companies in the exchanges. We can also introduce Future and Option
Market and help our already existing bond market to be more vibrant leaving the investors
with more instruments. Although we have some mutual funds (MF) currently trading in the
secondary market, yet we believe there is higher demand for such products. With the help of
the bourse, we should welcome hedge funds from different parts of world to invest in our
capital market. Cash management can also play a significant role in overcoming the
drawbacks of our capital market. With the help of efficient and online cash management our
cumbersome settlement procedure could be stream lined. There are other numerous ways we
can reduce the drawbacks of our capital market. Last but not least, international auditing
standard has to be adopted, resulting in more transparency in the financial activities and
reporting. This would draw the attention of general investors and gain the confidence to
invest in every sector. More importantly, in the context of online central depository system,
guaranteed clearing agent for settlement is obvious for market development.

Absence of capital gain tax is the most attractive reason for foreign investors (FI) to invest in
Bangladesh capital market, which is not very common in emerging economies such as
Bangladesh. In addition to high return and significant dividend yield, FIs should be attracted
to our capital market because of the easy and hassle free repatriation of funds.

From the present point of time the future seems bright, not only because of our vibrant capital
market but also of our room for new products. With the introduction of direct listing and
possible book building method, our primary market is improving in line with the secondary
market. The market cap will grow significantly within next few years and turnover shall
reach an international level. Moreover, institutional clients, namely banks are entering the
market with their huge liquid fund causing the capital market to grow very rapidly. Domestic
and international banks have started not only to invest in the capital market but also to
operate brokerage and merchant banking wing. Cross border trading and index trading are
ideas we might adopt in future, which will result in liquidity and new avenues for investment
and minimize our cash market risk.

The Bangladeshi and foreign investors are experiencing the scarcity of diversified products in
Bangladesh. The platform of this market is supply and demand. Due to the absence of
diversified products, the liquidity of market is declining.

Introducing option and future market to our capital market can be a solution to the above
issue. Turnover and market capital of India grew substantially after introducing the option
and future market. However, the investors have to be educated properly to reduce
speculation. Derivatives and option market is unavailable only due to our lack of
26
professionals and technical weakness and also there are no specific regulations relating to
these products. However, in a very short span of time capital market intermediaries are
bringing in infrastructure changes such as book building, derivative and option market to our
market. Introduction of these products will further broaden investment horizon and bring
enhanced depth and liquidity to our market and attract global customers Although we have a
bond market but compared to other countries it is very weak. We have to attract private and
public sector companies to issue more bonds and thus increase liquidity in our bond market.

The need for cooperation among the stock exchanges in this region has to be emphasized her
in order reap tremendous benefits. At present, the level of such cooperation remains at a very
low level. The experience we have had in our respective markets can be valuable to each
other and ought to be exchanged, even though the sizes and specifications of our markets may
vary. Region wise, we are bound by commonalities in culture, environment, tradition. The
same Socio- political factors affect us rather similarly. Hence, the knowledge gathered in our
respective countries can be valuable to us, who belong to the same region. Through a friendly
dissemination of knowledge and experience, we can revitalize and energies our economies.
Shared knowledge can fuel the growth of a stronger and more vibrant capital market.

3.9 The Potential of the Bangladesh Capital Market

The capital market is the engine of growth for an economy, and performs a critical role in
acting as an intermediary between savers and companies seeking additional financing for
business expansion. Vibrant capital is likely to support a robust economy. While lending by
commercial banks provides valuable initial support for corporate growth, a developed stock-
market is an important pre-requisite for moving into a more mature growth phase with more
sophisticated conglomerates. Today, with a $67 billion economy and per capita income of
roughly $500, Bangladesh should really focus on improving governance and developing
advanced market products, such as derivatives, swaps etc.

Despite a challenging political environment and widespread poverty, Bangladesh has

achieved significant milestones on the social development side. With growth reaching 7
percent in 2006, the economy has accelerated to an impressive level. It is noteworthy that the
leading global investment banks, Goldman Sachs, JP Morgan and Merrill Lynch have all
identified Bangladesh as a key investment opportunity.

The Dhaka Stock Exchange Index is at a 10-year high, however, the capital market in
Bangladesh is still underdeveloped, and its development is imperative for full realization of
the country's development potential in 1993. After the bubble burst of 1996, the capital
market has attracted a lot more attention, importance and awareness that have led to the
infrastructure we have in the market today.

27
 3.10 Economic Development & Growth of Bangladesh Capital
Market
Capital market in Bangladesh consists of two full-fledged automated stock exchanges- the
Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE). Bangladesh
Securities and Exchange Commission (BSEC), as the watchdog regulates the stock exchanges
of the country. The analysis on capital market development gives some insights to understand
overall activities of capital market in Bangladesh. At the end of August 2020, both Dhaka
Stock Exchange(DSE) and Chittagong Stock Exchange (CSE) exhibited upward trend in
terms of both index and turnover compared to the end of July 2020. Total turnover value of
traded shares of DSE and CSE were BDT 186.18 billion and BDT 5.94 billion respectively at
the end of August 2020which were 210.23 percent and 70.02 percent higher respectively than
that of the July 2020.Broad index of DSE and all share price index of CSE stood at 4879.15
points and 13908.14 points respectively at the end ofAugust2020

Table: Monthly Importance Indicators of DSE & CSE

Enlisted Turnover
Issued capital Market Price/Earning
issues(Incl. during the Indices Yield
and Debentures Capitalization sRatio
End Mutual month
Month Funds /
Deb.) (BillionTaka) (BillionTaka) (BillionTaka)
CSE
DSE
All
DSE CSE DSE CSE DSE CSE DSE CSE Broad DSE CSE DSE CSE
Share
Index(
Price
DSEX)
Index(
CASPI)
Aug-19 586 328 1277.42 714.29 3808.46 3094.94 73.98 4.80 5095.78 15580.60 13.59 13.92 4.29 3.50

Sep-19 586 328 1279.17 715.43 3738.54 3019.73 84.95 5.47 4947.64 15046.73 13.36 14.89 4.34 3.29

Oct-19 586 328 1279.45 716.79 3559.38 2844.96 70.20 4.19 4682.90 14221.78 12.61 16.45 4.72 3.88

Nov-19 586 328 1280.03 722.63 3567.04 2858.60 74.11 5.17 4731.44 14392.43 12.26 16.53 4.79 4.09

Dec-19 587 329 1294.81 730.18 3395.51 2888.88 67.03 3.96 4452.93 13505.70 11.80 16.27 5.03 4.40

Jan-20 589 331 1297.42 732.66 3408.93 2698.45 80.72 4.10 4469.66 13586.40 11.74 11.65 4.99 4.33

Feb-20 589 331 1297.44 732.66 3429.83 2741.11 124.28 6.20 4480.23 13742.96 11.88 15.71 4.90 4.36

Mar-20 589 331 1297.44 733.08 3122.35 2445.72 66.46 4.84 4008.29 11328.00 10.58 10.56 5.50 4.77

Jun-20@ 589 331 1297.44 735.90 3119.67 2447.57 47.80 9.53 3989.09 11332.59 10.78 10.68 4.43 4.73

Jul-20 590 332 1300.96 743.24 3257.33 2572.76 60.01 3.50 4214.43 11957.06 11.37 11.40 4.29 4.56

Aug-20 591 333 1306.01 744.83 3698.34 2997.00 186.18 5.94 4879.15 13908.14 13.06 12.68 3.69 3.87

Source: Dhaka Stock Exchange (DSE) & Chittagong Stock Exchange (CSE), August 2020

Note: No Transactions were made in April,May,2020 due to covid-19

28
3.10.1 Dhaka Stock Exchange (DSE)
The total number of listed securities stood at 591 at the end of August 2020. Among listed
companies, there were 323 companies, 37mutual funds, 221 government bonds,
8debentures,and 2 corporate bonds. The number of companies consists of 30 banks, 23
financial Institutions,48 insurance companies and 222 other companies.

Total turn over value of traded shares was BDT186.18 billion during August 2020 which was
210.23 percent higher than thatofJuly2020and151.67 percent higher than that of the same
month of the last year respectively (see the table).

DSE Board Index (DSEX) stood at 4879.5 points at the end of August 2020 which was
15.77% higher than 4214.43 points at the end of July 2020and 4.25% lower than 5095.78
points at the end of August 2019 (Chart-1)

The market capitalization of DSE stood at BDT 3698.34 billion at the end of August 2020
which was 13.54 % higher than BDT 3257.33 billion at the end of July 2020 and 2.89%lower
than that of BDT 3808.46 billion at the end of August 2019 (Chart-1). The ratio of market
capitalization to

GDP (at current market price) stood at 13.23 % at the end of August 2020 which was 12.81%
at the end of July 2020.
Chart1:Trends in market capitalization and DSE Broad Index(DSEX)

4500 7000

4000 6000

3500 5000

3000 4000

2500 3000

2000 2000
Capitalization in billion taka(LHS) DSEX(RHS)
1500 1000
Shariah Compliant index named DSES went up to 1132.85 points at the end of August 2020
1000
which was 976.50 points at the end of July 2020 and 1183.44 points at the end of August
2019 (Chart2).
500

Chart2:Trends in DSEX Shariah index (DSES)

29
The Price Earning ratio (P/E) increased to 13.06 at the end of August 2020 which was 11.37
at the end of the July 2020.The ratio was 13.59 at the end of August 2019. On the other hand,
the yield of the end of all share decreases to 3.69 at the end of August 2020 which was 4.29 at
the end of July 2020 and it was the same at the end of August 2019. Trends of priceearning
ratio and yields are shown in the chart 3.

Chart 3: Trends in Price-Earning ratio and Yield ofDSE(Endof August2020)

18 6
16 5
14
4
12
3
10
2
8

6 P/ERatio Yield
4

2
Sector wise Issued capital and market capitalization of DSE

The total amount of issued capital was BDT1306.01billionatthe end of August 2020 which
was BDT1300.96 billion at the end of July 2020 and BDT 1277.42 billion at the end of
August 2019.At the end of August 2020 among different sectors, Bangladesh Govt. Treasury
Bonds(BGTBs) dominate the bourse in terms of issued capital. This sector issued around
42.01 percent of the capital followed by other companies (23.99percent) and banking
sector(23.66percent). At the same time the share of Mutual Funds, Financial institutions(FIs),
Insurance companies, Corporate bonds and Debentures were 4.24 percent, 3.86 percent,
1.91 percent, 0.31 percent and 0.03 percent respectively(Chart 4).

Chart 4: Sector-wise Issued Capital (end of August 2020)

Banks23.6
Other
6%
Com.23.99%
Debentures0.03%
FIs3.86%
CorporateBond
0.31%
InsuranceCom.
1.91%

Govt.
MutualFun
T.Bonds42.0
ds4.24%
1% 30
The contribution of Banks to the total market capitalization was14.52percent but Bangladesh
Govt. Treasury Bonds(BGTBs) recorded as the highest contributor (14.83%) in market
capitalization followed by Financial Institutions (4.51%), Insurance Companies (3.24%),
Mutual Fund (0.94%), Corporate Bonds companies (manufacturing, service and
others)captured the highest portion(61.83percent) among all listed securities in DSE (chart5)

Chart5Sector-wise Market Capitalization (end of August 2020)

Banks
FIs14.52%4.5 InsuranceCom.3
1% .24%

Mutual

Funds0.94%

Govt.
T.Bonds14.83%

Corporate

Other DebenturesBond
Com.61.83% 0.02% 0.11%

31
3.10.2 Chittagong Stock Exchange (CSE)
The total number of listed securities in Chittagong Stock Exchange (CSE) stood at 333 at the
end of August 2020. Total turnover value of traded shares was BDT 5.94 billion during
August 2020whichwas70.02 percent higher than that of July 2020 as well as 23.96 percent
higher than that of the same month of the previous year. The market capitalization of CSE
stood at BDT 2997.00billion at the end of August 2020 which was 16.49 percent higher than
that of the end of July2020and3.16 percent lower than that of the end ofAugust2019.

All Share Price Index of CSE stood at13908.14 points at the end of August 2020, which was
16.32 percent higher than 11957.06 points at the end of July 2020 and 10.73 percent lower
than 15580.60 points at the end of August 2019 respectively (Chart-6).

The Shariah Compliant index 'CSES' went up to 902.97 points at the end of August 2020
whichwas777.28points at the end of July2020and 1023.32 points at the end ofAugust2019.

The total amount of issued capital rose to BDT 744.83 billion at the end of August 2020
which was BDT 743.24 billion at the end of July 2020 and BDT 714.29 billion at the end of
August2019. PriceEarnings(P/E)ratioinCSEincreasedto12.68attheendofAugust2020whichwas
11.40 at the end of July 2020. The ratio was13.92 at the end of August 2019. In Chittagong
Stock Exchange, the yield decreased to 3.87 at the end of August 2020 compared to the end
ofJuly2020 which was 4.56 and the yield was 3.50at the end of August2019.

Chart6:Trends in market capitalization and CSE All

Share Price Index (CASPI)
3500
17000
3000
12000
2500

2000
7000
1500

1000

500 Capitalization in billion taka(LHS) CASPI(RHS) 2000

32
3.11 Reasons Behind Undevelopment
Access to high quality and credible corporate information remains a major problem in the m
investment unit manned with qualified officers, nothing exists for retail investors. And, in the
absence of independent research houses, retail investors primarily focus on advice given by
their brokers, which often consists of market rumors. This is not acceptable, and it often leads
to enormous losses for small investors who are vital for a low-income and emerging market
like Bangladesh. The authorities should not force major corporations to come into the market,
without creating an enabling environment. The market has to reach such a stage of
development that companies will take it as a serious alternative to bank financing. The
government has reduced the interest rates on savings instruments, however this particular
market is still limited to the commercial banks, and individual investors do not have access to
these instruments. These savings instruments are considered risk-free, and since they are not
present in the capital market, the overall risk of investment for an investor remains very high.
An estimate suggests that the ratio of institutional-to-retail investors is still low in
Bangladesh, even relative to other emerging markets. Institutional investors bring long-term
commitment and a greater focus on fundamentals and, hence, stability in the market. The
presence of institutional investors is also expected to ensure better valuation levels due to
their specialized analytical skills. Corporate governance of international standard is still
lacking. Multinational corporations and institutions operating in Bangladesh often adhere to a
very high international standard compliance regime.

An important aspect for capital market is reflection of fair value of scrips. This is not
adequately present in the current scenario, and due to this reason the market is not receiving
the attention of an important segment of investors, both foreign and local. Investors are
perhaps depending more on speculative analysis, resulting in volatility in the market, as
opposed to fundamental analysis, which could attract more stable long-term investors who
are sure about their investment tenure and expectations.

3.12 Problems of Capital Market

The rise and fall in share market influences the general confidence of the investors. Apart
from political instabilities, economic downtown, changes in monetary and fiscal policy there
are many reasons for unexpected rise and fall in the share market. And stock exchanges of
Bangladesh are also not free from these problems.

The problems in DSE and CSE can be summarized as:

Price Manipulation

In capital market whoever has the better information can manipulate the price in favor of him.
This price manipulation significantly affects the normal growth of the share market.
Syndicates of share market related person are responsible for this manipulation taking the
advantages of their better situation.

33
Delays in Settlement

Financing procedures and delivery of securities sometimes take an unusual long time for
which the money is blocked from nothing.

Irregularity in Dividends

Some companies do not hold Annual General Meeting(AGM) and eventually declare
dividends that confused the shareholders about the financial positions of the company.

Selection of Membership

Some members being the directors of listed companies of DSE, CSE look for their own
interest using their internal information of share market.

Improper financial statement

Many companies do not focus real position of the company as some audit firms involve in
corruption while preparing financial statements. As a result the shareholders as well as
investors do not have any idea about position of that company.

Others Problems

 The concept of centralization of the securities market has not been implemented that
arises technical problems and political in fighting.
 The intrinsic values for securities traded are sometimes estimated without considering
the current market prices of the securities.
 The absence of comprehensive legal and supervisory framework.
 Lack of skilled manpower as well as financial and non-financial institutions involved
in the securities market.
 The lack of proper policy framework that provides incentives and protection to
investors.
 The dominance of bigger public sector and borrowing of public sector as well as
government form the institutional sources rather than the market.
In recent years, Bangladesh capital market witnessed both bullish and bearish trends caused
by irregular fluctuation in the indices due to various reasons.

34
3.13 Findings
While working on the term paper, the following findings have been identified:

• One impediment at the regulator and regulation level is the overlapping authority
between the two financial market regulators, Bangladesh Bank and the Securities and
Exchange Commission (SEC), and no clear jurisdiction over the fixed-income market. In
general, BB regulates the commercial banks and their activities, while the SEC regulates the
NBFIs, the two stock exchanges, and the capital market.
• On the investor side, few investors are sophisticated enough to think about investing
in bonds. Most of them don’t have even financial literacy.
• Intermediaries in Bangladesh lack many of the skills needed to foster an active local
corporate bond market. As mentioned earlier, commercial banks dominate the
financial sector and not enough intermediaries are skilled in securities. Few are able to
identify issuers and investors and bring them to the market. They provide little or no
research analysis on industries or companies to encourage investment in the local debt
market. Too few private merchant banks are able to conduct financial advisory and
trust services. Nor do any feel motivated to become a market maker for an issue.
• Growth of mutual fund in Bangladesh has been slow. Only recently there has been a
rush for new funds. Many banks and financial institutions are in the queue with
proposals for their funds. Mutual fund is often a misunderstood subject in Bangladesh.
Many investors do not understand the difference between mutual fund shares and
other company shares.
• The Securities and Exchange Commission will have to be more efficient and
professional. It simply cannot run with the present manpower. It needs more
professionals, more training at home and abroad and more logistic support. But it is
just not possible to attract the right kind of professionals with the current pay
structure.
• Price manipulation: It has been observed that the share values of some profitable
companies has been increased fictitiously some times that hampers the smooth
operation of DSE
• Delays in settlement: Financing procedures and delivery of securities sometimes take
an unusual long time for which the money is blocked for nothing.
• Some companies do not hold AGM and eventually declare dividends that confused
the shareholders about the financial position of the company.
• Some members being the directors of listed companies of DSE look for their own
interest using the internal information of share market.

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 .
3.14 SWOT Analysis
The capital market of Bangladesh is overshadowed by recent market failure and investor
mistrust. The industry has often been considered highly volatile by industry experts and
specialists. The market has sometimes been marred as highly unpredictable because of high
uncertainty involved with market returns and overall risk perspective. Interviews with the
executives from different equity firms currently operating in the capital market of Bangladesh
has revealed some key characteristics of the market. Following is an analysis covering the
strengths, weaknesses, opportunities and threats of the industry.

Strengths

Protection for
Frontier 1. Protection of Foreign Investors: Over a
Foreign
Market Status dozen of foreign hedge/frontier funds are
Investors
operating in the capital market in Bangladesh.
One of the reasons behind their investing in here
Protection for
High Return is that Bangladesh Government is strictly
Institutional
and Growth concerned about the capital safety of these
Investors
foreign investors. This protection gives a
competitive leverage to these foreign investors
Hedging
Government when market failure is apparent because
against Global
Facilitation
Risk investors are able to generate high positive
excess returns over a significant time frame.

2. Protection for Institutional Investors:

Bangladesh government is more concerned about protecting the institutional investors (e.g.,
commercial banks, insurance companies) than about individual small-scale investors.
Because institutional investors are actually managing their investment generated by
deposits/premiums of thousands of small-scale individual investors, the government gives the
top priority while protecting investors from massive market failure. In the most recent market
crash in 2008, Bangladesh Government protected the commercial banks by offering them
opportunities for safe liquidation of assets from the capital market.

3. Government Facilitation: Foreign hedge/frontier funds want to have a long-term

exposure to the capital market of Bangladesh. From that perspective, foreign hedge/frontier
funds are more important than individual small-scale investors who invest from a short-term
perspective. The government facilitates the long-term foreign investors by giving them
protection and safe capital preservation.

4. Frontier market status: JP Morgan has given a Frontier Five status to Bangladesh
considering its above-average growth opportunities and potential for higher positive excess
return from a long-term perspective. Bangladesh has also been given an Emerging Eleven
status in another research report published by Goldman Sachs.
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5. High Return and Growth: The fact is globally investors now have very limited
opportunities to earn high positive excess returns by investing in assets belonging to the
developed countries around the world. This is why investors have a tendency to move their
capital into a less structured environment where there are still opportunities of massive
development and returns resulting from that. Bangladesh is offering that kind of opportunity
to the foreign investors.

6. Hedging against Global Risk: Even when the entire world’s economy faced a
recessionary hit in 2008, the capital market of Bangladesh was still in a robust growth state.
In fact, the market was at that time becoming a bull market. This fact proves that the
Bangladeshi capital market can be a better hedging investment location for the global
investors because even when the world is in recession, Bangladesh offers sizable
opportunities of growth.

Weakness

Lack of
High Volatility Day Trading Market Rumor
Entrepreneurs

Lack of
Lack of Following Premature
Investor
Experts Practice Surveillance
Knowledge

Low
Lack of
Syndication Lack of Trust Regulatory
Research
Oversight

Lack of
Insider Market Weak
companies'
Trading Manipulation Infrustructure
goodwill

1. High volatility: The major weakness of the capital market of Bangladesh is its sensitivity
to high unpredictability of returns. High volatility also means that investors will be entitled to
high returns also. But it has been evident from the recent market failure that the risk profile of
Bangladesh is quite high. This high risk often makes the investor base vulnerable to massive
losses. The fact is also concerning when the loss has to be borne by investors who invest in
the market for the first time or who is not responsible for any market bubble.

2. Lack of expert manpower: There is a lack of qualified and resourceful human capital
base. In most of the companies operating in the capital market, there are no efficient bases of
human capital for which operation of the entire market is often inefficient and depends on
rumor news. Besides, lack of expert manpower also means that investors will not be able to
get quality and relevant information about the capital market in time. There also arises
37
another problem when investors want some advisory or consultancy services from the
manpower concerned.

3. Lack of equity research: The market is not driven by research knowledge. So, equity firm
employees are not encouraged to do relevant research on the listed securities. This is the
primary reason for which the employees working in equity firms cannot deliver the investors
with investment ideas from a long-term perspective. Fear exists among those investment
employees that if they give some long-term advice about investing in a security to the clients
and after that the price of that security falls, the clients might think that they are not capable
of handling advisory role successfully.

4. Insider information and Insider Trading: The entire market is said to be driven by
insider information and insider trading. Employees working in the equity firms are said to be
involved with insider trading as they have adequate prior knowledge and ideas of different
press releases. These sorts of prior information have made them able to able to front-run
general investors by buying or selling securities much ahead of the investors.

5. Manipulation by Institutional investors: Recently, the merchant banks have been

blamed by experts from all corners as they have involved in massive-scale market
manipulation. These merchant banks have artificially manipulated the market in favor of their
institutional investors by Omnibus accounts which cannot be tracked by SEC on an account-
by-account basis. Other sorts of market manipulation (e.g., block trading) are also responsible
for sudden rise or fall in particular securities. Asset management firms sometimes artificially
inflate the share price by issuing bonus/right shares which have no economic reason to
justify.

6. Syndication: It has recently been reported in some dailies that institutional investors form
syndication with equity firms so that the former can get the competitive advantage over retail
investors. This unequal status of investors all through the market has prompted further market
inefficiencies in the market.

7. Herding and following practice: There is no fixed pattern of investment by retail

investors as they do not invest from a long-term perspective. Their short-run investment is
triggered by following few large-scale investors who can control the entire market by
controlling the demand and supply situation of securities. Retail investors primarily follow
the existing market pattern. When a particular stock goes down, they immediately try to
liquidate their investment and are thus faced with losses.

8. Day trading: Most of the investors are said to be day traders, meaning that they do not
invest from a long-term perspective rather they try to gain profits from day-to-day price
movement. This day trading is primarily responsible for unpredictable movement of the
market that happens in DSE.

9. Market rumor: Apart from insider information, market rumor has been significantly
responsible for the overall market inefficiency. Retail investors often get trapped into market
rumor and try to liquidate their investment, resulting in a significant amount of loss.

38
10. Lack of investor knowledge: Most of the investors are not much educated. Lack of
investor knowledge about particular securities and the overall mechanism of the market are
responsible for unpredictable market movements. Because investors do not have sufficient
knowledge and expertise, they are not capable of investing from a long-term perspective and
thus they have to depend on their brokers when an investment decision has to be taken.

11. Lack of investor trust: Excessive market volatility has made many retail investors
reluctant to invest in the market for long. Lack of investor trust is one of the reasons for
which the market is now stagnant and less liquidity has become a persistent problem.

12. Lack of major companies’ reputation: Investors do not know which equity firms are
better capable to serve them and guide them throughout their investment horizon. In fact,
there is not a single equity firm in Bangladesh which has prohibited their employees from
trading on specific securities. For this reason, investors are disadvantaged to a high extreme
because the employees at equity firms can execute their own propriety trading far ahead of
the investors themselves.

13. Weak infrastructure: Bangladesh stock market has not been able to provide an adequate
infrastructure base for an efficient operation of the market. Limited technology use coupled
with lack of efficient manpower has made the overall infrastructure very poor compared to
that of other countries. It has also been reported that the algorithm that is followed to
determine DSE index is flawed and this is why investors sometimes get concerned over price
movements which are actually not significant. It has also been reported that DSE index is not
adjusted for splits, bonus shares, rights shares, repurchases and other market activities
effectively.

14. Low regulatory oversight: The SEC is the controlling body of the entire equity capital
market of Bangladesh. Till date, the regulatory oversight that the entity has tried to
implement into the system of the market has not been successful because of massive
loopholes and scopes of non-compliance. Besides, frequent changes in stock market rules and
regulations are responsible for further complication of trading in the market.

15. Unwillingness of good companies to be listed: The supply of good and quality securities
in the market is not high. Till date, most of the multinational corporations have been away
from the stock market. This sort of unwillingness to be listed in the stock market is a
hindrance for the long-term growth of the entire market.

16. Subjective price quotation during IPO process: Currently, the prices for securities
during an IPO are calculated on a purely subjective basis. Decisions regarding premium often
depend on the subjective arrangement between companies and issue managers.

17. Lack of sophisticated financial securities: Unfortunately, Bangladesh is still far away
from implementing a financial system incorporating relevant financial securities. There is no
active secondary T-bill market. Besides, there is no corporate bond market and derivates are
not yet brought into the system. Some sophisticated actions like ‘short sell’ is not yet

39
introduced to the system. All these make the investment into the capital market of
Bangladesh a nightmare.

Opportunity

1. Considerable economic growth: Though

Considerable Growing Base of stated as a third-world economy, Bangladesh
Economic Investors and
Growth Experts has seen a considerable GDP growth (i.e.,
around 5%-6%) in the last couple of years. It
will be possible to earn high returns if the
overall capital market can be correlated with
Regulatory Effort Positive Future
by Government Outlook the broad economy. This will only be possible
if the investors will make considerable effort
to conduct due research for each listed entity
before investment in its shares.

2. Regulatory effort by the government: The government surveillance system is still

unable to develop the entire market system. However, the government is now trying to
change the current scenario incorporating the need of an efficient market structure and
adequate market oversight.

3. Positive future outlook: Goldman Sachs has reported in a seminar that it will come to
invest in Bangladesh in 2-3 years as the future prospect of the country’s stock market and the
overall economy looks promising.

4. Growing base of investors and experts: Because of inability of Bangladeshi citizens to

invest in safe investment instruments of other countries, stock market will be a promising
investment haven for investors within the next decade. Because banking industry is already
saturated, investors might look for other investment opportunities and therefore, there
remains a higher possibility that a growing base of investors will be investing in the capital
market in future.

Threat

1. Competition with other frontier markets: Frontier markets like

Competition
with other Sri Lanka and Pakistan are far ahead of Bangladesh in implementing
Frontier Markets an efficient market because of technical as well as human resource
base. Bangladesh may not be able to attract of adequate foreign funds
if these other markets look much more profitable in the long run.
Possibility of a
Price Bubble

40
2. Possibility of further price bubble: The geographic limitation of Bangladesh is one of the
major problems that make ways to price bubbles. Because investors do not have much wide
scope for investment, they end up investing in a concentrated base. This leads the way to
price bubble and subsequent market failures. So, investors might avoid the stock market for a
long period of time

41
 Chapter 4
Conclusionary Aspect

42
4.1 Recommendations
The following recommendations can be utilized for making the market stronger:

➢ Government should ensure the supply of fundamentally strong shares in the market to
meet the demand which will make the market efficient as investors would not go for
buying junk shares.
➢ Government must also ensure the appointment of skilled and capable personnel in
different regulatory bodies and must give punishment to the persons responsible for
any kinds of irregularities.
➢ Government must also ensure that the chairman and members of the Investment
Corporation of Bangladesh (ICB) are honest and skilled.
➢ It is high time for SEC to take a decision regarding the stocks in the OTC market
because huge amount of money has been blocked due to inefficient OTC market.To
bring fundamentally strong private companies in the capital market, there is an
alternative of Book Building Method of IPO. So, the postponed Book Building
Method must be reintroduced with necessary correction to resist all sorts of
manipulation. To aware investors having no or insufficient skills about the investment
in stock market should be trained through different training programs, seminars and
motivating fair.
➢ Institutional Buyers (Mutual Funds, Merchant Banks etc.) must show mature
behavior to ensure balance in the stock market by buying share when there is sale
pressure and vice-versa. In providing margin loan, they must follow the rules as
prescribed by SEC as well.
➢ Individual Investors should, analyze EPS, P/E Ratio, dividend policy, future growth,
industry average etc. before investing in a particular company. Industry In analyzing
financial strength of a company they must consider the audited annual reports instead
of quarter lyun-audited report as often these information is not accurate or do not
reflect the real position of the company. They should participate in different seminars
and training programs relating to stock market to enhance their knowledge and skill in
making stock market investment decisions.

43
4.2 Conclusion

The capital market is playing the role of development for an economy. It performs a
important role in acting as an intermediary between investors and companies who needs extra
financing for business expansion. An efficient capital market helps to obtain money for
business efficiency. Commercial banks provides valuable primary support for corporate
development. A developed capital market is necessary for moving into a more mature growth
phase. BSEC, DSE, CSE should work together with the support of the government. Capital
market of Bangladesh lost their confidence of its investors due to bad performance in last two
years because of Covid-19.Investors will have to understand that in any capital market there
are ups and downs and they cannot blame others whenever stock prices down. Fortunately,
investors are getting matured slowly. BSEC should play an important role to bringing back
investors confidence. Bangladesh must focus on improving and developing governance and
advanced market products.

44
Bibliography
➢ Financial Institutions and Markets by JeffMadura

➢ The Economics of Money, Banking & Financial Markets by Frederic S.Mishkin

➢ Money & capital markets: Financial institutions & instruments in a global

marketplace by Rose, P.S

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