Report

STOCK MARKET CRASH

Prepared By

ABIR, MD. ZABER TAUHID

ID: 10-15556-1

Session: Fall 2012 Credit Completed: 99 Current CGPA: 3.96

Bachelor of Business Administration

FBA, AIUB

Submitted To

HASAN, KAZI RASHEDUL

ID: 1205-1305-2

Department of Finance

Faculty of Business Administration AIUB

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Table of Contents

Page No.

Chapter 01: Inception

1.1 Objective ---------------------------------------------------------------------------------------------------------- 1

1.2 History of DSE ---------------------------------------------------------------------------------------------------- 1

1.3 Crash of 1996-1997 --------------------------------------------------------------------------------------------- 1

Chapter 02: Stock Market Crash 2010-2011

2.1 Background ------------------------------------------------------------------------------------------------------- 2

2.2 Causes of the 20102011 crash ----------------------------------------------------------------------------- 4

2.3 Effects of the crash ---------------------------------------------------------------------------------------------- 7

2.4 Bailout Policy ---------------------------------------------------------------------------------------------------- 9

Chapter 03: Business Illustration

The City Bank Limited --------------------------------------------------------------------------------------------- 10

Chapter 04: Future Outlook -------------------------------------------------------------------------------------------- 11

Bibliography

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Chapter 01: Inception 1.1: Objective

From the beginning Dhaka Stock Exchange (DSE) has encountered two major market crashes,

November 1996 and December 2010. The regulatory committee has been taken number of steps to

handle the occurred situation in those periods. This assignment is going to find the prime causes of

2010-2011 crash in DSE, Impact of the crash, The Bailout Policy and future outlook of Dhaka Stock

Exchange. Numerical & Graphical expressions will be illustrating the objectives of the Assignment.

1.2: History of DSE

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.

DSE was first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and

started trading from year 1956. After the Liberation War there was a Temporary Shutdown of DSE for 5

years. In 1976 DSE has started the journey with only 9 listed companies, having a total paid up capital

of Tk. 137.52 million. The actual growth of the stock exchange has been started in 1983 when the

market capitalization was Tk. 812 million. By 1987, the number of listed companies in DSE increased

up to 92. But high development of the market is noticeable in the 1990s comparing with any other

time since its establishment. (Source: Economy watch, 2010)

1.3: Crash of 1996-1997

The situation of stock market crash in 1996 and crash in 2010-11 are not in an equal line

scenario. In 1996, the number of Beneficiary Owners (BO) account holders was only 300,000 and most

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of them were unaware and totally unfamiliar of the stock market. During the crash of 1996 shares used

to be sold in front of DSE in the street and it was not easy for illiterate investors to identify which one is

profitable and which one not. Even fake printed shares also were sold in the street. People have been

started believing the fake brokers. The reason behind this situation is that the market was developed

enough to gain confidence of investors. There was no automated trading sys-tem, market monitoring

was not enough strong and no circuit breakers were there. (Source: Hossain, 2011)

During the crash, the index lost over 233 points on Nov 6, 1996. After the bubble burst general index

dropped to its lowest point and stood at 957 in April 1997. DSE General Price index lost almost 70

percent from its highest point of November 1996. Then index continued to decrease for next 7 years

until April 2004. During this long time period DSE General Index rarely crossed 1000 point of the

index. (Source: Mansur, 2010)

Chapter 02: Stock Market Crash 2010-2011

2.1: Background

According to Centre for Policy Dialogue (CPD, 2011) the total number of BO Account holders on 20th

December, 2010 reached to 3.21 million though the number was 1.25 million in December 2009.

Most of these new investors dont have enough knowledge about the stock market but invest their most

or all savings in the market. 238 brokerage houses opened 590 branches at 32 districts.

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19th

December was a historical day of the financial year 2010-11 in Bangladesh stock market. On

this day DSE witnessed its biggest one day fall in 55 years history until the date with losing 551.76

points or 6.71 percent. The losing index was even higher than 284.78 points or 3.32 percent of 12th

December. Prices started to fall in an hour after the trading started and about 200 points were wiped off.

In the middle of the session it recovered little bit and ended up the session at 7654 point.

CPD reported (2011) found, internet-based trading operation, opening branches of brokerage houses

across the country, easy access to the market information, arranging a countrywide 'share fair' are the

factors for increasing investors. But supplies of new securities through IPOs were not enough to

chase huge capital of too many investors in the market.

Banks & other financial institutions of Bangladesh had a lot of excess liquidity due to less business

opportunities in the recession period of 2009-10. To minimize the cost of bearing excess liquidity and as

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a great opportunity, theses financial institutions & its officials as well as other people took loan and

invest in the share market. This made a huge flood of liquidity in the share market. It was seen that the

daily transaction in the share market was on an average from Taka 20,000 to 30,000 million in

2010 and the figure was double comparing to 2009. (Raisa, 2011)

To boost the economy Bangladesh Bank has taken adaptive monetary policy during the high

inflation periods to support investment. As Taka has been undervalued, it has made excess growth in

money supply. Last couple of years remittance made excess liquidity and the main motive behind it was

Bangladesh Bank`s exchange rate policy. A big portion of this excess liquidity had gone to the stock

market but there were very few shares in the market. The policy that was adopted by Bangladesh Bank

to grow economy by increased exports & investment eventually misguided and ended up with invitation

of the stock market bubble.

Moreover Security & Exchange Commissions was not capable to monitor the market conditions

properly. Due to the poor monitoring & market shadowing share prices of Z Category Companies and

small companies increased dramatically. Moreover, some initiatives taken by SEC were not effective

and changed directives frequently such as; it changed directives of margin loan ratio 19 times.

2.2: Causes of the 20102011 crash

The most common reasons of the crash are incomplete account, placement share, book building method,

rumors and so on. According to M. Shamsul Haque Combination of wrong information to the

investors, illegal participation of banks and institutions in the stock markets, weak accounting functions

are at the core of the crisis that saw billions of Tk. wiped out.

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The investigation report has identified a group of manipulators including key officials, auditors, issuers,

issue-managers, brokers, individual investors and some other stakeholders. According to the

Investigation report (2011) of the inquiry committee, reasons for the stock market crash are

following:

Role Of Market Regulators And Their Employees

The role of SEC to control & monitor capital market. But SEC was working in favor of manipulators,

approving unethical proposal and issuing wrong orders which lead to unexpected market

conditions deteriorated the image of SEC. Listing committee of DSE & CSE examines listing

application of company, but on the another side SEC doesnt do it properly and approve it. Placement of

Mutual fund & IPO at a price lower than the market value has become a new method of bribery for

powerful employees of regulators.

Rapid Investment Of Bank In The Capital Market

In 2009 & 10 banks and financial institutions invested huge amount of deposit money in the stock

market. As a result share prices go up all on a sudden until December 2010. When Bangladesh Bank

restricted the investment rate not more than 10 percent of deposited money, it creates liquidity crisis in

the stock market and pushed the market to be crashed.

Stock Price Manipulation

Investigation report reveals that during the price bidding stage investors manipulated share prices for

placement with too high price. High price was maintained only for the lock-in period and then

investors discharged their shares. As a result they pulled out a lot of profit within a short period

and after that the share price did not increase. In this process corrupted Issuer and issue manager

manipulated the price.

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Valuation of Assets

As result of weak asset revaluation method companies have overvalued their asset. In this process

corrupt auditors generated artificial audit reports. So, calculating of Net Asset Value (NAV) on

overvalued asset indicates wrong interpretation. Some companies issued Bonus shares against unrealized

gain of revalued asset price which is a faulty accounting practice. There is rule to maintain provision

against deferred tax during asset revaluation to pay tax in future, but companies are not following it.

Direct Entry

Government Investigation report showed that with the approval of SEC few companies has been directly

listed in the stock exchange. These companies come to the market with inflated share prices. Indicative

prices of these companies were determined even 58 times more than EPS and 9 times of Net

Asset Value. Though share prices of these types of directly listed companies have been artificially

determined, but SEC or exchanges did not investigate the reason of abnormal price.

Other influencing factors of the Crash

Disparity of demand and supply of shares

Blindness of investors on financial report

Unfair audit report

Buying shares based on rumor & without study

Majority of general investors dont have knowledge about capital market

Intervention of Bangladesh Bank (central bank)

Over expectation of general investor

Liquidity crisis

2.3: Effects of the crash

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Similar crash in 2008 has slowed down the US economy and unemployment rate is still above 10

percent. But bail-out packages of billions of dollars has been allocated for re-installment of factories and

business organizations. Bangladesh also need huge bailout program to rescue the small investors and

business firms, but from where will the money come, on the other hand, due to lack of integrity and

support from the top edge, Bangladesh economy is going to a deep trouble. Government need to take a

quick step to resolve unstable condition.

Lets have a look on the effects emerged by the scam-

1) Taka has lost value against Dollar: Bangladesh currency taka continues to fall against the US

dollar. Taka loses about 17.5% value against dollar during the year. Devaluation of taka hits new

record. The value of taka has been diminishing in automatic process when dollar is disappearing

from the market. Dollar has become unavailable in both the formal and informal markets.

2) Investment has gone down: Because of the scam, investors has loose the interest of investing in

Bangladesh, even in the infrastructural development. Bangladesh is now losing the opportunity to be

developed by infrastructural development. The scam has created crisis in the market because other

investment sectors are in lack of investment. That will have adverse effects on consumption as well.

3) Economic growths are in stuck: Many of the people lost their money in the stock market so that

the real rate of economic growth will be adversely affected which is already started. Entrepreneurs

are not willing to start new business in afraid of business failure or low price of market share.

4) Default Capital Structure: because of low share price, financial institutions like Corporate &

Investment Banks are not willing to provide easy loan to the organizations, thats why companies are

unable to manage proper Capital Structure. So tax payment is very high and business firms are afraid

to survive.

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5) Job for millions will not come as were expected: The investment of millions of people stuck in the

market and they lost everything so that numbers of business are not being established during these

years. So, it is expected that numbers of job facilities will not come as expected.

6) Rise in the Inflation rate: The peoples who made the share market manipulated for their interest,

huge sum of black money is stuck with them. So when the money comes out to the consumption

market the inflation rate will automatically be raised. Because, the money is already gone as per the

records of Bangladesh Bank. In fact, the inflation rate according to Government is about 12% but the

real inflation rate is about 33% accumulating the CPI [Consumer Price Index].

7) Standard of Living has gone down: Standard of living refers to the degree of wealth and material

comfort available to a person or community. The standard of living includes factors such as income,

quality and availability of employment, class disparity, poverty rate, quality and affordability of

housing, gross domestic product, inflation rate, cost of goods and services, infrastructure, national

economic growth, economic and political stability, environmental quality, climate and safety which

things are totally not feasible in our country because of current situation of stock market.

8) Stock market loses the investors attraction: Investors those who are capable of changing the face

of stock market and expertise on the title; they are losing the attraction of investing in Bangladesh

after the overwhelming clash in afraid of losing capital.

9) Money Captured by Special Group: Because of the stock market scam, a few numbers of people

has captured the huge amount of money by insider trading. As a result common people have gone

caught off losing their initial investment. Middle class people have brought down to the street & top

class people has become minor.

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10) Lack of liquidity in market: Bangladesh capital markets lack the liquidity needed for a sustainable

bond market that can fund growth and development in the public and private sectors. This is a

proposal to financial market illiquidity and provides recommendations. The economic environment

in Bangladesh is penetrating and can be suitable to create a sustainable vibrant bond market that can

be vital in economic development.

2.4: Bailout Policy

The Market Stabilization Fund (MSF) was conceived by the Bangladesh Association of Banks (BAB) in

late October 2011 as a method to increase liquidity in the market and increase share prices, worth BDT

50 billion ($ 667 million). Banks have reportedly kept buying shares despite suffering from liquidity

crises themselves, and not selling any shares. However, share indices kept dropping throughout the time

period. However, prices rose by 7% ahead of the Prime Minister's emergency meeting about the market.

(bdnews24.com/ff/bd/1448h)

The effective steps taken by the government to improve the market condition are following:

Opportunity to whiten the black money by investing in stock market

Appointing new chairman and members in SEC

Establishment of law division

Chapter 03: Business Illustration

The City Bank Limited

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City Bank has recently been named as Best Bank in Bangladesh for 2012' by FinanceAsia, a leading

financial publication in the Asia-Pacific region. This is the first year of FinanceAsia's extending the

award into local bank category in Bangladesh.

City bank is one of the fastest growing consumer banks in Bangladesh. Like other banks The City Bank

has also invested their excess liquidity in the stock market due to less business opportunities in the

period of 2009-10. To minimize the cost of bearing excess liquidity and as a great opportunity to earn

more marketable liquid asset the bank has invested in the share market. During the Stock Market Crash

the bank stock price falls to 20-25 from 45-50. Although they have almost regained the lost amount, the

harsh impact is still on their roof.

Chapter 04: Future Outlook

Capital market of Bangladesh is one of the most important sectors of countrys economy. The growth of

the market indicates growth of economy. The capital market of Bangladesh has a huge number of

investors. A lot of them are uneducated and from middle class family. These investors invest their little

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savings in the market. To secure their investment and growth of the country government can take

necessary initiatives.

Economists and regular investors have some recommendation how regulators can protect this kind of

crash in future. They made following recommendations for SEC and stock exchanges. Provided

recommendations are-

Regulators should perform their job honestly and sincerely

SEC needs honest officials

Insider trading should be prohibited

Government should announces incentives through SEC to attract companies

Government should take long term actions for the market

Actions should be taken against those who were involved in this stock market crash

Improving security laws and penalty for breaking those

Balancing of demand and supply of shares

Follow-up the market and protect against any kind of manipulation

To save general investors DSE, CSE, and SEC should provide courses and training programmers to

enrich their knowledge about the stock market. Regulators should adopt new technologies like

surveillance software to monitor trading activities. SEC should appoint more qualified officials for

market research and in other necessary areas. SEC officials should perform their job honestly according

to law. They should not work for market manipulators and their decision should serve interest of

general investor and other stakeholders of the market.

Investors should enrich their knowledge about the market and the company where they invest. They

should not rely on rumor and need to study financial reports of companies before making their

investment decision. They need to know that in investment there is risk too. So, they should take their

investment decision carefully. Educated investors can take better investment decision and can be

aware of manipulation. For the investor this is the best way to save investment and prevent this kind of

crash in future. Moreover, investor should not rely on margin loan too.

Bibliography

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http://www.stockbangladesh.com

http://www.bdnews24.com/details.php?id=211267&cid=4

http://www.economicshelp.org/blog/221/stock-market/

Economy watch 2010

Hossain M. K., 2011. Securities And Exchange Commission Annual Report 2010-11.

Mansur A., 2010. Is the Bull Market Sustainable? Volume 3 Issue 4, The daily star.[Internet],

Available from: http://www.thedailystar.net/forum/2010/april/bull.htm

Raisa A., 2011. Behind the Scenes The Stock Market Saga. [Internet]