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tock market is one of the most important financial institutions of any economy as well as Bangladesh. It opens door for companies to raise huge amount of capital from a lot of individual investors inside & outside of a country. Hafer and Hein (2007) pointed that growth of new businesses or our economy would not be possible without availability of stocks and development of financial markets. Here investors participate voluntary to buy ownership of a company in the public market. In these days for millions of middle class educated people in Bangladesh investing in stocks is more popular than investing in any other investment sectors. For an investor, stocks are more liquid than any other investment sources as it gives ability to sell and buy ownership anytime without any hassle. The consecutive outstanding performance of Bangladesh stock market in recent years before the crash lured millions of investors to the stock market to invest their little savings. Before the stock market crash the market had become a route of easy money for too many new individual investors. That is why millions of fresh investors invest their small saving in the market during this period. For these fresh investors investing in this market provided a way to avoid working a job. Even some BO account holders worked as intermediaries of friends, relatives to invest their money in the stock market. Finally, the stock market crashed and taught these investors that investing money in the stock market involves risk too. But the lesson that investors are taught wreaked havoc on the lives of millions of innocent investors. The crash wiped out billions of taka from the market where fresh, illiterate investors were the main victim. It has been more than a year since the crash occurred. But the market is still struggling to regain its loss. Stock market crash of 2010-11 has become a national, political and social issue of the country

STOCK MARKET AND CRASH What is a stock market?


Fellowes (2008, p.29) described that stock market has same features like a normal market with buyers, sellers and agreed price. He also added that there will be a middleman who guides investor to deal offers of buying and selling shares in the stock market. We usually find stock exchange, regulatory organizations, investors, listed companies with securities, broker houses, merchant banks, and other intermediary organizations in a stock market with co-operation of central bank and government of the country.

Stock Exchange
A stock exchange is a body that provides services to stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issuance and redemption of securities and other financial instruments, capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, Mutual funds, unit trusts, derivatives and bonds. The initial

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public offering (IPO) of securities (stocks and bonds) is done in the primary market and subsequent trading of it is done in the secondary market. A stock exchange is often the most important component of a stock market.

The major functions of Stock Exchanges are:


1. Listing of Companies (As per Listing Regulations). 2. Providing the screen based automated trading of listed Securities. 3. Settlement of trading (As per Settlement of Transaction Regulations). 4. Gifting of share / granting approval to the transaction/transfer of share outside the trading system of the exchange (As per Listing Regulations 42). 5. Market Administration & Control. 6. Market Surveillance. 7. Publication of Monthly Review. 8. Monitoring the activities of listed companies (As per Listing Regulations). 9. Investors grievance Cell (Disposal of complaint by laws 1997). 10. Investors Protection Fund (As per investor protection fund Regulations 1999) 11. Announcement of Price sensitive or other information about listed companies through online

What is a stock market crash?


When there is more than 10 per cent loss within a few days in the market, it is called stock market crash Stock market crash is a sharp and unexpected decline of stock market prices for a very short period of time, usually accompanied with the decline of many other assets prices mentioned by stockmarketcrashes.net. It causes significant capital losses to investors and speculators. The market participants become panicked which leads to more losses. BANGLADESH STOCK MARKET History of Bangladesh stock market The journey of Bangladesh stock market started on April 28, 1954 as East Pakistan Stock Exchange Association Ltd. At that time Bangladesh used to be ruled by Pakistan and the name of the country was East Pakistan. But trading on this market started in 1956 with a total paid up capital of Taka 4 billion and 196 securities were listed on this market. The exchange was renamed on June 23, 1962 as Dhaka Stock Exchange (DSE) Limited

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Dhaka Stock Exchange (DSE) Dhaka Stock Exchange is the first & biggest stock exchange of the country. The operation of Dhaka Stock Exchange started on May 14, 1964 after renaming East Pakistan Stock Exchange Limited In the beginning DSE was a physical stock exchange and used to trade in the open outcry system. Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities are regulated by its Articles of Association rules & regulations and byelaws along with the Securities and Exchange Ordinance - 1969, Companies Act - 1994 & Securities & Exchange Commission Act 1993 DSE uses automated trading system. The system was installed on 10th August, 1998 and was upgraded time to time. The latest upgrading was done on 21st December, 2008. Table 1: The number of listed companies of DSE according to FY FY 1990-91 2001-02 2005-08 2009-10 2011-12 The number of listed companies of DSE 149 248 300 273 268.

The working days of DSE are 5 days in a week without Saturday. The trading time is from 10:30 am to 14:30 pm (local time). Investment options for an investor in this market are ordinary share, Debenture, Bond & Mutual funds. Chittagong Stock Exchange (CSE) Chittagong Stock Exchange is the 2nd stock exchange of Bangladesh. It is said that CSE is the pioneer of the modern capital market of the country as it introduces modern technology & sophisticated logistic support It was incorporated as a self regulated non-profit organization on 1st April, 1995 and formally opened on November 4, 1995. It started its trading through cry-out system. Then Chittagong Stock Exchange started first automated trading bourse of the country. CSE started its automated trading on 2nd June, 1998 and internet trading service on 30th May, 2004 Central Depository Bangladesh Limited (CDBL) The establishment of CDBL added value to the stock market of Bangladesh and attracted more investors especially foreigners. Before the establishment of CDBL process of transferring and delivering ownership was too lengthy and risky. After implementing automated trading system in DSE & CSE and introducing central depository system, the stock market of Bangladesh became more effective and credible to the investors. (Bepari & Mollik, n.d.)

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CDBL was incorporated as a public limited company on 20th August, 2000. The owners of CDBL are DSE, CSE, banks, Investment Corporation of Bangladesh and some other financial institution. The participants of CDBL are called Depository Participant (DP). CDBL charges fees from its participants for different services provided by CDBL.
The functions of CDBL are given below:

Operate and maintain the Central Depository System (CDS) of Electronic Book Recording and maintaining securities accounts and registering transfer of securities Changing the ownership without any physical movement or endorsement of certificates Supervision of Depository participant activities Providing different investor services including providing a platform for the secondary market trading of Treasury Bills and Government Bonds issued by the Bangladesh Bank. (Source: www.cdbl.com) Bangladesh Security & Exchange Commissions (BSEC) The aims of forming Security Exchange Commission are to protect investors interest, improvement of securities markets, and appropriate issuance of securities and proper guiding of securities laws. The most important organizations and intermediaries under supervision of SEC are DSE, CSE, CDBL, stock brokers, merchant banks and asset management companies. Khaled (2011) The Government of Bangladesh founded Security and Exchange Commission (SEC) on 8th June, 1993 under the Securities and Exchange Commission Act, 1993. The commission is consists of a chairman and four members. The Chairman & members of security exchange commission are appointed by the government of Bangladesh. SEC is directly connected with the ministry of Finance and has rights to supervise all of securities laws & regulations. According to Securities and Exchange Ordinance, 1969 SEC has been empowered to control even self regulatory institutions for instance Stock Exchanges.
The main functions of SEC are following:

Registering and regulating the business operation of DSE, CSE, stock brokers, merchant banks, underwriters, share transfer agents, portfolio managers and other intermediaries. Developing investors education, providing training for intermediaries, executing market research and publishing those. Controlling every authorized self regulatory organizations too Inspecting and controlling fraudulent and unfair trading in security markets Auditing and investigating of any intermediaries or stock exchanges Collective investment scheme registering & controlling

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(Source: www.secbd.org) Some trends of Capital market An analysis of capital market depends on the observed trends in market capitalization, investment capitalization ratio, turnover, volatility of share index, the number of listed companies and monetary policy. Market Capitalization Ratio Market capitalization ratio equals the sum that derived from the current stock price per share times the total number of shares outstanding. Although the market capitalization of a company is an indication of the value of the company, it is only a temporary metric based on the current stock market. Market capitalization ratio equals the value of listed shares divided by GDP. This ratio are often using as a measure of stock market size.

Figure 1: Market capitalization ratio in percent

In FY2009-10 the rate of market capitalization reached at 32.79 percent and finally in FY 2010-11 became 29.55 percent. Market Capitalization and Investment Ratio Investment ratio has stayed between 10 to 35 percent. Following that fiscal year the scenario has been changed significantly and the ratio of market capitalization and investment has increased with a maximum growth, indicating the huge accumulated concentration in capital market than those of other forms of investment

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In FY 2009-10 and FY 2010-11, the market capitalization and investment ratio were 134.29 and 119.46 percent respectively. These indicate that in these years the market capitalization exceeded the total investment of the economy. Figure 2: Market capitalization and investment ratio

TURNOVER Turnover equals the value of total shares traded divided by market capitalization. High turnover is often used as an indicator of high level of liquidity. Turnover measures trading relative to the size of the stock market. Therefore a small, liquid market may have a high turnover ratio but with a small total value traded and GDP ratio. Figure 3: The percentage change of turnover of DSE during FY 1995-96 to FY 2010-11

The extent of ups and downs in turnover of capital market mainly depends on economic environment and some others factors such as short term increase in profit in capital market than those of other economic activities. In calendar year 1996, the sudden increase in general index made the temptation to the people and it also has induced people to invest more in capital market. Therefore in FY 1996-97, the turnover

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increased by 697.81 percent than the previous fiscal year. But game planner has achieved the goal and reduced the turnover by 80.71 percent than that of the previous fiscal year. The turnover increased dramatically from FY 2008-09 to FY 2009-10; in this period the turnover increased about 186.81 percent than that of previous fiscal year and became Tk. 256353.55 crore. The turnover as well as liquidity of capital market started to fall in FY 2010-11. The present economic adverse condition together with the contractionary monetary policy may cause a negative impact on turnover and liquidity of capital market may go down in near future. CAPITAL MARKET VOLATILITY Volatility is a measure of the degree of price movements of a stock. It shows how active a stock price typically is over a certain period of time. In general, the volatility of stock return is determined by the fluctuations in stock index. Fluctuation in the stock index also depends on the demand and supply of securities traded in the stock exchange. The market estimate of volatility can be used as the barometer of the vulnerability of the stock market

CAPITAL MARKET SIZE One of the important indicators of the capital market is the number of listed companies. The rationale of including this measure is that as the number of listed company increases, available securities and trading volume also increases. The properties of the companies, the companies are divided into five groups; A, B, G, N and Z. The properties of these companies are shown in the table below. Table 2: Capital Market Company Category and Characteristics

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Stock market crash of Bangladesh in 1996


Background
The scenario of stock market crash in 1996 and crash in 2010-11 are totally different. The number of BO account holders was only 300,000 and most of them were very new in the market. During the crash of 1996 paper shares used to be sold in front of DSE and it was not easy for investors to identify fake and original shares. The market was enough developed to gain confidence of investors. There was no automated trading system, surveillance was not enough strong and no circuit breakers as well as international protections. (Hossain, 2011) There was a huge surge in the stock market in 1996 evidenced by an enormous increase in the market capitalization. In DSE general index increased from 775.65 in January 1996 to 3064 in November, 1996. After an increase in the general index of DSE for a short period, the index started to fall down dramatically and in December 1996, the index fell down to 2300.15. The short time game plan made the investors to invest more in the capital market but when this game plan achieved its goal;

Figure 4: stock market crash in 1996 (Source: Dhaka Stock Exchange) the confidence of the investors was significantly damaged because of excessive speculations, allegedly aggravated by widespread irregular activities. This fall down of general index of DSE continued over the calendar year of 1997. In April 1997, the general index of DSE was 957.48 while in December 1997 it fell down to 756.78. Finally abnormal rise of share prices started to fall and Bangladesh stock market experienced its first crash of the history in 1996.

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Reasons
Effect of Policy Reforms on Market Efficiency: Evidence from Dhaka Stock Exchange, Alam and others (n.d.) mentioned that some foreign portfolio managers, few brokers and sponsors of few listed companies were behind the stock price manipulation in October 1996. As a result all share price index of DSE dramatically sky rocketed to 3600 point from 1000 point in six months time. Few foreign & local investors that had inside information made huge profit and a lot of general investors paid heavily The cause of stock market crash in 1996 was the failure of market regulators mentioned by Afroz (2006). Stock exchanges did not take any action against the dramatic price increase of listed securities during June to November 1996. Bubble formed due to abnormal demand of securities by new investors where the numbers of listed securities were very few. The reason of huge influx of investors was political stability in the country and bringing confidence in investors mind. The delivery versus payment (DVP) system of trading used to allow buyer-seller to settle their transactions between them without stock exchange participation. Many brokers/dealers used it as a tool to show fake trading to increase demand of share from the general investors side. According to Bangladesh Bank analysis that there was an unauthorized kerb market consisting of over 25,000 investors outside the stock exchange where securities were traded at a very high price. Moreover, SEC could not handle the crisis for its defective infrastructure. Weak regulations and surveillances could not monitor market manipulators and market intermediaries. Even information inefficiency, artificial financial statements certified by chartered accountants, false information and rumor were other important factors that overheated the market and burst the bubble. (Afroz, 2006)

Steps taken
Finally on 26th December, 1996 BSEC formed a probe committee to investigate and find out manipulators behind the stock market debacle. The committee published a report on March 27, 1997 stating a number of companies, investors and brokers who were in the market manipulation. BSEC obtained warrants of arrest against 32 people in 7 brokerage firms, 8 listed companies and filed 15 share-scam cases in the court. (Afroz, 2006) It took too long for the government and market regulators to restore the market conditions. The stock market crash of 1996 destroyed confidence of investors. As an initiative government of Bangladesh adopted Capital Market Development Program (CMDP) to stabilize the capital market, and attract more local and foreign investors on 20th November, 1997. After that adopting automated trading system and establishment of CDBL increase the credibility of capital market to the investors. (Bepari & Mollik, n.d.)

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STOCK MARKET CRASH OF BANGLADESH IN 2010-11


SECTOR WISE PERFORMANCE
In FY 2010-11, there was an upward trend in terms of sector wise performance; all sectors experienced an upward trend with a few exception Figure 5: Sector Wise Performance in FY 1995-96

Source: Dhaka Stock Exchange, 2011

In FY 1995-96 the major contribution of market capitalization were engineering (22%), pharmaceuticals (13%), food and allied products (11%), banks (11%) and insurance (7%). In this period the major market contribution of market capitalization was mainly depended on those sectors which have direct influence on the real sector of the economy. In FY 2001-02, the major sector wise contribution of market capitalization has significantly differed from the previous time trend. In this fiscal year the major market contribution in terms of market capitalization was banking sector. About 30 percent market capitalization has contributed by only single banking sector. All the other sectors like engineering, food and allied products, pharmaceuticals and fuel and power have less contribution in market capitalization. The sectors which can directly influence the real sector have contributed less than that of previous time and the growth of financial sector of market capitalization process has increased significantly.

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Figure 6: Sector Wise Performance in FY 2001-02

The financial market contribution in capital market in terms of market capitalization has increased significantly in FY 2010-11. In this year the banks, insurance including mutual funds have jointly contributed 53 percent of market capitalization whereas pharmaceuticals and chemicals, textile industries, food and allied products and engineering have jointly contributed 21 percent of total market capitalization. The short term larger profit of financial sector has induced the investors to make a larger investment in financial sector than those of real sectors. Therefore in short run the profit has been maximized but in the long run it can make a disturbing effect on the economy which has already been observed through capital market downward trend and zero recovery in the capital market in this year.

Figure 7: Sector Wise Performance in FY 2011-12

Source: Dhaka Stock Exchange, 2011

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Root of bubble
Due to political unrest of Bangladesh state of emergency was declared and military took power of the country in 2007. During military-backed regime investment in real sectors as well as FDI decreased but the inflow of foreign remittance increased. Investors tried to find alternative investment sector to invest their savings and found stock market as an attractive alternative. (Khaled, 2011) Nature of Investors: At the end of 2010, total number Beneficiary Owner (BO) Account stood at 3.3 Million (DSE Data) 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. Information of BO accounts of last 3 years are given below: Table 3: Change in total Number of BO Accounts in two Years Date 01.01.2009 30.06.2009 31.12.2009 30.06.2010 31.01.2011 Table No. of BO/AC 14,68,500 14,19,019 19,20,602 25,70,654 33,79,719 Change (+/-) --(49481) 5,01,583 6,50,052 8,09,065

From the table we find that most of the BO accounts were opened during June 2009 to January 2011 that indicated that more than half of the investors could be treated as new investors. 238 brokerage houses opened 590 branches at 32 districts. As CPD (2011) found, internet-based trading operation, opening branches of brokerage houses across the country, easy access to the market information, arranging a countrywide 'share mela (fair)' are the factors for increasing investors that seems to be successful as the BO accountholders was doubled in last two years that might be treated as a potential for market development. But due to scarcity of new securities market price increased substantially. This demand-supply mismatch along with inadequate investors knowledge made the stock prices in a new height and finally turned into a big depression that is still going on. 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 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 influx of liquidity in the share market.

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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 grow Bangladeshs economy by 7-8% per year Bangladesh Bank adopted accommodative monetary policy during the high inflation periods to support investment. Bangladesh Bank has pegged Taka against dollar to support exports. As Taka has been undervalued it has made excess growth in money supply. Last couple of years broad money made excess liquidity and the main motive behind it was Bangladesh Banks ex-change 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 BB to grow economy by increased exports & investment eventually misguided and ended up blowing the mother of all bubbles. Then government again fuelled the bubble after permitting whitening of black money through tax breaks and schemes. (Rahman, 2011) Moreover Security & Exchange Commissions was not capable to monitor the market conditions properly. Due to the poor monitoring & market surveillance 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. (Raisa, 2011)

Time of historical fall


Timeline of historical fall of the crash has been divided into two sections which are December 2010 and January 2011. December 2010 It has been stated by Bhuiyan (2011) that 5th December, 2010 as the last glorious day of the year for the investors of Bangladesh stock market. On this day DSE General Index (DGEN) gained its all-time highest 8, 918.51 point & broke all old records of DSE turnover by Taka 32.50 billion.

Figure 8: DSE daily DGEN index of December, 2010

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Figure 9: CSE daily CASPI index of December, 2010

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 nosedive 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 Bangladesh Bank got a complaint that Banks are investing money in the stock market from their reserve. On the 1st day of December BB sent 50 teams in different banks of Dhaka & Chittagong to investigate and found some banks in such irregularities. (Raisa, 2011) On 15th December, BB increased CRR and SLR by 0.5 percent and increased to 19 & 6 percent. Another important directive initiated by BB was withdrawal of illegally invested industrial loans by December 31, 2010. As a lot of the reserved money was invested in capital market, banks started selling shares and withdrawing that money from the market. By the time investors became panicked. To handle the disastrous & assure the panicked investors BB extended its deadline for submitting and adjusting loans. For the merchant banks the deadline was January 15, 2011 and for the commercial bank February 15, 2011. January 2011 The down slope of index is noticeable from January 2nd to 10th On 9th January DSE General (DGEN) Index declined by 600 points and all indices declined nearly 7.75 percent. On 10th January Dhaka Stock Exchange General (DGEN) Index lost by 660 points or 9 percent & Chittagong Stock Exchange Selective (CSE) Index declined by 914 points or 6.8 percent within 50 minutes of trading. CSE All Share Price Index (CASPI) stood at 19212.34 losing by 1,396.21point, which is 6.77 percent. CSE Selective Categories Index (CSCX) lost 914 points or 6.87 percent and CSE -30 Index also lost 1490.83 or 8.28 percent.

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Figure 10: daily DGEN index of January, 2011

Figure 11: CSE daily CASPI index of January, 2011

January 2012

Figure 12: Trend of DSE General (DGEN) index

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Figure gives the highly volatile and sharply falling index trend of DSE general Index that started to increase from 2600 points in January 2009 and crossed its zenith price of 8600 in December 2010. After climbing the highest point it started to fall sharply and came down below 4000 in January 2012 less than half of the highest point. It had broken all previous records of decreasing index. After that Security & Exchange Commissions called for an emergency meeting with BB and stop trading at both Dhaka & Chittagong Stock Exchanges. Investors came out in the street with processions and demonstrated against free fall of Share index in both bourses as well as suspension of trading. Investors from different parts of the country such as, Chittagong, Comilla, Narsingdi, Narayanganj and Jessore brought out processions and clashed with law enforces in some places as well. Following two days consecutive historical fall of share prices the government, Central Bank & SEC took instant actions to stabilize the market and bring the confidence among million of small investors. The government created pressure on Bangladesh Bank & SEC to improve the market condition. As a result, recovery was initiated with Institutional buyer for instance merchant banks, state owned banks & non-financial institutions. On 11th January market recovered 15.6 percent of General index by the end of the session and made a record in Bangladesh stock market history of gain

Factors contributed to the crash


According to the Investigation report (2011) of the probe committee, reasons for the stock market crash are following:
Role of market regulators and their employees: The role of BSEC to control & monitor capital market, working in favor of manipulators, approving unethical proposal and issuing wrong directives which lead to unexpected market Conditions deteriorated the image of SEC. Investigation report mentioned some names of corrupt employees of the market regulators who were directly or indirectly responsible in the market manipulation. There is a job overlapping between SEC and exchanges. Such as, DSE & SEC both organizations have surveillance department for the same job but there is no co-ordination. Listing committee of DSE & CSE examines listing application of company but 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. There is another accusation that these senior level employees received placement by using others name which is very difficult to identify. The report admits that BSEC doesnt have enough employees for example; qualified accountant, financial analyst and researcher to control and monitor the market.
Demutualization of Exchanges: There are both elected & nominated members in DSE and CSE. Basically, elected members run the administration due to less

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interest & relation of nominated members. As a result, the players of the capital market act as controllers. Meanwhile, controllers are inactive during unethical activities due to conflict of interest. In the investigation report it was said that different stake holders of capital market and civil society support & demand for demutualization of exchanges. The meaning of Demutualization is separating controlling functions from controllers functions, empowering controller and taking decisions without being motivated by the market players. 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 sky rocketed until December 2010. When Bangladesh Bank restricted more than 10 percent investment of deposited money, increased CRR and SLR ratio, created liquidity crisis and market crashed Pre-IPO & IPO process: Investigation committee considered that due to PreIPO & IPO manipulation share prices sky rocketed and that is the main reason for the share market crash. Manipulators illegally & unethically created a Kerb market in Pre-IPO stage. Without recommendation by the listing committee application for IPO was accepted. SEC did not examine abnormal asset revaluation and indicative price. As a result in Pre-IPO or IPO stage placement process and placement trade Kerb market overvalued share prices. This eventually generated liquidity crisis in the capital market. Changes in Face Value (Stock Split) of Securities: A most important reason for abnormal climbing of index was indicated to uniform face value of share at Taka 10 . Splitting share does not change revenue or asset of a company and should not affect the share price. But Small investors showed their utmost interest to buy split share with their small investment and consequently pushed the price up. Up to 62 listed companies split their shares in 2009 & 2010. So, it abnormally increased liquidity of the market and brought notable change in market capitalization. Investigation report shows that MC increased 655% of companies those adopted share uniform and MC increased only 46% of those that did not adopt. From July 2009 to December 2010 the role of total MC were 81.5% of companies which adopted share uniform and only18.5% those that did not adopt. Placement trade / Kerb market: Before issuing IPO, Issue manager or Issuer Company sell shares to their nominated person and that is called Private placement or pre-IPO placement. Private placement is risky because it doesnt have accounting discloser. In the developed countries there are some fixed rules but in Bangladesh SEC didnt have proper rules for it. As a result some manipulators used it as a tool of price manipulation. Investigation committee found that in most of the cases placement was offered at less than the IPO price. Though aim of public offering is participation of public but placement doesnt make sure it.

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Eight companies issued convertible preference share in 2009 & 10 in which average 69% went for placement. So, participation of the public was hindered and that created placement trade or Kerb market.
Table 4: Top Companies offered preference Shares

Company name

Value of preference share Private placement (Tk. Million) 4100 3000 1800 1200 750 63% 69% 82% 58% 77%

Beximco Pharma Sumit Power Aftab Automobile Peoples Leasing BD Thai Aluminum

In case of preference share, most of them are distributed through private placement where there was no transparency of allocation. Another interesting thing is that, stock price of most of the companies mentioned above increased substantially just after the offerings that increased the greed of investors to make profit through buying right/preference shares of these companies. Insider Trading: Insider trading also might be a cause of economic bubble, esp., in the capital market. Insiders can use the hidden information to take advantage of the undisclosed news from the market and can make the stock price higher than its intrinsic value (Ronald R et. al. 1993) Omnibus account : Omnibus accounts of ICB and merchant banks as another major reason behind the stock market debacle. It was found that many speculative deals were made through Omnibus accounts of Merchant Banks. Report showed that each Omnibus account consists of 3000-10000 individual accounts and big market players/manipulators used Omnibus Accounts to make speculate stock prices. Even high SEC and Government Officials used the help of Omnibus account to buy and sell share though its prohibited for them to involve invest in the stock market.(Ibrahim Khalid Committee Report). In this case Merchant Bank did not comply with SEC and Bangladesh Bank rules. As per central Bank law, shares of Banks cannot be bought in unidentified accounts but Merchant banks did so in many cases. But SEC never raised any question about such accounts and never made any investigations to dig out irregularities that indicate poor regulations. As investigation reports shows that this kind of account made a lot of illegal transactions. It publishes name of 30 big players including ICB for a lot of suspicious transactions and says most manipulators traded from the omnibus accounts. It was also reported at least Taka 2.5 billion has been traded from hidden or omnibus accounts.

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Asset revaluation & Rumor: By taking chance of weak asset revaluation method companies have overvalued their asset. In this process dishonest auditors generated artificial audit reports. So, calculating of NAV on overvalued asset indicates wrong signal Book building method: Its a procedure of determining price of IPO at which it is offered. The fair price is determined by the demand of a security from institutional investors and their indicative price. The main aim of introducing this method in Bangladesh stock market was to attract more firms for enlisting in the stock exchanges through fair share pricing. However, it was found as an instrument of manipulating market prices. Investigation report reveals that during the price discovery/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 offloaded 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 Suspicious transaction of top players: Investigation report reveals some names of individual and institutional investors as top buyers and sellers during abnormal increase and decrease of index in different time periods. The transactions of these investors were suspicious and affected the market heavily and liable for abnormal rise and fall.
Direct listing: With the approval of SEC few companies have been directly listed in the stock exchange. These companies come to the market with inflated share prices. Investigation report mentioned that indicative prices of these companies were determined even 58 times more than EPS and 9 times of NAV.

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.

Bangladesh Securities exchange commission (BSEC) has taken some initiatives to protect investors from any potential loss. Some of the steps are mentioned below:

Query to the Company: SEC many query to the company for several times to explain the reason behind the price boom of the company stock. In each time, the company answered that there is no undisclosed price sensitive information of the Company for recent unusual price hike. Investigation of factory and accounts: SEC/DSE sent their investigation team to the factory and looked into physical and financial resources to discover the reason of price boom and disclosed the found matters to investors through stock exchanges.

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Investors awareness messages: SEC disclosed many messages to made investors aware from not to buy the security of the company to protect them from any potential loss. SEC says Honorable Investors please make your investment decision based on company fundamentals, technical analysis, price level, disclosed information; and avoid rumor based speculations. Repeat of company Fundamentals to DSE Screen: SEC repeatedly disclosed the company fundamentals to the screen to make investors aware about the company. Legal actions against company Directors: SEC sued against five directors for recent price hike of the company stock and the case still running with the court

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RECOMMENDATIONS AND CONCLUSION


Strengthening the Market Surveillance Systems
To strengthen the SECs operations and governance, (i) A real-time market surveillance system should be installed, and (ii) Capacity building will be provided to improve monitoring, supervision, and enforcement capacity of the SEC Ensuring Integrity and Efficiency of SEC Members and Staffs Staff of SEC, CSE, and DSE will be trained in modern market surveillance and enforcement techniques to enable them to be more effective at detecting trading irregularities and market abuses. The training will include examination of evidence and analysis of trading accounts of brokerage firms Co-ordination between SEC and Stock Exchanges From the analysis and Investigation report we found lack of coordination and inconsistencies between the functions of SEC and Stock Exchanges. Esp. in case of Company listing and surveillance, Coordination is highly important. To combat future debacle both SEC and stock exchanges should work closely. Bank Finance in Capital Market Commercial Banks relies heavily on capital market by investing directly and indirectly (Margin Loans) that creates high risk on depositors money. So Regulators should impose restriction on investment on Capital market by Banks. In India, Banks can invest a certain portion of their owners equity/capital (not deposit) to capital market but in Bangladesh Banks can invest 10% of their total liability that is not rational at all. Such huge investment by banks pushes only the demand side and creates bubble to the market as supply side response is very low in Bangladesh. SO, regulators should set new limit on the basis of Shareholders equity and should monitor this very strictly.

Supply of adequate securities Supply side response during last two years was very poor relative to sky rocking demand of securities that helped to inflate the price of almost every share traded in Dhaka and Chittagong stock exchanges. Government should take measures to bring good companies (both local and MNCs) by allowing easy access and good IPO price to promote the market. Other regulators like (Bangladesh Bank, Bangladesh Telecom Regulatory Authority, Registrar of Joint Stock companies and Ministries) can also take measures to enlist new companies to the market to enhance the depth of it.

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Transparency in listing procedure As listing methods (Book Building methods and direct listing) played a vicious rule to damage the stability of the market; major change should be brought to make it acceptable and transparent. In this regard, SEC should promote only Fixed Price method as it lack less opportunity to manipulate the offer price. SEC can also use due diligence to fix the offer price under this method. For Book Building Method, price bidder Eligible Institutional Investors (EIIs) should deposit at least 10% of the value of the securities that they are interested to buy. Such deposit will make them more careful and help them to make better analysis to quote any price. Lock-in period should be fixed to at least 180 days at short lock-in (21 days) help them to speculate them more to get higher returns. Institutes and persons behind the book building scam should be under trial and steps should be taken to the confiscate their ill-gotten wealth. Peoples of Regulatory bodies who allowed such offences also should be brought under proper trial. Direct listing method should not be allowed as it is very to manipulate under this method. Consistency in Regulation From the analysis made in this report, I found various inconsistencies in the SEC regulations. SEC notification came only when the market rises continuously for many days that do not reflect good regulation. The Bangladeshi stock market needs to move towards a market based system of regulation for capital market activities and SEC should act proactively instead of its reactive response. SEC does not measure the costs and benefits of its rapidly changing guidelines/regulations. SEC and GOB should have long term visions regarding market and should make cost-benefit analysis before making any rule/law as it affect investors return. Regulatory parity and consistency between all institutions and participants conducting related capital market activities has to be ensured at all times

Serial Trading and Manipulation As there are many evidences that some investors and institutions were involved in the serial trading and insider trading to manipulate the price of individual stocks under regulatory supports. Manipulative trading under Omnibus accounts should be fully investigated and peoples and institutions under the hidden accounts should be identified and also should bring under trial if any irregularity is found

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Steps already taken by the Government: Government already took some steps
to stabilize the market. Securities and Exchange Commission is restructured and all the all management people are replaced by new peoples. Uniform per value of shares are started from December 2011 that ensured the uniformity in terms of par value in the market. Government sued against some manipulators and the court is running the cases. Government has also introduced some big funds to provide liquidity supports to the market and also planning to compensate small investors who lost everything due to use of margin loan by redeeming the interest of the loan.

Role of government to prevent this kind of crash in future Recommendations that government should adapt to avoid and tackle the same kind of crash in future are given following: Actions should be taken against those who were involved in this recent 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

Bangladesh unveils 21-point stock market stabilization package


Dhaka, Bangladesh (BBN) - Bangladesh has announced a 21-point stock market stabilization package that primarily focuses on greater participation of banks and other financial institutions in stock market in the short-term
The SEC chairman said the measures included in the package were in short, medium and long-term in nature. "The implementation of the short-term measures will start immediately, the medium- term ones in three months and the long-term ones in six months," the SEC chief noted.

The package includes a plan to formulate a 'special scheme' aimed at helping the small investors recoup their losses.

The ten short-term measures include:


1) The loans provided by banks to their capital market subsidiaries, will not be taken into account while estimating their 'exposure to stock market'; 2) The long-term equity investment made by a bank in any company will not be

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considered as 'capital market exposure'; 3) The repatriation of commission money, which has to be paid to foreign brokerage firms in case of foreign investment, will be made speedier, subject to submission of relevant documents; 4) The 10 per cent tax imposed on the profits earned by investments by foreign institutional and non-resident Bangladeshis will be withdrawn; 5) The central bank will consider the banks' exposure limit to the stock market on a 'net-off' basis, instead of 'marking to market', basis; 6) The deadline for adjusting single-borrower exposure limit of banks has been extended by another two years, up to December 31, 2013; 7) The commercial banks have agreed to make more investment in the stock market in line with the advice given by Finance Minister AMA Muhith; 8) Insurance companies (life and non-life) have agreed to inject their surplus funds in the stock market; 9) The sponsor-directors of listed companies will have to own at least 30 per cent stakes of their respective companies; and 10) The merchant banks and other subsidiaries have so far collected 99 to 100 per cent of their funds from their parent companies, which are banks, non-banking financial institutions (NBFIs) and insurance companies. From now on, the merchant banks and other subsidiary firms will be allowed to mobilize 49 per cent of their funds from sources beyond their parent companies.

The mid-term measures are:


1) The securities regulator will take initiatives to launch the 'Investment Advisory Service' to make the market an informed one. For this, brokerage firms will have to employ professional and expert investment managers; 2) The securities regulator will make available 'Equity Research Publication' to ensure access to information by investors, academicians and policy makers; 3) A corporate governance guideline will be formulated to ensure transparency and accountability of the listed companies; and 4) The securities regulator will immediately take measures to increase the capital of merchant banks and other subsidiary firms.

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The long-term measures are:


1) Financial Reporting Act (FRA) will be formulated in a bid to increase the quality accounting and auditing disclosure by listed companies; 2) The present 'insider trading' rules will be upgraded and stricter. 3) The regulator will make the 'Small Investor Protection' law more time- befitting; 4) The proposed demutualization of the two stock exchanges will be completed very soon to ensure their corporate governance; 5) Necessary measures will be taken to strengthen the mutual funds and make those more attractive to investors; and 6) The securities regulator will further strengthen the monitoring activities in the stock market by establishing improved surveillance system

Conclusion:
The study shows that the major reasons behind the stock market crash are irrational market behavior, inconsistency in regulations, excess liquidity in the market, stock split by companies, faulty listing system, issuance of right shares and preference shares by companies at high price, stock manipulations by insider trading, serial trading etc and excessive greed of investors. In most cases, investors behavior was natural and consistent to the standard behavior. But the study did not find regulatory failure as the root-cause of the volatility and disagree with the Ibrahim Khalid Committee report and suggest for further study to implement the recommendations of the committee. Due to many constraints (data availability and access, time etc.), I have failed to conduct more comprehensive study on the crash but I hope my study might give some guideline for researchers who want to conduct further study on it. Further study in this field is required as many of the issues are not covered in my report.
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