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Capital Market of Bangladesh

Essay by   •  August 16, 2011  •  Case Study  •  4,481 Words (18 Pages)  •  2,088 Views

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Introduction

Capital Market:

Capital market is a vehicle through which surplus fund is invested in alternative investment opportunities. Robust capital market plays a vital role in the economic development and industrialization of a country. Capital market is a very important segment of our financial market where loanable fund is transacted for a period longer than one year. In other words, capital market is a market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.

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 $94.507 billion economy and per capita income of roughly $573.79 (Source: http://www.economywatch.com/economic-statistics/country/Bangladesh), Bangladesh should really focus on improving governance and developing advanced market products, such as derivatives, swaps etc.

The market has two segments:

Debt market: this is the market where loans are traded. Here debt instruments are the contract that specifies the amounts and rate of interest to be charged and schedule of the repayment by the borrower. It has also some more details like mortgage, bond, consumer credit etc. participants in this market in Bangladesh are banks and the leasing & Investment Companies. They individually can arrange such funds or sometimes arrange these through syndication and consortium.

Equity market: it represents ownership in a company, corporation or entity and entitles the stock or share holders to receive cash dividend generated from income of those. Listed shares are traded in a country's stock exchange. In Bangladesh two stock markets viz. Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) are the trading houses of shares/debentures/mutual funds etc.

Stakeholders of the Capital Market:

The stakeholders are the entities who have certain interest in the capital market. We can divide the stakeholders into three categories.

1. Investors: investors are the entities who invest their savings and funds in the capital market for the expectation of getting a higher return. They invest in the instruments and securities which they think will do well and yield higher return. So the performance of the capital market is of great interest to the investors as their fund is being involved in it.

2. Intermediaries: the intermediaries are the brokerage firms, through which the investors buys the instruments and shares. They have to abide by the rules and regulations of the regulating bodies of the capital market. They take a certain percentage on every transaction made by the investors. Also they provide margin to the help the investors raise their funds.

3. Listed Companies: the companies that enlist themselves in the capital market to collect fund from the investors. They also have to follow some rules and adopt some policies to be enlisted, like they have to publish annual report, have to provide financial information that reflects the true picture of their market price etc.

Regulatory Aspects:

The capital market of Bangladesh is regulated by Securities Exchange Commission (SEC). The Securities Exchange Commission was established in June 8, 1993 as the capital market regulator through the Securities and Exchange Commission Act, 1993 (Act 15 of 1993). The SEC ensures the compliance with capital market related laws, rules and regulations etc by the intermediaries, persons and institutions related with Capital Market. Basic Laws of capital Market are as follows:

1. Securities Act, 1920

2. Securities and Exchange Ordinance, 1969

3. Securities and Exchange Commission Act, 1993

4. Depository Act, 1999

The securities are traded through two exchange commission; Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). DSE was set up in 1954 and its operations began in 1956. DSE is a self regulatory body whose main job is to supervise the functions of the listed companies. Administration of the Dhaka Stock Exchange is run by the Dhaka Stock Exchange regulations, 2003. The DSE board of directors is comprised of 24 members of whom 12 are elected with direct votes of DSE members and 12 directors are nominated by the elected members from non DSE members with the approval of the commission. The CEO of DSE is also a nonvoting director. The CEO of the DSE conducts the daily affairs and oversees all the daily transactions. Only the registered members under Dhaka Stock Exchange can conduct securities business and according to the rule they must be corporate entities. CSE was set up in 1995. It is also a self regulatory body and its management structure is same as DSE. CSE was the first to start online trading system in Bangladesh from 1998. As per the rule of the Securities Exchange Commission, every intermediary firm has to designate a compliance officer who will ensure the compliance of the respective firm's with the security laws. If the intermediary does not comply with the security law then the compliance officer has to report it to the head of the intermediary and in case of continuation of the non compliance the compliance officer has to report it to the commission.

The 1996 capital market crash still remains a bad memory for today's regulators and as well as all the investors. Over the last several years Bangladesh has taken number of regulatory measures to boost up and reform the capital market of the country. Bangladesh has involved many international agencies and regulators for the reform project of capital market. They are Asian Development Bank, International Monetary Fund, The World bank, The United States Agency for International Development (USAID), United Nations Development Program (UNDP).

Present State of Capital Market

Bangladesh capital market is one of the smallest in Asia but the third largest in the South Asian region. The structure of the financial market is not conducive for proper liquidity and

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