CPD: Budget should highlight how govt will reform capital market

The upcoming budget should showcase how the government is going to address the capital market reform agenda as incentives and support have had limited positive impact on the market’s performance, said the Centre for Policy Dialogue (CPD).

A report of the think tank said government incentives after the 2010 capital market crash improved some key performance indicators such as market capitalisation, trade volume and a few other major indices, but the improvement was limited.

There has been no change in the highly concentrated nature of the market, its volatility and pricing irregularities, the CPD observed.

The think tank came up with the observations at a discussion on upcoming budget priorities on Tuesday in Dhaka. The session was chaired by CPD Research Director Dr Khondaker Golam Moazzem, and the keynote speech was delivered by Research Director Dr Towfiqul Islam Khan.

CPD Distinguished Fellow Dr Debapriya Bhattacharya was also present at the discussion.

CPD observed there have been different fiscal and budgetary supports that were extended to the capital market over the years, targeting retail and institutional investors, listed companies, bourses, brokerage houses and other stakeholders.

According to stock exchange data, Dhaka Stock Exchange’s (DSE) Broad Index, which was above 8,500 in December 2010, bottomed to below the 3,400 mark in 2013. In the last six years of moderate but choppy upward-trend, it is now above 5,400.

Average daily trade volume shrank below Tk200 crore at its lowest, which is over Tk400 crore now.

Problems however remain.

At the DSE, around 62% of total market capitalisation is tied to bank, telecom, pharmaceuticals, fuel and power stocks, highlighting the concentrated nature of the market.

Referring to price-to-earnings (P/E) ratio of some sectors (such as jute companies’ average P/E ratio 694, cement 90.7, miscellaneous 63.9), the CPD pointed out the irrationality in securities pricing, where Average Market P/E, an indication of valuation level, is now around 16.

P/E ratio is a widely used indicator for understanding the price of securities against their fundamentals.

During the discussion, the CPD mentioned that the election-centric gains in stocks have almost been wiped out within a few months due to high volatility.

Illegal practices

CPD said the lack of finance is not a key problem for Bangladesh’s capital market, instead the real issue stems from various illegal practices.

Pointing to the root causes of the capital market’s persisting weakness, the CPD identified factors such as poor listing of well-reputed companies, submission of false information in Initial Public Offering (IPO) disclosures, placement share trade, allegations of collusion, illegal activities and poor financial reporting.

As an example, the CPD questioned how sectorial shares such as insurance and non-banking financial institution were performing well despite poor to modest performance in the real economy.

Some of these shares are enlisted in Category Z, which lists companies that do not pay dividends regularly. Usually, these companies are not performing well business-wise.

Proposed fiscal measures in the national budget 2019-20 include increasing tax exemption limit of annual dividend earnings up to Tk50,000, from the existing limit of Tk25,000. The CPD believes this move will marginally contribute to improving the stability of the capital market, but will hardly address the existing key weaknesses in the market.