Why capital market under bear attack

The series of measures taken over the years in the stock market has discouraged many large and good companies from participating in it for long-term financing, say experts and stakeholders.

Companies often turn to bank borrowings to bypass the cumbersome process of an unattractive stock market, according to the speakers.

This is keeping the capital market low-performing which is a hindrance to fulfil Bangladesh's long-term financing requirements for its economic growth objectives, such as achieving upper-middle-income status by 2031 and high-income status by 2041, they said.

In a recent Focus Group Discussion on the capital market organised by The Business Standard, they identified several key factors hindering the market's development including a scarcity of investible stocks, the imposition of minimum shareholdings at 2% for directors and 30% for sponsors and directors, frequent market interventions and an unwelcoming listing process.

The discussion was held recently at the TBS conference room to observe the fourth founding anniversary of the business daily.

Participants of the discussion also pinpointed other challenges in the capital market such as a non-transparent secondary market, lack of actions against manipulators, a conservative pricing mechanism for IPOs, the preference for easily accessible bank loans compared to time-consuming IPOs, and a high cost of compliance which is higher than 7.5% tax benefits for listing.

They said the consequences of the capital market's shortcomings are far-reaching, encompassing a severe shortage of sustainable long-term financing, an overburdened banking system grappling with the problem of default loans, and savers being deprived of opportunities to capitalise on economic growth.

Highlighting the gradual weakening of the capital market, former commissioner of the Bangladesh Securities and Exchange Commission (BSEC) Arif Khan said the total market capitalisation to GDP ratio more than halved over the last one and a half decades to below 18% at the end of 2023, while it was 106% in India and 175% in the USA.

The pricing model in the IPO regulations is conservative and no entrepreneur of a sought after company would be happy to sell stakes at such low prices, said Dhaka Stock Exchange (DSE) Managing Director ATM Tariquzzaman, who is also the former executive director at the BSEC.

For instance, the stringent IPO pricing model offered Omera Petroleum, the LPG market leader, a price even lower than what its foreign strategic investors paid five years ago. "The requirement for a director to hold a minimum of 2% shares and the combined 30% ownership by sponsors and directors has become a manipulative tool," said Tariquzzaman.

Companies are not getting a good price in IPO and their stocks surge in the secondary market after listing, said Bangladesh Association of Publicly Listed Companies Executive Committee Member Kyser Hamid.

"We have to decide who we want to benefit," said Hamid.

Regulations are too strict here in Bangladesh as the regulators have been making the job tough for everyone instead of only punishing the wrongdoers, he added.

Chartered Financial Analyst Md Moniruzzaman, who is also the managing director of Prime Bank Securities, said as good companies shy away, weaker ones opt for listing; there is a severe shortage of investment-grade companies in the stock market that are able to grow sustainably and keep generating long-term wealth for their shareholders.

He said the DSE has only 20 to 50 investable stocks and for foreign investors, the number would not be more than five to seven.

Faltering capital market

M Mashrur Reaz, chairman of the think tank Policy Exchange Bangladesh, said the capital market development that should have taken place at least two decades ago still falters and the country needs a national vision and strategy for sustainable long-term financing.

Speakers at the discussion said Bangladeshis facing gigantic financing gaps – over $200 billion for infrastructure development in the next two decades, annually $2.6 billion for SME financing, billions of dollars more for housing financing without which no economy can turn into a developed one.

Also, the green transformation of the apparel industry would need huge investments that would need capital market financing.

Stock market not useful for capital raising

The stock market was irrelevant in the planning of the bold entrepreneurs who have established billion-dollar business empires like Abul Khair, Meghna, City, T K, and Akij groups with billion-dollar turnovers. It is not catering to the capital raising needs of the private sector – whether in the form of equity or debt.

Capital raising through initial public offerings (IPO) dropped to around Tk1,000 crore in 2023, from the previous annual average of Tk2,000 crore, said former BSEC Commissioner Arif Khan, who is now the vice chairman of Shanta Asset Management.

Banks easier, faster for capital

The amount companies are raising from the stock market a year is often lower than the loans a bank branch disburses annually, he said to show the capital market's ineffectiveness in serving entrepreneurs.

"For instance, after investing Tk160 crore-Tk170 crore in the Tk250 crore Labaid Cardiac Hospital project, its entrepreneurs went for an IPO in 2009 eying Tk60 crore-Tk70 crore and they were offered an inadequate Tk30 crore in equity only," said A M Shamim, managing director (MD) of Labaid Group that already invested Tk3,000 crore-Tk4,000 crore for international standard healthcare in the country which "can save over a billion dollar of foreign currency a year against an investment of $3-$4 billion."

After lacklustre responses from the market regulators, Labaid turned to the International Finance Corporation (IFC) which funded nearly half of the group's hospital projects – a much easier and faster process for the companies.

Recently, the group approached the capital market for some Tk180 crore equity funds for its cancer hospital project and after having insufficient response, it borrowed around Tk100 crore from the IFC, the process of which did not take more than three months, in contrast to the common experience of firms waiting for years to get the funds from the capital market.

"Out of our Tk1,000 crore-Tk1,500 crore turnover, we can retain 20% as net profits and we were ready to share it with the public if treated well by the market regulators," said Shamim, adding that the consequence of non-listing would not be good for the economy as it keeps the financial burden on entrepreneurs high and the ventures remain debt-dependent.

Evercare Hospital operator STS Holding, Delta Hospital facing similar hurdles, shied away from their planned IPO and opted for private investments or bank loans later.

The cumbersome, prolonged listing process, conservative IPO pricing mechanism, and market-unfriendly over-regulations together have made the stock market unattractive to entrepreneurs, according to the speakers.

Even the 7.5 percentage points cut in corporate tax after listing, which was 10 percentage points earlier, failed to allure big companies to the stock market as they find the post-listing cost of compliances, in terms of corporate governance, dividend payout, or tax-VAT transparency, higher than the cost of bank loans, said Bangladesh Merchant Bankers Association President Md Sayadur Rahman.

He said the effective cost of capital is higher than 12% a year if a firm pays out 10% cash dividends to remain in "A" category in the bourses, as dividends are its post-tax expenses, while an equal pre-tax interest expense against bank loans help it save taxes.

Post-listing exchequer contributions of companies are much higher, said the investment banker, adding that the government should widen the corporate tax gap between listed and non-listed firms to 15%.

Issuing a bond costs a company up to 2% of the capital because of excessive documentation, while regulators could help reduce it by making things easier, said Kyser Hamid who is the MD and CEO of Bangladesh Finance.

Bourses across the world pursue after big firms to get them listed and failing to attract them, the stock market in Bangladesh turned into a secondary market gain focused one, said Arif Khan.

Market intervention hurts trust

The speakers said Bangladeshi regulators have introduced various measures such as implementing floor price, intervening in the operations of listed companies' boards, mandating minimum shareholding of sponsor-directors, and establishing a minimum paid-up capital structure. However, these actions have ultimately been proven to be market interventions and tools for market manipulation.

"We have global and regional best practices and we do not need to innovate regulations that end up hurting people's trust," said ATM Tariquzzaman of the DSE.

Echoing him Arif Khan, formerly of the BSEC, said policy must be market friendly and clear to all.

In a unique example, the BSEC conducted investment promotion road-shows in various financial districts of the world and international institutional investors got scared to see the regulator acting like market players, said Mashrur Reaz of Policy Exchange.

Market pricing should be the market's job and no one should expect regulator's participation there, said Arif Khan.

Bangladesh, despite having a decent national savings rate of over 25%, significantly lags behind in terms of how much of the population invests in the capital market – not even 1%, which is over 6% in Vietnam and 8% in Thailand.

Experts suggested building a market that would encourage long-term wealth creation in quality stocks, mainly through promoting the culture of investing through mutual funds.

To create a strong investor base for insurance funds, pension funds need to be much bigger, they suggested.