Institutions backing off from stocks too

Institutional investors, who were supposed to be cool heads in the sea of jittery retail investors, are selling off more shares than they are buying and in so doing causing a slump.

In the last 15 days, institutions -- which include merchant banks, financial institutions and state-owned Investment Corporation of Bangladesh -- have sold stocks amounting to Tk 1,000 crore and bought stocks worth Tk 800 crore, according to the Dhaka Stock Exchange.

During the period, DSEX, the benchmark index of the DSE, slid 237 points to close at 4,986.37 points yesterday. It lost Tk 15,971 crore in market capitalisation.

“Some of the institutions were forced to sell shares to adjust their margin loans,” said a senior merchant banker requesting not to be named.

Buyers are paltry in comparison to the sheer volume of stocks pushing to be sold, which is causing the market to fall, he said.

Meanwhile, analysts said measures taken by the regulator in May this year to boost the stock market did not work as they ignored the key problem: the liquidity crisis.

The Bangladesh Securities and Exchange Commission (BSEC) has taken a number of reform measures in May by consulting with stock brokers, merchant bankers and asset managers to restore investors’ confidence, when the benchmark index of the DSE fell 775 points, or 13 percent, in a space of three months.

The regulator also brought 21 changes in the primary market and some changes in the secondary market. The government also provided some incentives through the budget, including doubling the tax-free limit of dividend income to Tk 50,000 for general investors.

What is more, the Bangladesh Bank came forward to enhance the investment scope of financial institutions by easing the market exposure conditions.

After taking the steps, the index soared to 5,475 points on June 11, up from 5,175 on April 24. However, the trend continued for a few days and then plunged again.

BSEC took some steps, but it ignored the key issue: the cash flow, said Faruq Ahmed Siddiqi, former chairman of BSEC.

Banks that lend money to institutions for stock market investment are facing severe liquidity crisis, he said, adding that excessive manipulation and listing of under quality stocks have eroded investors’ confidence.

“All the steps have become ineffective due to a liquidity crisis among the financial institutions,” said Mizanur Rahman, professor of the Department of Accounting & Information Systems of the University of Dhaka.

The recent market slump is unfortunate as the investors are losing money but the fall was not surprising because the steps were not properly set, he said.

The financial institutions do not want to invest in the market now as they fear the pressure may mount, he said adding that banks’ asset quality is questionable and their operating cash flow is also very low, which ultimately will create more pressure on future liquidity.

Rahman recommends solving the liquidity crunch through ensuring good governance and strengthening macroeconomic indicators, including balance of payments.

A top official of a leading asset management company said the main problem of the market is not addressed yet, which led to a communication gap among the regulators as witnessed in case of Grameenphone recently.

Liquidity crisis among the financial institutions is also a big problem for the market and it is not solved yet, he said.

The official pointed out another problem: the non-stop gambling in the market.

“Some stocks are either soaring or tumbling all the time due to gambling. This has not been stopped by the regulator.”

But, a number of general investors are losing money with the gambling so they have become inactive in the market. A top official of the commission said they are disappointed to see the recent slump.

The official, who declined to be named, said they have done almost everything that the stakeholders asked for a few months back.

“After that, this fall was not expected.”