Developing Bangladesh's Capital Market: A Strategic Roadmap

Bangladesh’s capital market holds immense potential, but to fully realize this, we must address key structural challenges. Currently dominated by retail investors, our market lacks the stabilizing influence of institutional investors—a contrast to global practices. To cultivate a resilient, balanced capital market, strategic measures must be implemented. Here’s a roadmap for progress:

1. Demand Side Improvement: Expanding Institutional Investment

Institutional Investors are crucial for stabilizing the market. Yet, in Bangladesh, legal and structural barriers limit their participation.

Provident Funds: Under current regulations i.e. Trust act and Labour law, investments in the capital market are restricted. For instance, only 25% of trust money can be invested in listed securities, limiting market exposure. Revising these regulations is vital for greater participation.

Universal Pension Scheme: The proposed scheme could be transformative if a portion of the funds is allocated to the capital market, ensuring steady inflow and encouraging long-term investment.

Mutual Funds: Our mutual fund industry faces challenges related to fund management ethics and performance. To restore confidence, stricter regulations on fund managers, the cancellation of fraudulent licenses, and preventing closed-end funds from extending beyond 10 years are necessary. Additionally, promoting investment through Mutual Fund Schemes (MFS) and Mobile Network Operators (MNOs) could broaden participation.

Raising awareness about wealth management and encouraging investments in well-managed mutual funds (such as VIPB, Edge, CWT, IDLC, Shanta, Ekush, UCB) should be a key strategy. The government and media should actively promote the mutual fund industry to support this initiative.

Endowment Funds: Encouraging the creation of endowment funds within universities and large institutions can provide long-term capital and enhance market liquidity. Private universities should be encouraged to create and invest in these funds.

Foundations and Life Insurance: Formation of foundations and allowing life insurance companies (having proper business model for life insurance) and bank to allocate a portion of their portfolios to the capital market can diversify and stabilize the investor base.

Sovereign Wealth Fund and Foreign Investor base: Although Bangladesh doesn't currently have a sovereign wealth fund, we can cultivate an environment that attracts foreign investors and international sovereign wealth funds. By ensuring stability and eliminating concerns over sudden policy changes, we can encourage confident investment in our country.

2. Enhancing Regulatory Oversight and Investor Protection

Maintaining market integrity through strict regulations is critical.

Curbing Unethical Practices: Strengthening surveillance against unethical practices like serial trading and insider trading, coupled with severe penalties, will help restore confidence among fundamental investors.

Price Controls: The current practice of maintaining a floor price distorts market dynamics. Removing the floor price and ensuring symmetrical price limits will allow for a more balanced and efficient market response. Current practise allows only 3% downward price which should be removed as soon as possible.

Margin Rules: Recalibrating margin rules based on criteria like P/E ratios, liquidity, volatility and style is essential. Caps should be determined for small, mid, and large-cap stocks to ensure appropriate leverage.

Short Sale Introduction: Introducing short selling can reduce gambling and speculative behavior in the market by allowing investors to profit from declining prices, thereby promoting more balanced and informed trading practices.

Credit Rating Agencies: Credit Rating Landscape in Bangladesh differs from the global standard. While Bangladesh has 8 credit rating agencies, globally, 2-3 agencies are common. The local agencies generally exhibit comfort in corporate ratings, but bond ratings are more rigorous. To enhance consistency and quality, the Bangladesh Securities and Exchange Commission (BSEC) might consider limiting bond rating agencies to 2-3, implementing stricter guidelines. Establishing a reliable credit rating system for bonds can help investors assess risk and make informed decisions. To reinforce the credibility of credit rating agencies, merging smaller agencies for a more reliable system is suggested. Continuous surveillance and limiting the number of agencies can improve rating quality.

Auditor Integrity: A robust auditing system is essential for investor trust. Identifying and penalizing fraudulent auditors will deter unethical behavior and enhance market integrity.

Support from NBR: Consistent policies and favorable tax treatment from the National Board of Revenue (NBR) are necessary to facilitate market development.

3. Improving the Supply Side: Enhancing the Capital Raising process

A flexible and transparent IPO process is key to attracting companies to the market.

Enhancing the IPO Process: Revising current valuation methods, potentially adopting Dutch auctions, and allowing flexibility in the use of proceeds can make IPOs more attractive. Addressing lock-in periods and offering direct share offerings should be considered.

Encouraging MNCs, large Conglomerate and Startup Companies: Profit-making MNCs, large Conglomerate (Akij, Pran, City Group, Meghna) and startup companies should be encouraged to go public. Allowing IPOs with negative retained earnings under certain conditions can also be considered.

Flexible Use of Proceeds: Companies should have the flexibility to adjust their capital allocation as needed.

Proper Taxation: A conducive tax environment is essential for encouraging public offerings. Revising tax policies that deter companies from going public is necessary.

Reducing Fees: Lowering the costs associated with raising capital through an IPO/ Bond will make the process more accessible to companies.

Digital Roadshows: Transitioning from traditional roadshows to digital formats can be a cost-effective and inclusive alternative.

Automation: Document requirement for any kind of approval shall be minimized. The documents available to other regulators or Departments shall not be submitted repetitively. Rather BSEC should be able to access RJSC information and Audited Reports of Listed Company directly. BSEC should also reconsider the necessity of receiving the attached copy of the submitted documents.

Adopting Insolvency and Bankruptcy Regulation: Implementing a robust insolvency and bankruptcy framework, similar to the Insolvency and Bankruptcy Code, 2015 of India, can enhance investor confidence by providing clear rules for debt recovery and resolution, thus promoting a healthier bond market.

By implementing these strategies, Bangladesh can develop a more resilient, transparent, and efficient capital market. These measures will protect investors and attract long-term investments, contributing to the overall growth and stability of the country’s economy.