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									                                                Chapter: 01

                                     Capital Market in Bangladesh

1.0 Introduction

    Capital market can be termed as the engine of raising capital, which accelerates industrialization and
    the process of privatization. In other words, capital market means the share and stock markets of the
    country. It is a market for long term fund. With the emergence of the need for infrastructural
    development projects, for setting up of new industries for entrepreneurial attempts-now there are more
    frequent needs of funds. Participants in the capital markets are many. They include the commercial
    banks, saving and loan associations, credit unions, mutual saving banks, finance houses, finance
    companies, merchant bankers, discount houses, venture capital companies, leasing companies,
    investment banks & companies, investment clubs, pension funds, stock exchanges, security
    companies, underwriters, portfolio-managers, and insurance companies. A capital market will play as
    a strong catalyst in the industrialization and economic development of the country.The Dhaka Stock
    Exchange (DSE) is a new and emerging stock exchange located in the capital city of Bangladesh. The
    Dhaka Stock Exchange has also undergone significant changes contributing towards the development
    of Bangladesh capital market. Theoretical and empirical literature has shown that the prices of shares
    and other assets are an important part of the dynamics Capital Market mainly refers to the Stock and
    Share market of the country. When banking system can’t totally meet up the need for funds to the
    market economy then capital market stands up to supplement it. Companies and the government can
    raise funds for long-term investments via the capital market. The capital market includes the stock
    market, the bond market, and the primary market. Securities trading on organized capital markets are
    monitored by the government; new issues are approved by authorities of financial supervision and
    monitored by participating banks. Thus, organized capital markets are able to guarantee sound
    investment opportunities. This paper reveals the various aspects of the Capital Market in Bangladesh.

1.1 Objectives of the Study

    The specific objectives of the study are:

          To analysis the pattern of Bangladesh Capital market, its structures, functions, importance and
           its growth.
           To identify various indicators of Bangladesh stock market growth.

          To develop an index of Bangladesh stock market

                                                                                        December 28, 2013    1
                                                                                         Chapter:          1
1.2 Data and Methodology

    Secondary data and information were used in preparing this assignment paper, and these were
    collected through my self by adopting the following process:

    The study covers time period from Data are collected from various issues of annual report of
    Securities and Exchange Commission (SEC) of Bangladesh, Quarterly Review of SEC, Monthly
    Review of Dhaka Stock Exchange (DSE), Bangladesh Economic Review, Statistical Year Book of
    Bangladesh, Website of Dhaka Stock Exchange, and Website of SEC Bangladesh Website of
    Bangladesh Bank, Website of Trading Economics and some other books. Descriptive statistics,
    correlation matrix, and trend equation of key indicators are mentioned along with.

1.3 Literature Review

    The stock market efficiency hypothesis is a fundamental part of the modern Finance and Economics.
    Market efficiency has an influence on the investment strategy of an investor because if market is
    efficient, trying to pick up winners will be a waste of time. Because in an efficient market there will no
    undervalued securities offering higher than deserved expected returns, given their risk. On the other
    hand if a market is not efficient excess return can be made by applying the trading strategy. Thus the
    efficiency of stock market is one of the most controversial and well-studied propositions in the
    literature of capital market. The wide range of studies concerning the efficiency hypothesis of
    Bangladesh stock market in the literature provides mixed evidences.

1.4 Limitations of the Study

    While conducting the study, we were confronted with the following limitations:

      ■ There was a little scope for research on this crucial subject as all the data was
         secondary and no way to collect primary data was available.
      ■ Lack of a wider coverage due to time constraint. We did not have much time to visit all
         the relevant places and meet respective personnel.
      ■ Only secondary data was used, but there is no alternative of primary data to ensure the
         accuracy and effectiveness of the study.

                                                                                           December 28, 2013     2
                                               Capital Market around the World
                                                                                                                      Chapter:    1
        1.5      The scenario of capital market in different countries, changes in economy and trade balance:

                                                                                                            ANNUAL          TRADE
                                                                                                         INTEREST RATE     BALANCE
                                                                     OUTAGE     CLANGED IN INFLATION       (10 YEARS
                                                                       ON         GDP IN    (%) CHANGE       GOV’T
    NAME OF THE COUNTRY                                                                                    BONDS) %       IN BILLION
                                     2012     PE RATIO   MARKET     INDEX (%)    CURRENT ON YEAR AGO
                                                         YIELD                                                  A YEAR     DOLLAR
                                                                     YEAS TO     PRICE (%)
Baneadesh (Dse GEN)                4,572.88      12.53     4.35      (32.50)       13.42        22.27           11.60

INDIA (BSE 30)                    16,896.60     16.49      1.80       3.50         5.30        10.40             8.39
PAKISTAN (KARACHI 100)            13,667.20                           14.90        4.20        12.30            13.31
INDONESIA (JAKARTA COMPOSITE)      3,943.90                           (0.70)       6.30         4.50             NA
MALAY.SIA (KISE COMPOSITE)         1,604.40     16.00      3.00       5.30         4.70         1.90             3.53
THAILAND (SET)                     1,173.20     13.00      3.30       14.70        NIL          2.50             3.52
TAIWAN (TAIWAN WEIGHTED)           7,334.60     18.00      4.60       5.20         0.40         1.70             1.20
JAPAN (NIKKEI 225)                 8,752.30                           0.40         2.80         0.50             0.83
HONG KONG (HANG SENG)             19,518.90     11.00      3.30       6.00         0.40         4.70             1.04
SINGAPORE (STRAITS TIMES)          2,855.70     11.00      3.60       10.30        1.60         5.40             1.42
GERMANY ((DAX)                     6,392.10                            6.0         1.70         1.90             1.63
UK (FISE 100)                      5,622.30                           2.20        (0.10)        2.80             1.75
USA (DJLA)                        12,824.40                           5.00         2.00         1.70             1.64
                                                                                       Chapter:         1
               1.6       Market Capitalization & GDP in some countries of Asia Pacific:

   Named country                  Market Cap.             GDP (US dollar) in        Market Cap and
                                  USD in billion               billion                GDP ratio

Bangladea (DSE)                       30.92                    103.95                      29.75

India (ESE)                          1,035 91                  1,84338                     5620

Pakistan (Karachi 100)                37.16                     204.08                     18421

Srilanka (Colombo SE)                 13.69                     58 82                      2328

Indonesia (SE)

Bursa Malaysia                        40624                     247.57                     164.10

Thailand (SE)                        298.96                     339.40                     88.09

Taiwan (SE Corp.)                    668.14                     504.61                     132.41

Philippine (5E)                       192.89                    21640                      89.26

Japan (SE)                           3,1/5.44                  5855.38                     55.09

Hong Kong Exchange                   2,320.23                   246.94                     93939

Singapore Exchange                    637.99                    266.50                     239.40

                                                                     _ Source   Dhaka Stock Exchange Ltd.

                                                                                           December 28, 2013   4
                                             Chapter: 02

2.0 Functions

   The functioning of an efficient capital market may ensure smooth floatation of funds from the savers
   to the investors. When banking system cannot meet up the total need for funds to the market economy,
   capital market stands up to supplement. To put it in a single sentence, we can therefore say that the
   increased need for funds in the business sector has created an immense need for an effective and
   efficient capital market. It facilitates an efficient transfer of resources from savers to investors and
   becomes conduits for channeling investment funds from investors to borrowers. The capital market is
   required to meet at least two basic requirements:
                (a) It should support industrialization through savings mobilization, investment
                    fund allocation and maturity transformation and
                 (b) It must be safe and efficient in discharging the aforesaid function. It has
                    two segments, namely, securities segments and non-securities segments.

2.1 Structure of the Capital Market in Bangladesh
   Bangladesh capital market is one of the smallest in Asia but within the south Asian region, it is the
   third largest one. It has two full-fledged automated stock exchanges full-fledged namely Dhaka Stock
   Exchange (DSE), Chittagong Stock Exchange (CSE) and an OTC exchange operated by CSE. It also
   consists of a dedicated regulator, the Securities and Exchange Commission (SEC) since, it implements
   rules and regulations, mentions their implications to omonitorsoperate …..

2.2 Stock market size

   Market capitalization ratio equals the value of listed shares divided by GDP. Analysts frequently use
   the ratio as a measure of stock market size. In terms of economic significance, the assumption behind
   market capitalization is that market size is positively correlated with the ability to mobilize capital and
   diversify risk on an economy wide basis (Agarwal 2001). La Porter et al. (1997, 1998) and Levine and
   Zervos (1998) used the market capitalization to GDP ratio as an indicator of market development.

                                                                                           December 28, 2013     5
                                                                                             Chapter:       2
2.4 Bangladesh Securities and Exchange Commission (SEC)

   Capital market plays a significant role in the economy as a source of long term financing. Existence of a
   fair, efficient and transparent capital market is essential for industrialization and economic development
   of a country. To develop such a fair, efficient and transparent capital market the Bangladesh
   Securities and Exchange Commission was established as a regulator through enactment of the Securities
   and Exchange Commission Act 1993 in June 1993, with the following mission.

                 1. Protecting the interest of investors in securities;
                 2. Developing the capital and securities markets; and
                 3. Ensuring proper issuance of securities and framing of securities rules
                     concerning above.

   The Commission frames rules and regulations under the relevant laws, and regulate the capital
   market through ensuring compliance of securities laws by the issuer, stock exchange and market
   intermediaries involved in the market.

   The Commission consists of a Chairman and four full time Commissioners who are appointed by the
   government for a certain period as per law, and terms of their service is determined by the government.
   The Chairman Works as the chief executive officer of the Commission.

2.5 The Dhaka Stock Exchange (DSE)

   Dhaka Stock Exchange Ltd (DSE) is the oldest and largest stock exchange in Bangladesh. Though USE was
   established on 22 April 1954, its commercial operation started hi 1956. The board of directors consisting of 25
   members directs the avidities of USE. Out of them, 12 directors are elected among DSE members, other 12
   directors upon approval of the Commission are nominated by the elected member from non-USE members
   and CEO is the ex-officio director, at present, there are 238 members in DSE of which 217 members are
   registered by the Commission for conducting securities business. In addition to the divisional towns DSE has
   expanded its on-line trading network to many district towns like Gazipur, Narayanganj, Conilia, Feni, Habiganj,
   Maulvibazar, Mymensingh, Chittagong, Khulna, Sylhet, Kushtia, Barisal, Rajshahi and Bogra. As on 2012 total

                                                                                              December 28, 2013      6
    number of listings in DSE was 511 against which issued capital was Tk. 93,36296           Chapter:           2
    million and the market capitali7ation was Tk. 249,1612.9 million (ANNEX-1).

2.6 The Chittagong Stock Exchange (CSE)

    The Chittagong Stock Exchange Ltd (CSE), the second stock exchange, was established in 1995. The board of
    directors consisting of 25 members directs the activities of CSE. Out of them, 12 directors are elected among
    COE members, other 12 directors upon approval of the Commission are nominated by the elected members
    from non-CSE members and CEO is the ex-officio director. Now there are 148 members in OE of which 138
    members are registered by the Commission for conducting securities business. In addition to the
    divisional towns COE has expanded its on-line trading network to many district towns like Chittagong,
    Dhaka, Narayanganj, Feni, Sylhet, Chounnuhuni, Noakhali, Coxs Bazar, Khulna, Jessote, Barisal, Rajshahi. Beside
    this CSE has introduced internet trading system by which investors can buy & sell securities from anywhere.

    As on 2012 total number of securities in (SE was 251 against which issued capital was it 37, 5220.20 million and
    market capitalization was it 187, 1532.90 million (ANNEX- 3).

                                                                                               -Annual Report 2011-2012

2.7 Over -the-Counter Market or OTC Market

    Non-listed securities are traded through mutual understanding of the seller and buyers without intermediaries
    in the OTC market, which are outside the stock exchanges. Securities de-listed from the exchanges and
    not listed securities obtaining consent from the Commission can be traded in the OTC market In CSE stock
    exchange's OTC market, there are opportunities of securities trading. Under Securities and Exchange
    Commission (Over-the-Counter) Rules. 2001, OTC market was established in CSE. Dhaka Stock Exchanges
    Ltd started OTC market on 6th September, 2009 in line with the direction of the Commission. Settlement
    procedure of the OTC market is similar to the public market. The list of the companies trading in WE OTC
    market as on 30 June 2012 is furnished in ANNEX4.

2.8 Categorization of Listed Companies

    Listed securities are categorized into "A", B", "Z", "N" and "G" based on profitability, commercial operation,
    holding of AGM and accumulated toss exceeding paid up capital etc. This categorization helps investors
    to know the qualities of securities before making investment decision.

                                                                                                December 28, 2013         7
    During the reporting FY 2011-2012, number of "A" category companies has
                                                                                                       Chapter:        2
    increased compared to the last FY. The number of "BP category companies has
    Increased and "Z" category companies has decreased             compared to the last

    compared to the last FY, which can be seen in the following table:

                                                                                          Number of    Number of
            Name of the               Criteria of Categorization
                                                                                      Companies        Companies
                                                                                   FY 2010-2011       FY 2011-2012
            "A" category     Companies that hold AGM regularly and                           235          242
                             declare dividend 10% or higher.

            "B" category     Companies that hold AGM regularly and                           7            15
                             declare dividend less that 10%.

            "G" category     Companies that have not yet started                             0             0
                             commercial operation

            "N" category     Companies that are newly listed in stock
                             exchanges who’s next AGM have not yet                           5             6
                             take place after the listing.

            "Z" category     Companies that do not hold AGM
                             regularly or do not pay any dividend or
                             accumulated loss exceeds paid up capital                        20           19
                             or    commercial       operation   remains
                             suspended for more than six months.

2.9 Derivatives

    Derivative products are necessary for reducing the risk of investors through creating alternative investment
    opportunities in the capital market. At present there exists no rule for trading of derivative products and
    knowledge about derivatives are also limited among the intermediaries and investors. CST is imparting training on
    derivative products. The Commission is now looking at the legal issues related to this matter so that it can
    frame necessary rules for introducing this instrument

                                                                                                        December 28, 2013   8
                                                                                                      Chapter:         2

2.10 Bond Market
     The capital market of Bangladesh is predominantly an equity based securities market Number of bonds and other
     debt instruments are insignificant at present, there are Tic 140 million of debentures of .8 companies listed in
     the stock exchanges. In order to popularize the government bond and to increase the depth of market, trading of
     government treasury bonds have been introduced in stock exchanges with effect from 1 January 2005, there
     was no transaction in bond market in last FY.

     As on 2012 government treasury bonds, 3 corporate bond„ 8 debentures were listed in DSE whose market capitalization
     was Tk. 55, 5749.7 million. But bonds are not yet popular. Banking and Financial Institution Division, Ministry of
     Finance, Bangladesh Bank, Bangladesh Securities and Exchange Commission and National Board of Revenue are
     working together for development of the bond market.

2.11 Securities Activities over Internet

     Capital market related activities especially investment related information flow, value aided information
     services and other securities related activities may take place over the Internet, which may be of immense value
     to person/ various market participants. In this regard 13SEC is working to frame rules/guidelines named "Securities
     Activities over the Internet for introducing securities related activities in the Internet.

2.12 Expansion of Capital Market and Its Future

     The capital market of Bangladesh is an emerging market. Although the capital market started in 1956, the
     establishment of the Bangladesh Securities and Exchange Commission in 1993 quickened the pace of growth of
     the securities market. While in 2000 the market capitalization was only around 2.24% of the country's GDP, at the end of
     June, 2012 it stood around 31.64%. The average daily turnover of the country's main stock exchange stands to
     Tk.492.21 crore earlier which was 10-15 acre only. The trading network has expanded to the six divisions of the
     country transcending the periphery of Dhaka and Chittagong. The network is also expanding to district towns
     and other important places gradually. But expansion of the trading network is not enough; it requires expansion
     of investment related knowledge especially for the investors and development of trend in investing based on
     fundamentals, which will help investors to protect themselves in many ways from unexpected loss.

                                                                                                       December 28, 2013        9
BSEC, DSE, CSE and merchant bankers arrange regular training programs for the                 Chapter:
                                                                                              Chapter:       2
investors in related areas. Booklets and brochures have also been published in this regard.
To conduct more extensive level of training, an institute named Bangladesh Institute of Capital Market (IIICM) is
working simultaneously.

Pot the sake of the depth of the capital market, efforts are underway to launch activities for the
development of bond market and derivatives market It is expected that in the next years considerable
development will take place in these areas.

Actions have been initiated to launch a full-fledged separate automated clearing house, which is expected to
reduce settlement time and thus improve overall market efficiency.

To demonstrate the growth of the capital market, two graphs showing the market capitalization of DSE and the ratios
of market capitalization of USE to gross domestic product (GDP) during the last few years have been presented as

                                                                                              December 28, 2013   10
                                                                                         Chapter:            2
2.13 Initial Public Offering (IPO)

    During FY 2011-2012, the Commission accorded consent to 14 companies to raise capital. Out of 14
    companies, 11 companies have accomplished the subscription process. The subscription for shares was
    Tk. 8, 2253.20 million (without premium) leading to over subscription by 3.88 times. Information
    concerning public issue during the year is furnished at Annexure-9.

    Comparative status of IPO and subscription during the last five years is furnished below:

                        No. of            Size of IPO        Subscribed Amount          Additional
            FY        Companies         (in million TIE.)      (in million Tic.)       subscription
                                                                                         (in times)
          2005-06          8                 990.5                   13943.1               14.08

           200647          10                 32173                   22148.0               818
                                       (Including Premium)      (Including Premium)
          2007-08          9                  19354                   24679.6              12.75
                                       (Including Pronium)     (Including Premium)
          2008-09          7                  820.0                  23892.9               29.14
                                      (including Premium)      (Including Premium)
          2009-10          10                1398092            91250.96 (Including         6.52
                                       (Including Premium)          Premium)
          2010-11          6                11220.40           8,2250.32 (including         7.33
                                       (Including Premium)          Premium)
          2011-12          11          10470.38 (including          4067037                 188

                                                                                         December 28, 2013   11
                                                        Chapter: 03

3.0 Role of Capital Market in Economic Growth
3.1 Bangladesh Standing Tall At 42

   Bangladesh has been striding ahead with 6.0 plus per cent growth of gross domestic product (GDP)
   over the past several years when the world has undergone a sort of slowdown and the country
   remained under unrelenting challenging politics.

   Despite the agitated political situation the countrymen, including people of different trade and culture,
   continued their pursuit to achieve economic affluence through persistent struggle, in which
   contribution from the reigning politics or the administration has been said to be inadequate.

3.2 Bangladesh GDP Constant Prices

   GDP Constant Prices in Bangladesh increased to 4337.20 BDT Billion in 2013 from 4093.78 BDT
   Billion in 2012. GDP Constant Prices in Bangladesh is reported by the Bangladesh Bureau of
   Statistics. GDP Constant Prices in Bangladesh averaged 3355.17 BDT Billion from 2003 until 2013,
   reaching an all-time high of 4337.20 BDT Billion in 2013 and a record low of 2372.59 BDT Billion in
   2003. This page contains - Bangladesh GDP Constant Prices - actual values, historical data, forecast,
   chart, statistics, economic calendar and news. 2013-12-27

   Note: i) Data have been valued using the concept of the "Own Funds at Book Value (OFBV)", which may
            differ from market value of stocks.
        ii) Inflow figures are recorded as during the period but stock figures are recorded as end period.
   Source: Statistics Department, Bangladesh Bank.

                                                                                                             December 28, 2013   12
3.3 Bangladesh Stock Market (DSE General)
                                                                                                 Chapter:       3
   Stocks in Bangladesh had a negative performance during the last month. Bangladesh Stock Market
   (DSE General), declined 0 points or 0.00 percent during the last 30 days. From 1990 until 2013,
   Bangladesh Stock Market (DSE General) averaged 1762 Index points reaching an all-time high of
   8919 Index points in December of 2010 and a record low of 282 Index points in October of 1991. The
   Bangladesh Stock Exchange All Share Price Index tracks the performance of all companies listed on
   the Dhaka Stock Exchange. This page contains - Bangladesh Stock Market (DSE General) - actual
   values, historical data, forecast, chart, statistics, economic calendar and news. 2013-12-27

                                               DSE (GENEREL INDEX)
                                             As on 29/04/2011 to 31/05/2013

   Source: Website Trading Economics -

                                                                                                 December 28, 2013   13
                                                                                          Chapter:         3
3.4 Indicators of Stock Market Growth and Trend of Market Performance

   In this section some key indicators like as market capitalization, market liquidity, number of listing
   companies and turnover ratio have been considered to highlight the development of the Bangladesh
   stock market. These indicators are given in Table (1), also an index is computed which is constructed
   by Dermirguç – Kunt and Levine (1996), for measuring the development of DSE based on the market
   growth indicators viz. market size, liquidity, and turnover ratio. This index is given by;

                 (X i (t) - X i )
    IX i (t) =                    : i = 1, 2, 3.                                  (1)
                  ABS(X i )

    X1 is a series of market capitalization ratio to GDP, X 2 indicates the series of turnover ratio and X 3

   indicates the ratio of traded value to GDP. The index at time t is given by

             IX1 (t)+IX 2 (t)+IX 3 (t)
    I(t) =                             .                                          (2)

   Ranking these calculated indices for different years we can measure the development of DSE.

3.5 A new Index of stock market launches to development/ boost market

   The country’s two bourses will launch new indices on Monday under free-float system scrapping the
   existing indices in a bid to restructure the ailing capital market. The Dhaka Stock Exchange will
   launch two new indices — DSEX, which will replace the existing key index of the bourse DGEN, and
   DS 30, which will include shares of the top 30 companies. DSE officials said the base year for both
   indices was 2008 and the base point was 1,000. With the introduction of the new indices, the value of
   DSEX would be around 4,005 points on Monday while the value of DS30 would be around 1,350
   points, said the officials. The DSE will also run the previous key index DGEN to allow the investors
   some time to get used to the new ones. The DGEN closed at 4167.69 points on Thursday.

   An index based on the free-float method is calculated by multiplying the price of an issue by the
   number of shares available for trading on the market. However, locked-in shares are excluded from the
   calculation. In the new DSE indices more than 5 per cent shareholding by listed companies’ sponsors-
   directors, government’s shareholding, strategic shareholding and cross holding by associated
   companies would be excluded from the calculations under the free-float system.

                                                                                           December 28, 2013   14
                                                                                  Chapter:         3
The investors and market stakeholders are waiting for the new index with mixed anticipation as some
fear the value of the new index would be way lower than the existing one and some are hopeful the
new index would boost the ailing market with a higher index.

The DS 30 will feature the premier companies of the bourse that are selected with a number of criteria
taken into consideration, including having a minimum net profitability record for 12 straight months.
The DS30 index companies must have a minimum daily turnover of Tk 50 lakh for three consecutive
months while the performances of the companies would be reviewed every six months. The DS30
also must have representation of every sector of the bourse and no single sector can have more than
five companies in the index.

The DS30 criteria also said the banks, financial institutions and insurance companies cannot have
more than 10 representatives in the index. The value of DSEX was computed under the performance
of the DGEN since 2008 and the companies listed with it.

The DSE new indices were formulated with the assistance of S&P, an American financial service
provider, which formulated a number of major stock market indices across the world, including Dow
Jones Industrial Average and S&P 500.
The flawed computation of the index first came to light following the debut of Grameen phone on the
stock market in November 2009 when the DSE general index gained more than 700 points in a single

A Securities and Exchange Commission committee in 2010 proposed that the DSE should introduce
free-floating index to get over the flaws in the calculation process.

The Chittagong Stock Exchange is also set to launch its existing indices under free float method on
The CSE officials said it would continue with the existing indices CXEX, CSE30 and CSPI, but would
transform the index calculation process into free float system.

Both the bourses published the name of 30 companies on Thursday which would be included in their
new indices of Top-30 shares.

                                                                                    December 28, 2013   15
                                                                                                           Chapter:         3
   The CSE selected the top 30 companies whose paid-up capital is 29 per cent of the total paid-up
   capital of the market and the market capitalization is 30 per cent of the total market capitalization.

   Source: Website- New Age - Friday, January 25, 2013

3.5 Importance of Capital Market in the Economy

   In a market economy, the role of the capital market is very important. The good functioning of the
   capital market is vital in the contemporary economy, in order to achieve an efficient transfer of
   monetary resources from those who save money toward those who need capital and who succeed to
   offer it a superior utilization; the capital market can influence significantly the quality of investment
   decisions. The gathering of temporary capitals that are available in the economy, the reallocation of
   those that are insufficiently or inefficiently used at a certain moment and even the favoring of some
   sectorial reorganizations, outline the capital market’s place in the economy of many countries.

                                                                                                              December 28, 2013   16
                                                                                           Chapter:         3
Among the mechanisms which are specific for the capital market, the mechanism of financing the
economy is the most important one, although, due to the fact that an ensemble of interconnected
mechanisms contribute to the good functioning of the capital market, the way in which each of them
function determines the quality of the ensemble. Thus, for instance, the efficient allocation of
resources, which is achieved by the help of the capital market, relies on the information obtained on
the basis of the (secondary) market prices. The inadequate functioning of the stock market mechanism
– as a component part of the ensemble mechanism that is specific for the capital market – and
eventually the lack of relevance of the stock market prices, can generate errors inside the system and
can alter its finality. In this case, the efficient allocation of resources will fail to appear, and this is its
finality. In this case, the efficient allocation of resources will fail to appear, and this is a pithy specific
trace of the capital market.

The contact between agents with deficit of money and the ones with monetary surplus can take place
in a direct way (direct financing), but also by the means of any financial intermediation form (indirect
financing), situation in which specific operators realize the connection between the real economy and
the financial market. In this case, the financial intermediaries could be banks, investment funds,
pension funds, insurance companies or other non-bank financial institutions. Even if, traditionally, the
companies appeared only as agents with deficit of money, in the last two or three decades it could be
noticed a change in the financial behavior of the modern firms: these are not considering anymore the
financial market (both the capital and the monetary market) only as sources for rising funds (as issuers
of financial assets), but appears more often as buyers of financial assets.

The capital market fulfils the transfer function of current purchasing power, in monetary form, from
companies which have a surplus of funds to those which have a deficit, in exchange for reimbursing a
greater purchasing power in the future; in this way the capital market makes possible to separate the
saving act from the investment one.

In addition, the capital market mechanism allows not only an efficient allocation of the financial
resources available at a certain moment in an economy1 – from the market’s point of view – but also
permits to allot funds according the return and the risk – from the investor’s point of view – offering a
large variety of financial instruments with different profitableness-risk characteristics, suitable for
saving or risk covering. Nowadays, the protection against financial risks becomes a necessity, imposed
by the transformations in the global economy, by the accented instability and the financial crisis that
affects without discrimination both developed and emerging stock markets. Covering the risk that

                                                                                            December 28, 2013   17
could be realized by the help of different operations, market orders or
                                                                                     Chapter:         3
derivatives defines the function of

of insurance against risks, specific function of the capital markets. The capital market allows risk
dispersion between investors (of the diversifiable risk), exactly in the same measure in which each of
them is willing to assume it, too. From the issuers’ point of view, the money which is necessary for
the development or the unfolding of their activity can be mobilized by the help of the capital market at
accessible costs, theoretically speaking smaller than those possibly obtained by the help of the banking
market or by other financial intermediaries. From the investors’ point of view, the advantages of the
mobilization process (the advantages of the financial assets), in fact those of the organization in the
form of a joint-stock companies, is under the propriety transfer, which can be rapidly achieved, in a
simple and safe way, by the help of the stock exchange, due to the securities’ negotiability. In this
context, the stock market facilitates the investments in financial assets, their circulation and mobility
and through the offered suppleness sustains, indirectly, the economy’s financing by the help of
primary market.

The capital market is the market for long-term loans and equity capital. Developing countries in fact,
view capital market as the engine for future growth through mobilizing of surplus fund to the deficit
group. An efficient capital market may perform as an alternative to many other financing sources as
being the least cost capital source. Especially in a country like ours, where savings is minimal, and
capital market can no wonder be a lucrative source of finance.

The securities market provides a linkage between the savings and the preferred investment across the
business entities and other economic units, specially the general households that in aggregate form the
surplus savings units. It offers alternative investment windows to the surplus savings units by
mobilizing their savings and channelizes them through securities into optimal destinations. The stock
market enables all individuals, irrespective of their means, to share the increased wealth provided by
competitive enterprises. Moreover, the stock market also provides a market system for purchase and
sale of listed securities and thereby ensures liquidity (transferability of securities), which is the basis
for the joint stock enterprise system. (The existence of the stock market makes it possible to satisfy
simultaneously the needs of the firms for capital and of investors for liquidity.) Especially at times
when the banking sector of the country is facing the challenge of bringing down the advance-deposit
ratio to sustainable level, the economy of the country is unfolding newer horizon of opportunities. Due
to over-exposure level of the financial system the securities market could play a very positive role, had
there been no market debacle. Due to the last market crash and follow through events, it will be
difficult to utilize the primary market to raise significant volume of funds. Thus the greatest economic
importance of securities market at this point can be understood from the opportunities being lost.

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Bangladesh having its target to become a middle income country must have
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significant level of rise in

Bangladesh having its target to become a middle income country must have significant level of rise in
investment, which at the present state of banking system cannot be met. The securities market could
play the key role in meeting these huge investment demands if the secondary market would remain

The capital market also helps increase savings and investment, which are essential for economic
development. An equity market, by allowing diversification across a variety of assets, helps reduce the
risk the investors must bear, thus reducing the cost of capital, which in turn spurs investment and
economic growth. However, volatility and market efficiency are two important features which will
ultimately determine the effectiveness of the stock market in economic development. If a stock market
is inefficient due to insufficient informational supply, investors face difficulty in choosing the optimal
investment as information on corporate performance is slow or less available. The resulting
uncertainty may induce investors either to withdraw from the market until this uncertainty is resolved
or discourage them to invest funds for long term. Moreover, if investors are not rewarded for taking on
higher risk by investing in the stock market, or if excess volatility weakens investor’s confidence, they
will not invest their savings in the stock market, and hence deter economic growth. The emerging
stock markets offer an opportunity to examine the evolution of stock return distributions and stochastic
processes in response to economic and political changes in these emerging economies.

1 The fund allocation in an economy between different financial assets, based on financial market’s signals is also called the
process of price discovery (Fabozzi, F.; Modigliani, F.; Ferry, M., Foundations of Financial Markets and Institutions, Prentice
Hall International, London, 1994, p. 6).

3.6       Stock market’s contribution to GDP insignificant

The capital market’s contribution to country’s gross domestic product (GDP) is less than 1 percent, a
recent study by Bangladesh Institute of Bank Management (BIBM) found.
The study titled “Banks, stock market and economic growth: perspective of Bangladesh” found the
capital market’s contribution to the GDP in 2011 to be only 0.17 percent and the banking sector’s
around 44 percent. Moreover the banking sector deal with crises.
However there is a scope for increasing the stock market’s contribution to GDP through increasing the
number of listing. Citing the section in the law which stipulates compulsory listing of companies

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whose paid-up capital is over Tk. 50 crore. Finally, the government policy makers should take
necessary steps to increase the listing of such companies.

Source: The Daily Star, Sunday, September 22, 2013

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