Capital Market PDF

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Introduction: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 fin...

Description

Introduction: 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. 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 1|Page

securities market could play the key role in meeting these huge investment demands if the secondary market would remain stable.

Objectives: Capital market, being an essential element of today’s economy, demands an intensive and special attention. The objective of this study is to look into every aspect of Bangladesh capital market and identify its various pros and cons along with some recommendations to overcome the existing problems. The specific objectives of this study are: 

To give an overall idea about the capital market-its structures, functions, importance,



To identify the current situations of our capital market of Bangladesh.



To compare the relative conditions of Bangladesh capital market to other countries

etc.

of the world. 

To sort out the problems associated with our capital market.



To suggest some practicable solutions to these problems.

Methodology: As the report was based on theoretical research all the information collected from secondary sources. The sources are: 

Research articles



Thesis paper



Survey reports



Relevant websites



Books

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Reference articles

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

Journals



Newspaper articles

Scope of the study: The study was concerned with the problems, prospects and measures to develop capital market in Bangladesh. This paper will help to understand the reason behind the underdevelopment of capital market in Bangladesh and the steps that can be taken to improve the situation.

Limitations: 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.

Importance: The capital market 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

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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. The role of capital market in Bangladesh economy is addressed below: 

Provides an important alternative source of long-term finance for long-term productive investments. This helps in diffusing stresses on the banking system by matching long-term investments with long-term capital.



Provides equity capital and infrastructure development capital that has strong socioeconomic benefits

-

roads,

water

and

sewer

systems,

housing,

energy,

telecommunications, public transport, etc. - ideal for financing through capital markets via long dated bonds and asset backed securities. 

Provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialization. The Savings and investment ratios are too low, below 10% of GDP.



Encourages broader ownership of productive assets by small savers to enable them benefit from Bangladesh’s economic growth and wealth distribution.

Equitable

distribution of wealth is a key indicator of poverty reduction. 

Promotes public-private sector partnerships to encourage participation of private sector in productive investments. Pursuit of economic efficiency shifting driving force

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of economic development from public to private sector to enhance economic productivity has become inevitable as resources continue to diminish. 

Assists the Government to close resource gap, and complement its effort in financing essential socio-economic development, through raising long-term project based capital.



Improves the efficiency of capital allocation through competitive pricing mechanism for better utilization of scarce resources for increased economic growth.



Provides a gateway to Bangladesh for global and foreign portfolio investors, which is critical in supplementing the low domestic saving ratio.

Components of capital market: The components are: 1. New Issue Market 2. Secondary Market 3. Financial Institutions.

Capital Market: Component # 1. Primary Market:

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The Primary market represents the primary market where new securities, i.e., shares or bonds that have never been previously issued, are offered. Both the new companies and the existing ones can raise capital on the new issue market.

The prime function of the new issue market is to facilitate the transfer of funds from the willing investors to the entrepreneurs setting up new corporate enterprises or going in for expansion. Diversification, growth or modernisation. Besides, helping corporate enterprises in securing their funds, the new issue market canalizes the savings of individuals and others into investments.

The two facets of this market, i.e. supply and demand, are represented by the issuing companies and the investors respectively. But then the organisation of the new issue market is not complete without the specialised agencies, intermediaries and institutions, etc., which promote issues of new securities and help in selling, transferring, underwriting etc.

These agencies include financial institutions, underwriters, brokers, merchant bankers, etc.

As the new issue market directs the flow of savings into long-term investments, it is of paramount importance for the economic growth and industrial development of a country. The availability of financial resources for corporate enterprises, to a great extent, depends upon the status of the new issue market of the country.

It must also be noted that although the functions and organisation of the new issue market are quite different from that of the secondary (stock) market, the sentiment in the stock market influences the activity in the new issue market.

The stock market is more sensitive and reacts fast to the changes in the economic, political and business conditions of a country. But then this affects the new issue market also. The

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historical study of the activity in the two markets show that whenever there has been boom in the stock market, there has been increased activity in the new issue market also. The corporate securities that are dealt in primary market can be classified under two categories: 1. Ownership Securities or Capital Stock, and

2. Creditorship Securities or Debt Capital.

Capital Market: Component # 2. Secondary Market: The secondary market is a market where existing securities are purchased and sold. Stock market represents the secondary market where existing securities (shares and debentures) are traded; Stock exchange provides an organised mechanism for purchase and sale of existing securities. By now, we have 23 stock approved stock exchanges in our country.

The investors want liquidity for their investments. The securities which they hold should easily be sold when they need cash. Similarly there are others who want to invest in new securities. There should be a place where the securities may be purchased and sold.

Stock exchanges provide such a place where securities of different companies can be purchased and sold. Stock exchange is a body of persons, whether incorporated or not,

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formed with a view to helping, regulating and controlling the business of buying and selling of securities.

Stock exchanges are organized and regulated markets for various securities issued by corporate sector and other institutions. The stock exchanges enable free purchase and sale of securities as commodity exchange allow trading in commodities. The following definitions explain the meaning and scope of stock exchanges.

Definitions of Stock Exchange: Pyle. “Security exchanges are market places where securities that have been listed thereon may be bought and sold for either investment or speculation.”

Stock exchanges allow trading in securities both to the genuine investors and speculators.

Securities Contract (Regulation) Act, 1956. “Stock exchange means anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling in securities.”

According to this definition, the stock exchange allows trading in securities under certain rules and regulations.

Hartely Withers “A Stock Exchange is something like a vast warehouse where securities are taken away from the shelves and sold across the countries at a fixed price in a catalogue which is called the official list.”

Hartley calls stock exchange a warehouse where all securities are kept and traded on specified prices. It may not always be that every type of security is purchased for sale; there 8|Page

may be investors who do not bring their securities to the market but keep them only as investments.

Husband and Dockeray “Securities or stock exchanges are privately organised markets which are used to facilitate trading in securities.” As per this definition the stock exchanges are the organised places where securities are purchases and sold.

Characteristics of Stock Exchanges: From the definitions given earlier, the following characteristics or salient features of stock exchange come out: i.

It is a place where securities are purchased and sold.

ii.

A stock exchange is an association of persons whether incorporated or not.

iii.

The trading in a stock exchange is strictly regulated and rules and regulations prescribed for various transactions.

iv.

Both genuine investors and speculators buy and sell shares.

v.

The securities of corporations, trusts, governments, municipal corporations etc. are allowed to be dealt at stock exchanges.

Capital Market: Component # 3. Financial Institutions: Special Financial institutions are the most active constituent of the Indian capital market. Such organisations provide medium and long-term loans on easy installments to big business houses Such institutions help in promoting new companies; expansion and development of existing companies and meeting the financial requirement of companies during economic depression.

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The need for establishing financial institutions was felt in many countries immediately after the Second World War in order to re-establish their war-shattered economies. In underdeveloped countries, the need for such institutions was much more due to a large number of organizational and financial problems inherent in the process of industrialization.

Problems and reasons behind underdevelopment: The problems of the capital markets in Bangladesh are structural, and, actually quite farreaching than what meets the eye. As we all know, the capital markets here, notably the Dhaka Stock Exchange (DSE), is way overvalued due to, firstly, the DSE index calculations being incorrect. Secondly, there are big syndicates acting together to artificially influence the prices resulting in huge profits for them at the expense of the average investors who put in their hard earned lifetime savings. And last, but definitely not least, is the Securities and Exchange Commission (SEC) whose total policy and regulations favors’ the syndicates which primarily consists of high net worth people and the stock exchange members resulting in an “artificial demand driven market”. Until and unless these fundamental issues are addressed the capital markets here will fail to see the light of the day.

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The capital market is the engine of growth for an economy. It performs an important role in acting as an intermediary between savers and companies enhancing business expansion. It is encouraging to see that the capital market of Bangladesh is growing but the market has seen a lot of development which are not that much develop. So there are some reasons behind the underdevelopment of capital market which are describe below An important aspect for capital market is reflection of fair value of scrips. This is not adequately present in the current scenario, and due to this reason the market is not receiving the attention of an important segment of investors, both foreign and local. Investors are perhaps depending more on speculative analysis, resulting in volatility in the market, as opposed to fundamental analysis, which could attract more stable longterm investors who are sure about their investment tenure and expectations.

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 It has been observed that the share values of some profitable companies have been increased fictitiously some times that hampers the smooth operation of capital market.  Financing procedures and delivery of securities sometimes take an unusual long time for which money is blocked for noting.  Some companies do not hold annual general meeting and eventually declare dividends that do not reflect the real or actual financial positions of the company and ultimately shareholders become confused.  The concept of centralization of securities market has not been implemented that arise technical problems and political infighting. 

Many companies of DSE do not focus real position of the company as some audit firms involve in corruption while preparing financial statements. As a result the shareholders as well as investors do not have any idea about position of the company.

 The market does not have an adequate number of fundamentally sound scrips. The authorities should not force major corporations to come into the market, without creating an enabling environment. The focus should be on the privatization of state owned enterprises through public offerings in the bourses. The market has to reach such a stage of development that companies will take it as a serious alternative to bank financing.  Institutional investors bring long-term commitment and a greater focus on fundamentals and, hence, stability in the market. The presence of institutional investors is also expected to ensure better valuation levels due to their specialized analytical skills. While we do have public sector as well as private sector institutional investors in the economy, proprietary investment from these institutions is not significant.

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 Corporate governance of international standard is still lacking. Multinational corporations and institutions operating in Bangladesh often adhere to a very high international standard compliance regime. Unless the local market adheres to, and effectively enforces, a standard corporate governance system, there will not be a level-playing ground for international business houses also local operators.

 The government has reduced the interest rates on savings instruments, however this particular market is still limited to the commercial banks, and individual investors do not have access to these instruments. These savings instruments are considered riskfree, and since they are not present in the capital market.

 There are strict rules and guidelines, trading circuit breakers and international standard surveillance to protect investor rights and ensure fair play. The disclosure requirements and its timing for both listed scrips and IPOs as devised by the SEC are now more reflective of international practices.

 Another very important bottleneck of capital market is the scarcity of technical knowhow and skilled personnel. These elements of productive power take long in building up and foreign technicians are very costly.

 Many businesses have cited tax administration and the tax system as one of the biggest barriers to doing business in Bangladesh.

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 In a more developed market, institutional investors such as merchant banks, commercial banks, insurance companies, are major traders of securities. We need enforceable and more ...