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Introduction to DSE: The Dhaka Stock Exchange Limited (DSE) was established in 1954, but its commercial operation started in 1956. Due to nationalization policy trading activities of DSE remained suspended during the post liberation period and resumed again 1976. DSE is a self-regulatory not-for-profit organization. As a self-regulatory organization DSE supervises the function of listed companies. Administration of DSE is run by Dhaka Stock Exchange (Board and Administrations) regulations, 2000. The board of directors consists of 24 members, 12 directors are elected by direct votes of DSE members and 12 directors are nominated by elected members from non-DSE members with the approval of the commission. The Chief Executive Officer (CEO) is also a non-voting member. DSE hires the CEO of DSE which requires commission’s approval. The CEO conducts the daily affairs of DSE. Now there are 234 members in DSE of 194 members are registered by SEC for conducting securities business. According to the rules every member must be corporate body. Transaction and transfer of most of the securities listed on DSE are executed electronic form. At presented DSE expanded its on-line trading activities into the divisional and district towns of the country.
Legal Control:
The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities are regulated by its Articles of Association rules & regulations and by-laws along with the Securities and Exchange Ordinance - 1969, Companies Act - 1994 & Securities & Exchange Commission Act - 1993.
The major functions of Dhaka Stock Exchange are:
Listing of Companies (As per Listing Regulations).
Providing the screen based automated trading of listed Securities.
Settlement of trading (As per Settlement of Transaction Regulations).
Gifting of share / granting approval to the transaction/transfer of share outside the trading system of the exchange (As per Listing Regulations 42).
Market Administration & Control.
Market Surveillance.
Publication of Monthly Review.
Monitoring the activities of listed companies (As per Listing Regulations).
Investors grievance Cell (Disposal of complaint bye laws 1997).
Investors Protection Fund (As per investor protection fund Regulations 1999).
Announcement of Price sensitive or other information about listed companies through online.
DSE Clearing & Settlement Process:
The Clearing and Settlement module provides the management of trade from the point of entry into the Settlement Pool trade database until it has been delivered, settled and removed from the Settlement Pool. It consists of three major business processes.
Clearing: Here participant trade reporting, affirmation, billing and assigning settlement instructions are done.
Settlement: The process of overseeing that delivery of all instruments to the buyer and payment of all moneys to the seller has occurred before removing the trade from the settlement pool.
Figure: For A category
Figure: For Z category
Figure: DSEX Index Graph of Last 1 Year from 20-09-2014 to 20-09-2015
The Chittagong Stock Exchange (CSE)
The Chittagong Stock Exchange Limited (CSE) was set up in 1995. It is also a self-regulatory not-for-profit organization and its management structure is same as DSE. The Chittagong Stock Exchange Limited (CSE) started first on-line trading system in Bangladesh capital market in 1998 and at present it is carrying out trading activities from Dhaka, Chittagong, Sylhet, Rajshahi, Barisal, Cox’s-Bazar and Khulna.
Regulatory Bodies
The Securities and Exchange Commission (SEC) was established on June 8, 1993 as capital market regulator in Bangladesh through Securities and Exchange Commission Act, 1993 (Act 15 of 1993). The commission ensures compliance of capital market related laws, rules and regulations etc. by the intermediaries and persons and institutions related with capital market. Basic laws of the capital market are as follows;
a. Securities Act, 1920
b. Securities and Exchange Ordinance, 1969
c. Securities and Exchange Commission Act, 1993 and
d. Depository Act, 1999
Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions engaged in financing activities including leasing companies and venture capital companies.
Compliance Officer
As per the securities laws every intermediary institution has to designate an officer as compliance officer whose main responsibility is to ensure particular firms compliance with securities laws. As a primary regulator, if an intermediary does not comply with the laws properly the compliance officer has to report to the chief officer of the related intermediary. If violation of securities laws continues then the compliance officer shall report to the commission.
Book Building Method
Book Building Process of IPO pricing is a free pricing regime that values the company on its performance, both past and future, keeping in mind its investment, earning forecast, economic scenario etc. The commission is examining possibility of introducing Book Building System for IPO pricing on selected basis.
Trading of Securities in the Exchanges
In DSE and CSE trading of securities is done through automated system. As a result volume of transaction has increased substantially over the years. Now trading is done in the following four market segments:
a. Public market
b. Spot market
c. Block market
d. Odd-Lot market
O-T-C Market
Securities and Exchange Commission (Over-the-Counter) Rules, 2001 was issued in 2002 under which securities de-listed from the exchanges and securities not listed with the exchanges but have been issued obtaining consent from the commission could be traded. CSE has provided the platform but this facility has not yet been used.
Settlement of Securities transaction in the Exchanges
Mechanism of settlement of securities transactions is elaborately specified in DSE and CSE settlement of Stock Exchange Transactions Regulations, 1998. It also categorizes securities into A,B, G,N and Z based on profitability, operation and failure to hold AGM and sustaining loss that ultimately exceeds paid up capital. This categorization helps investors to know about the fundamental and attractiveness of security.
During the FY 2006-07, governance scenario of listed company improved remarkably. In this period number of “A” category companies increased and number of “B” and “Z” category companies decreased and increased respectively.
Securities Trading in the Exchange through Borrowing
In a bullish market securities price continues to increase and the investors may opt for investing more than the equity availing loan from the brokers. A per DSE/CSE (Member’s margin) Regulations, 2000 investors could invest more than his own resources and help reaping profit from the bullish market.
Likewise supply of securities could also be increased through short-sale mechanism. Short-sale refers to selling of securities that the seller does not own. As per Dhaka Stock Exchange (Short-sale) Regulations, 2006 any person with a securities borrowing arrangements could sale securities without owning it. This mechanism helps increasing supply of securities and could be a win-win situation for seller, lender and brokerage firm.
Securities Issue through Private Placement
Rules that are required to be complied with for issuance of securities through private placement is Securities and Exchange Commission (Issue of Capital) Rules, 2001 under which applicants has to furnish certain information and documents to the commission. While according consent the commission imposes conditions that include timely preparation of financial statements and furnishing of the same to the commission, execution of all transactions except petty cash items through company’s bank account. These conditions help issuer companies elevate their corporate governance status and make them ready for raising capital through public offering.
Rights Issue
Share issue to existing shareholders by listed companies in proportion to their capital is approved by the commission under Securities and Exchange Commission (Rights issue) Rules, 2006. As per the said rules, such rights issue and price are required to be approved by the shareholders in general meeting.
Investment Corporation of Bangladesh (ICB)
The Investment Corporation of Bangladesh was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programs, and maintains investment accounts, floats and manages closed-end & open-end mutual funds & closed-end unit funds to ensure supply of securities as well as generate demand for securities. ICB also operates in the DSE and CSE as dealers.
Specialized Banks
Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), BASIC Bank Ltd., some Foreign Banks and NCBs are engaged in long term industrial financing.
Product of capital market: a) Shares, b) Debentures, c) Mutual funds, d) Bonds, e) Derivatives, f) Future and options.
Participants of capital market: a) Investors, b) PLCs, C) Stock Exchanges, d) Brokers and Dealers, e) Merchant banks, f) Securities and Exchange Commission, g) CDBL.
Parameters used to measure size of capital market: a) Number of listed companies, b) Number of securities, C) Size of market capitalization, d) Index, e) Daily trade volume, f) GSP ratio to market capitalization,
Efficiency indicators of capital market: a) PE multiple, b) Dividend yield, c) Liquidity, d) Visible presence of regulators, e) Exit route regulation for sick PLC.
Read Part 1: Capital market in Bangladesh: Progress and Prospects
Read part 2: Capital Market Securities in Bangladesh
Read Part 4: Capital market development in Bangladesh
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