A forgotten market scam: What did investors learn after the burnout 25 years ago?

Highlights:

• Stocks investor behaviour remains the same as the market goes up; they hurriedly move to park funds in junk stocks for quick gains like in the past
• After a dull time for many years, the capital market gained momentum as investors' participation increased and fresh funds poured in
• The DSEX rose to an all-time high of 7,410 points on 11 October but following sell pressures, the index has now fallen below the 7,000-mark
• Former BSEC chairman Faruq Ahmad Siddiqi suggested that, instead of being lured by quick gains, investors should study the fundamentals and track records for good returns

Some worthless stocks made a lot of noise, luring in investors. Prices skyrocketed, much to the excitement of newcomers.

Then the bad guys in the market sold those shares at a much higher profit, leaving the inexperienced investors high and dry.

That's what happened in 1996, a turbulent year when many new investors suffered financial burnout. Some stocks with weak fundamentals in the capital market had become surprisingly "valuable" just in four and a half months. Now, 25 years later, most of these stocks are junk.

When the market went up, these stocks' prices had gone up six- to seven-fold within a short time, and when crushed in the mid-1996, these companies share prices fell rapidly.

The scam, one of the biggest in Bangladesh's history, has left behind a lesson for present-day investors.

But stocks investor behaviour remains the same as the market goes up; they hurriedly move to park funds in junk stocks for quick gains like in the past.

As per data, in the last three months this year, shares of more than 30 companies rose abnormally compared to market bellwethers.

After a dull time for many years, the capital market gained momentum as investor participation increased and fresh funds poured in.

The DSEX, the benchmark index of the Dhaka Stock Exchange (DSE) rose to an all-time high of 7,410 points on 11 October and the market capitalisation increased to over Tk5.86 lakh crore on 9 September.  

Following sell pressures, the index has now fallen below the 7,000-mark and the capitalisation decreased to Tk5.57 lakh crore.

"We have seen in the past, the price of junk shares rises dramatically when the market goes up," said Faruq Ahmad Siddiqi, former chairman of the Bangladesh Securities and Exchange Commission (BSEC).

"Junk stocks jump and create a turmoil in the stock market. Even after the 1996 crash, it seems investors haven't learned any lesson."

He suggested that, instead of being lured by quick gains, investors should study the fundamentals and track records for good returns.

In the middle of 1996, the DSE and the Chittagong Stock Exchange (CSE) had experienced a bullish run and later the market crashed.

Again in 2009, the most valuable shares became gradually fragile after the stock market crash and they were sent to the over-the-counter (OTC) and some had been de-listed from the stock market.

Recently, the DSE authorities have dissolved the OTC board to regenerate the weak companies.

An inquiry committee was formed in 1996 to find out the cause behind the fall, and it found, without any valid reason share prices surged as investors were lured by quick capital gains. 

"Some matured and skilled players played the flute in the background and made the real fortune at the cost of new generation investors," says the report.

As per the report, among 192 listed scrips, good or bad, all share prices went up and some stocks rose 7-8 times in the bull market.

The committee found 65 companies were the most significant ones where manipulation scopes were apparent.

Of them, the share prices of 24 fundamentally weak companies also rose abnormally at that time.

During the bullish market, the index was 967.70 on 1 July 1996 and it jumped to a record 3,648.75 points on 5 November.

After the report, the then Securities Exchange Commission (SEC) sued some companies for manipulations.

The cases were running at a special tribunal set up for stock market cases.

"We are trying to make the market vibrant," Professor Shibli Rubayat-Ul-Islam, chairman of BSEC, has said recently.

"The lack and deficiencies in rules and regulations were removed with the learnings from the past. Not lured by quick gained in junk shares, Investors should invest in fundamental shares," he added.

Present scenario of the companies

Data shows the financial state of some companies, often chased by investors, is fragile. Some of them have even shuttered their factories and exist only on paper.

Meanwhile, some shiny shares in 1996 are now shining with good financial health and paid out decent dividends to its shareholders.

The share price of Quasem Silk Mills rose 502% between July and September of 1996.

But now its share price is below the face value at Tk5.90.  

Quasem Textiles, which saw its shares price soaring by more than 400% before the market crash, faces the same fate. It exists on paper only, says DSE officials.

In this way, the share price of Chittagong Cement went up by 433%, Quasem Dry cells by 671%, and Ambee Pharmaceuticals by 440%.

The most advanced companies of 1996, which were placed on OTC, are Petro Synthetic products, Chic Tex Limited, Quasem Textile, and Dhaka Fisheries Ltd.

Recently, Paper Processing and Monospool Paper resumed trading on the mainboard this year.

Milon Tannery, Delta Millers, Rupom Oil, Chittagong Cement, Padma Textiles, and Tripti Industries data was not available.

One dozen well-discussed stocks are being traded on the mainboard.

Most of the companies are profitable except for state-owned Eastern Cables, National Tubes, and Renwick and Jajneswar.

The profit-making companies are Beximco Ltd, Ambee Pharma, Quasem Industries, Agricultural Marketing Company, Aftab Automobiles, Sandhani Life Insurance, Green Delta Insurance, and Bangladesh Shipping Corporation.