Stock price can fall up to 3% a day: BSEC
Following a few weeks of sharp volatility since the withdrawal of the floor price restriction in late January, Dhaka-Chattogram stocks nosedived and continued to fall for more than two months.
In a bid to arrest the downward spiral in the stock market, prompted by the removal of a significant regulatory curb – the floor price, the Bangladesh Securities and Exchange Commission (BSEC) has once again resorted to its regulatory toolkit.
As per the latest directive issued on Wednesday, the BSEC has mandated that from Thursday onward, no stock can experience a decline of more than 3% per day, significantly narrower than the previous 10% limit, across both the Dhaka and Chattogram bourses.
However, the commission clarifies that this regulation is a provisional measure, subject to further updates.
Keep updated, follow The Business Standard's Google news channel
Stakeholders raise a pertinent question: can such regulatory interventions restore investor confidence in the stock markets? Many doubt it. They argue that prolonged imposition of measures like floor price restrictions, along with the recent tightening of limits, may actually dampen the sentiment among serious investors.
Echoing this sentiment, stock market expert Abu Ahmed, a former professor of economics at the University of Dhaka, suggests that similar regulatory interventions in the past could merely avert the inevitable consequences rather than address the underlying issues.
DSEX, the broad-based index of the Dhaka Stock Exchange (DSE), has had a few volatile weeks since 21 January, when the regulator removed the 18-month floor price from individual stocks. Following a failed move to go higher, it nosedived from 6473 on 12 February, to 5,578 on Wednesday – the lowest in 35 months.
Earlier this week, the BSEC had a meeting with leading market intermediaries that aimed to restore investor confidence already battered by floor price restrictions that deprived them of exit opportunities, kept their funds stuck for one and a half years, and, at the end, removed the artificial protection at an unsuitable time, which is fundamentally tough for stocks to attract funds from Treasury bills and bonds yielding 11-12% guaranteed returns.
Monday's meeting with stakeholders failed to restore investor confidence as the market fell sharply over the following two days.
"It was not that unexpected, especially in a prolonged adverse market condition," said Md Saiful Islam, president of the DSE Brokers Association, adding that the association members were analysing the possible impact of the new restriction on securities price declines.
Just like the previous restrictive measures to regulate the market price, narrowing the downward price change limit or bottom circuit would only defer the consequences, said Professor Abu Ahmed.
Rather, it would reduce market liquidity – the ease of buying and selling securities, he added.
The biggest damage of embracing the restrictive measure again would be that it could further hurt the confidence of serious investors, said Abu Ahmed, adding that real investors believe in market economics, not unpredictable restrictions.
Without enough appetite for stocks before the cyclical downturn is over, the people and institutions that have already invested found themselves in a tight corner due to capital erosion almost every day for the last seven-eight weeks, said Raise Ahmad Rashid, executive director at Rashid Investment Services Ltd, a DSE brokerage firm.
After the recent sharp fall, a narrower bottom circuit is supportable, he said, adding that the floor price should never come back.
"Hopefully, this will slow down the forced selling pressure from the leveraged accounts and help reduce the velocity of the rapid downtrend of the index," he added.
The brokerage professional blamed the series of untimely regulatory measures for the spiralling down behaviour of the market, removing floor from large cap stocks like Grameenphone and British American Tobacco at a time when punishing many small cap stocks by sending them to the Z category after three years of exemptions.
As the small cap stocks were trendy during the floor, many investors found their funds stuck there after the unpredictable downgrading to Z, he said, adding that it intensified both the fund and confidence crises.
A top BSEC official, on condition of anonymity, told TBS after the new restriction that the regulator observed a manipulation attempt by a quarter of market players to artificially create selling pressure before the closing bell and that narrowing the bottom circuit would discourage them.
"The new restriction could potentially send the market into another extended bearish phase. I hope and pray that it is proved wrong," said Chartered Financial Analyst Md Moniruzzaman, managing director of Prime Bank Securities.
"We are again trying to tamper with the natural flow of the market, which was never fruitful in any market place, including Bangladesh," he added.
Foreign investors are always fearful of such regulatory events, said another stockbroker with a long experience serving foreign portfolio investors in Bangladesh.
The narrowed downward price changing limit will not be applicable for the six stocks that are still at the floor price – Beximco, BSRM Ltd, Islami Bank, Khulna Power, Meghna Petroleum, and Shahjibazar Power, according to the BSEC.
