In an interview with The Business Standard, Shakil Rizvi expressed his thoughts on what is wrong with the capital market, as well as on its potentials
Md Shakil Rizvi, the president of the DSE Brokers' Association of Bangladesh, had presided over the Dhaka Stock Exchange (DSE) twice before it was demutualised. After the demutualisation, which separated the exchange's management from its ownership, he was a director at the DSE board.
Starting his stock market career in 1986 as a young graduate, Rizvi achieved membership at the premier bourse of the country six years later.
Rizvi, who is widely respected in the investor community for his experience and investment prudence, has visited stock markets around the world, and has attended many international training programmes for market professionals.
As a senior stockbroker of the country, he is worried that local high-net-worth individuals are gradually turning away from the stock market, where, he thinks, there has been and still is a high potential to channelise their money to finance ongoing economic development and developing business ventures.
He believes the market offers a huge opportunity to investors as well as to entrepreneurs.
In an interview with The Business Standard, Shakil Rizvi expressed his thoughts on what is wrong with the capital market, as well as on its potentials.
What is wrong with the capital market?
"Our capital market is still equity-centric, and the absence of other types of investment vehicles, such as debt securities and derivatives, are discouraging a pool of institutional investments," said Shakil Rizvi.
Besides, he added, the equity market is also in a vicious cycle of poor supply and low demand.
"Investors look for abundant good stocks in a market to put their money into. Good stocks attract investors and the investors inspire entrepreneurs to come to the stock market."
"We, however, are yet to establish a big and strong institutional base for investment."
"On the other hand, small investors have been experiencing losses for a decade, for whatever reason. They could collectively provide a huge investment if there were the right arrangements in place."
High-net-worth individuals turning away
Rizvi thinks that high-net-worth individuals of the country have the potential to finance through the capital market, but they seem to have lost interest in doing so.
"I barely see them showing interest in the stock market nowadays, even though this is a good time to pick stocks at a bargain price, and the government offers a zero capital gain for them," he said.
He thinks the problem is mainly with investor confidence.
In the stock market, nobody can guarantee a profit, but a good market provides many opportunities. Bangladesh needs such an environment to attract high-net-worth individuals.
Call for a larger number of good companies in the bourse
Rizvi says that a research-based investor can hardly find two to three dozen shares to watch here. Whereas, if the market is compared to the economy, the DSE should have at least 1500 companies already listed, and picking 100 or 200 as blue chips would not be a tough job for the exchange.
"Our economic system is offering a tax regime where private companies can still avoid huge taxes and duties that surpass the benefits of investing in the capital market."
He said too many regulations also discourage successful businesses from sharing their fortune with the public.
"Historically, the phase of capital formation in economies can be found with looser regulations intended to inspire more investment."
Rizvi adds that there are even many companies that are listed in the market but are not of much interest to investors because of the poor quality of their business.
"We see a large number of companies who merely use the market to collect money, but fail to return a fair share to investors."
Rizvi continues by saying that investors may make a mistake by buying an overpriced share, but if the company is growing, it will ultimately compensate investors a few years sooner or later. The biggest problem with our market is it that it cannot offer investors a large number of companies like these.
Rather, investors regret "grabbing sinking ships".
Rizvi blamed the lack of financial literacy for the wrong decisions often made by investors. But, he added, we cannot ignore the realities of the market.
IPOs should be more competitive
"In our market, the IPO (Initial Public Offering) is often overpriced, not because of the inherent fundamentals, but rather due to the supply scarcity of so-called low-risk primary securities."
He says that in India, IPO shares are offered for a short period, like two days, and if the companies fail to be sufficiently subscribed to within that period, underwriters absorb all the unsold portion of offered shares.
There, more than one IPO subscription is seen to be opened simultaneously so that investors can choose freely, and issuers also face a competition to offer better fundamentals for a fair price.
Rizvi thinks that the IPO supply should be much higher so that the "culture of grabbing IPO shares at any cost" goes.
Only an abundant supply of good IPOs can make investors choose among good companies rather than speculate for a higher price for nothing tomorrow.
Market mechanism vs a controlled environment
"Buying and selling is a natural act for investors in stock exchanges. In a down day, investors have every right to sell or buy if they comply with the rules and regulations," said Rizvi.
But, he continues, here on a bearish day, lots of our clients are nervous about selling because they face too many regulatory queries about why they are selling.
This regulation might help the market to reduce supplies for a short term, but the investors' spontaneous decision faces difficulties.
We should rather inspire liquidity that results in higher trading volume in the market that helps absorb big selloffs, and caters to huge buy orders too. It also inhibits investors from acting on their own plan.
According to Rizvi, a turnover of less than Tk500 crore a day is a very unwelcome scenario. A decade ago the turnover used to be 5-6 times more.
If liquidity increases with the blessings of market depth, we don't have to worry about controlling investors' spontaneous decisions.
More importantly, he argued, "we need a liquid market to attract both big investments and companies."
Brokerage industry is seriously suffering
Poor trading in the market is gradually downsizing the stockbrokers' pie. More than half of the exchange members are in a marginal situation because they are not earning enough from brokerage commission.
As the president of the Brokers' Association of Bangladesh, Rizvi cautiously analyses the possible consequences if the exchanges issue more and more brokerage licenses to non-member entrants, because that may divide the already minimised pie of the brokerage business among more service providers.
The Securities and Exchange Commission (BSEC) is preparing a draft rule on how the stock exchange can issue new brokerage licenses in coming days.
The Stock market now
Rizvi thinks the overall market is yet to be called undervalued, even though it has dropped a lot in terms of price from the historic high in 2010.
He thinks that if the majority of the newly added stocks after the 2010 crash perform consistently, their stock price in the secondary market too could sustain a higher level, as we generally see in blue-chip stocks.
And that would add to the stock indices.
"I am still optimistic about the market, and the time for improvement is not yet over."
"I will just look for improvement in the condition of the money market, and the health of the banking sector."
Financing growth through the capital market
"We need investments to support growth, and the capital market is unfortunately left behind in terms of catering to that need," said Rizvi.
"All business ventures and mega projects could be financed through the market if we could build it properly," he added.
"It seems Bangladesh has missed a decade in terms of utilising the capital market to reach the unprecedented economic growth that we achieved a number of years ago."
Rizvi hopes that in the next decade, the economy and the capital market will march together, and small investors, high-net-worth individuals, institutional investors will not regret being in the capital market.
For that "addressing both structural and cultural problems is a must," he concluded.