Wiping out ‘Horcrux’ and sharing the benefits with ‘Muggles’ in our stock market

Illustartion:TBS

When we think of developed economies, the first name that pops up in our mind is the United States. A general investor or 'muggle' in Bangladesh may wonder what magic spell has been cast in the US stock market that makes it possible for an average American to generate a 10%+ return every year. 

The fanatic search for the magic spell is not surprising at all, as suffering a series of losses has become a part of the daily routine for the muggles in Bangladesh, thanks to the 'Horcrux' hidden in our stock market. 

As the country is still hung over from the revolution, there has not been a more suitable time to end the reign of you-know-who(s) in the Bangladeshi stock market. We believe benefiting from the economic progress of the country should be equitable for both the muggles and the wizards. With this hope, we are laying out the following tactics to destroy the ill-hidden Horcrux in our market. 

Reform the 'House of Slytherin': Bring back accountability and transparency 

There is a saying that banks do not deal with money; they deal with trust. Without an iota of doubt, public trust is the building block of both the money market and the capital market, as you will definitely not put your hard-earned money with somebody like Bellatrix Lestrange.

The heaviest KPI of the regulators of every financial market is upholding public trust through transparent systems and accountability. When trust is breached, chaos becomes inevitable. 

Unfortunately, from time immemorial, the regulators of our stock market, by their actions, have proven themselves to be nothing short of the House of Slytherin. Instead of fixing the broken system, they gave free passes to a few 'Dark Lords'. How? Out of a hundred egregious ways orchestrated by the regulator, one was fining someone Tk2 crore for running a show, which made them Tk100 crore. It has reached a point where, unless you cleanse the House of Slytherin, the stock market will always remain the safe house for the gamblers. 

Stop playing Quidditch with policy measures: Ensure consistency and heal the sick regulations 

You may debate which is the most popular sport in Bangladesh. Is it cricket or football? However, both of us can confidently attest that our regulator's favourite sport is changing policies overnight. Regulations regarding the floor price, circuit breakers, allowable margin loan ratios, and stock categorisation are changed so frequently that it may seem that the regulators are manoeuvring their broomsticks to catch the 'Golden Snitch'. 

The result is an ultimate loss of trust among the shareholders, particularly the foreign investors. When a year ago a foreign fund manager asked us, "Are you guys sure that your guardian won't reimpose the floor price?" our response was, "You never know."

Pour the healing potion to cure the market: Make it mirror our economy

Let's get back to the bookish realm. The stock market has an important role in the economy. In this market, companies raise money from the public. The money is invested in long-term projects. The successful running of these projects contributes to GDP growth. The profit from these projects is shared with the public in the form of dividends and capital gain.

Surprisingly (unsurprising for us), this simple math is not mathing in Bangladesh. Our stock market fails to represent our economy. One good way to prove it is our equity market cap to GDP ratio. In Bangladesh, this ratio is around 10%, in contrast to our peer countries, where the ratio is more than 50%. As a result, the pockets of our general investors are not blessed by double-digit nominal GDP growth. 

To change the fate, we don't see an alternative to listing more and more well-governed, large corporations in the bourses. However, encouraging them to be a part of the stock market will be an undertaking as formidable as a basilisk. That will entail speeding up the review process for listing and scrapping the magic formula for IPO valuation prescribed by the regulator. 

Institutionalise Retail Investors: Develop the Institutional Base

Truth be told, investing money in the capital market itself is a full-time job. There are 360+ stocks and 230+ Treasury bonds listed on the Dhaka Stock Exchange. Changing the allocation of your funds, tracking the interest rate movements, and closely following the evolving business environment and industry dynamism necessitate the involvement of investment professionals.

In other countries, mutual funds, which are managed by a team of professional fund managers, shoulder this responsibility. Even in India, mutual funds are extremely popular. Initiatives like 'Mutual Fund Sahi Hain' have been taken to strengthen the industry. Putting it in numbers, the monthly inflow to mutual funds through SIP (monthly investment plan, similar to DPS) was 21,262 crore Indian rupees or approximately Tk30,000 crore in June 2024. In stark contrast, Bangladesh's mutual fund industry struggles to secure less than Tk10 crore (only 1/3000th of that of India) monthly inflow through SIP while our economy's size is 1/9th of India's.

The industry stakeholders are largely to blame for this sorry state. Resuscitation of this ailing industry calls for a series of chest compressions. The first push is needed in building a functioning ecosystem for mutual funds. 

The next push is needed in regaining trust among the investors. We believe that both the regulator and the fund managers make concerted efforts to regain what was lost. Ensuring accountability among the fund managers for their decisions and running branding and awareness campaigns at a national scale can improve the state.

Rationalise the tax system 

As per the current tax policy, the corporate tax rate for listed companies in Bangladesh is less than that for non-listed companies. Nonetheless, the regulators scratch their heads when they contemplate why large companies do not get listed. The truth is, why bother about tax incentives if you can evade taxes? 

Hence, the scope of tax evasion must be blocked out. Secondly, the corporate tax rate gap between listed and non-listed companies can be widened to attract compliant companies to list themselves.

We also identified scopes for the rationalisation of tax policies. Some high-net-worth individuals (HNIs) may need to pay 30% or more tax on capital gains above Tk50 lacs, whereas capital gain tax for corporations is 15%. This huge gap needs to be narrowed down for the interest of the market by reducing the capital gain tax rate for individuals.

Lastly, in the case of availing of a tax rebate, the allowable investment limit through mutual funds is Tk500k. However, there is no limit if the investment is made directly in the stock market. Unless this discriminatory treatment is rationalised, the progress in building a strong institutional base will always be impeded.

Let the masters of Hogwarts speak: Create the right opinion leaders

Let us share a personal (read 'shared') experience. We both spent most of our time in equity research in our respective careers. As analysts in equity research, our job was to recommend our clients to either buy, sell, or hold the stocks. We also communicated the target price backed by research data. Like Covid-19, a new virus started infecting equity research in 2020. We stopped publicly announcing 'sell' recommendations to our clients, and in a few months, the target price column in our reports started disappearing. All hail to the 'He-who-should-not-be-named' for spreading the virus of fear among the analysts.

When you clamp the hands and mouth of masters, the house becomes the pasture of evil spirits. The greed of people to become rich overnight makes the spirits go rogue. Rumours become the blood of our stock market. If the people in power have an ounce of willingness to change the culture, our earnest request is to set the Masters free from house arrests and to trim the wings of the evil spirits. 

Spread financial literacy at the national scale: Change the attitude towards money

Science, Business, and Humanities—these three streams steer our career paths in different directions. However, what holds us together is that we all earn money and save up for the rainy days. At the expense of overgeneralising, the fact that even university graduates do not know how to manage money is a matter of misfortune. Thanks to channelling all our national energy to raising the literacy rate to 100%, yet turning a blind eye to financial literacy. 

Our culture has also played a big role in dissuading us from financial literacy. 'Money is the root of all 'evil'—this very spell has been injected into our minds from an early age through books, films, the arts, and 'moral education' imparted by the elders. The situation is so wretched that only the inclusion of money management programs in the national curriculum can rescue us.

Of course, the reformation efforts for building a stock market for the people should not be limited to the seven areas we have discussed above. An upheaval is required in technology, stakeholder monitoring, branding and awareness, and a few other areas. We are eagerly waiting for the new commission to take charge and reflect public expectations in their actions.

Sketch: TBS

Kazi Monirul Islam, CFA, CMT is the CEO of Shanta Asset Management and Shopnil Paul is a Lecturer at the Institute of Business Administration (IBA) of the University of Dhaka.  

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.