A file photo shows the Dhaka Stock Exchange building in Nikunja in the capital Dhaka. — New Age photo
Investors in the country’s stock market have been suffering from prolonged stagnation, mainly due to the cap on minimum prices, poor confidence, the economic crisis and political tension ahead of national elections.
Prior to the imposition of a floor price by the securities regulator, the market was falling sharply amid the economic crisis, prevalent fraudulent activities in the market that reduced investor confidence and foreign investment outflows.
To save the market from this sharp decline, the Bangladesh Securities and Exchange Commission on July 28, 2022 imposed a floor price cap on all companies.
However, the price floor backfired as investor distress, especially institutional ones, worsened after the cap was imposed.
They argue that this measure has had unintended consequences.
Rather than stabilizing the market, the price floor limits investors’ ability to adjust their portfolios, stifling market dynamics and preventing accurate reflection of the market’s true state.
The key index of the Dhaka Stock Exchange, DSEX, was at 7,043.69 points on February 16, 2022, which declined sharply to 5,980.51 points on July 28, 2022.
However, since October 13, 2022, the DSEX has failed to break the 6,500 mark and is now hovering at 6,200 for a long period of time, as about two-thirds of the companies remained at the minimum price.
Market operators said that due to the floor price restriction, the DSE has witnessed a decline in trading activities.
The continuous increase in interest rates by the US Federal Reserve and massive market manipulation provoked many foreign investors to leave the country’s stock market.
Foreign investment in the Bangladesh stock market has seen a decline over the years.
Investments in equity securities by foreign investors witnessed a gradual decline from FY 2019 to FY 2023, according to Bangladesh Bank data.
The data showed that total portfolio investment holdings at the end of June 2023 reached $2,331.68 million, including investments in debt securities, from $4,578.91 million in 2019.
Market operators said investors were shunning large-cap companies because of their prolonged price stagnation and instead favoring small-cap companies because of their potential for quick and substantial short-term gains.
They said the lack of positive indicators left investors unsure of when the market might recover, causing many to stay on the sidelines.
In addition, investors remain cautious ahead of national elections, fearing possible political instability in the country, market operators added.
Dhaka University economics professor Abu Ahmed told New Age that stocks of good companies in the market have consistently been locked in at floor prices, preventing investors from realigning their portfolios effectively.
As a result, investors either became inactive or withdrew their investments from the market while only a few waited for favorable market conditions.
He said the current market activity is mostly driven by speculators and manipulators who are actually dealing in junk company stocks.
He expects that the withdrawal of the price floor could ease the current situation, potentially increasing investor activity.
Farooq Ahmad Siddiqui, former chairman of BSEC, told New Age that investors prefer long-term investments in good stocks, but since all quality stocks are now at rock bottom prices, investing means locking up money that cannot be easily withdrawn.
In such a scenario, investors may wonder why they should tie up their funds when they can’t sell them, he said.
He said even if the floor price is ever lifted by the market, the risk remains.
He said the immediate consequence of raising the floor price could be a temporary drop in stock prices.
Therefore, many investors are reluctant to take this risk and refrain from engaging in long-term investments.
In addition, the current liquidity crisis in the market serves as another reason for long-term investors to keep their distance.