Executive Summary

In a market economy, the capital market plays a vital role in the efficient allocation of scarce
resources. Well-functioning and developed capital markets augment the process of economic
development through different ways such as encourage savings, draw more savers and users
into the investment process, draw more institution into the intermediation process, help
mobilize non financial resources, attract external resources, bring disciplines in the sick
organizations and invest for organizing production of goods and services and create
employment opportunities.
There is a saying that the stock market is the pulse of the economy. There is no doubt that a
vibrant capital market is likely to support economy to be robust but two major catastrophes in
the capital market of Bangladesh within one and half decades do not indicate the existence of
a vibrant market; rather these show a highly risky and unstable capital market. The recent
surge in the capital market has shaken the whole country as millions of people became
insolvent within a very short span of time. It was observed in 2010 that the DSE general index
was the highest ever which made it Asias top performer after China.
But the reverse scenario was scaring investors in the 1st quarter of 2011 as the lowest ever in
the index observed during that period.
Actually, stock market crash is as more than 10% loss within few days in a stock market. But
stock market crash has differentiated from stock market correction where the loss is 10% or
less.
Stock market crash is a sharp and unexpected decline of stock market prices for a very short
period of time, usually accompanied with the decline of many other assets prices mentioned
by stock market crashes.net. It causes significant capital losses of investors and speculators.
The market participants become panicked which leads to more losses.
Bangladeshi Stock Market has experienced a big crash twice from its inception. In 1996, the
market was crashed because of speculative bubble whereas; it was an asset bubble in the
year 2011. The stock price was overvalued this time. Price was inflated about 500-700
percent compare to the face value. DGEN Index climbed at point 8918.51 on December 05,
2010 which signaled a steeper bubble.
This study postulates the present scenario of Bangladesh Stock Market through various
quantitative and qualitative data which are extracted from the secondary sources. Quantitative
data are gathered from the web site of Dhaka Stock Exchange and other qualitative data are
collected from published research journals, newspapers, websites etc. This study has
revealed that, Gap between the Demand and Supply of stock, extraordinary over pricing of
stock, market manipulation, lack of knowledge about the stock market mechanism among the
general investors, price distortion, inefficient regulations, political unrest, etc caused the crash
of DGEN Index in the FY2011. Security and Exchange Commission (SEC) of Bangladesh and

government should encourage more public limited companies to offer more share to meet the
current demands. In order to get back the confidence among the existing investors regulatory
body may introduce Income tax rebate, Injection of Market Stabilization Fund, Mandatory
holding certain percentage of share among the board of directors, short term incentives
packages etc.
Regulators had failed to take proactive measures to not grow the bubble and caused losses
for millions of investors when the bubbles burst. When analysts were anxious about the
bubbles, regulators were ignoring them and even defended the bubbles.
The recent volatility of the capital market of Bangladesh is an abnormal phenomenon and
such volatility tends to economic instability. I believe it will be interested enough to look into
the causes of the problem. As such volatility affects mass people (many investors), it is
essential to try to minimize such volatility by identifying the causes (esp., Regulatory failure)
and solving the problems.
Introduction:
Stock market is one of the most important financial institutions of any economy as well as
Bangladesh. It opens door for companies to raise huge amount of capital from a lot of
individual investors inside & outside of a country.
Investors participate voluntary to buy ownership of a company in the public market. It is said
that stock market is an intermediary institution to adjust a gap between surplus units and
deficit units of an economy. In these days for millions of middle class educated people in
Bangladesh investing in stocks is more popular than investing in any other investment
sectors. For an investor, stocks are more liquid than any other investment sources as it gives
ability to sell and buy ownership anytime without any hassle.
Since 2007 share prices of Bangladesh stock market have been increasing steadily over the
past four years and it outperformed almost all the worlds markets.
The financial year 2008-09 is known for the global financial and economic crisis. Many
developed and developing countries fall into recession. However, it could not affect
Bangladesh economy greatly. So, the stock market of the country did not see any significant
changes or fall. As CPD (2011) reported, financial year 2008-09 was a volatile year but during
this year Bangladesh economy benefited from low prices of import-able and was able to avoid
negative pressure on its export of goods and services. Consecutive outstanding performance
of Bangladesh stock market in recent years before the crash lured millions of investors to the
stock market to invest their little savings. Before the stock market crash the market had
become a route of easy money for too many new individual investors. That is why millions of
fresh investors invest their small saving in the market during this period. For these fresh
investors investing in this market provided a way to avoid working a job. Even some BO

account holders worked as intermediaries of friends, relatives to invest their money in the
stock market.
Finally, the stock market crashed and taught these investors that investing money in the stock
market involves risk too. But the lesson that investors are taught wreaked havoc on the lives
of millions of innocent investors. The crash wiped out billions of taka from the market where
fresh, illiterate investors were the main victim. It has been more than a year since the crash
occurred.
Generally market crash occurs because of a sudden dramatic fall of stock prices across a
significant cross-section of a stock market, resulting in a significant loss of paper assets.
Crashes are driven by panic as much as by underlying economic factors. They often follow
speculative stock market bubbles. Stock market crashes are social phenomena where
external economic events combine with crowd behavior and psychology in a positive
feedback loop where selling by some market participants drives more market participants to
sell. Generally speaking, crashes usually occur under the following conditions, a prolonged
period of rising stock prices and excessive economic optimism, a market where P/E ratios
exceed long-term averages, and extensive use of margin debt and leverage by market
participants.
Objective of the report
Since the origination of DSE in 1986, it passed through two big market crashes during 1996
and 2011. This repeated crisis made all the small investors empty. Main r objective is to find
out the underlying causes of recent market fall and address some suggestions to get it back
in structured market mechanism. Specifically focuses are to:To depict the present scenario and the recent crash in the stock market of Bangladesh
through a chronological analysis of stock market in Bangladesh..
The study tries to examine the reasons that leaded the Bull Run for dramatic increase of
different instruments in Bangladesh stock market and the fundamental factors of the collapse
Tap few guidelines to recover the recent crisis.
Methodology
The report is both descriptive & calculative by nature. The report is based on information
collected from primary as well secondary sources. The indicators which are responsible for
recent crash are measured by calculation. The trend of those indicators has also been
measured for last three years. Statistical approach has also been used in the report.
To find out the critical issues of this sudden drama, we have collected secondary information
from various sources. We have emphasized on quantitative and qualitative data to analyze
the recent share market crash and its prevail crisis in Bangladesh stock market. All the
quantitative data are extracted from Dhaka Stock Exchange website and qualitative data are
collected from published research journals, newspapers, websites etc.

Data Collection:
In order to make the report more meaningful and presentable, two sources of data and
information has been used.
The Primary Sources are as followsPractical work exposure
Discussion with the respective executives & officers of the bank.
The Secondary Sources of data and information areAnnual Reports of DSE.
Various publications regarding DSE.
Analysis:
The main factors of DSE have been analyzed from different perspectives.
SOWT analysis
Regression analysis:
Rationale of the report
The thesis is required for students who are completing Masters of Business Administration
(MBA) from University of Dhaka. It is a three credit hour program with duration of minimum
one and half month. Students who have completed all the required courses are eligible for
this program. This report has been prepared as a partial fulfillment of MBA program
authorized by the Department of Banking. In this program, I was assigned to make report
regarding DSE share crash. During making this report, I have learned about various aspects
related to share market. This report has been prepared according to the topic given by the
supervisor.
Scope and limitations
A comprehensive knowledge on stock market crash has come under the scope of the report.
The present study is an attempt to evaluate the stock market of Bangladesh.
The report is limited only to gather knowledge about the determiner of the crash of the share
market of Bangladesh. Here the past history & present condition of Bangladesh share market
will also be taken into consideration.
Limitation
There are some limitations, which act as a barrier to conduct the program and for doing an
empirical research work. The limitations were:
Large scale analysis was not possible due to constraints & restrictions this report is limited
only to the share crash, it does not cover the whole perspectives.
In many cases, up to date information was not published.
In some cases, access to relevant papers & documents were strictly prohibited.
Another Problem was time constraints.
Insufficiency of necessary information, lack of experience and budget constraint.

Chapter 2:

Literature review

Chapter contents..
Literature review of the report
Literature review
About share market volatility many researcher of our country and abroad has worked by
applying different methods and has tried to find out various factors that are actually liable to
cause a crash. Here I have given some of their opinions regarding this topic and finally I have
concluded according to my own.
The United States experienced the NASDAQ bubble in the late 1990s. The fluctuations
beliefs generated by overconfidence among Bangladesh investors led to larger speculative
component in stock prices, and the technical bubble of the U.S. market was identified as the
result of exuberance.
(Shiller, 2000; Chen, Hong, and Stein, 2002). Given that markets in the advanced economies
seemed to be more susceptible to speculative bubbles and crashes, and many emerging
markets also display similar evidence, it seems reasonable that no one should look forward to
these phenomena disappearing from the Bangladesh markets (Ahmed et al., 2006).
In line with Shiller (2000), other researchers also discussed how price movements are led by
social processes in a non stationary environment or irrational market and that individuals
value other persons opinion in assessing probabilities. For example Chen, Hong, and Stein
(2002) analyzed the overvaluation generated by beliefs. The authors conclude that the market
overvaluation was caused by the investors overconfidence.
According to (Zaman, 2011) regarding Bangladesh market it is found that there is a general
tendency among investors to hold onto their shares till the record date so that they get entitled
for dividend, and then sells it off after the record date. This results in an increase in share
supply which might result in price decrease.
Chowdhury & Chowdhury (2010) gathered secondary data of publicly listed companies,
traded in Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE), to see the
relationship between capital structure and firm value in Bangladesh. It was observed that by
changing its current ratio, operating leverage, EPS, dividend payout ratio or share capital, a
firm may increase its value in the market. Chowudhury & Abdullah (2011) opines that lack of
market regulation, lack of supply of good shares, presence of syndicate, lack of financial
knowledge helped the market index jumped over 8000 point during December 2011.
I also agree about that some of the factors that have been presented by them are really the
actual reason of market crash. Besides these I have also mentioned some other elements

related to crash among which some are primary issue related and some are secondary issue
related and some are authority regulatory related.
Here I think the Capital Market of Bangladesh have been passing tough times since
December 2010 as high volatility is eroding the capital of Thousands of Investors that might
turn into social instability. This fall is caused by many factors that I tried to identify and tried to
link up between causal factors of market crash and regulatory failure.
Primary issue related problems was faulty listing methods and IPO overpricing, few numbers
of new listings, revaluating assets before company listing, high premium in issuance of right
share/Repeat IPO etc. while secondary market related problems was stock splits and stock
price manipulations through block trading, circular trading and insider trading. Investors
greed and irrational behavior played a big rule to make the stock prices sky rocking as they
were crazy to buy shares without judging the company fundamentals. Shares of the
companies with closed operations and big accumulated losses were rising constantly due to
investors high risk appetite that caused them to loss everything. Government had already
taken many steps (including SEC reforms) to stabilize the market but failed as investors
confidence is in the bottom level. Government and regulators should work together to identify
the main speculators and should brought under proper trial to bring investors back to the
market. Regulator should make reforms on Listing procedures and other faulty regulatory
frameworks to ensure transparency and efficiency in the capital market and also should bring
clear guidelines regarding Private Placements, Asset Revaluation, Insider Trading, Dealing
with Omnibus Accounts etc.
Chapter 3:
A profile of the DSE.
Chapter contents..
About stock exchanges
Historical background of DSE
Corporate information at a glance
Management, trading and settlement
DSEs functions.
About stock exchange of Bangladesh
A stock exchange is a body that provides services to stock brokers and traders to trade
stocks, bonds, and other securities. Stock exchanges also provide facilities for issuance and
redemption of securities and other financial instruments, capital events including the payment

of income and dividends. Bangladesh has two exchanges. Their acquaintances are given
below:Two stock exchanges
DSE
CSE
Type of organization: A Not-for-profit public limited company by guarantee.
Authorized capital: TK. 150 Millions
Paid up capital: TK. 38.7 Millions ($0.72 millions)
Number of members: 129,
No. of listed companies: 212
No. of listed Mutual funds: 10
No. of listed Debentures: 04
Market capital: TK. 56.36 Billions
Trading days: Sunday to Thursday.
Trading procedure: Automated Trading System.
On line trading system: 30th may, 2004.
Location: Dhaka, Bangladesh
Founded:

1954

Key people: Mr. Md. Rakibur Rahman

Market Cap: US$ 50.28billion
No. of listings: 750
Volume: US$ 1.43 billion
Indexes:

DSE

20

Index

General Index
Trading procedure: Automated Trading System.
Types of securities traded: Shares, debentures and mutual funds
Trading days: Sunday to Thursday.
Website: www.dsebd.org
Historical Background of DSE
Dhaka Stock Exchange is the first & biggest stock exchange of the country. First incorporated
as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started formal trading
in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June 1962. Again,
renamed as Dacca Stock Exchange Ltd in 13 May, 1964. After the liberation war in 1971 the

trading was discontinued for five years. In 1976 trading restarted in Bangladesh, on 16
September 1986 DSE was started. The formula for calculating DSE all share price index was
changed according to IFC on 1 November 1993. The automated trading was initiated in 10
August 1998 and started on 1 January 2001 and was upgraded time to time. The latest
upgrading was done on 21st December, 2008. 15 Central Depository System was initiated in
24 January 2004.
Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its active-ties
are regulated by its Articles of Association rules & regulations and bye-laws along with the
Securities and Exchange Ordinance 1969, Companies Act 1994 & Securities & Exchange
Commission Act 1993.
In the beginning DSE was a physical stock exchange and used to trade in the open out-cry
system. After that to secure smooth, timeliness & effective operation on the market, DSE uses
automated trading system. The system was installed on 10th August, 1998 and was upgraded
time to time. The latest upgrading was done on 21st December, 2008. 15.
There are 238 members and total 507 listed securities in Dhaka Stock Exchange. The
working days of DSE is 5 days in a week without Saturday, Sunday public holidays & other
government holidays. The trading time is from 11:00 am to 15:00 pm (local time). Investment
options for an investor in this market are ordinary share, Debenture, Bond & Mutual funds.
In the beginning DSE had only one index. However, now there are three different indices
which are DSI (All share), DGEN (A, B, G & N) and DSE 20.
DSE at a Glance for the year 2011
Factors

FY 2011

Total trading days

235

Total Turnover Value (BD mn)

1,560,912

Daily average Turnover Value (BD mn)

6,642

Average Volume (BD bn)

849

Market Capitalization (USD bn)

30.77

Market Capitalization: Equity portion (USD bn)

23.84

DSE General Index (DGEN)

5,258

DSI Index

4,384

DSE 20

3,910

Total Number of Listed Securities

501

Total Number of Companies

232

Total Number of Mutual Funds

37

Total Number of Corporate Bonds

Total Newly Listed Securities

Market Capitalization to GDP (Ratio)

33.23

Management, trading and settlement

Management
The management and operation of Dhaka Stock Exchange is entrusted on a 25 members
Board of Director. Among them 12 are elected from DSE members, another 12 are selected
from different trade bodies and relevant organizations. The CEO is the 25th ex-officio member
of the board.
The following organizations are currently holding positions in DSE Board:
Bangladesh Bank
ICB
President of Institute of Chartered Accountants of Bangladesh
President of Federation of Bangladesh Chambers of Commerce and Industries
President of Metropolitan Chambers of Commerce and Industries
Professor of Finance Department of Dhaka University
President of DCCI (Dhaka Chamber of Commerce and Industry)
Trading
The Dhaka Stock Exchange is open for trading Sunday through Thursday between 10:30am
2:30pm BST, with the exception of holidays declared by the Exchange in advance.
Settlement
Trade in Public, Block & Odd-lot Market: Trade in Public, Block & Odd-lot market has two
different settlement periods for A, B, G, N & Z categories shares and Settlement is executed
through stock exchange clearing house. Here the settlement period is same for A, B, G & N.
However, for Z category share settlement period is different.
1)

A, B, G & N Category: Settlement is done through DSE or CSE clearing house on

T+1(pay in day) and T+3 (pay out day).

2)

Z Category: Settled on the basis of T+1 (pay in day) and T+9 (pay out day).
Trade in Spot Market (A, B, G, N & Z category): Settlement period is same for all

category shares traded in this market through clearing house that is T+0 (pay in day), T+1
(pay out day).

Settlement of foreign traders: Foreign buyers and sellers settle their transaction between
themselves involving custodian bank. It is processed within T+5 (pay in day) and T+6 (Pay
out day).
Functions of DSE
The major functions are:
Listing of Companies (As per Listing Regulations).
Providing the screen based automated trading of listed Securities.
Settlement of trading (As per Settlement of Transaction Regulations).
Gifting of share / granting approval to the transaction/transfer of share outside the trading
system of the exchange (As per Listing Regulations 42).
Market Administration & Control.
Market Surveillance.
Publication of Monthly Review.
Monitoring the activities of listed companies (As per Listing Regulations).
Investors grievance Cell (Disposal of complaint by laws 1997).
Investors Protection Fund (As per investor protection fund Regulations 1999).
Announcement of Price sensitive or other information about listed companies through
online.
Causes of stock market crash in 2011
1.

From the graph we find that most of the BO accounts were opened during June 2009

to January 2011 that indicated that more than half of the investors could be treated as
new investors. During 2009, stock exchanges, Institutional investors and SEC make many
campaigns within and outside the country to attract new investor that seems to be
successful as the BO accountholders was doubled in last two years that might be treated
as a potential for market development.
Increase of BO a/c
But due to scarcity of new securities market price increased substantially. This demandsupply mismatch along with inadequate investors knowledge made the stock prices in a new
height and finally turned into a big depression that is still going on.
2. increase of listed securities
The fundamental strength of the market essentially comes from financial strength of the listed
companies. The market witnessed that last few years many fundamental companies with
strong financial strength have been listed in the market. From the graph, it is seen that
number of security listing are increasing year to year and highest amount is in the year 2011.
But growth of market demand for stock was much then that of supply that inflated the market
in recent years and made the market most volatile one in the region
3. Increase of Market Cap and Turnover value.

The graph shows that market capitalization and turnover of Dhaka stock exchange, prime
bourse of Bangladesh increased substantially in consecutive three years that might be
considered as a good factor for capital market development. But as the supply side response
was poor, stock price might go up due to excess liquidity. SEC had nothing to do with this as
they had no direct tool to control money supply and also they cannot force companies to
come to the market.
The DSE General Index (DGEN) crossed 3000 marked point in December 2007 for the
second time. Since the third quarter of FY09, the DGEN gained sharply and it jumped to
8918.51 in December 2010 increased by 5908.51 points or 197 percent from the index of end
June 2009(3010 points).
4. Fluctuation of DGEN
In December 2010, DSE index had crossed 8500 points. The market had called bullish
during this period. After this period, the market became bearish. The exchange lost 1800
point between, December 2010 and January 2011. In January 2011, the General Price
Index (DGEN) fall 660 points. Again that during December 2011 to January 2012 Dhaka
Stock Exchange general Index (DGEN) felled by more than 50% during that period, i.e.,
DGEN lose its value by 50% during the period that says that this is not simple volatility and
it can be defined as a collapse.
January 2011, the General Price Index (DGEN) fall
Graph gives the highly volatile and sharply falling index trend of DSE general Index that
started to increase from 2600 points in January 2009 and crossed its zenith price of 8600
in December 2010.
After climbing the highest point it started to fall sharply and came down below 4000 in
December 2011 to January 2012 less than half of the highest point.
From graph, we find that DSE general index, Daily trade value and market capitalization of
DSE increased substantially during last 4 years. But number of listed securities remained
almost the same during the period that implies that supply side response was less relative to
demand side response and market capitalization and index increased due to increased
demand for securities.
5. Faulty listing methods
In the year 2010, regulator introduced Book building method to attract new companies to the
market. Some companies abused this opportunity to exploit maximum benefits from listing
that inflated the market. SEC allows companies to float securities through IPO (Fixed Price
and Book Building method), Direct Listing and Repeat IPO where Book building method is
used mostly in the year 2010.
In Bangladesh, following companies used book building method for listing in the capital
market:

Name of Company

Premium value

Offer price

Collected capital

(Million Tk.)Market Price (02/02/12) MJL Bangladesh Ltd.142.40152.40569068.10MI cement

Ltd.101.60111.60305065.20Khulna

power

company

Ltd.184.25194.25960043.20Ocean

containers Ltd.(OCL)135145160046.20RAK Ceramics Ltd.3848131054.07

From the Table it is found that first four companies charged very high premium for its share
where and withdrawn huge amount of capital from market. When these companies asked for
very high price, shares of other companies of same industry tends to rise on an expectation
that it is highly undervalued that increases the general price index which is the most important
factor behind the recent stock market volatility in Bangladesh.
6. Recently listed Companies with financial information
Twenty three companies (including three direct listing companies) raised new equity of Taka
18.2 billion in the capital market in FY10, higher than the Taka 5.9 billion raised by the sixteen
companies in FY09.
The volume of public offerings in FY10 was oversubscribed more than nine times indicating
the high demand of new securities in the primary market. Bonus shares valued at Taka 27.6
billion were issued in FY10 by one hundred and twenty one companies against retained
profits, higher than the Taka 16.2 billion issued in FY09 by ninety one companies.
Currently 493 securities (Debt and Equity securities) are being traded in Dhaka stock
exchange. Few numbers of companies are making fresh issue every year. 13, 18 and 10
companies listed their securities respectively in 2009, 2010 and 2011. [In appendix]
Traditionally DSE used fixed price method for flotation of new companies. But fixed price
method does not attract good companies always. So, to attract new companies, SEC decided
to introduce Book building method that is a globally acceptable method for IPO. But in
Bangladesh, Book Building method is handled very roughly that caused loss for millions of
investors.
7. Changes in Face Value (Stock Split) of Securities
With similar financial condition or weaker financial conditions lower face value companies
were overvalued relative to higher face value companies in same industries. This situation
was persisting for many years and regulator failed to identify the face value of all listed
companies that created some overvalued securities in the market. Investors were eager to
buy the securities of these companies that were going to change face and before split price of
these were jumping.
7. Stock price Manipulation:
Stock price manipulation was very common in last few years as some companys stock price
grew by more than 4000% in one year without any significant change in company

fundamentals. Stock price was inflated with the help of serial trading by few numbers of big
investors that was one of the reasons of recent collapse of stock market in Bangladesh.
8. Pre-IPO & IPO process:
Investigation committee considered that due to Pre-IPO & IPO manipulation share prices sky
rocketed and that is the main reason for the share market crash. Manipulators illegally &
unethically created a Kerb market in Pre-IPO stage. Without recommendation by the listing
committee application for IPO was accepted. SEC did not examine abnormal asset
revaluation and indicative price. As a result in Pre-IPO or IPO stage placement process and
placement trade Kerb market overvalued share prices. This eventually generated liquidity
crisis in the capital market.
9. Investment of bank in the capital market
In 2010 & 11 banks and financial institutions invested huge amount of deposit money in the
stock market. As a result share prices sky rocketed until December 2010. When Bangladesh
Bank restricted more than 10 percent investment of deposited money, increased CRR and
SLR ratio, created liquidity crisis and market crashed.
10. Omnibus account
Investigation report found Omnibus accounts of ICB and merchant banks as another major
reason behind the stock market debacle. Every branch of merchant bank operates only one
omnibus account. There could be 3-10 thousands BO Accounts under the omnibus account
which are not under the surveillance of SEC. So, information of individual accounts and its
transaction 40 are kept only with merchant banks. As investigation reports shows that this
kind of account made a lot of illegal transactions. It publishes name of 30 big players including
ICB for a lot of suspicious transactions and says most manipulators traded from the omnibus
accounts. It was also reported at least Taka 2.5 billion has been traded from hidden or
omnibus accounts.
11. Asset revaluation & Rumor
By taking chance of weak asset revaluation method companies have overvalued their asset.
In this process dishonest auditors generated artificial audit reports. So, calculating of NAV on
overvalued asset indicates wrong signal. Some companies issued Bonus shares against
unrealized gain of revalued asset price which is a faulty accounting practice. There is rule to
maintain provision against deferred tax during asset revaluation to pay tax in future, but
companies are not following it.
12. Block placement
There was a lot of suspicious block trading of mutual funds. Some investors got enormous
amount of placement time to time.
13. Direct listing:

With the approval of SEC few companies have been directly listed in the stock exchange.
These companies come to the market with inflated share prices.
14. Suspicious transaction of top players
Investigation report reveals some names of individual and institutional investors as top buyers
and sellers during abnormal increase and decrease of index in different time periods. The
transactions of these investors were suspicious and affected the market heavily and liable for
abnormal rise and fall.
15. Serial and artificial trading
Some manipulators created artificial active trading environment among themselves through
bulk transaction and increased share 41 prices. Moreover serial trading and price
manipulation by many buy-sell orders through different accounts and broker houses which
overheated the market.
The above reasons can be categorized in the following way:Background of the 1996 crash
The scenario of stock market crash in 1996 was totally different. The number of BO account
holders was only 300,000 and most of them were very new in the market. During the crash of
1996 paper shares used to be sold in front of DSE and it was not easy for investors to
indentify fake and original shares. The market was enough developed to gain confidence of
investors. There was no automated trading sys-tem, surveillance was not enough strong and
no circuit breakers as well as international protections.
From 1991 to the end of 1995 DGEN price index gained by 139.3% and reached to 834 point.
But in 1996 the market experienced dramatic change and pushed the price index up by
337%. DGEN Index recorded high growth from July and stood at 3648.7 points or by 280.5%
on 5th November 1996.
During the Bull Run period new records were posted almost every day in both bourses for
example market capitalization achieved to $2 billion which is equal to 20% of total GDP. As
market became overheated government took step by selling state owned institutions and Taka
2 billion will be given to ICB for buying shares and support the mar-ket. But the steps taken by
the government did not work.
Finally abnormal rise of share prices started to fall and Bangladesh stock market experienced
its first crash of the history in 1996. The index lost over 233 points on Nov 6, 1996. After the
bubble burst DGEN index dropped to its lowest point and stood at 957 in April 1997. It stood
at around the same point where it was 10 months before and DSE General Price index lost
almost 70 percent from its highest point of November 1996.
Reasons of the 1996 crash
Manipulation

Some foreign portfolio, 28 managers, few brokers and sponsors of few listed companies were
behind the stock price manipulation in October 1996. As a result all share price index of DSE
dramatically sky rocketed to 3600 point from 1000 point in six months time. Few foreign &
local investors that had inside information made huge profit and a lot of general investors paid
heavily.
Demand Supply mismatch
The cause of stock market crash in 1996 was the failure of market regulators mentioned by
Afroz (2006). Stock exchanges did not take any action against the dramatic price in-crease of
listed securities during June to November 1996. Bubble formed due to abnormal demand of
securities by new investors where the numbers of listed securities were very few. The reason
of huge influx of investors was political stability in the country and bringing confidence in
investor`s mind.
Defective (DVP) system
The delivery versus payment (DVP) system of trading used to allow buyer-seller to settle
their transactions between them without stock exchange participation. Many brokers/dealers
used it as a tool to show fake trading to increase demand of share from the general investors
side. According to Bangladesh Bank analysis that there was an unauthorized kerb market
consisting of over 25,000 investors outside the stock exchange where securities were traded
at a very high price. Moreover, SEC could not handle the crisis for its defective infrastructure.
Weak regulations and surveillances could not monitor market manipulators and market
intermediaries. Even information inefficiency, artificial financial statements certified by
chartered accountants, false information and rumor were other important factors that
overheated the market and burst the bubble.
Background of the 2011 crash
History of the stock market crashes show that Bull Run before a stock market crash is kind of
normal phenomenon. There was no exception for the stock market crash of Bangladesh in
2010-11.
According to CPD (2011), the total number of BO Account holders on 20th December, 2010
reached to 3.21 million though the number was 1.25 million in December 2009. Most of these
new investors dont have enough knowledge about the stock market but invest their most or
all savings in the market.
As CPD (2011) found, internet-based trading operation, opening branches of brokerage
houses across the country, easy access to the market information, arranging a countrywide
share mela (fair) are the factors for increasing investors. But supplies of new securities
through IPOs were not enough to chase huge capital of too many investors in the market.
Last couple of years broad money made excess liquidity and the main motive behind it was
Bangladesh Bank`s ex-change rate policy. A big portion of this excess liquidity had gone to

the stock market but there were very few shares in the market. The policy that was adopted
by BB to grow economy by increased exports & investment eventually misguided and ended
up blowing the mother of all bubbles.
Moreover Security & Exchange Commissions was not capable to monitor the market
conditions properly. Due to the poor monitoring & market surveillance share prices of Z
Category Companies and small companies increased dramatically
15th December, BB increased CRR and SLR by 0.5 percent and increased to 19 & 6 percent.
Another important directive initiated by BB was withdrawal of illegally invested industrial loans
by December 31, 2010. As a lot of the reserved money was invested in capital market, banks
started selling shares and withdrawing that money from the market. By the time investors
became panicked. To handle the disastrous & assure the panicked investors BB extended its
deadline for submitting and adjusting loans. For the merchant banks the deadline was
January 15, 2011 and for the commercial bank February 15, 2011.
Institutional investors including financial institutions started selling shares from the be-ginning
of December to show high return on investment at their balance sheet. As the Institutions &
banks started selling their shares from the beginning of December the turnover of DSE was
the highest ever in its history on 5th December. (Raisa, 2011)
19th December was a historical day of the financial year 2010-11 in Bangladesh stock market.
On this day DSE witnessed its biggest one day fall in 55 years history until the date with
losing 551.76 points or 6.71 percent. The losing index was even higher than 284.78 points or
3.32 percent of 12th December. Prices started to nosedive in an hour after the trading started
and about 200 points were wiped off. In the middle of the session it recovered little bit and
ended up the session at 7654 point.
Comparison between two years
2011

1996

trading was automated

trading was not automated

surveillance was strong

surveillance was weak

circuit breakers and international protections were in place

circuit breakers and international protections were not properly

in place

Being automated there were no forged shares traded and the

Being not automated

there were no forged shares traded

kerb market

and the kerb market

there were also omnibus accounts in the market

there were no omnibus accounts in the market

the BO account value was 35 lacs

compared to 3 lacs before

2011 crash was an asset bubble

the 1996 crash was a result of a speculative bubble

while in 2011 it lost up to 660 points, nearly 10 percent

In the end, in 1996 the index lost 232 points,

SWOT Analysis of Stock Market

SWOT analysis:
SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a project or in a business venture. It involves
specifying the objective of the business venture or project and identifying the internal and
external factors that are favorable and unfavorable to achieve that objective. The technique is
credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and
1970s using data from Fortune 500 companies.
A SWOT analysis must first start with defining a desired end state or objective. A SWOT
analysis may be incorporated into the strategic planning model. Strategic Planning has been
the subject of much research.
Strengths: characteristics of the business or team that give it an advantage over others in the
industry.
Weaknesses: are characteristics that place the firm at a disadvantage relative to others.
Opportunities: external chances to make greater sales or profits in the environment.
Threats: external elements in the environment that could cause trouble for the business.
Strength, weakness, opportunity, and threats (SWOT) of Bangladesh Stock Market are given
below:
Strength:
The first and for most thing of strength of Bangladesh stock market is its ability to provide
high return.
Regulatory body of Bangladesh stock market that protects the interest of the investors.
Large number of securities which provides medium for investment.
Large number of Brokers who plays a role of facilitator for investment.
Weakness:
The weak point of Bangladesh stock market is its volatility.
It is a kind of gambling where no guarantee of return and some time it depends on luck
also.

Opportunity:
Stock market provides an opportunity to money lender and money seeker to invest and
use money for their plan.
It provides an opportunity to the investor to be the owner of the company and contribute in
the business decision of the company.
Stock market is a kind of indicator of the economic growth of the country where it provides
an opportunity to gain according to the inflation of the country or more than that.
Threats:
There are many competitors of stock market such as post office savings, public provident
fund, company fixed deposits, fixed deposits with bank etc. which provides fixed and assured
returns.
Changing of economic condition.
Capital market instrument is highly risky then money market.
Changing of government rules and regulations.
Speed of growth in Capital Market not complemented by the controlling agency.
Regression analysis
In this analysis, Turnover value and M.Cap are taken as independent variable where DGEN is
taken as dependent variable. Here I try to find out the relationship between the DGEN and
independent variables Turnover value and M.Cap.
Variables Entered/Removed
Variables

Model

Variables Removed

Method

Entered
1

turnover, M.Capa

Enter

a. All requested variables entered.

b. Dependent Variable: DGEN

Model Summary
Model

R Square

Adjusted R

Std. Error of the Estimate

Square
1

.966a

.934

a. Predictors: (Constant), turnover, M.Cap

Interpretation of R:

.919

196.91543

It is the coefficient of correlation. It shows the positive or negative correlation among Turnover
value and M.Cap with DGEN. Here the value of R is .966that indicates that the independent
variables Turnover value and M.Cap are strongly positively related with the dependent
variable DGEN.
Interpretation of R square:
It is the coefficient of determination. If the independent variable is changed by some units
then the dependent variables also became changed and how much changed is done by the
independent variables, is shown by R square. Here the value of R square comes .934
meaning that 93.4% changes in the dependent variable are happening for the changes of the
independent variables. And the least part (1 .934) = 0.066 is changed by other factors which
are not considered.
Interpretation of Adjusted R Square:
It is the actual coefficient of determination. If another independent variable is added then the
R also became changed and Adjusted R Square shows logically how much value change is
possible and thats why the value of Adjusted R Square is always less than the value of R
square. The value of Adjusted R square is .919. It shows actually how much dependent
variable (DGEN is changed for the changing of independent variables Turnover value and
M.Cap.
Interpretation of Standard Error of Estimate:
It shows how much error or variability stands between the predicted result and actual
observed result. Here the value is 196.91543 that show the amount of variability of our
predicted result and the actual result acquired from the real observation.
ANOVA
Sum of Squares

Model
1

Regression
Residual
Total

df

Mean Square

4900558.846

2450279.423

348981.194

38775.688

5249540.040

11

a. Predictors: (Constant), turnover, M.Cap

b. Dependent Variable: DGEN

Interpretation of Regression Sum of Squares (SSR):

F
63.191

Sig.
.000a

How much error is reduces by using regression rather than mean is shown by SSR. The
value comes 4900558.846 showing the extent to which the error can be minimized through
using the multiple regression tools.
Interpretation of Error Sum of Squares (SSE):
Here the Residual is SSE. It is shown how much error is not possible to remove by using
regression because of some independent factors, which is not considered. The value comes
348981.194 showing the extent to which error is remaining after the regression and can be
minimized with the increment of the dependent variable.
Interpretation of Total Sum of Squares (SST):
The sum of SSR and SSE together forms the SST. In this observation the value is
5249540.040 that come after adding the SSR (4900558.846) and SSE (348981.194).
Interpretation of Degrees of Freedom (DF):
Here, the value 2 is degrees of freedom for the numerator and the value 9 is degrees of
freedom for the denominator.
Interpretation of F Distribution:
F Distribution shows whether our taken model is rejected and accepted as a whole or on an
average, but not individually. So it is showing whether there is any relation between
dependent variable and independent variables as a whole.
Interpretation of F value:
The Null Hypothesis is that the Turnover value and M.Cap are related to DGEN. It means if
we give any value to X then the value of DGEN became changed. The DGEN is dependent
on Turnover value and M.Cap.
So Alternative Hypothesis is that the Turnover value and M.Cap are unrelated to DGEN. It
means if we give any value to X then the value of DGEN will become constant. The DGEN is
independent of Turnover value and M.Cap.
Interpretation of Table Value:
At a 10% significance level, for 2 numerator degrees of freedom which is regression and for 9
denominator degrees of freedom which is residual, the table value is 3.36.
Interpretation of Acceptance Criterion:
If the calculated value of F is less than the table value of F then the null hypothesis is
accepted subsequently the alternative hypothesis is rejected.
Interpretation of Rejection Criterion:
If the calculated value of F is greater than the table value of F then the null hypothesis is
rejected subsequently the alternative hypothesis is accepted.
As the calculated value of F is 63.191, which is greater than the table value of F 3.36, so the
Null hypothesis is rejected and alternative hypothesis is accepted. Hence the conclusion
comes that the T value and M.cap are not related that means negatively related to DGEN.

Coefficients
Unstandardized Coefficients

Model

Standardized

Sig.

-1.378

.201

Coefficients

Std. Error

Beta

(Constant)

-1203.865

873.383

M.Cap

2.471E-9

.000

.839

7.013

.000

Turnover

3.504E-8

.000

.171

1.433

.186

a. Dependent Variable: DGEN

= a +b1 X1+b2X2
= -1203.865 + 2.471E-9X1+3.504E-8X2
In this regression equation, the relationship between DGEN with Turnover value and M.Cap
has been demonstrated.
Dependent Variable = DGEN
Independent Variable X= Turnover value and M.Cap
Here, a is constant and b1 and b2 are the slope of X1 and X2.
If

Turnover

value

and

M.Cap

is

zero

then

-1203.865

Here, = -1203.865 is Y intercept. It shows that the DGEN of the DSE is negative because
the DSE will have some DGEN without Turnover value and M.Cap in a given year as there
may be some DGEN of previous years.
Now, the value of b1 and b2 or the slope of X1 and X2 are 2.471E-9 and 3.504E-8 it means if
the volumes of Turnover value and M.Cap increase by TK. around tk.2 and 3 then the DGEN
decreases for TK. 2 and 3 points assuming all other variables are constant.
Findings
After preparing this report, it has been come to my mind that only one factor cannot be
mentioned greatly for this share market crash. But it is the collective of various factors who
are responsible for this huge crash. The followings are some findings that are.
Financial institutions are the biggest investors in the market and there aggressive
involvement increased market liquidity manifold in recent years. Financial Institutes could
invest more than 10% of their demand and time liabilities to the

stock market and greater

involvement of financial institutes increased the liquidity in the market that created a bubble in
the stock market.SEC must be aware about this.
Number of listings in the DSE and the procedures of listings were not fair and square.

Book building method was not followed properly in case of share pricing. For this reason
share price especially IPO pricing was overvalued. It can be said that by taking chance of
weak asset revaluation method companies have overvalued their asset also.
Demand and supply side of stock in the stock market were mismatched which resulted a
great crash in the 55 year history of Bangladesh.
Stock price manipulation and insider trading was very common phenomena in the stock
market in which SEC did not perform its inspection clearly.
Omnibus accounts of ICB and merchant banks as another major reason behind the stock
market debacle. This kind of account made a lot of illegal transactions and manipulation
which was in favorable for the stock market.
Misunderstanding between stock market and stock exchanges was very poor and
irregularities to take actions against the manipulators were also responsible for this crash.
During the time of crash year Block trading, circuit trading and direct listing have also
been noticeable greatly.
Recommendation
All are responsible for crash. So proper activities have to be adopted by everybody from their
own situations to restore the previous situation of the market. Some of them are in the
following.
Recommendations for the Government
There is no doubt that the failure of the government in making various decisions regarding
capital market played role behind the recent crash:Government should ensure the supply of fundamentally strong shares in the market to
meet the demand which will make the market efficient as investors would not go for buying
junk shares. For ensuring the supplies of such shares, Government can offload the shares of
different companies which it possesses now. It also can urge the private limited companies to
go public by offering tax benefits through fiscal policy. Even it can offer shares to the public for
infrastructural development work like constructing big bridges, highways and power stations.
Government must ensure the appointment of skilled and capable personnel in different
regulatory bodies and must give punishment to the persons responsible for any kinds of
irregularities.
The responsible persons of the Government should refrain from delivering irrelevant,
irresponsible and sensitive speeches which many of them did before.
Government should ensure more active merchant banks to participate in the smooth
building of a sound stock market.
Government must ensure that the chairman and members of the Investment Corporation
of Bangladesh (ICB) are honest and skilled. Any sort of direct or indirect involvement of any of
the ICB members and officials in the stock market must be stopped in any way.

Government should delegate all power to the SEC to take legal actions against the
criminals. Even if necessary, new Act may be passed in the Parliament in this regard.
Flow of black money in the capital market must be restricted as it can never bring any
good results in the long run other than creating bubble in the stock market the blast of which
nothing but a disaster.
Recommendations for Securities and Exchange Commission (SEC)
SEC as the guardian of capital market should play significant role to make it march forward. It
must ensure the followings:
SEC must ensure that neither of its members nor any of its officials is involved either
directly or indirectly with the transactions in the stock market.
The monitoring and surveillance should be strengthen so that none can get chance to
gamble.
SEC must have its own certified Chartered Accountants to ensure the accuracy of the
Financial Statements of the listed companies and they should give punishment if the books of
accounts are not accurately audited.
SEC must rethink about the rule of disclosure of quarterly financial reports by the
companies because many of the companies misused it as a vehicle of misguiding the
investors. In fact, it became a common practice of most of the listed companies to show high
quarterly EPS in its un-audited quarterly report to bring down P/E ratio. In some cases, it is
seen that a few companies annual audited EPS for the year ended 2010 was lower than its
accumulated EPS of three quarters.
It must ensure speedy disposal of decision for market operation and all the decisions
should be taken considering the long term effect on the market.
To bring fundamentally strong private companies in the capital market, there is no
alternative of Book Building Method of IPO. So, the postponed Book Building Method must be
reintroduced with necessary correction to resist all sorts of manipulation.
It is high time for SEC to take a decision regarding the stocks in the OTC market because
huge amount of money has been blocked due to inefficient OTC market. The companies in
the OTC market should either be de-listed and their assets and liabilities should be settled or
these companies may be brought in the main market through acquisition by the Government
or by the interested entrepreneurs restarting production of those enterprises.
Recommendations for DSE
Dhaka Stock Exchange has important role to play as the monitoring authority of the Broker
Houses. So, it needs to play vital role by ensuring the followings:
It must ensure proper monitoring of the brokerage houses for which more skilled
manpower should be appointed in the Monitoring and Surveillance Team.

Any sort of irregularities in case of trading should be identified promptly and immediate
action should be taken.
The operating software of the stock exchange should be updated as often these fail to
take immediate sale or buy order. So, it must bring new software within the shortest possible
time to bridge a gap between the prices of script in stock exchange
Now there is a common practice by DSE to ask for query for price hike of any script
which is nothing but a routine work. To make such query fruitful, visible action should be taken
if any involvement of sponsor/directors is identified.
To aware investors having no or insufficient skills about the investment in stock market
should be trained through different training programs, seminars and motivating fair.
Last but not the least that the stock exchanges need to be demutualized as it is the
demand of time now to have a new corporate governance structure for more effective conflict
management among market participants, and to make more quick decision with greater
flexibility.
Recommendations for Bangladesh Bank
Though Bangladesh Bank is the regulatory body of Money Market; but its decisions are also
reflected in the capital market as the money market and capital market are interrelated. In this
regard it has the following roles to play:
It must ensure that the Banks and Other financial institutions exposures do not exceed
the limit from the very beginning. But in the recent slump it failed to do so as it could not
monitor the involvement in the early periods while it put pressure on the banks to readjust
their capital market exposures at the eleventh hour which accelerate a huge sale pressure
from their side.
It must ensure the proper functioning of the Merchant Banks through arranging money
from the parent company to mitigate liquidity crisis.
It should keenly monitor the loan of the commercial banks to industrial sector and take
regular feedback so that no industrial loan may flow to the capital market. It is found that in
case of recent catastrophe, it failed to do so.
Recommendations for Institutional Buyers
Institutional Buyers (Mutual Funds, Merchant Banks etc.) ensure balance in capital market
through reacting according to the interaction between demand and supply. But in recent past
they completely did the opposite as when there was huge sales pressure in the market
instead of buying, they also sold shares in a large scale resulting further decline. Their
behavior in that case was not different from individual investors.
They must show mature behavior to ensure balance in the stock market by buying shares
when there is sale pressure and vice-versa.
In providing margin loan, they must follow the rules as prescribed by SEC as well.

They should advise their client giving emphasis on the benefits of the clients instead of
thinking their own benefits only.
At the time of huge decline they should not be involved in forced/trigger sale of clients
shares without giving them any chance to adjust their loan.
All sorts of transactions through omnibus accounts should be restrained.
Recommendations for Individual Investors
No matter what is the reason of a crash, individual investors are the ultimate losers. Hence, it
is their own responsibility to take care of their own money and they ought to consider the
following things while taking investment decisions.
Before investing in a particular script they must analyze the key factors of that company to
justify whether the company is fundamentally strong. Such factors include EPS, P/E Ratio,
dividend policy, future growth, industry average etc.
In analyzing financial strength of a company they must consider the audited annual
reports instead of quarterly un-audited report as often these information is not accurate or do
not reflect the real position of the company.
They must restrict themselves from buying junk shares and taking whimsical investment
decision.
They must build their portfolio in a way which will involve at least three or four different
types of fundamentally strong shares from different industries. It should also contain shares
considering both long term and midterm benefits.
Instead of being traders, the retail investors need to think of being investors.
They ought to keep some cash for emergency so that they might buy more shares
(fundamentally strong) which they bought earlier when there is a big decline in price.
They should not buy on the basis of rumor or following advices of the persons who do not
possess sufficient knowledge about capital market investment.
They ought to participate in different seminars and training programs relating to stock
market to enhance their knowledge and skill in making stock market investment decisions.
They must know that both gain and loss are the indispensable parts of stock market.
Instead of looking for gain, sometimes they must accept loss with patience so that they
may recover the loss in future through higher gain.
Above all, they must understand that perseverance and patience is the key to success in
investing in capital market.
Conclusion
From our analysis we have found that major indicators of the countrys major stock exchange
is becoming more volatile over time and the regulators are not efficient enough to guard this
volatility. But, for a developing country like Bangladesh, the importance of sound development
of the market cannot be undermined. Although the SEC has been trying to maintain a

continuous flow in the market, very often its role meets the broad economic objectives. In
order to make the market less volatile, SEC itself should be strengthen both in terms of
number of manpower and quality of the professionals involved with special focus on
independent research, monitoring mechanism and prompt decision making.
Security and Exchange Commission (SEC) of Bangladesh and government should take the
short term and long term initiatives to stabilize the market. They should encourage more
public limited companies to offer more share to meet the current demands. Income tax rebate,
Injection of Market Stabilization Fund, Mandatory holding certain percentage of share among
the board of directors, short term incentives packages should be introduced to get back the
confidence among the existing investors. Regulatory bodies of Bangladesh stock market must
educate the current and potential investors about the market mechanism and provide them
the accurate information so that investors trade their shares carefully. Unless, there are any
corrective measures, Bangladeshi stock market will be facing this irrational downward of
DGEN Index again in the near future.
To guide and restore the confidence of individual investor in capital market, the regulatory
authority should take necessary actions to encourage corporate governance rating among
listed companies, which will enable investors to differentiate the good governance companies
from the rest and can then attach higher value to those firms as well. And, without improving
the governance of the market and eliminating scope of manipulation, it will be difficult to
attract good scripts at the desired level. In this endeavor, regulators must adapt continuously
to the changes in the economy and the pressures of globalization.
References
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on 14.04.2012]
Hossain, Md. Toufique (n.d), Bangladesh stock market crisis: diagnosis, remedies, and
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Websites
Central Depository Bangladesh Limited, www.cdbl.com
Dhaka Stock Exchanges, www.dsebd.org
Security and exchange commission, www.secbd.org.26.16