Forma # 1.ai - ICAB

) Huge inflow of new investors
in the stock market eager to
participate in the ‘Keynesian
Beauty Contest’
In recent years there is an
unexpected rise in the number of
investors in the stock market. Total
number of Beneficiary Owner
(BO) account holders till 20
December, 2010 was 3.21
million.71 This number increased
by 154 per cent between January
to December 2010.72 A large part
of these investors have little
knowledge about the market and
participate in trading as if they are
participating in a ‘Keynesian
Beauty Contest’.
A number of factors have
facilitated the influx of investors to
the stock market, such as opening
of brokerage houses in various
districts (590 branch offices of 238
brokerage houses of DSE are
currently being operated in 32
districts)73, organization of ‘share
mela’ in different districts and
introduction of internet‐based
trading operation. Also
market‐related information is now
easily accessible through
electronic and print media as well
as internet. According to a number
of studies (Tetlock (2007);
Tumarkin and Whitelaw
(2001)74), a large number of
investors are now participating in
short‐term trading. Besides,
prediction about future flow of
funds to the stock market is
encouraging investors to
participate more in the short‐term
trading.
Poor governance of the
capital market
a) Weak Performance of the
Regulatory Authority
The capacity of the Securities and
Exchange Commission (SEC)
appears to be inadequate in
ensuring market regulation of the
type that is required in view of the
current scale and scope of the
country’s stock market. Various
markets regulating instruments75
made use of by the SEC often
appears to lack both
ppropriateness and effectiveness
from the perspective of providing
the required stewardship in the
market.
There are several reasons for this
observation. First, frequent
changes in the rules by the SEC
concerning margin loans have led
to volatility during the ‘buffer
period’. This has also led to
confusion with regard to the
method of calculation of the
margin. Second, application of
lock‐in period in case of sale of
placement shares is not being
properly maintained; rather in a
number of incidence the rule has
been relaxed. Third, floating of
right shares is increasingly
becoming a way of mopping up
money from the market.76 A total
of Tk. 2,014.5 crore was raised by
16 companies by way of issuance
of right shares between July 2010
and second week of December
2010.77 Fourth, lack of expertise
in the area of competent
examination of audited reports of
listed companies, submitted in
support of revaluation of assets, is
a major operational weakness of
the SEC. A number of companies
have used the method of
revaluation of assets with a view
to raising the share prices and
thereby to collect additional funds
from the market. Fifth, SEC has
taken an inordinately long time to
implement the guidelines set by
the International Organisation of
Securities Commissions (ISCO);
because of the delay to apply
these guidelines share prices of a
number of listed companies have
experienced unusual volatility.78
Sixth, because of weak monitoring
and surveillance system, the SEC
is not suitably equipped to take
actions against the incidence of
possible insider trading in the
market. Seventh, although
price‐sensitive information is
supposed to be made public
throughdaily trading operations,
often such information is leaked
out earlier or rumours are
purposefully spread to influence
the market behaviour.
The Bangladesh Accountant January - March 2011 25