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Topic Investor Protection: A critical review of the existing laws by SEC and DSE. Investment Analysis Course Code: Fin- 3105 Prepared To: Prof. Dr. M. Abu Misir Professor and Chairman, Dept. of Finance Jagannath University, Dhaka Prepared by: Mohammad Alamgir Hossain BBA-Fin, 2 nd Batch 3 rd year, 1 st Semester Department of Finance

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TopicInvestor Protection: A critical

review of the existing laws by SEC and DSE.

Investment AnalysisCourse Code: Fin- 3105

Prepared To: Prof. Dr. M. Abu Misir

Professor and Chairman,Dept. of FinanceJagannath University,Dhaka

Prepared by:Mohammad Alamgir HossainBBA-Fin, 2nd Batch3rd year, 1st SemesterDepartment of FinanceJagannath University,Dhaka.

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Date of Submission: 24-02-2011

Jagannath University, Dhaka

Acknowledgement

At the beginning I desire to express my deepest sense of gratitude of almighty Allah. With

profound regard I gratefully acknowledge our respected course teacher Prof. Dr. M. Abu Misir, Professor and Chairman, Department of Finance,

Jagannath University, Dhaka for his generous help and day to day suggestions during the preparation of this report. We also would like to thank Mr. Md. Shahiduzzaman, Researcher, Policy Analysis Unit, Bangladesh Bank, and Mahmud Salahuddin Naser, Joint Director, Monetary Policy Department, Bangladesh Bank also other staffs of Bangladesh Bank who helped me.

I would like to give thanks especially to my friends and many individuals, for their

enthusiastic encouragements and helps during the preparation of this report me by sharing

ideas regarding this subject and for their assistance in typing and proof reading this

manuscript.

1.2 Rationale of the study

The report is assigned by my course teacher Prof. Dr. M. Abu Misir as a part of our

Investment Analysis course. The topic of the report is “Investors protection: A critical review of the existing laws by SEC and DSE”. By conducting this study I can enhance my knowledge and skill to apply various research methods in professional life or higher educational life. The report has given me a chance to raise my quality in developing research instrument and its applications. By doing so, we can boost our acceptability in job market and develop our real life knowledge.

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1.3 Objective of Our Study

The report has the following objectives:1. To understand the capital market of Bangladesh. 2. To understand the economy of Bangladesh.3. To understand the impact of capital market in Bangladesh4. To understand the various factors which are related to capital market.5. To find out the capital market status of Bangladesh.

1.4 Scope

There were huge scopes to work in the arena of the report. Considering the deadline, the

scope and expose of the paper has been wide-ganging. The study on “Investors protection: A critical review of the existing laws by SEC and DSE”, has covered overall capital market status of Bangladesh and the impact of different factors related to capital market has been shown in this report. By preparing this report it becomes more understandable about the real condition of the capital market of Bangladesh and the importance of its through proper channel.

1.5 Methodology

Information and Data were collected from different Share Capital related web sites from the internet.

1.6 Limitations of the Study

Although I have completed my studies on “Investors protection: A critical review of the existing laws by SEC and DSE”, I have faced some problems or limitations during my studies. These limitations are given below: There is no sufficient information on this topic. As we collected my data from secondary sources so there may be chance of biasness. Secondary data are not reliable all the time that I have followed. Because of time shortage many related area cannot be focused in depth. If I would become more efficient then I could provide more data and better research. Unknown errors that occur in this paper are also my limitation.

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Introduction

“Investors protection: A critical review of the existing laws by SEC and DSE”, has several aims, especially related to rules, laws regulation changed by different player of the share market.

Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) are the platforms where all the primary and secondary shares are bought and sold. The market is regulated by a government organization called the Securities and Exchange Commission (SEC) located in Motijheel, Dhaka. DSE is also located in Motijheel, Dhaka and the CSE is located in Agrabad, Chittagong. However, both the exchanges have their own branch offices across Bangladesh.

When a company declares share offerings in the market to collect capital from interested investors, it is then called the primary shares. Primary shares are offered through the process called the Initial Public Offering (IPO). Finally, the primary share can be exchange through stock exchange called secondary market

In this stage the above players regulate the whole system through rules, regulations, amendments, and laws to protect the interest of the investors. Most of the time, SEC, DSE, CSE, and Government change these rules, regulations, amendments, and laws to protect the interest of the investors. These rules, regulations, amendments, and laws to protect the interest of the investors may be for the long time or for the short time period. Since the establishment of SEC, DSE, CSE many of these rules, regulations, amendments, and laws have been changed to protect the interest of the investors.

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There are mainly two players in our country who regulate, make rules, acts, in the security markets. These are the Government and Security and Exchange Commission of Bangladesh (SEC). Beside this the two markets Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) are also enable to make rules, regulations regarding their market affairs.

Government Regulation

The government has enacted varieties of laws applicable to the securities markets. These laws were the result of certain abuses that took place during the last decade. The collapse of the stock market of Bangladesh in 1996 provides an impetus for the regulation of securities trading. Securities markets regulating authority of Bangladesh along with the investors recognize that the regulation of securities markets is necessary in order to restore the confidence of the investors in the markets and ensure a continuous flow of capital in business.

The basic laws under which the transfer of stocks and bonds are being regulated are the securities and exchange ordinance, 1969, and Securities and Exchange Commission act, 1993. The principles objectives of these laws are to protect the suppliers of capital from fraud and to ensure that information received by investors is truthful, accurate, complete, and reliable.

Laws launched and imposed by the regulating authorities SEC attempt to achieve these goals by way of disclosing all material information affecting the price of a security, controlling the insider activities, and controlling the issuance of new stocks favorable nor unfavorable information from the public. The actual implementations of full disclosure sometimes present problems, which must be turned over to corporate counsel. Corporate directors, officers and shareholders (who are called insiders) are not permitted to profit from inside information.

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Transactions made by such insiders must be reported to the security and exchange commission. The SEC publishes reports of insider trading showing the names of insiders involved in trades. Corporate insiders are permitted to trade in the stock of their corporation if the comply with the reporting requirements although they are not permitted to make short term abnormal profit by selling short.

Laws have been established to ensure that information provided to investors in prospectuses for new stocks is accurate and complete. For the sake of the investor’s protection in the securities markets, government has enacted various regulations as needed time to time.

Government Legislation

Many fraudulent and undesirable practices occur in the securities markets-both in primary and secondary markets. To improve the stability and validity of the securities markets, more acts, rules and regulations have been legislated by the government after establishments of Securities and Exchange Commission in 1993.

A tremendous development in the securities markets is possible if the legislations come into effect. Major legislations regulated in the securities markets that are liable to give protection to the investors in the securities markets. The following are the regulations regarding the legislation to protect the interest of investors.

Securities and Exchange Commission

In mixed economies like Bangladesh, the major part of domestic savings takes place in the private sector. The domestic saving rate is positively related to the level of income and its growth rate. To raise the saving rate one must

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understand the savings preferences and motives of the non-corporate sector of the country. Economic history of some developing countries suggests that in the evaluation of the financial structure, the non corporate sector prefers to hold more than 50 percent of its financial savings in the form of savings and fixed deposits.

Security markets in Bangladesh well established in 1954 while the formal trading began in 1956. Their activities are being controlled and regulated by the article of association along with other government regulations subject to amendment from time to time. The capital issue Act, 1954, however, is one of the pieces o legislation governing the stock exchange in the country.

Consequently upon, with the spirit of the nationalization and socialization motive of the government, the then only securities market in Bangladesh, The Dhaka Stock Exchange Limited suspended its trading and other administrative activities in 1971 after the independence of the country later 1976 it regimes it activities with 9 listed companies after the changes of government policies. Activities of the security market improve since 1985 and gained momentum from early 1991.

Efficient and effective operation of sectors market is required to meet at least two basic requirements. First one is to support industrialization through savings mobilization, investment fund allocation and maturity transformation. Second one is to be satisfy and efficiency in discharging the above role. In the developing country like Bangladesh such conditions do not prevail due to the prevalence of informal credit market. It performs various functions in process of economic development.

In economic development of a county like Bangladesh, the practices and the supervision of issuers, market and intermediaries are vested upon regulatory authority. The board of SEC is the policy making and overseeing body and the

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regulatory functions are taken care of by chairman and members.

All the components of securities markets should be concerned with the investor’s protection it is essential to say that the legal protection of investors in a country is an important determinant of the development of its financial markets. Where laws are protective of outside investors and enforced, investors are willing to finance firms, and financial markets are both boarder and more valuable.

Keeping this view in mind, the government of Bangladesh has set up Securities and Exchange Commission (henceforth SEC) on June 8, 1973 under the security and exchange commission act, 1993. Security Exchange Commission is an independent quasi-judicial agency of the government, the mission of which is to administer law in the securities field and to protect investors and the public in securities transactions. Consistent with the overall policies, SEC is supposed to act as a central regulatory agency performing wide range of functions covering the entire capital market including the proper issue of capital, the establishment of fair trading.

The SEC Acts, Rules and Regulations

The Securities Acts

Securities and Exchange Commission Act, 1993:

It is expedient for the establishment of the Securities and Exchange Commission for the purpose of the protection of interest of investors in securities, for the development of the securities markets toward achieving the objectives of the securities investors. To protect the interest of the investors in securities, the securities and exchange commission can apply all the power under the code of civil procedures, 1908 (Act V of

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1908) with a view to investing into the affairs of brokers, sub-brokers, share transfers agents, bankers to an issuer, underwriters, portfolio managers, investment advisers and such other intermediaries associated with the dealing in securities markets.

The depository act 1999:

The act has effects on any other law for the time being relating to the holding and transfer of securities. To avoid any fraudulent a transfer of securities must be effective by making an appropriate entry in the depository register as per provision of the regulation as per provision, the commission preserves the right, for the interest of the investors to issue an order and direction to any person associated with the depository or with the issuer.

Securities and Exchange Commission rules

SEC Rules Part-II:A profit and loss account asserts the profitability of a firm.

S the profit and loss account is the disclosure of profit or loss of a company, the commission makes the listed companies to disclose clearly the result of the working of the companies during the period cover by the account.

SEC Rules Part-III:Under the purview of this rule, the assets, liabilities, debts,

reserve and other provision of the listed companies are defined and the treatment of these terminologies should be compliance with the securities and exchange rules, 1987.

Meeting Rules, 1994:

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In exercise of the power conferred by section 25 of the Securities and Exchange Commission act, 1993 the commission should hold at least six meeting every year in regards to the matters protecting the interest of the investors.

Credit Rating Companies Rules, 1996:No issue of debt security, or public issue of shares

(including rights share) at a premium, shall be made by an issuer unless the issue is rated by a credit rating company and declaration about such rating is given in the offer document, prospectus or rights share offer document, as the case may be: Provided that the Commission may by general order which shall be notified in the official Gazette grant exemption, in the interest of the capital market, from any requirement of the rule.

commence business as a credit rating company shall be illegible for registration under these rules if it fulfils or complies with the following conditions or requirements, namely:-(a) that such company is incorporated as a public company under the Companies Act, 1994 (Act No. 18 of 1994).

Public Issue Rules, 1998:Any issuer or its representative violating any of the

provision of rules or furnishing false, incorrect, misleading information or suppressing any information that hampers the interest of the investors, the Securities and Exchange Commission may impose penalty as prescribed under the securities and exchange ordinance, 1969.

Right Issue Rules, 1998:To protect the investor’s interest, the companies offering

the right shares must make and offer the proper documents referring the financial year for which the dividend is to be declared, date of the dividend declared as per the provision of the right issue rules, 1998.

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Margin Rules, 1999:In exercise of the power conferred by section 33 of the

securities and exchange ordinance, 1969, SEC controls the members regarding the credit facilities to their approved clients for securities transactions subject to the margin account requirements of these rules. Contravention of any of the provisions of these rules shall be punishable under the provision of the securities and exchange ordinance, 1969 (XVII OF 1969), the rules and regulations made there under, and the bye-laws of the stock exchange as well.

Issue of Capital, Rules, 2001:A company (thereinafter referred to as the applicant)

intending to issue capital in Bangladesh shall make an application to the Securities and Exchange Commission for consent.

The application shall contain the following particulars, namely:-(a) Name of the company;(b) Address of the registered office;(c) Telephone number;(d) Fax number and e-mail number, if any;(e) Date of incorporation;f) Date of commencement of business;(g) authorized capital;(h) paid up capital;(i) amount of capital to be issued;(j) Face value of shares; and(k) Period within which capital to be issued.

The applicant whose application has been rejected by the Commission under rule 3(4) may apply to the Commission for review of its decision within thirty days from the date of such rejection, and the decision of the Commission thereon shall be final.

The applicant shall pay an amount of taka five thousand (nonrefundable) as application fee, along with the application, by way of pay order or demand draft issued in favor of the Commission.

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OVER-THE-COUNTER RULES, 2001:

The issuer of an unlisted or delisted security shall apply to the exchange, as designated by the Commission, through a stock dealer/ stock-broker in the form prescribed by the exchange

For availing the OTC facilities for buying or selling of such security on payment of prescribed fee, etc. to the exchange.

The exchange shall receive, in advance, the securities at OTC from the selling stock-dealer/stock-broker against issuance of an official receipt to him mentioning details of such security, including the selling price, commission or charges separately, for subsequent payment to the selling stock dealer/stockbroker after sale of the concerned securities by the exchange.

PUBLIC ISSUE RULES (Review), 2006:

Upon receiving the consent of the Securities and Exchange Commission to the issue of capital under this Rules, the abridged version of the prospectus, as approved by the Commission, shall be published by the issuer in four national daily newspapers (in two Bengali and two English), within the time specified in the letter of consent issued by the Commission. The full prospectus shall, however, be posted on website of the SEC, stock exchanges, issuer and the issue manager

RIGHTS ISSUE RULES (Review), 2006:

Conditions to be fulfilled prior to making rights issue-An issuer of a listed security may make rights issue by

issuing rights share offer document subject to compliance with the following.

Pricing and ratio of rights share – The issuer of a listed security making rights issue shall

determine the price of its rights share in consultation with the issue manager.

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Filing of the application for rights share offer – An application for issuing rights share along with offer

document shall be furnished to the Commission for approval within fifteen days of approval of such issue by the shareholders of the company in a general meeting.

Public announcement for rights issue-The issuer of a listed security making offer for rights issue

shall:-Announce two separate dates, for record date, one for shareholders decision regarding the proposed rights issue and the other for determination of entitlement of rights issue after the Commission accords approval.

Approval fee on rights share.– The issuer of a listed security shall deposit approval fee

with the Commission for the rights issue at 0.15% of the total offered amount of rights issue, including premium, if any, by a bank pay order or demand draft issued in favor of the Securities and Exchange Commission within seven working daysfrom the date of according said approval.

Subscription–Subscription shall be received through the banker to the

issue during the subscription period of not less than fifteen days and not more than thirty days.

Netting facilities Rules, 2007:

The Securities and Exchange Commission on 30 January

2008, in the in the Interest of investors and securities market,

rescinded its Directive No-SEC/SRMID/94-231/1356 dated 30

July 2007, which shall be effective from the trading day of 3

February 2008. The 30 July 2007 directive had suspended the

mechanism for adjustment of total buy with total sale of scrip’s.

Opening branch offices of brokers Rules, 2008:

The SEC has prepared a guideline in the interest of

investor and development f securities market which will be

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followed by Brokers to obtain approval of the Commission prior

to opening branch offices.

Maximum rate of margin loan Rules, 2008:

As per SEC Order dated February 03, 2008, the maximum

rate of margin loan for Merchant Banker (Portfolio Manager)

has been re-fixed @ 1:1 by SEC. Based on this, Merchant

Banker (Portfolio Manager) can provide loan to their clients up

to that ratio with effect from.10th February,2008 until further

Order. In case of considering market price of

portfolio/securities, the Instruction no. 7 of SEC (Merchant

Banker & portfolio Managers) Regulations, 1996 must be

ensured. The earlier order of SEC dated 25th November 2007

regarding this issue will be considered as amended.

Securities and exchange Commission regulations:

Merchant Banker and Portfolio Manager Regulations, 1995:

The merchant banker shall preserve books of accounts and other books and documents maintained for a period of twelve years. In this connection, no merchant banker or any of its directors, partners or managers or any officer oN their respective accounts or associates or relatives can enter into any transaction in securities of the company on the basis of unpublished price-sensitive information obtained by them during the course of nay professional assignment either form the customers or otherwise under the provision of merchant banker and portfolio manager regulation, 1995.

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Prohibition of Insider-trading Regulation, 1995:

Under the section 25 of the Securities and Exchange Commission act, 1993 (XV of 1993) transaction of any security by any insider on the basis of price-sensitive information is prohibited. If any person being a stock broker or stock dealer or authorized representative or any other intermediary licensed for dealing in securities contravenes the provision of this regulation, the Securities and Exchange Commission may cancel or suspend it license. The commission may also take different necessary actions according to the law in force against any person concerned failing to produce any document, books of accounts or any other information in accordance with the direction of the inquirer working for the commission.

Appeal Regulation, 1995:

Any person being any company, body incorporate, partnership firm of any other organization aggrieved by an order of a member or an officer of the commission may prefer an appeal to the commission under the Securities and Exchange Commission (Appeal) regulation, 1995.

Mutual Fund Regulation, 1997:

In exercise of the powers conferred by section 25 of the securities and exchange commission act, 1993 (Act No, 15 of 1993), the commission makes some regulations to protect the interest of the investor, as for example, a penalty of cancellation of registration of mutual fund may be imposed when indulges in manipulation of price rigging or any activity affecting securities markets and the investors interest as well. Action may also be taken against mutual funds when its financial position deteriorates to such an extent that the commission may consider that its continuance is not in the interest of the investors.

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Depository Regulation, 1999:

Under the purview of the depositories act, 1999, the Securities and Exchange Commission, by the depository’s regulations, 1999 may seek further document or information for the consideration of an application. If any document or information furnished to the commission by any depository is found to be incorrect or misleading in material particular after the grant of the registration certificate, the said certificate may be cancelled. If the commission finds it is not suitable to protect the interest of and helpful to capital market, it may reject the application mentioning the reasons thereof.

Self-Regulations:

The stock exchange (both DSE & CSE) regulate and monitor trading and all activities of broker/dealer and the listed firms as well for the benefit of the investors and for the safeguard of the financial system. The exchanges regulate themselves as part of combined effort involving the SEC itself and member firms. During a typical trading f=day the exchanges continuously monitor all market participants. They also monitor the performance of brokers, dealers and specialists in their responsibilities for maintaining a fair and orderly market on the stocks they are dealing. After the market crash in 1996, DSE has instituted several measures one of which is called “circuit-breaker” to reduce the market volatility and serve the investors best interest.

Bangladesh Association of Publicly Listed Companies (BAPLC):

BAPLC is a trade association formed by the public listed companies in the stock exchange to enhance the self-regulation of the securities industry. In collaboration with the

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commission it watches the matters relating to the interest of the investors and the capital market as well.For the better understanding of the market indicators, the DSE has established a new selective index of best 20 companies entitled “DSE-20” from January 2001 and CSE did the same thing with best 30 companies listed with it entitles “CSE-30” form January 2000.

Dhaka Stock Exchange

The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities 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.

The Necessity Of Establishing A Stock Exchange In The Then East Pakistan Was First Decided By The Government When, Early In 1952.It Was Learnt That The Calcutta Stock Exchange Had Prohibited The Transactions In Pakistani Shares And Securities. The Provincial Industrial Advisory Council Soon Thereafter Set Up An Organizing Committee For The Formation Of A Stock Exchange In East Pakistan. A Decisive Step Was Taken The Second Meeting Of The Organizing Committee Held On The 13th March ,1953.

It Was Also Decided That Membership Fee Was To Be Rs.2000 And Subscription Rate At 15 Per Month. The Exchange Was To Consist Of Not More Than 150 Members. A Meeting Of The Promoters Was Held At The Chamber On 03.09.1953 When It Was Decided To Appoint Orr Dignam & Co., Solicitors To Draw Up The Memorandum And Articles Of Association Of The Stock Exchange Based On The Rules Of Stock Exchange Existing In Other Countries And Taking Into Account Local Conditions.

The 8 Promoters Incorporated The Formation As The East Pakistan Stock Exchange Association Ltd. On 28.04.1954. As

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Public Company, on 23.06.1962 The Name Aws Revised To East Pakistan Stock Exchange Ltd. Again On 14.05.1964 The Name Of East Pakistan Stock Exchange Limited Was Changed To "Dhaka Stock Exchange Ltd."

On 1.10.1957 the stock exchange purchase a land measuring 8.75 Kattah at 9F Motijheel C/A from the Government and shifted the stock Exchange to its own location in 1959.

The DSE Acts, Rules and Regulations

Dhaka Stock Exchange rules:

Circuit Breaker Rules, 2004:

Since March 20, 2004 circuit breaker has been withdrawn

from ‘Z’ category shares have been widen. Share prices under

these categories are now allowed to fluctuate between 7.5%

and 20% depending on day’s market value per share. The

existing circuit breaker limits on A, B & G category shares are

as follows:

Up to Tk. 200 20% but not exceeding to

Tk. 35

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201 to Tk. 500 17.5% but not exceeding to

Tk. 75

501 to Tk. 1000 15% but not exceeding to Tk.125

1001 to Tk. 2000 12.5% but not exceeding to

Tk. 200

2001 to Tk 5000 10% but not exceeding to

Tk. 375

5001 & above 7.5% but not exceeding to

Tk. 600

Investors Portfolio account Rule, 2004:

Transaction of the foreign Portfolio Investors As per directive

of Securities and Exchange Commission dated 8th October 2002

all transactions of the foreign Portfolio Investors in the

secondary market are to be made either through portfolio

accounts opened with a portfolio Manager registered under the

Securities and Exchange Commission (Merchant Banker and

Portfolio Manager) Rules, 1996 or through non-resident

investors having accounts with a schedule Bank in Bangladesh

and Exchange Commission for providing custodian banking

services for investment in shares and securities.

Settlement and Clearing Period Rules, 2004:

For A, B and G category securities, the settlement and

clearing period have been further changed in the following

manner:

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For Settlement T+1= between broker/ dealer and clearing house

For Clearance T+3= between clearing house and broker/ dealer

Treasury bond Rules, 2005:

For the interest of the investors and securities market,

transactions of the Govt. Treasury Bonds started in the Dhaka

Stock Exchange on January 01, 2005 as per Directive of SEC.

The bondholders can receive coupon interest on the

government-approved securities on a half-yearly basis after

deduction of taxes as follows:

Name of the Securities Coupon rate

a) 5 years Bangladesh Govt. Treasury Bond 7.5% payable on half-yearly rest

b) 10 years Bangladesh Govt. Treasury Bond 8.5% payable on half-yearly rest

Settlement cycle for Z category companies changed Rule, 2006:

The settlement cycle for Z Category Company (as per the

decision of SEC) changed to T+3 and T+7 instead of existing

settlement cycle of T+4 and T+7, which came into effect on

December 17, 2006.

Inter-category Financial Adjusting Facilities Provided Rules, 2006:

According to a decision of SEC on December 5, 2006 inter-

category financial adjustment facilities will be provided in

respect of transactions in A, B, G and N category scraps in this

decision also allowed financial adjustment facility to B, G and N

categories also, in addition to “A”. Due to this decision any

investor can buy any securities under A, B, G and N categories

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against sale proceeds of any securities under those categories

in the same day with the effect from December 10, 2006. This

facility is allowed in the Public, Block and Odd Lot Market only

and Spot and Foreign Market will remain out this facility

Deferment of compliance of margin rules, 2006:

SEC has decided to keep in abeyance the Compliance of

Margin Rules 1999 by brokers/dealers. Due to the decision, the

stock brokers/dealers. Due to the decision, the stoke brokers

are now allowed to execute purchase or transaction of shares

on behalf of an investor without instant cash or pay order.

BO Account’s Annual Fee Rules, 2007:

The Securities and Exchange Commission (Depository Act,

1999 and Section-17) in a notification ordered all the

Beneficiary Owner (BO) Account holders to deposit Tk. 300 for

very account per year within a fixed time. On failure of

payment of the said amount of money the BO account will be

cancelled. To facilitate the fair flow of securities trading and to

encourage a completely fair ground for the real investors the

SEC under –took this Strategy.

Bank Statement containing particulars for BO Accounts Rules, 2007:

The SEC, in an order (Depository Act, 1999, Section -14)

instructed all to Submit Bank Statement Containing Applicant’s

name, Bank Account No, and also signature at the back of

photographs which must be similar to the signature he or she

gave at the time of opening the Bank Account. On failure of

providing Bank Statement following these terms and conditions

the BO Accounts will be closed after six months.

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Margin Rule, 2007:

The SEC, according to its (Merchant Bankers Rule and

Portfolio Manager ) Rules, 1996 and Section-36 (Direction-6,

(1), remixed the maximum use of 1:0,5 which come into effect

on November-26, 2007 and until further notice disbursable loan

meaning half of client’s capital (cash and security) may be

disbursed.

Transfer of IPO securities from Closed BO accounts Rules, 2008:

The commission receives requests from individual

investors and issuers on behalf of investors for to transfer of

IPO securities from the respective investors closed BO accounts

to New BO accounts. For this purpose the investors/issuers are

required to send applications to SEC attaching the copies of old

BO account set up reports and its closing reports, new BO

Account set up reports, IPO securities allotment letters and

other relevant papers. The commission examines the

consistency of information contained in the said documents in

according approval to transfer of securities. Henceforth, until

further order, the concerned issuers will examine the aforesaid

papers and after being satisfied the respective issuers will

approve transfer of IPO securities from closed BO accounts to

new BO accounts. In such cases no approval is required from

SEC.

Dhaka Stock Exchange Regulation:

DSE Investors Protection Fund Regulations, 1999:

It is expedient to frame regulations for establishing a fund for the protection of the investors of defaulting member of the

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DSE. In exercise of the powers conferred by section 34 of the securities and exchange ordinance, 1969 (Ord. XVII of 1969), the DSE makes, with the approval of the securities and exchange commission, the board of trustees of the fund to have the entire control over the administration and management of the fund and shall be vested with all the powers authorities and discretion necessary or expedient for that purpose in addition to any express powers conferred by these regulation.

DSE Automated Trading Regulations, 1999:

In exercise of the powers conferred by section 34 of the securities and exchange ordinance, 1969 (Ord. XVII of 1969), the DSE may regulate the market control parameters such as tick size, market lot, minimum block size, maximum block size, minimum order size, maximum order size, closing price minutes, closing price traders, circuit breaker, circuit filter, market protection percentage, index calculation frequency, etc. under intimation to SEC. however, the system shall automatically enforce the price limit regulation/orders, which shall reject any order beyond the price limit set under the price limit regulation/orders. Being empowered under this regulation the DSE may also regulate the net limit for a member. A member exceeding the limit shall be automatically suspended by the system under immediate intimation to SEC.

Member’s Margin Regulations, 2000:

The Securities and Exchange Commission has further

modified the regulation of Members Margin, 2000 as follows:

Regulation 3 has been substituted as the following-3. Free limit

up to Tk. one crore per trading day Regulation 4(3) has been

substituted as the following –

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Every member shall deposit the member’s margin with the

clearing house on the additional trade exposure at the following

rates:

A) Above Tk one crore @20%

B) Above Tk two crore @30%

C) Above Tk three crore @50%

D) Above Tk five crore @100%

Direct listing of public limited company, 2001:

Dhaka Stock Exchange Ltd. (Direct listing of shares of

public limited company) Regulation. 2001 has come into effect

from 9th October, 2001. For the first time in the history of

Bangladesh Capital Market, public limited companies will the

DSE. Companies having a paid-up capital of at least Taka three

core and operational performance for at least three years with

two years profit record, without having any accumulated loss in

its financial statement and having no record of annual general

meeting default will qualify to get listed with the DSE.

Pay off declared Dividend Regulation, 2004:

If ‘A’ or ‘B’ category company fails to pay off declared

dividend within the prescribed time limit its share shall be

placed in ‘Z’ category. On the other hand if a ‘Z’ category

company declares dividend its shares shall be placed in ‘A’ or

‘B’ category as the case may from the next day of SEC,

confirming paying off the declared dividend within the

prescribed time limits.

Direct Listing Regulation, 2005:

To facilitate the companies with good fundamental to offload a

part of its existing shares through capital market, SEC has

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approved direct listing regulation. Now interested and sound

companies can get listed on the bourses directly and enabling

them to sell their shares to investors directly without the

rigidity of floating shares through IPO. The requirements for

eligibility of a company to get listed directly are:

- shall have minimum paid up capital of Tk. 100.00

million

- shall have no accumulated loss

- shall be commercial operation for at least immediate

last five years

- Shall have profit in three years out of the immediate

last five completed accounting/financial years with

steady growth pattern.

- Is regular in holding Annual General Meeting (AGM).

Corporate Governance Guidelines Regulation, 2006:

SEC has launched corporate governance guidelines for the

listed companies on “comply or explain” basis aiming to ensure

corporate governance accountability and practices in

Bangladesh. This includes provisions, for the first time, to

constitute an audit committee and to appoint independent

directors in a listed company.

Sponsors or directors of Z-category companies Trading Regulation, 2008:

The Securities and Exchange Commission on 15 January,

2008 in a notification said in the interest of investor and

securities market, the sponsor or director of companies listed

on the stock exchanges and placed under 7 ere gory should be

barred from trading for implementing the Notification

No.SEC/CMRRCD/2001-14/Admin/03/06dated 1st August 2002,

published in Bangladesh Gazette on 7th August 2002, for tasty

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being. Now, therefore, with a view to facilitating the above, the

Securities and Exchange Commission, in exercise of the power

conferred by section 20A of the Securities and Exchange

Ordinance Stock Exchange to ensure that no sponsor or

director shares of those ‘Z’ category at Dhaka Stock Exchange

and Chittagong Stock Exchange to ensure that no sponsor or

director shares of those ‘Z’ Category companies, excluding

bank, insurance and financial institution, are transacted on the

stock exchanges or transferred outside the stock exchange in

any other from until further order.

The Share price movement Regulation, 2008:

The Securities and Exchanges Commission on 16 January

2008 directed the Dhaka Stock Exchange and Chittagong Stock

Exchange to make the following further amendment in the

existing “Guideline for Regulating the Share price Movement in

the Stock Exchanges Trading”, which Shall take effect from 17

January 2008, namely “The existing price limit prescribed for

A,B,G, and N-Category companies shall also be applicable for

‘Z’-category companies”

Chittagong Stock Exchange

Chittagong Stock Exchange (Short - Sale) Regulations, 2005

In exercise of the powers conferred by section 34 of the Securities and Exchange Ordinance, 1969 (Ordinance No. XVII of 1969), the Chittagong Stock Exchange Ltd. makes, with the

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prior approval of the Securities and Exchange Commission the following regulations, namely: -

1. Short title: - These regulations may be called the Chittagong Stock Exchange (Short-Sale) Regulations, 2005.

2. Definition :- (1) In these regulations, unless the context otherwise requires –

a) “ledger” means a record containing the details of all short-selling activities by a stock dealer or stock broker for its own account or for the account of its clients as required under these regulations;

b) “stock exchange” means the Chittagong Stock Exchange Ltd.

c) “short-selling” means the sale of a security which –

i) the seller does not own, or

ii) is consummated by the delivery of a security borrowed by or for the account of the seller;

(2) Words and expressions used herein and not defined, but defined in the Securities and Exchange Ordinance, 1969 (XVII of 1969), the Securities and Exchange Commission Act, 1993 (XV of 1993), the Rules and Regulations made thereunder shall have the same meanings respectively assigned to them in the said Ordinance, Act, Rules and Regulations.

3. Owning security :- A person shall be deemed to own a security only if –

a) he has title to the security; or

b) he has purchased the security; or

c) he has entered into an unconditional contract, as prescribed by the SEC legally binding on him to buy the security, even if the buyer does not yet have title to them; or

d) he has unconditional right or interest to or in the security; ore) he owns a security convertible into or exchangeable for the

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relevant security and has tendered such security for conversion or exchange or has issued irrevocable instructions to convert or exchange such security; or

f) he has an option to acquire the security and has exercised such option; or

g) he has rights or warrants to subscribe to the security and has exercised such rights or warrants.

4. Prohibition of short-selling :- (1) No stock dealer/stock broker can be engaged in short selling unless authorised by CSE.

No stock dealer or stock broker shall be allowed to engage in short-selling a security of a company that is not an eligible security for short sale as per the Guidelines for Securities Borrowing and Lending for Short-Selling of Securities Listed on the Chittagong Stock Exchange, and the said security which it does not own either for its own account or for the account of its client except as prescribed in these regulations.

Provided that a stock dealer or stock broker shall not short sell for its own account or the account of its clients unless the stock dealer or stock broker or the client, as the case may be, has a valid contract conforming the aspects/form that are included in the said Guidelines for Securities Borrowing and Lending to ensure delivery within the time stipulated by the clearing house of the stock exchange in terms of its Settlement of Stock Exchange Transactions Regulations, 2005:

Provided further that in the case of short-selling for the client’s account, the relevant contract to borrow the security shall be countersigned by the stock dealer or stock broker dealing on behalf of the selling client to stand as guarantor for its client to ensure timely delivery of the security sold short:

Provided further that no person shall make a short-sale of a security on the stock exchange below the price of the last sale of the security in the stock exchange.

(2) The Chief Executive Officer of the stock exchange or any officer of the stock exchange authorised by him for the purpose may, by notice in writing, restrict or prohibit a stock dealer or

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stock broker from short-selling any security, if the circumstances so warrant.

(3) The notice of such restriction or prohibition to the stock dealer or stock broker as mentioned in sub-regulation (2) above shall take effect immediately upon communication to or service on such stock dealer or stock broker and shall remain effective and in force until it is revoked or modified by the chief executive officer or by the officer of the stock exchange authorised by him for the purpose.

5. Manner of short-selling : - (1) Subject to the provisions of regulations 3 and 4, a stock dealer or stock broker may short-sell a security –

(a) for its own account; or

(b) for the account of its clients provided it knows or is informed in writing that an order to sell is a short-sale, and shall, when placing a short-selling order, indicate in such manner as the stock exchange concerned shall, from time to time, determine that the order is a short-selling order.

(2) On receipt of an order for the sale of a security, a stock dealer or stock broker shall enquire of the client whether at the time of placing the order such client owns the security offered for sale.

(3) A stock dealer or stock broker shall take all reasonable steps to ensure that the client’s disclosures pursuant to these regulations are accurate.

6. Maintenance of records, etc :- (1) A stock dealer or stock broker engaged in short-selling shall maintain a ledger as specified in Form-A, which shall be kept upto-date in respect of short selling activities carried out by it on its own account or for the account of its clients.

(2) No stock dealer or stock broker shall cause or allow an entry to be made in a ledger maintained under sub-regulation (1) which it knows or has reasonable grounds to believe to be false or misleading in any material respect.

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(3) A stock dealer or stock broker shall make the ledger maintained under sub-regulation (1) available for inspection to the stock exchange and the Commission upon the request of any of them and shall provide copies of such ledger, if requested by either of them.

(4) A stock dealer or stock broker is required to preserve the ledger maintained under sub-regulation (1) for a period of not less than five years after the date of execution of the short selling transactions to which they relate.

7. Contravention: - Contravention of any of the provisions of these regulations shall be punishable under the provision of the Securities and Exchange Ordinance, 1969 (XVII of 1969), Securities and Exchange Commission Act, 1993 (XV of 1993), the Rules and Regulations made thereunder, and the bye-laws of the stock exchange as well.

8. Power to impose restriction or grant exemption: - The Commission may, from time to time restrict or exempt any order or trade of any stock dealer or stock broker in respect of all or any of the provisions of these regulations.

9. Supersession of existing regulations:- These regulations supersede any other regulations relating to trading, clearance and settlement of transactions in force in the stock exchange, so far it relates to the short-sale of any listed security pursuant to these regulations:

Provided, however, that in case of short-sale of security which is under depository system, relevant provisions of the depository related laws, regulations and bye-laws shall be applicable.

Initiatives taken by DSE for market expansion (2008-09)

All the preparations have been taken to introduce Book-Building Method, scientific method of price discovery of shares, which will ensure fair prices of securities in the capital market. In the meantime, contract has also been

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signed with Dubai-based Info-tech Company for building software of Book-Building Method.

To expedite the process of automated trading through ensuring more transparency and accountability DSE has recently shifted its ICT section with more capacity building at new place 9/G, Motijheel C/A, Dhaka-1000.

ICT capacity has also been increased with the support of India-based Cambridge Solutions so that investors can do transactions uninterruptedly.

Speed has also been added with Automated Trading System of the country’s premier bourse in Bangladesh.

Steps are also underway to introduce On-line trading so that investors can have access to securities trading from across the world, which will also help the expansion of capital market in a broader dimension.

Plans are also underway to introduce brokerage houses in all the district level towns in Bangladesh.

To conduct all the activities of the country’s oldest and prime bourse DSE has recruited some highly qualified professionals and 40 highly brilliant executive officers to cope with the mission of expediting the execution of growing volume of works.

To reshape the overall activities and to revamp the infrastructure of DSE its authority has signed an agreement with a reputed organization named E-Zone, which has nearly completed their assigned job.

To expedite the overall activities for the sake of time-bound expansion of market DSE Board of Directors under the dynamic leadership of its President Md. Rakibur Rahman has met with the Honourable Prime Minister, Finance Minister, Law Minister, Commerce Minister, Industries Minister, Attorney General, Bangladesh Bank Governor, Securities and Exchange Commission Chairman and NBR Chairman to discuss the potential areas of improvement.

Many distinguished persons including the US Ambassador to Bangladesh, the British High Commissioner to Bangladesh, the Norwegian Ambassador to Bangladesh, the Indian High Commissioner to Bangladesh and the

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Economic Adviser to the Prime Minister Dr. Mashiur Rahman visited the Dhaka Stock Exchange in 2010 and they expressed satisfaction over the performance of DSE.

Training Programmes for investors, representatives of member houses and relevant stakeholders are also being arranged on regular basis.

To further enhance the capital market with broader width and dimension DSE declared vision 2013 (a five-year plan) and steps have also been taken to implement the Vision 2013.

DSE Automated Trading Platform TESA and MSA plus is modernized time to time.

With time passes DSE has also advanced more to cope with the increasing volume of activities. It has rented huge space at Rupali Sadan at Motijheel Area, Dhaka-1000, Bangladesh.

DSE has also decided to open Media and Call Centre to cater to the need for information, which will be disseminated among the investors and relevant stakeholders time to time.

With the objective of reducing time period of transaction settlement and to ensure more transparency and accountability DSE has been trying to establish Independent Settlement and Clearing Company.

Under the inevitable leadership of the present President Md. Rakibur Rahman there have been 19 Board Meetings. There are 21 committees in the DSE, apart from that there are many sub-committees, which are holding meetings on a regular basis to review the recent developments of the capital market.

An Investors’Awareness Programme has been held in London recently to attract the Non-Resident Bangladeshis to the capital market. Including DSE President, Board of Directors, Honorable Speaker of Bangladesh Jatiya Sangsad (National Parliament) and some other MPs also attended the programme in London, UK.

DSE has planned to arrange investors’ awareness programme in every district of the country.

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Plans have also been undertaken to arrange road show and investors’ awareness programme in the USA, Australia, Canada, Thailand and some other countries.

DSE has been putting all-out effort to bring dynamism and more speed in the activities of Research, Monitoring, Listing, Surveillance and other vital departments, which will directly contribute to the further time-bound expansion of the capital market.

Stock Exchanges of different countries have been being visited and experiences are utilised properly to the development of Bangladesh Capital Market.

To maintain reliably genuine speed of capital market activities OTC Market has been introduced on September 06, 2009 and securities of a total of 51 companies have been sent there for trading.

DSE has requested the concerned authority to simplify the investment procedure by NRB to the country’s capital market.

DSE plans to establish a media room for journalists so that they can collect stock market related news.

The present government has laid due importance on capital market in the national budget for 2009-10, it has also instructed the authorities to allow more mutual funds as mutual funds play an important role to stabilise the capital market.

To strengthen the capital market the Finance Minister empowered the Securities and Exchange Commission o

Bangladesh to issue licence for 15 more merchant banks (at present SEC can give permission upto 50 number of merchant banks, but 31 merchant banks are in operation).

DSE has signed agreement with some organisations and institutions to provide them with real time data about securities market trading which will further play significant role to expand the country’s capital market.

Steps have also been underway to bring equalisation in face value of securities.

Proposals of DSE for market expansion (2008-09)

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On January 13, 2010 the finance minister said that shares of 26 companies (government shares in those companies) will be off-loaded soon; some of them have been already listed (more shares of these companies will be off-loaded) and other companies will have to be listed anew. Though late it is a very good time-bound decision for further expansion of the country’s capital market. But to expedite the process of share off-loading right people, who understand the process of share off-loading, should be assigned for immediate off-loading of shares. In the past such types of decisions had been taken but those decisions have not been implemented.

To bring stability in the market more mutual funds should be off-loaded; when the market undergoes depression Mutual Fund Managers, who are equipped with professional knowledge and having expertise of current market scenario, will come up with fund and buy shares, which will bring stability and balance the market price. Normally professionally expert mutual fund managers will never buy shares when price level is very high. On the other hand, there is a wrong conception that if more mutual funds come then market will be overheated. Mutual funds come up with liquidity but it should be kept in mind that they will also float more units in proportionate to their buying of shares from the market. Mutual fund is itself a share; when more mutual funds will come it will tap up liquidity from the market and the professional market experts of funds will utilise the fund in an articulated way.

The Government should also take effective and fruitful measures to make the Book-Building Process more sophisticated to attract fundamentally sound companies to get listed with the bourses. Unnecessary intervention by any group or regulator at the time of determining indicative price may halt the process of fair price discovery.

For the sake of expected market development and desired level of growth in the capital market too much intervention and frequent regulation do not augur well

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rather well monitoring and appropriate form of surveillance system sound well for the time-bound development of the capital market.

Placement of shares by companies is a priority. When any company places shares through private placement (there should have lock-in) it instills the conception among the investors that shares of the concerned company have already been placed among the institutional investors. On the other hand, if all the shares (IPO amount) of a company (when paid-up capital is big) are floated in the secondary market then market may not absorb the whole portion resulting in negative trend in demand. If all the shares are not sold at fair or reasonable price then potential entrepreneurs will be dampened and ultimately it will demotivate the probable industrialists and entrepreneurs to get their securities listed with the bourse.

DSE authority has requested the government to raise fund from the country’s capital market for infrastructure development and implementation of development projects.

To bring balance between the demand and supply in capital market through increasing the supply of good shares DSE authority has been trying to pursue the government to off-load shares it has in different companies.

Capital Market is poised to supply fund worth of Tk 20 thousand crore for the development of Bangladesh power sector. If the government wants then capital market can provide the government with green field facility.

DSE has also recommended not to enlist companies having paid-up capital less than Tk 50 crore (including IPO amount) as it thinks that companies with less paid-up capital can destabilize the market.

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Thinking about the welfare of general investors DSE has recommended to preserve minimum 50 per cent of Mutual Funds in IPO for general investors.

Instructions have also been given to dematerialise shares by the end of the last year. On failure of doing so 24 companies of A category have been relegated to B category.

SEC has serious manpower shortage. With the present number of manpower the market regulator is not able to do its activities with growing volume of activities in the country’s capital market. SEC should be equipped with more professional manpower with separate pay scale.

Problems of Stock Markets in Bangladesh

The unexpected rise and fall in share prices mostly followed from the general confidence of the investors about political stability, euphoria of investment in shares, prospect of quick capital gains, a vacuum in respect of institutional presence in the share market, monopolistic dominance of member brokers, inefficiency of the SECS to cape with the developments, existence to Kerb market absence of proper application of circuit breaker etc. Delivery versus payment mechanism was used as one of the main vehicles of manipulation. Kerb market gave birth fake and forged share certificates. Although there are increasing trends in all the indicators, DSE, CSE are not free from problems, The problems of DSE, CSE may be summarized as under:

Suggestions to improve the activities of Stock Market

To introduce automated monitoring system that may control price manipulation, malpractices and inside trading.

To introduce full computerized system for settlement of transactions.

To force the listed companies to publish their annual reports with actual and proper information that can ensure the interests of investors.

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To control and abolish kerb market form premises of stock market.

To take remedial action against the issues of fake certificates.

The composite Quotation system(CQS) should be introduced and implemented that available the exchange specialist bid-ask quotes to the subscribers.

To make arrangement to set-up merchant banks, investment banks and floatation of more mutual funds particularly in the private sectors.

Banks, insurance companies and other financial institution should be encouraged deal in share business directly.

The brokers should not be allowed to deal in the Scripps on their own accounts.

The management of DSE and CSE should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms

The recent surge in the stock market

The Dhaka Stock Exchange Index was at a 10-year high in the 2007 year end (up 66 percent), which made it Asia's top performer after China. The steady investment atmosphere prevailing throughout 2007 is considered to be one of the main reasons behind this surge. Good return prospects, stable market growth, and uninterrupted trading as a result of political stability attracted foreign investors to local securities. In 2007, foreign investors bought shares worth $205.7 million, while the amount of selling was $78.6 million, according to a DSE statistic. According to the DSE, in 2007, net foreign or portfolio investment on the Dhaka Stock Exchange surged 8.3x to $129 million. The banking sector, followed by the power, pharmaceutical and cement sectors, received the most foreign investment.

The caretaker government has also attracted investors by pledging to sell state enterprises. The state-owned companies

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-- Jamuna Oil Company Ltd. and Meghna Petroleum Ltd. -- debuted in the bourses early this month. Some analysts think that the market had been undervalued before the surge, and the uphill trend, therefore, played the role of an upward correction of the market.

The P/E ratio now stands at 20x as compared to 14.1x for emerging markets. It seems sustainable if the planned big IPOs of a few SOEs and the top telecom companies take place. More such large issues are required, which can emerge out of the energy, infrastructure and public sectors.

Conclusion

To expedite the market development process, it may be a good idea to decide on certainmilestones and link them to the disbursement of Development Credit Support of the World Bank. The government is making good progress in other sectors, including monetary management, corporatization of public-sector banks and others through this linkage.

The missing link between the SEC, Bangladesh Bank, Bangladesh Telecom RegulatoryCommission and other regulatory bodies is now getting established. Individually, they were not serving each others' interests, and there was no effective coordination among them, hence the country was deprived of great initiatives. A dedicated financial market cell at the Ministry of Finance could be formed to coordinate with these regulators as well as other ministries.

In terms of creating market depth, more profitable state-owned-enterprises should be listed. The supply of securities can be increased if the SOEs are allowed to operate through the stockexchanges. Floatation of SOE scrips is expected to expand the market by couple of times. Corporatization of SOEs will bring in transparency as well as confidence on the government financial system.

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The Bangladesh capital market still has a long way to go. The recent measures taken by thetransitional government have already begun to positively impact the markets. If more investor-friendly policy reforms were to be implemented, the capital market will undoubtedly play critical role in leading Bangladesh towards being the next Asian tiger with growth comparable to India, Vietnam and the other most dynamic economies in the region.