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SUBMITTED BY Name
Mohammad Atikuer Rahman bhuyan Md.Mahmodul Hasan Rone Bibi Joynab Md.Ibrahim Srimangal Das Tajkia Sherefin
ID
08304013 08304034 08304083 08304083 08304110 08304132
Letter of Submission
Date: January 7, 2012
To
Dear Sir, We have great pleasure to submit you my industrial tour report title Role of Chittagong Stock Exchange for the economic development of Bangladesh. During preparation of this paper, I have tried my best to ensure completeness. We have put my best effort to overcome my shortcoming and prepare the report to the best of my ability. However, if any clarifications are required, I would be glad to provide them as best as we can.
Thanking you
Yours sincerely,
Name
Mohammad Atikuer Rahman bhuyan Md.Mahmodul Hasan Rone Bibi Joynab Md.Ibrahim Srimangal Das Tajkia Sherefin
ID
08304013 08304034 08304083 08304083 08304110 08304132
2 Role of Chittagong Stock Exchange for the economic development of Bangladesh
PREFACE
Stock market is an essential part of capital market. The economy of our country largely depends on a strong capital market. Contribution of any stock exchange generally leads to economic growth by increasing the funds to finance industry and other enterprise
The Industrial Tour is a program that is common for the BBA student. The program intends to provide practical training in handling of jobs as well as to integrate the knowledge of theories, formulas, frameworks and models with current management practices in business community. This paper titled Role of Chittagong Stock Exchange for the economic development of Bangladesh is conducted as a part of Industry Tour arranged by department of Finance And Banking, University of Chittagong. In this report I have tried to give an idea about Role of Chittagong Stock Exchange for the economic development of Bangladesh in our country.
This report is prepared on the basis of study and submitted in partial fulfillment of BBA course requirements of the department of Finance and Banking, University of Chittagong.
EXECUTIVE SUMMARY
This report concentrates on the Performance evaluation of the Chittagong Stock Exchange. From the very beginning of taking birth, this organization is playing an outstanding role for the betterment of the capital market in this country
Stock markets contribute to the development of economy through the development of businesses and Industries. It can perform will to meet financial needs of business enterprises on a continuous basis if there exist a congenial legal, administrative and infrastructural environment for boosting confidence of all stock market participants including investors. Stock market in Bangladesh has two exchange-CSE and DSE. The study has examined the performances of CSE on different important such as growth in listed companies and securities, market capitalization, sales volume, market shares ; changes in stock index, changes in share prices by employing both statistical and financial techniques. It has also tested the randomness of changes in share prices of some listed securities. It has identified some important problems such as political instability, lack of supply of good certificates, demand listed members, lack of awareness of investment, etc. to the development of stock market. The study has put especially of Chittagong stock exchange (CEG). The policy measures are promulgation of lows for activating dormant listed members, bringing good securities into the net, curbing fraudulent activities in the stock market, introduction of full-flagged corporate governance, and disclosure of financial information. These measures are for consideration of Government, policy markets, SEC, stock exchange and other concerned parties in other to develop the performance of stock market, especially of CSE.
ACKNOWLEDGEMENT
First of all gratitude goes to almighty Allah who blessed me to accomplish the industry tour report.
Assistant
Professor, Department of Marketing Studies and International Marketing, University of Chittagong. who sent us to the Chittagong Stock Exchange in lieu of visiting its various departments and modes of operating CSE. His assistance, instructions, advice, investigation were all along with me while working on the issue. My report has seen the face of success because of his sincere assistance as well as supervision..
CHAPTER ONE
1.1 INTRODUCTION
Stock market is considered to be a barometer of the Economy. The economic development of a country depends largely on the effective performance of stock market. The stock market augment the process of economic development though a number of ways: a) bringing together holders of surplus funds and users of such funds; b) offering a broad spectrum for investment and financing choices to both investors and issuers, c) drawing more institutions into investment, and e) reducing the dependence of industrial enterprises on non security market for capital. Thus stock market contributes to the development of economy through the development of businesses and industries.
Stock market can perform well to meet the continuous financial needs of business enterprises if exist a congenial environment for boosting confidence of both stock market operations and investors. The growth and development of stock market in a market economy largely depend upon the creation of enabling environment for boosting up investors confidence. Lassitier has identified five prime environment ingredients that contribute to the enhancement of investors confidence and in turn, healthy growth of stock market. .These are: a) stable political environment, b) investment sensitivity tax and regulation environment c) reliability flow of information d) liquidity and e)fair financial disclosure practice, codes of conduct and smooth trading guidelines
To examine and evaluate the growth of the issued capital and market capitalization of the securities during the period under study. To analyze the indicators of the development of CSE during under study. To highlight the performance of CSE on different parameters such as number of listed companies, number of listed securities, volume of trade, capitalization market, market share, and share price fluctuation etc. To identify the weakness with the stock market operation, especially of CSE. To suggest some sound policy measured for the improvement of the performance of CSE.
Analysis of data
The data thus collected have been tabulated first manually. Then they have been analyzed by employing techniques such as percentage for measuring the growth in listing of companies and securities in CSE; average, standard deviations and coefficient of correlation foamed r measuring financial & turnover performance of listed securities, ratio analysis for market capitalization & turnover, diagrammatic and graphical presentation for seeing the trend of CSE price index; variance & coefficient of variance for measuring the price volatility of some selected companies ,securities. It has also used the test of randomness of changes in share prices of sample listed
8 Role of Chittagong Stock Exchange for the economic development of Bangladesh
companies. Different calculations using the data made by the researchers themselves, average, ratios, percentage and necessary calculations have been done by using statistical methods. A number of different indicators over time have also been prepared
The study was confined in CSE & Internet Primary & secondary data were not available in the organization form Short Time: I had to conduct the whole survey alone in this very short time, which also hindered my study. There was shortage of adequate literature in the CSE Low facility of the Internet and personal computer.
Lacks of enough previous experience also limit my performance in conducting the study.
In spite of above limitations, I have tried with all of my efforts to know and find out the response pattern of the subject and consultation of relevant record and document. Data have reached a fairly acceptable degree of accuracy
9 Role of Chittagong Stock Exchange for the economic development of Bangladesh
CHAPTER TWO
1. Companies Act, 1994. 2. Securities and Exchange Commission Act, 1993. 3. Securities & Exchange commission Act, 1993 (Act repelling controller brokers) Regulations, 1994. 4. Chittagong Stock Exchange. a) By laws b) Listing Rules c) Memorandum of Association d) Articles of Association e) Settlement to Transaction Regulations.
In 1998 CSE had many new rules and regulations as well as amendments in the rules & regulations of Stock Exchanges, Issuers and in the overall capital market. Some major ones are as follows: 1. The National Parliament passed The Depository Act, 1999 on the 5the of April 1999. 2. SEC adopted public Issue Rules 1998 which was gazette on the 25th January 1999 and subsequently brought some amendments in this rule on the 28th April 1999. 3. SEC has approved the Merging Rules 1999 to facilitate proper administration of credit facilities extended by the brokers to their clients and to enhance liquidity in the exchange. 4. The cabinet on June 7th, 1999 approved the amendment to the Trust Act 1882 to facilitate the investment of 25% of person and insurance funds in the capital market. 5. SEC has extended the time limit for brokers/dealers to continue underwriting business form June 30 to December 31, 1999.
12 Role of Chittagong Stock Exchange for the economic development of Bangladesh
6. SEC amended the Securities & Exchange Rules 1987 with a view to removing the Counter party Identification facility form the trading of the Stock Exchange. 7. SEC amended the Settlement of Stock Exchange Transactions Regulations 1998 envisaging stern measures a gained defaulters for failing to deliver securities or make payment within stipulated time.
2.5 STRUCTURE
Ministry of Finance
The securities act 1920 Securities & Finance ordinance 1969 Securities & Exchange rule 1987 The SEC Act-1993
Company Act-1994
SEC
CDBL
CSE
Continuous trading session Closing session Close price trading session Post closing session Odd lot session
11.00 a.m. To 3.00 p. m 3.00 p.m. To 3.10 p. m 3.10 p. m To 3.30 p. m 3.30 p. m To 4.15 p. m 11.30 a. m To 2.30 p. m
Board of Directors
General Manager
Manager
Senior Manager
Officer
2.7 STRUCTURE OF THE STOCK EXCHANGE (CSE) General Body Board of Director CEO
Administrative Committee Finance Committee Human Resource Committee Trading Committee Technical & Development Committee Surveillance & Inspection Committee Clearing House Committee Default Committee Attribution Committee 16 Role of Chittagong Stock Exchange for the economic development of Bangladesh
CHAPTER THREE
17 Role of Chittagong Stock Exchange for the economic development of Bangladesh
suspension/reinstatement/expulsion, expulsion entails forfeiture or card, liabilities to subsist, disposal of forfeited card and proceeds thereof, authorized assistants, unauthorized assistants excluded from market, power of authorized assistants, register of authorized assistants, notice of authorization - termination & withdrawal, undertaking from the authorized assistants, liability of the employer to continue until notice, admission during food behavior, badges, penalty for improper use of badge, loss of badge, return of badge, members ceasing to do business, expelled members, report of violation of rules, sub-committees, chairman and member-secretary, removal/retirement of member, arbitration committee, dispute to be referred to arbitration, application for arbitration, appointment of arbitrators, disagreement between arbitrators, late claims barred, appeal to arbitration committee, award of committee final in certain cases, members interested not to attend, adjourned meetings etc are discussed in general rules and regulation of CSE.
iv) shall have profit in three years out of the immediate last five completed accounting/financial years with steady growth pattern; and v) is regular in holding annual general meeting. Legal Documents of Listing of Concerned Companies:i) The Company shall apply to the stock exchanges with application fee of Tk. 10,000/-(ten thousand) only, and shall simultaneously furnish a copy thereof, along with the copies of documents mentioned under sub regulation (ii), to the Securities and Exchange Commission (SEC). ii) The Company shall, among others, submit the following documents along with the application : (a) Memorandum of Association and Articles of Association (b) A brief profile of the company, including brief particulars of existing sponsor-directors of the company; (c) Certificate of incorporation and certificate of commencement of business (d) Audited financial statements for the last five years (e) Members/ shareholders list together with shareholding position (f) Return of allotment(s) filled with the Registrar of Joint Stock Companies and Firms (g) Existing material agreements including deed of mortgage (if any); (h) Status of loan including information concerning loan default, if any, of the company; (i) VAT and Tax identification numbers; (j) Due diligence certificate from the directors as per format prescribed by the Exchange; (k) No objection certificate from the lending bank(s) /financial institutions of the company, if any, where applicable;
19 Role of Chittagong Stock Exchange for the economic development of Bangladesh
(l)
Undertaking in the prescribed form as laid down in the listing regulations of the Exchange
to the effect that the company shall comply with the securities laws including requirements of the said listing regulations upon listing with the Exchange; (m) Relevant resolution(s) of the shareholders in the general meeting of the company and the
Boards resolution, if so authorized, for the purpose of listing with the Exchange; (n) Credit rating report issued by the credit rating company registered with the Commission with minimum investment grade of BBB; (o) (p) Information Document as per format prescribed by the Exchange; The shareholders resolution in respect of disposal of shares in accordance with the
regulation.
8. he has rights or warrants to subscribe to the security and has exercised such 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
for its own account; or 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.
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. A stock dealer or stock broker shall take all reasonable steps to ensure that the clients disclosures pursuant to these regulations are accurate.
All moneys forming part of the Fund shall be deposited into a bank account opened with any scheduled bank in the name of Chittagong Stock Exchange Investors Protection Fund.
All investments and banking accounts of the Fund shall be operated jointly by at lease two of the Trustees as decided by the Board of Trustees The Fund shall be used to satisfy the claims of the investors and expenses under
Suspension of book Building method The Securities and Exchange Commission postponed the book building method for initial public offering until further order. SEC/CMRRCD/2008/186/Admin dated January 20.2011.
Amends to the Securities and Exchange Commission (Stock Dealer, Stock Broker and Authorized Representative) Rules, 2000 The Securities and Exchange Commission (SEC) added new criteria to obtain license of stock broker or dealer. As per the new rule any company or statutory organization is not eligible for stock dealer stock broker registration certificates if more than fifty percent of its directors are members or associated with the sponsor or Sponsor Company.
Branch opening allowed only in divisional Cities: The commission suspended the approved to open the branch offices by stock brokers outsides divisional on October 20, 2010.
Initial Public offering Rule: Several changes have been made in the initial public offering (IPO) rukes undaer athe Book building method through SEC notification no. SEC/CMMRCD/2009-193/67/Admin/Dated November 14, 2010. The thrust Sectors (namely power and Gas infrastructure) companies with at least one year of commercial production and profits would now be eligible to raise funds under the book building method. Earlier minimum three years of commercial operation and two years profits were the required minimum qualification criteria. The eligible institutional investors who participate in the indicative price discovering process must compulsorily take part in the final bidding for price determination.
Issuance of Capital The Securities and Exchange Commission shorten the eligibility public flotation by companies having paid up capital of tk. 30 crore (thirty crore) only instead of tk 40 crore as set earlier, provided that the IPO portion should not be less than tk 12 crore but not less than 10% of their total paid up capital
Margin Ratio: Securities and Exchange Commission reduced the margin ratio once again in an effort to tame a heated market through SEC notification no. SEC/CMRRCD/2001-43/68 &
SEC/CMRRDCD/2001-43/69 dated November 21, 2010. The previous ratio for margin was 1:1 which set at 1:0.5. Credit providers will have to follow a net asset value (NAV) based method while giving loans to their clients or investors. The members of the stock exchange and the merchant ;bankers were also restricted to provide credit facility to the clients during the first 30 trading days of opening the clients account for and depositing clients own fund into such account for trading purpose.
Members margin: Securities and Exchange Commission on November 25, 2010 decided that members of the stock exchange would have to double their deposits with the stick exchange against any additional trade exposure from December 5, 2010. Under the new directive, a stockbroker or a stock exchange member will have to deposits 40% of the value of an additional trade value crosses BD:T1 crore after the free limit for BDT 5 crore. For up to trade value of BDT 8 crore, the SEC raised the rate to trade value of BDT 9 crore. The ratio is unchanged at 100%. However this directive of sec was suspended indefinitely on December 19, 2010 before application.
Margin Issues /the margin ratio for member and Merchant Bank had been increased affair from to 1: 0.5 to 1:1 through SEC notification Nos. SEC/CMRRCD/2001-43/74 & SEC/CMRRCD/2001-43/75 dated December 13, 2010.
Margin Issues: Securities and Exchange Commission (SEC) raised the margin loan ratio to 1:1.5 instead of 1:1 and suspended the net asset value based margin loan calculation system on December 19, 2010. That means from now on investors will get margin loan worth taka 150 from the brokerage houses and merchant banks.
CHAPTER FOUR
Now I try to discuss one by one, to realize the performance of CSE on Economic growth of the Bangladesh capital Market.
The comparative statement of CSE at the end of FY2008-09 and FY2009-10 is shown below:
Indicators
% Increase
Number of listed securities (include 245 mutual funds and debentures) Issued capital of all listed securities Market Capitalization of all (Tk. in crore) listed All Share (Tk. Pricein Index securities crore) Source: Chittagong Stock Exchange. 10,477.67 96,247.70 13,742.05
*All share price index is calculated on General Share Price Index (excluding Z group) by withdrawing weighted average method from 9 December, 2003.The index base was 1000 for CSE from the year 2000. Previously it was 100.
The number of securities (including mutual funds and debentures) listed with the CSE stood at 232 as of June 2010 which was 245 as of June 2009. By the end of June 2010, the issued capital of listed securities stood at Tk. 20,111.56 crore which is 46.35 percent higher than that of end June 2009. As of June 2010, market capitalization of securities reached Tk.2, 53,439.33 crore (36.6 percent of GDP) which is 163.32 percent higher than that of end June 2009 . General share price index of the CSE reached 18,116.05 as on June 2010, which was 10,477.67 on June 30, 2009. The trading operation in the Chittagong Stock Exchange since 1995 to June 2010 is shown in table 5.9 below:
Trading Operation in CSE for Economic Dvelopment Calendar Year/ MonthEnd 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 No. of Listed Securities 61 117 141 150 159 165 177 185 199 195 210 213 227 238 217 232 Initial Public Offering (IPO) Issued Capital Market Turnover Price Index* 409.43 1157.90 332.98 232.80 197.83
(In crore Tk.) (In crore Tk.) 1036.80 2413.90 1872.60 2276.14 2418.03 2508.09 2726.60 2965.27 3107.99 4196.76 4697.87 5551.93 6937.84 8917.39 12160.32 15512.49 20677.4 14704.30 5283.23 4138.25 3654.24 5776.55 5636.35 6046.77 8531.23 21501.08 21994.28 27051.07 61258.00 80768.40 147080.70 224176.8
16 19 6 9 3 9 9 10 3 16 6 13 18 7
1755.13 3597.70 1404.27 3378.68 1589.31 3724.39 5259.03 7657.06 9980.37 8692.75 16256.26 13181.37 21711.2 23449.0
Source: Chittagong Stock Exchange. *All share price index is calculated on weighted average method from 24 November, 2001.The index base was 1000 for CSE From the year 2000. Previously it was 100.
28 Role of Chittagong Stock Exchange for the economic development of Bangladesh
*All share price index is calculated on General Share Price Index (excluding Z group) by withdrawing weighted average Method from 9 December, 2003. The index base was 1000 for CSE from the year 2000. Previously it was 100
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 249 260 267 256 286 310 350 412 415 437 445
Number of Companies listed Dhaka Stock Exchange Chittagong Stock Exchange 177 185 196 198 210 213 227 238 217 232 240
Source: Bangladesh Economic Review, Chittagong Stock Exchange, Dhaka Stock Exchange and Securities and Exchange Commission (Annual Report and quarterly review), various issues.
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010
Descriptive Statistics of Market capitalization to GDP Mean Standard deviation Skewness Minimum Maximum 20.71 16.78 1.30 4.82 54.61
Market capitalization ratio equals the value of listed shares divided by GDP. In terms of economic significance, the assumption behind market capitalization is that market size is positively correlated with the ability to mobilize capital and diversify risk on an economy wide basis (Agarwal 2001). La Porter et al. (1997, 1998) used the market capitalization to GDP ratio as an indicator of market development. Above table shows the size of Bangladesh stock market. Market Capitalization ratio has i n c r e a s e d f r o m 1 4 . 2 8 % i n 2 0 0 6 t o 54.61% in
30 Role of Chittagong Stock Exchange for the economic development of Bangladesh
2009. Then the stock market experienced a sudden growth in market capitalization in the next two years, 28.92% in 2007 and nearly 31.53% in 2008.
Year
Market Capitalization GDP (million taka) (million take) 60,468 85,312 215,011 220,353 267,501 612,479 807,875 1,470,807 2,983,929 12.99 13.24 2,732,010 3,005,800 3,329,730 3,707,070 4,157,280 4,724,770 5,458,220 6,147,950 6,905,710p
Market Capitalization to GDP (%) 2.15 2.8 6.07 5.61 6.44 12.00 14.80 23.92 43.20
2002 2003 2004 2005 2006 2007 2008 2009 2010 Mean SD
Year
Ratio of Turnover to Market Capitalization 22.46 7.88 6.89 6.32 6.18 8.53 12.47 11.05
2002 2003 2004 2005 2006 2007 2008 2009 Mean SD Coefficient of Skewness
60,468 85,312 215,011 220,353 267,501 613,175 807,875 1470,807 10.22 5.43 1.97
CHAPTER FIVE
1. At the time of initial public offering Share pricing during the IPOs are 3 categories: a. At per b. At premium c. At discount.
A. At per: Normally share is issued at per basis. Here face value and issue price both are same. Face value of a share depends on the no of shares. B. At premium: If share is issued above face value. C. At discount: If share is issued below the face value
Continuous Trading Index: Calculated considering the trade price of scripts and it changed with respect of the share price changed. Close index: Calculated the basis of close price of the shares. It is treated as the open index for the next day.
Before starting on line trading at the Chittagong Stock Exchange trading were conducted through Cry out system. Under this system members and there authorized assistant of the Stock Exchange who have license to trade from the Securities and Exchange Commission would come to the Stock Exchange Floor and participate in trading. But there were a number of shortcomings of this trading system.
Automated Trading System: To fulfill the need of Chittagong Stock Exchange a vector (Standard product of CMC Ltd.) was customized. The program is window based and user friendly. The system has three modules(1) Brokers Workstation (BWS) (2) Market Operation (MOP) (3) Surveillance. The brokers workstation module is available from each brokers office. This module provides the facility to view the market scenario and input order. This department handles the market operation is exclusively for the trading department of the Exchanges issues like disclosure and circuit breaker. The surveillance department of the exchange will use the third module. This module facilitates on-line surveillance adding new dimensions to the issue of overseeing the market in this country.
Strength: The nationwide connectivity and recently the worldwide connectivity through the Internet is the superiority over the other stock exchange of Bangladesh. Efficient management and effective Corporate Governance gives CSE an edge over the competitor. Weakness: CSEs operation is less effective due to the lack of professional attitude of the members, lack of Dhaka based member, non-availability of the dual listing facilities, small number of active members, regional image problem, etc. Opportunity: With the growth of Internet users and governments interest in the capital market ushers new opportunity for CSE. As a member of SAFE, CSE will get the opportunity to trade regional (Sough Asian) shares in future. Threat: New regulations of the different regulatory bodies (e.g. Government, SEC, Bangladesh Bank, etc.) change the trade volume in the exchange. Besides connectivity to the Internet also increased the security concern of the network.
CHAPTER SIX
CHAPTER SEVEN
7.2 Conclusion
CSE has been found to play a pioneering role in boosting the confidence of all participates including investors. It has implemented different revolutionary programs for developing a congenial regulatory and administrative environment in its operations. Of course, it has exerted influence in the entire stock market of the country. The study has identified different impediment of development of stock market; and also suggested some policy measures for improvement of the operational efficiency of CSE. The suggestions are expected to develop the stock market of the country as well. The analysis of the three measures of CSE development indicators reveals that CSE shows a smooth and steady growth over the decade under study but low market capitalization as a percentage of GDP is reflecting shallowness as well as the lack of depth of the market. This sort of market is always subject to manipulation.
References
1. "Foreign Investment in Asian Stock Markets" ESCAP, Monograph No. 6,1996; 2. Ahmed, M. Farid, Khan, Harunur Rashid and Islam Md. Sadiqul, 'Industrial Finance Through 'Capital Market in Bangladesh; A study on the Demand Side'. The Asia Foundation and Bureau of Economic Research, Dhaka University; 3. Annual Report and monthly Review of DSE and CSE, various issues; SEC Quarterly Review and Annual Report, various issues. 4. Annual Report of Bangladesh Bank, Various issues. 5. Annual reports of 2010, 2009.2008,2007,2006,2005,2004,2003,2002 of Chittagong Stock Exchange. 6. Bangladesh Capital Market" A publication of Chittagong Stock Exchange March-2001 7. Bangladesh Economic Review, 1999. 8. BIBM Bulletin, Vol.2 No. 3, May-June, 1999. 9. CSE Bazar Porikroma" -May 2007. 10. Levin, Ross "Stock Markets: "A Spur to Economic growth", Finance & Development, March, 1996. 11. MCCI, Chamber News, Various issues 12. Portfolio" of Chittagong Stock Exchange (Jan-Mar; 2005). 13. Rouf, M.A and Nabi, Md Golzare "Stock Market in Bangladesh Challenges Ahead" "Thoughts on Economics", July December 1998. 14. Share-e- Binioge" A publication of Chittagong Stock Exchange. 15. The Financial Express, Various issues.