Capital Market in Bangladesh

Submitted to:
Tazrina Farah
Assistant Professor,
Faculty of Business Studies
University of Dhaka.
April 02, 2017

Prepared by
Group # 02
Evening MBA Program
Batch # 33

Capital Market in Bangladesh 2

 Financial Institutions and Market
(F - 509)

Report
On

Capital Market in Bangladesh

Group 02: Members

Sl. No Name ID
1
2
3 Mohammad Amirul Islam 33003
4
5
6

University of Dhaka
Date of Submission: 02 April, 2017

Capital Market in Bangladesh 3

02 April, 2017

Tazrina Farah, Assistant Professor

Course Teacher
Department of Finance
EMBA Program
University of Dhaka.

Sub: Submission of Report.

Dear madam,

We would like to submit this report on Capital Market in Bangladesh. Thank you very
much for providing us an opportunity to work in such an interesting topic. We have
enjoyed working on it. We have tried our level best to make it a good one.

This project enhanced our practical knowledge in a greater extent and we would like to
thank you for allowing us to prepare a report on such a successful venture.

Sincerely yours

(Name Please)

On Behalf of the members of Group #02, Batch#33

Capital Market in Bangladesh 4

 Acknowledgement

At first we would like to express our gratefulness to the almighty Allah for being strength to
preparing the report successfully.

We would like to give special thanks to Tazrina Farah, Assistant Professor, Department of
Finance, University of Dhaka, for her guideline which has enabled us to form such a report on
Capital Market in Bangladesh.

Capital Market in Bangladesh 5

 Table of Contents

INTRODUCTION..8
1.1 Origin of Study..........................................................................................9
1.2 Objectives of the Report............................................................................9
1.3 Methodology...........................................................................................10
1.4 Literature Review....................................................................................10
1.5 Limitations..............................................................................................11

CAPITAL MARKET IN BANGLADESH........................................................................12

2.1 Company Background.............................................................................13
2.2 Function..................................................................................................13
2.3 Classification of Companies..........14
2.4 Importance of the Capital Market............................................................14
2.5 Structure of the Capital Market...............................................................16
2.6 Bangladesh Stock Market...................................................................16
2.7 DSE and CSE..........................................................................................17
2.8 Main Board DSE.....................................................................................19
2.9 Sectoral Performance DSE......................................................................20

STATUS OF CAPITAL MARKET....................................................................................21

3.1 Brief History...........................................................................................22
3.2 Present Context.......................................................................................22
3.2.1 Bond Market in Bangladesh...........................................................22
3.2.2 Corporate Debt Market in Bangladesh...........................................26
3.2.3 Govt. Debt Market in Bangladesh..................................................27
3.2.4 Secondary Market of Govt. Securities...........................................28

Capital Market in Bangladesh 6

 COMPARISON ............................................................................................................30
4.1 Status of Bond Market.............................................................................31
4.2.1 Comparison with South-Asian Countries................................................32
4.2.2 Comparison with US Capital Market.......................................................32
4.2.3 Some Graphical Representation .............................................................34

FINDINGS, RECOMMENDATION CONCLUSION.....................................................36

5.1 Findings..................................................................................................37
5.2 Recommendations..................................................................................39
5.3 Concluding Remarks...............................................................................39

BIBLIOGRAPHY ............................................................................................................40

Capital Market in Bangladesh 7

 CHAPTER 1
Introduction
1.1 Origin of Study
1.2 Objectives of the Report
1.3 Methodology
1.4 Literature Review
1.5 Limitations

Capital Market in Bangladesh 8

 Chapter

1
Introduction
1.1 Origin of the Study:
Capital Market mainly refers to the Stock and Share market of the country. When banking
system cannot totally meet up the need for funds to the market economy, capital market stands
up to supplement it. Companies and the government can raise funds for long-term investments
via the capital market. The capital market includes the stock market, the bond market, and the
primary market. Securities trading on organized cap-ital markets are monitored by the
government; new issues are approved by authorities of financial supervision and monitored by
participating banks. Thus, organized capital markets are able to guarantee sound investment
opportunities. This paper reveals the various aspects of the Capital Market in Bangladesh.

1.1Objectives of the Report:

Capital market, being an essential element of todays economy, demands an intensive and special
attention. The objective of this study is to look into every aspect of Bangladesh capital market
and identify its various pros and cons along with some recommendations to overcome the
existing problems.

The specific objectives of this study are:

To give an overall idea about the capital market, its structures, functions, importance, etc.
To identify the current situations of our capital market of Bangladesh.
To compare the relative conditions of Bangladesh capital market to other countries of the
world.
To sort out the problems associated with our capital market. To suggest some practicable
solutions to these problems.

Capital Market in Bangladesh 9

1.2 Methodology:
Secondary data and information were used in preparing this seminar paper, and these were
collected through teamwork by adopting the following processes:
Visiting in person, the following organizations and respective key personnel:
Dhaka Stock Exchange (DSE)
Dhaka Chamber of Commerce
(DCC) Bangladesh Bank (BB)
Monetary Policy Department (MPD), BB
Consulting books from different libraries of:
Bangladesh Institute of Development Studies
(BIDS) Dhaka Chamber of Commerce (DCC)
Bangladesh Bank (BB)
Other Books

1.3Literature review
Keeping the objectives in mind of the present study, we had reviewed the existing literatures.
The Capital Market Development in Bangladesh: problems and prospects (Mah-mood Osman
Imam, October 5, 2000), Capital Market: An Overview (Md. Hasan Imam, 2005), An Overview
of Bangladesh Capital Market (AZM Nazimuddin, 2007), Emerging Stock market and the
Economy: The Case of Bangladesh (Ahmed, M. Farid, 2000), Equity Market Performance in
Bangladesh: An Evaluation Savings and Development (Ahmed. M.Farid, 1998), The Stock
market and the Economy: The Indian Experience (Mookerjee. R., R., 1981), Foreign Portfolio
Investment: Return. Growth, Determinants and Monitoring - A Critical Analysis (Nafisa H.,
1998), Financial deepening in Economic Development (Shaw. E., 1973), Fostering Investor
Confidence in the Asian and Pacific Capital Markets (Tarumizu, K., 1993). Dhaka Stock
Exchange Monthly Review, (September, 2011), Financial Markets and Institutions (Jeff Madura,
2008) are some of the studies that helped us.
However, although these studies offered various insights into the dynamics of the cur-rent capital
market of Bangladesh, their extent of point of discussion are different and reviewed from
different aspects. In this paper we have tried to compile and explain all the relevant information
to make the paper successful.

Capital Market in Bangladesh 10

 1.4Limitations of the study

While conducting the study, we were confronted with the following limitations:
There was a little scope for research on this crucial subject as all the data was secondary
and no way to collect primary data was available.

Lack of a wider coverage due to time constraint. We did not have much time to visit all
the relevant places and meet respective personnel.

Only secondary data was used, but there is no alternative of primary data to en-sure the accuracy
and effectiveness of the study.

Capital Market in Bangladesh 11

 CHAPTER 2
Capital Market in Bangladesh

2.1 Definition
2.2 Function
2.3 Classification of Companies
2.4 Importance of the Capital Market
2.5 Structure of the Capital Market
2.6 Bangladesh Stock Market
2.7 DSE and CSE
2.8 Main Board DSE
2.9 Sectoral Performance DSE

Capital Market in Bangladesh 12

 Chapter

2
Capital Market in Bangladesh

2.1Definition
Capital market can be termed as the engine of raising capital, which accelerates industrialization
and the process of privatization. In other words, capital market means the share and stock
markets of the country. It is a market for long term fund. With the emergence of the need for
infrastructural development projects, for setting up of new industries for entrepreneurial
attempts-now there are more frequent needs of funds.
Participants in the capital markets are many. They include the commercial banks, saving and loan
associations, credit unions, mutual saving banks, finance houses, finance companies, merchant
bankers, discount houses, venture capital companies, leasing companies, investment banks &
companies, investment clubs, pension funds, stock ex-changes, security companies, underwriters,
portfolio-managers, and insurance companies.

2.2Functions
The functioning of an efficient capital market may ensure smooth floatation of funds from the
savers to the investors. When banking system cannot meet up the total need for funds to the
market economy, capital market stands up to supplement. To put it in a single sentence, we can
therefore say that the increased need for funds in the business sector has created an immense
need for an effective and efficient capital market. It facilitates an efficient transfer of resources
from savers to investors and becomes conduits for channeling investment funds from investors to
borrowers. The capital market is required to meet at least two basic requirements:
(a) it should support industrialization through savings mobilization, investment fund allocation
and maturity transformation and (b) it must be safe and efficient in discharging the aforesaid
function. It has two segments, namely, securities segments and non-securities segments.

Capital Market in Bangladesh 13

2.3 Classification of companies

The SEC classified firms in terms of A, B, G, N and Z categories that had not only guided retail
investors to know weak shares but also helped reducing netting and gambling done by a few
hidden consortia.

A Category Companies: Companies which are regular in holding the Annual General
Meetings (AGM) and have declared dividend at the rate of 10 percent or more in a
calendar year. (Mutual fund, debentures and bonds are being traded in this category).

B Category Companies: Companies which are regular in holding the AGM but have
failed to declare dividend at least at the rate of 10 percent in a calendar year.

G Category Companies: Greenfield companies.

N Category Companies: All newly listed companies except Greenfield companies will
be placed in this category and their settlement system would be like B-Category
companies.

Z Category Companies: Companies which have failed to hold the AGM or failed to
declare any dividend or which are not in operation continuously for more than six months
or whose accumulated loss after adjustment of revenue reserve, if any is negative and
exceeded its paid up capital.

2.4Importance of Capital Market in the economy

The capital market is the market for long-term loans and equity capital. Developing countries in
fact, view capital market as the engine for future growth through mobilizing of surplus fund to
the deficit group. An efficient capital market may perform as an alternative to many other
financing sources as being the least cost capital source. Especially in a country like ours, where
savings is minimal, and capital market can no wonder be a lucrative source of finance.

Capital Market in Bangladesh 14

The securities market provides a linkage between the savings and the preferred in-vestment
across the business entities and other economic units, specially the general households that in
aggregate form the surplus savings units. It offers alternative in-vestment windows to the surplus
savings units by mobilizing their savings and channelizes them through securities into optimal
destinations. The stock market enables all individuals, irrespective of their means, to share the
increased wealth provided by competitive enterprises. Moreover, the stock market also provides
a market system for purchase and sale of listed securities and thereby ensures liquidity
(transferability of securities), which is the basis for the joint stock enterprise system. (The
existence of the stock market makes it possible to satisfy simultaneously the needs of the firms
for capital and of investors for liquidity.) Especially at times when the banking sector of the
country is facing the challenge of bringing down the advance-deposit ratio to sustainable level,
the economy of the country is unfolding newer horizon of opportunities. Due to over-exposure
level of the financial system the securities market could play a very positive role, had there been
no market debacle. Due to the last market crash and follow through events, it will be difficult to
utilize the primary market to raise significant volume of funds. Thus the greatest economic
importance of securities market at this point can be understood from the opportunities being lost.
Bangladesh having its target to become a middle income country must have significant level of
rise in investment, which at the present state of banking system cannot be met. The securities
market could play the key role in meeting these huge investment demands if the secondary
market would remain stable.

The capital market also helps increase savings and investment, which are essential for economic
development. An equity market, by allowing diversification across a variety of assets, helps
reduce the risk the investors must bear, thus reducing the cost of capital, which in turn spurs
investment and economic growth. However, volatility and market efficiency are two important
features which will ultimately determine the effectiveness of the stock market in economic
development. If a stock market is inefficient due to insufficient informational supply, investors
face difficulty in choosing the optimal investment as information on corporate performance is
slow or less available. The resulting uncertainty may induce investors either to withdraw from the
market until this uncertainty is resolved or discourage them to invest funds for long term.
Moreover, if investors are not rewarded for taking on higher risk by investing in the stock market,

Capital Market in Bangladesh 15

or if excess volatility weakens investors confidence, they will not invest their savings in the
stock market, and hence deter economic growth. The emerging stock markets offer an
opportunity to examine the evolution of stock return distributions and stochastic processes in
response to economic and political changes in these emerging economies.

2.5 Structure of the Capital Market in Bangladesh

Bangladesh capital market is one of the smallest in Asia but within the south Asian re-gion, it is
the third largest one. It has two full-fledged automated stock exchanges namely Dhaka Stock
Exchange (DSE), Chittagong Stock Exchange (CSE) and an OTC exchange operated by CSE. It
also consists of a dedicated regulator, the Security Exchange commission (SEC), since, it
implements rules and regulations, monitors their implications to operate and develop the capital.
It consists of Central Depository Bangladesh Limited (CDBL), the only Central Depository in
Bangladesh that provides facilities for the settlement of transactions of dematerialized securities
in CSE market and DSE.

2.6 Bangladesh Stock Market

Amid all the formidable obstacles, our countrys securities market has been gaining momentum.
Even in the backdrop of Global Financial Crisis 2008 when the stock markets in almost all the
developed and developing countries crashed and Governments of those countries spent
thousands of dollars to rescue the markets. Both depth and dimension in Bangladesh capital
market has been becoming gradually strong and securities market registered significant growth
at the initial stage and later market fell a little bit. The reason is might be that the amount of
foreign portfolio in Bangladesh securities market is more or less only two percent. But lack of
supply of fundamentally sound shares has been causing overheating situation and circumstance
like overpricing has been a common phenomenon here in recent times. Transaction has risen
from a daily Tk. of 250Crore two years ago to Tk. 2,500crore now and DSE General Index has
risen to record 8,918 from 2,400 two years back. But demand and supply should match at a
certain point to the tune of bringing time-bound balance in the securities market.

Capital Market in Bangladesh 16

2.7 DSE and CSE: core capital markets of the country

Dhaka Share Market consists of the Dhaka Stock Exchange or DSE, the main share market of
Bangladesh. Dhaka Share Market is s till at its infant stage and has to walk a long way for
coming into the radar of the Global Financial Market. The Chittagong Stock Exchange (CSE)
began its journey in10th October of 1995 from Chittagong City through the cry-out trading
system with the promise to create a state-of- the art bourse in the country.
On April 28, 1954 the DSE was first incorporated as the East Pakistan Stock Exchange
Association Limited. However, formal trading began in 1956 with 196 securities listed on the
DSE with a total paid up capital of about Taka 4 billion. On June 23, 1962 it was renamed as
Dhaka Stock Exchange (DSE) Limited. After 1971, the trading activities of the Stock Exchange
remained suppressed until 1976 due to the liberation war and the economic policy pursued by the
then government. The trading activities resumed in 1976 with only 9 companies listed having a
paid up capital of Taka 137.52 million on the stock exchange. As of 30th June, 1999 there were
230 Securities listed on the DSE with a market capitalization of Taka 50,748 million.
The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities
are regulated by its Articles of Association and its own rules, regulations, and by-laws along with
the Securities and Exchange Ordinance, 1969; the Companies Act,1994; and the Securities and
Exchange Commission Act, 1993 (DSE, 1999).
Trading is done through automated on-line system every day except Friday and other
government holidays. There are four markets in the system: (1) Public Market: Only trading of
market lot share is done here through automatic matching. (2) Spot Market: Spot transactions are
done here through automatic matching which must be settled within 24 hours. (3) Block Market:
A place where bulk quantities of shares are traded through pick and fill basis. (4) Odd Lot
Market: Odd lot scripts are trade d here based on pick and fill basis. All transactions in public
market of a day, after netting, are settled and cleared through the DS E Clearing House due on 3 rd
and 5th working day respectively, calculated from date of trading. Members shall be allowed to
carry out transaction of foreign buyers and/or seller involving a custodian bank to be settled
directly between the member through the custodian bank within the fifth day subsequent to the
trading day, in respect of the transactions carried out on each trading day with intimation to the
clearing house.

Capital Market in Bangladesh 17

The total number of tradable securities increased by 1.97 % but the issued capital of all listed
securities declined by 5% during this period. However, both total turnover of securities and total
traded amount of securities has increased enormously compared to that of the previous year. The
total Market Capitalization of all listed Securities in the DSE amounted to US$ 1046.36 million
in 1999 compared to US$ 1283.79 million in 1998 representing a decline in market capitalization
by 22%. The Market Capitalization declined during the period of 1998-99 due to: i) listing of
lesser number of new Issues, ii) absence of rights and bonus issues, and iii) impact of decrease in
all share price index (SEC, 1999). The all share price index of the DSE declined from 676.47 to
546.79 during this period. Special incentives are provided to encourage nonresident
Bangladeshis to invest in the capital market. Moreover, they can buy newly issued
shares/debentures of Bangladeshi companies and can maintain foreign currency deposits (styled
as NFCD account) in special accounts for up to five years. A quota of 10% reserved for
nonresident Bangladeshis in primary shares (IPO) has also been initiated.

Capital Market in Bangladesh 18

2.8 Main Board DSE as on October, 2016
Table 1: Total capital exchange of DSE in October 2016:
DSE Main Board October 2016
Total no of listed:
Securities 294
Companies 34
Mutual Funds 8
Debentures 221
Treasury Bonds 2
Corporate Bonds 0

Total no of Shares/Certificates of all listed: No. in mn.

Securities 57,849
Companies 53,094
Mutual Funds 4742.92
Debentures 0.49
Gov.-T Bonds 5.49
Corporate Bonds 5.951079

Total issued Capital of all listed: Figure Tk. In mn.

Securities 1,134,490
Companies 532,164
Mutual Funds 47,429
Debentures 354
Gov.-T Bonds 548,592
Corporate Bonds 5,951

Total Market Capitalization of all listed: Figure Tk. In.mn.

Securities 3,214,669
Companies 2,629,559
Mutual Funds 29,963
Debentures 576
Gov.-T Bonds 548,592
Corporate Bonds 5,979

2.9 Sectoral Performance:

DSE Sectoral Performance October 2016
Sector Market Capitalization Tk. in mn Turnover Tk. in mn
As on Oct-16 As on Sep-16 % of As on As on Sep- % of
Total Oct-16 16 Total
M. Turnov
Cap er
Financial Sector
Banks 439,145.42 441,835.84 16.48 11,848.35 9,354.99 11.22
Financial Institutions 142,337.10 153,209.71 5.34 8,134.06 8,119.31 7.70

Capital Market in Bangladesh 19

Insurance 74,618.26 74,817.39 2.80 3,377.64 1,781.03 3.20
Total 656,100.78 669,862.95 24.61 23,360.06 19,255.33 22.12
Manufacturing 228,601.49 226,269.63 8.58 4,641.43 3,785.76 4.40
Food & Allied Product
Pharmaceuticals & 416,227.57 426,837.68 15.62 9,953.68 11,115.14 9.43
Chemicals
Textile 86,069.13 86,986.92 3.23 12,620.41 7,616.36 11.95
Engineering 155,963.11 172,315.53 5.85 15,853.21 14,863.83 15.01
Ceramic 22,761.52 24,047.52 0.85 981.10 651.14 0.93
Tannery 26,781.90 22,646.27 1.00 2,339.72 746.10 2.22
Paper & Printing 1,364.80 1,625.47 0.05 334.05 76.38 0.32
Jute 1,042.06 1,054.61 0.04 356.31 234.84 0.34
Cement 144,922.08 151,292.06 5.44 3,179.07 3,468.70 3.01
Total 1,083,733.6 1,113,075.70 40.66 50,258.98 42,558.25 47.59
5
Service & Miscellaneous 29,962.89 31,181.86 1.12 828.00 1,181.94 0.78
Mutual Funds
Fuel & Power 363,496.30 361,885.00 13.64 16,671.30 12,624.94 15.79
Services &Real-estate 18,619.59 18,792.24 0.70 1,859.66 1,103.11 1.76
IT - Sector 10,467.16 9,667.19 0.39 4,022.43 2,079.43 3.81
Telecommunication 388,344.33 384,759.23 14.57 1,813.62 2,235.87 1.72
Travel and Leisure 18,314.25 19,286.08 0.69 1,062.65 1,038.34 1.01
Miscellaneous 90,482.98 93,582.07 3.39 5,719.68 4,795.80 5.42
Total 919,687.48 919,153.67 34.50 31,977.35 25,059.43 30.28
Bond 5,979.12 5,986.35 0.22 8.61 20.82 0.01
Corporate Bond
Total 5,979.12 5,986.35 0.22 8.61 20.82 0.01
Grand Total 2,665,501.0 2,708,078.67 100 105,604.9 86,893.82 100
3 9

CHAPTER 3
3.1 Brief History
3.2 Present Context
3.2.1 Bond Market
Status of Capital Market
3.2.2 Corporate Debt Market
3.2.3 Govt. Debt Market
3.2.4 Secondery Market of Govt Securities

Capital Market in Bangladesh 20

 Chapter

3
STATUS OF CAPITAL MARKET

3.1 Brief History

Bangladesh capital market has achieved some major milestone events in the recent past. The
capital market operations in this part of the country started in mid-fifties with the establishment
of East Pakistan Stock Exchange Association in 1954, which started trading in 1956. Initially it
was a mutual organization (cooperative body) which was corporatized in recent activity of the
Dhaka Stock Exchange (DSE) in term of turnover in the name of Dacca Stock Exchange Ltd.
During those early periods until 1971, all trades in the exchange were conducted using trading
data collected over telephone from Karachi Stock Exchange. After independence of Bangladesh,
the operations of the stock exchange remained suspended until August 1976. At that time market
trading started with only 14 listed companies having market value of only taka 90 million. The
trade volume was very thin and could not attract investors. Over time some reform initiatives
were taken to strengthen the market. First time Tk. 1Crore daily trades were recorded in April
1992. Government adopted the Securities and Exchange Commission Act 1993 and established
the SEC as the regulatory authority for the market and the Securities and Exchange Commission
(SEC), established in 1993 under this Act, as the central regulatory agency oversees the activities
of the entire capital market including issue of capital, monitoring the issue of stocks and
operation of the stock markets including regulating of portfolio market.

3.2 Present context

3.2.1 Bond Market in Bangladesh
Currently Bangladesh bond market plays a small role in the economy. The bond market is very
thin compared to the neighboring countries. Government should take actions to improve the
scope of bond market in Bangladesh. At the end of 2006, the outstanding bond amount was only
2 % of GDP, compared to Sri Lanka (55%), India (35%), Pakistan (31%) and Nepal (10%). The

Capital Market in Bangladesh 21

share of the Bangladesh bond market among South Asian countries was only 0.2% the smallest
among the five countries.
The market is dominated by the fixed income government debt instruments. The maximum
savings of small investors are mobilized by only one instrument name National Saving
Certificate. The interest on this saving certificate is higher than that of other bonds in the market.
Besides the national saving certificate, the other government debt instruments are treasury bills
and treasury bonds. In December 2003, government issued 5 and 10 years maturity treasury
bonds and 15 and 20 years bond were issued in July 2007. The capital raising pattern has been
changed from a focus in treasury bills to a noteworthy increase in treasury bonds. Consequently,
the ratio of treasury bills from about 20:80 in 2005 to 80:20 in 2011. Bank and financial
institutions are the main buyers of treasury bonds. Commercial banks have obligation to
purchase government securities as it is accepted security to meet their statutory liquidity
requirement (SLR) under the Banking Companies Act. This is still a small market. Banks and
financial instruments which have SLR obligations are the only participants in this market. The
government bonds are rarely traded on the exchange.
In September 2006, the Ministry of Finance started publishing the yearly treasury bills and bonds
auction calendar. The calendar shows the information of dates, types of instruments and amount
of each auction. Bangladesh bank also started publishing the auction results on its website.

Bangladesh corporate debt market is very small in size. The outstanding amount is only 0.2% of
GDP. Thus corporate bond market in Bangladesh is at a budding stage. During 1988-2011, only 3
corporate bonds and 14 debentures were issued by public offerings (Table-3.1). Many of these
bonds and debentures were partially convertible to common stocks. The biggest issue of
corporate bond was made first in 2007. It was a perpetual bond named IBBL Mudaraba
Perpetual Bond with a size of Taka 3,000 million (approximately US$ 40 million). It is an
Islamic bond on profit sharing basis since interest is prohibited by Sariah Principles. At the end
of 2011, three corporate bonds and eight debentures were outstanding. The corporate bond
market of Bangladesh faces manifold impediments although it has a good prospectus because of
an expected growth in financial market. It is believed that the availability of long-term
instruments is a prerequisite for developing an efficient market structure.

Capital Market in Bangladesh 22

Table-3.1 : Issue of Corporate Debt Securities in Bangladesh

Serial Securities Yearof Features Size(BDT

no. issue million)

1 17%BaximcoPharmaDebenture 1988 20%Convertible 40

2 17%Baximcolimited Debenture 1989 60
3 17%BaximcoInfusionDebenture 1992 45
4 17%Bangladesh ChemicalDebenture 1993 20%Convertible 20
5 17%BaximcoSynthetic Debenture 1993 375
6 17%Baximco Knitting Debenture 1994 20%Convertible 240
7 17%BaximcoFisheriesDebenture 1994 120
8 15%Eastern Housing Debenture 1994 10%Convertible 800
9 14%BaximcoTextileDebenture 1995 250
10 14%BDZipperDebenture 1995 20%Convertible 40
11 14%BaximcoDenimsDebenture 1995 300
12 14%BDLuggage Debenture 1996 20%Convertible 150
13 14%AramitCementDebenture 1998 20%Convertible 110
14 15%BDWeldingElectrodesDebenture 1999 20
15 IBBL Mudaraba Perpetual Bond 2007 ProfitSharing 3,000
16 ACIZero Coupon Bond 2010 20%Convertible 1,070
17 Sub Bonds OfBRAC Bank Ltd 2011 25%Convertible 3,000
Note: marked debentures are not available at present.
Source: SEC, DSE and CSE report.

Constraints on Development of Bond market

The sluggish growth of the bond market in Bangladesh has been recognized due to a number of
factors. They are discussed below:
Limited number of investor: Only limited number of investors compared to total
population is interested in investing in bond or stock market.
Capital gain: Impact of cliental effect, most of the investors in Bangladesh look for
capital gain rather than fixed flow of income while making their investment decision. In
case of bond chance of capital gain is limited.
High return in risk free government bond: Rate of return in case of risk free
government bond is too highs so corporate bonds have to offer even higher rate for
covering additional risk to the investors which make the rate non-viable for the issuers.

Capital Market in Bangladesh 23

 Alternative sources of debt financing: Other sources of debt financing, especially
borrowings from commercial bank are very easy and widely used in Bangladesh. The
charged by bank is less than borrowing rate through bond issuance. Besides these,
borrowing from bank is flexible and quick. So, issuers dont have to depend on bond
issue only to design their capital structure and to generate tax benefit from use of debt.
Limited private management of pension fund: In Bangladesh private management of
long-term pension fund is very limited. State owned bodies & government organizations
do not raise fund through issue of debt instrument. They depend on deficit financing &
printing money from central bank for financing their projects. So, all these factors make
secondary market for bonds very illiquid & discourage issuance of Bond.
Weak regulations and market infrastructure: Laws & regulations regarding
governance of bond market are inadequate. Market failure is common scenario in
Bangladesh. Risk free investors just prefer government bonds while risk takers go for
investment in stock market. There are not enough investors for corporate bond market.
Under developed tax system: Tax system in Bangladesh is not properly developed. Tax
can be evaded through unfair means (bribe and other means). So, tax incentive for issuing
bonds is not very high which causes underdeveloped corporate bond market.
Illiquid secondary market: Illiquidity in secondary market of government debt
securities makes constraints on determining proper pricing of the treasury bonds in the
primary market.
High interest rate: Individual savings are attracted by national saving scheme due to its
high interest rate (Table-3.2). National saving certificates are risk free though its interest
rate is high; consequently other saving products are crowded out from the market. Thus a
company has to propose a higher coupon rate to attract investors which might become
unviable for the corporate.
High transaction cost of bind issuance: The high transaction cost of bond issuance is
considered as constraint. Particularly, the registration fees, stamp duties, ancillary charges
and annual trustee fees on outstanding amount put forth to diminish the bond issue.

Capital Market in Bangladesh 24

 Cheap syndicated loans: It is a common phenomenon that a syndicate is formed by a
number of banks to finance large project. Syndicated loan is cheap as well custom-made
and flexible which makes bonds non-attractive to the corporate issuers.
Default on interest payment: In early 1990s, the interest payments of some corporate
debenture were defaulted. In the 90s, the regulations of financial market were not
adequate and credit rating was not mandatory. Besides, investors confidence was eroded
due to the failure of trustees to protect the debenture holders rights which makes the
investors averse to invest in corporate bonds.
Inexperienced investor: In Bangladesh most of the investors are inexperienced. They
are very much familiar with the bonds. They consider that return (interest) on debt
instrument is very small with no chance of capital gain. Therefore, they take investment
decision in stocks for abnormal capital gain.
High inflation: Comparatively high inflation has been prevailing since last decade,
which has made potential investors introverted to invest in corporate securities.

Table-3.2: Interest Rate on Saving Products by Source and Maturity (July 2011)
Source 3 to 6months 6 months to 1 year 1 year and above
Foreign banks 3.7512.50 4.0012.25 4.5011.00
Private banks 7.0012.75 7.2513.00 8.0011.75
State owned commercial banks 5.507.50 6.758.75 8.0011.50
Specialized banks 5.757.25 6.007.50 6.759.00
Post office NA NA 11.50
National savings certificates NA NA 12.00
Source: Bangladesh Bank

3.2.2 Corporate Debt Market in Bangladesh

Bank loans are the main source of finance for corporate (Table-3.3). The corporate bond market
in Bangladesh is very small in size. Banking sector is dominating corporate finance since other
sources of corporate debt instrument are under developed. Alternative sources of finance other
than bank loans should be developed by diversifying the debt instruments in order to establish
sound financial market in Bangladesh. A complete set of guidelines on bonds and debentures
must be developed to promote the corporate bond market. The government has to reduce the

Capital Market in Bangladesh 25

interest rate on national savings certificates in order to a favorable environment for developing
corporate bonds.

Capital Market in Bangladesh 26

Table-3.3: Instruments Available in Bangladesh
Instruments Nominal Amount(Billions of BDT) Relative size%

Deposits 4032 37.20%

Bank Loans 3501 32.30%
Term loans (as of June2011) 1333 12.30%
Government saving certificates 965 8.90%
Government bonds 534 4.93%
Treasury bills 271 2.50%
Equity(issued value) 192 1.77%
Private placement Not publicly available --
Debentures & bonds 11 0.10%
Source: Dhaka Stock Exchange, National Saving Bureau, and Bangladesh Bank

3.2.3 Government Debt Market in Bangladesh

Bangladesh Bank Order-1972, article 20 and Treasury rules-1998 (Appendix-1, Section-3)
empowers Bangladesh Bank for the issue and management of Government securities. As per
the above mentioned laws and regulations, Bangladesh Bank (BB) acts as the banker and debt
manager to Government of Bangladesh (GOB). Tax is the main source of governments revenue.
Government meets its deficit through sale of debt securities when expenditures exceed its tax
receipts.
In the past the financing of budget deficit for Government of Bangladesh was being done
through issuance of ad hoc Treasury Bills. Bangladesh Bank subsequently partially offloads
these ad hoc Treasury Bills through the issuance of Treasury Bills and Bonds to the market,
leaving the Governments cash position unaffected. Ad hoc Treasury Bills were thus accessed
both to meet cash mismatches as well as for financing the budget deficit. Issuance of ad
hoc Treasury Bills has been discontinued now. Financing budget deficit for Government of
Bangladesh takes place through the issuance of (i) Special bonds, (ii) Bangladesh
Government Treasury Bonds (BGTBs), and (iii) savings instruments (NSD).
However, for small deficit, Bangladesh Bank maintains a pretty cash account named
Ways and Means Advance (WMA). Normally, government borrows from WMA first and then
through Treasury Bills. For this advance a floating interest rate (bank rate + 1%) is charged. At
present the bank rate is 5%.

Capital Market in Bangladesh 27

3.2.4. Secondary Market of Government Securities:
Secondary market for government securities is still not active. Bangladesh Bank periodically
conducts secondary trading and also buys back the government securities as per instructions
of the government.
Developing liquidity in the secondary market is a gradual process. There is a substantial effort
and time required to develop the trading behavior among institutions. The best that any
institution which intends to promote secondary trading is to create a condition that is conducive
for developing a safe and efficient market place. Trading volume in Government securities is
currently negligible in Bangladesh. To activate the market, it is necessary to push institutions
(banks and other financial institutions) to encourage a culture of trading, develop safe and
efficient trading and settlement systems, sensitize market participants to internalize effective risk
management practices and stabilize market standards.
The following bottlenecks were identified as impediments to development of secondary market
and corresponding recommendations are made to solve them by Bangladesh Bank.

Problem: Almost all bond markets in the world have addressed the issue of settlement risk
by introduction of Delivery versus Settlement (DvP). There is no established
settlement system for the few secondary market transactions that take place in bond markets
in Bangladesh.
Solution: Delivery versus Settlement (DvP) based settlement have been introduced from
January 2010 for all marketable Government securities However network connectivity and
electronic settlement systems have not been established yet. In future, more efficient DvP
mechanisms can be introduced coinciding with the increase in market activity.

Problem: In the early stages of market development, there was a high degree of
uncertainty regarding appropriate pricing. While a market determined price discovery in
primary markets can act as an effective anchor for pricing, the problem still remains on how
to price securities in between auctions.
Solution: It may be desirable for the Primary Dealers (PDs) (through a trade association
recognized by BB) to disseminate a yield curve of Government securities based on
secondary market transactions, on a monthly basis. In the initial period (about a year) BB

Capital Market in Bangladesh 28

 may vet this yield curve before being released in the public domain. To facilitate year-end
valuation, BB may itself announce a yield curve valid for the end of the year.
Problem: Lack of proper mechanism for Dissemination of Trade Information among the
market participants.
Solution: BB may take up the responsibility of collecting and disseminating secondary
market trade information at the end of each day. The information it needs to disseminate
should be date of trade, settlement date, name of security, amount of trade (FV), price
and yield. In the initial phase, the information may be collected from Banks and PDs.
Consolidated and placed on BBs website by end of day after suppressing buyer and seller
names. In due course, as electronic network for banks and other institutions are established
and an electronic reporting/settlement system is developed, dissemination of trade
information can be real time.
Problem: Typically Government securities trade Over-the-Counter (OTC) through a
telephone market, although trading on electronic platforms is prevalent in some countries,
e.g. MTS system in Europe. Availability of electronic trading platform would
encourage secondary trading to a large extent.
Solution: It is learnt that the trading platform in the Dhaka Stock Exchange can be
modified for trading bonds. This should be enabled and the primary dealers should be
given the accountability of market making for government securities on the exchange.
Market participants may also be given the choice of trading with each other on an OTC
basis.

Capital Market in Bangladesh 29

 4.1 Status Of Bond Market
4.2.1 Comparison with South-Asian Countries
4.2.2 Comparison with US Capital Market
4.2.3 Graphical Presentation

Capital Market in Bangladesh 30

 Chapter

4CHAPTER 4
Comparison
Comparison

4.1 Status of Bangladesh Bond Market

The debt market in Bangladesh comprises mainly of two categories, firstly the Government securities and
the second category comprises of the non Government securities i.e. the corporate bonds and debentures.
The actual status of the capital market of Bangladesh is stated below:

4.2.1 Comparison of government bond market in some Asian countries:

The size of Bangladesh government bond market which is 17.1% of GDP has not developed on the
similar line as of other emerging East Asian bond market like China, Singapore, Malaysia and Thailand
(Table-5.1). India has the largest part of Government bond market of all the south Asian countries while
Bangladesh holds the lowest position with the size of 17.1% of GDP.
Table: Sizes of Some Asian Bond Markets (% of GDP)
Category Korea Mala China Sing Thailand Philip India Sri Pak BD

Government 48.8 48.1 46.1 41.2 40.7 33.3 36.1 31.6 27.5 17.1
Corporate 61.8 37.5 4.7 30.7 15.9 3.5 3.9 - - -
Source: Asian Bond on Line, BIS, RBI, March 2008.

i. Maturity structure:
A mature bond market exhibits longer average maturity since investors confidence is gauged by
their willingness to commit resources to longer time horizons (Barry and Pipat 2004). In South
Asia, India is the only country to have succeeded in building a risk-free sovereign yield curve
that can provide guidance to market players across the broad spectrum of maturities.
ii. Analysis on finance indicators:
In terms of the assessment of Finance Indicators as depicted in (Table-5.2), India has the
soundest financial sector among the south Asian economies. It o c c u p i e d the top rank with an
overall composite score. India has exceedingly done well (ranked 1) on three micro indicators

Capital Market in Bangladesh 31

 namely capital market development, market concentration and competitiveness, and financial
stability.
Finance Indicators for South Asian Countries during 2001-09
Individual indicators rank India Pakistan SriLanka Bangladesh Nepal
Overall rank 1 2 3 4 5
Access to finance 3 4 1 2 5
Performance andefficiency 3 1 2 4 4
Capital marketdevelopment 1 2 3 4 5
Market concentrationand competitiveness 1 4 5 2 3
Financial stability 1 2 3 4 5
Source: Getting Finance Indicators.

4.2.2 Comparison with US Capital Market:

There are 60 major stock exchanges throughout the world, and their range of sizes is quite
surprising. At the high end of the spectrum is the mighty NYSE, representing $17.93 trillion in
market capitalization, or about 27% of the total market for global equities. On the other hand
Bangladesh Capital market is tiny with DSE having 41.5 Billion in market capitalization. Some
comparisons with Bangladesh and US Stock Exchange are given below:

Bangladesh Stock
US Stock Exchange Exchange
NYSE NASDAQ DSE CSE
Market Capitalization
(USD) 17,931 6,982 41.547 31.15
% of Market
Capitalization 27% 11% 0.063% 0.047%
No. Of Listed Securities 2,453 2,850 559 233

Structural Differences:
There are some structural differences between Bangladesh and US Capital Market.
1) The Bangladesh Securities and Exchange Commission (BSEC) is the regulator of the capital
market of Bangladesh, comprising Dhaka Stock Exchange (DSE) and Chittagong Stock
Exchange (CSE). The Commission is a statutory body and attached to the Ministry of
Finance.

Capital Market in Bangladesh 32

 In the United States, the preeminent government body is the Securities and Exchange
Commission (SEC). The SEC was created in 1934 and currently employs over 3,700
employees. Its primary mission is to monitor and enforce laws created to govern the
existence of securities and other related assets in the United States. It licenses every
exchange in the U.S., from main exchanges like the New York Stock Exchange and
NASDAQ to the Chicago Stock Exchange, National Stock Exchange, and other minor
markets.

2) In United States, Each company that is listed publicly, for example, is required to submit a
Form 10-K, which is a comprehensive report of the companys overall financial health
including risk factors, earnings information, existing liabilities, executive compensation, and
the MD&A, or managements discussion & analysis. The MD&A is an intriguing document
because it gives a companys management space to explain the inner operations of the
company and how these operations impact the value of the company. Any serious investor
who wants to buy and sell stock based on the strength of the underlying company should
digest Form 10-Ks, quarterly Form 10-Qs, and the MD&A to get a better idea of the
underlying financials of the company.

In Bangladesh, there is no such report is submitted to give proper explanation of inner

operations of the company. So , Bangladesh stock market lacks proper information of the
company which hampers the analysis of the investors .

3) The SEC has jurisdiction over stocks and all publicly-traded companies, but that is only one
part of the overall market. The other part stock brokers and investment firms are
regulated by the Financial Industry Regulatory Authority (FINRA). FINRA regulates
trading, controls licenses, informs investors, and supervises compliance from investment
firms that fall under its purview. This is to ensure that investors deal with licensed
professionals who abide by the rules and legislation that are there for the smooth operation
of the market. FINRA set standards for stockbrokers and other industry professionals and
licenses them after comprehensive examinations.

In Bangladesh capital market there is no such regulator as FINRA to set standards for stock
brokers and other industry professionals. Market participants, including brokers, dealers, and

Capital Market in Bangladesh 33

 merchant bankers, require a license to trade from the SEC. However there are no
professional standards and minimal qualification requirements (e.g., examinations and
professional training) imposed by the SEC or the exchanges on any of the intermediaries.

4) Bangladesh stock markets investor doesnt have proper knowledge of investment. This
market is dominated by general people who dont have proper knowledge of investment. On
the other hand, US stock market is dominated by knowledgeable investors.
5) Results of various past studies identified the stock market of Bangladesh as inefficient which
infer that price changes in DSE do not reflect all relevant information. The existence of
market inefficiency in DSE changes in share prices do not necessarily reflect all identified
and relevant information in the market. US stock market is not perfect, but not that much
volatile.
6) In USA there is severe penalty for violating rules and regulations or misleading investors.
The SEC managed to fine Goldman Sachs $550 million in 2010 for misleading investors,
and AIG $800 million in 2006 for improper accounting and other offenses. In Bangladesh,
there are rules and regulations but many companies are violating these rules without any
penalty. There is lack of enforcement with the compliance of rules and
regulations.

4.2.3 Graphical Comparison:

Capital Investment in Billion Dollars (2010-2015):

Capital Market in Bangladesh 34

Capital Market in Bangladesh 35
 Capital Investment Trend from 1990 to 2015:
Bangladesh Capital market

US Capital Market

Capital Market in Bangladesh 36

Capital Market in Bangladesh 37
 Chapter

5CHAPTER 5
Findings,
Obstacles Recommendations
to Overcome
5.1 Measures to Improve Bangladesh Bond Market
and Conclusion
In spite of earlier setbacks, the bond market of Bangladesh is ready for takeoff. It seems reasonable
5.1 Obstacles to Overcome
that Bangladesh can take the following steps to boost up its bond market.
5.2 Recommendations
5.3 Conclusion
1) Establishing a sovereign yield curve to serve the pricing guide in the bond market: Lack of
benchmark bonds has been primary reason that the Bangladesh debt securities market has not
taken off. Without benchmarks, all other fixed-income instruments, including corporate bonds
will lack the pricing base. Based on the experience of say India the maturity of the bonds can be
increased by issuing a bond with 30 years maturity.
2) Proving the government as a credible issuer and market developer: The developed financial
markets have been brilliant in issuing standard diversified and high quality debt instruments on
a regular basis. For example Indian Government issues treasury bills of three maturities (91,
182, or 364 days) and medium and long-term securities (capital index bonds, floating rate
bonds, zero coupon bonds, bonds with call and put options) and plain vanilla bonds (the
most popular and actively traded). In contrast, the government of Bangladesh issues only
Treasury bill, treasury bonds, National Investment Bonds, and National Saving certificates.
Excessive dependence on NSD certificate by the government of Bangladesh has distorted the
market by establishing a high benchmark rate for the corporate sector. This is primarily the
reason that the Government of Bangladesh should come forward with a broad spectrum of
government securities.
3) Developing a level playing field for foreign and retail investor: Like developed countries,
Security and Exchange commission of Bangladesh should permit registration to foreign
institutional investor to invest in Bangladesh. The government of Bangladesh should also
take necessary actions to encourage retail participation in the government debt security market.

Capital Market in Bangladesh 38

4) Establishing a well-functioning system for primary dealers: With fifteen primary dealers
(12 commercial banks and 3 non-banking financial institutions) Bangladesh government
bond market has not been served yet to full swing. Bangladesh should practice the scope,
scale and regulation of the primary dealer system like India.
5) Taking steps to enhance secondary market liquidity: The secondary market for
government debt securities in Bangladesh is still in a very budding stage. For example, in
the DSE, 215 BGTBs are listed with a total worth of Taka 534 billion but only one 10
years BGTB was transacted on the secondary market since the inception of debt securities
in DSE in 2005. Thus, in favor of Bangladesh government, BB can lower minimum
denomination to Take 1000 and give wide range of facilities to the PDs.
6) Increasing transparency in the secondary market through dissemination of market
information: Transparency in the secondary market for government debt securities
remains limited in Bangladesh. No central source of information on trading activity in the
OTC market is available. Bangladesh bank does not publish the information while it
receives reports on OTC trading from primary dealers. Information on debt securities and
the money market should be distributed through press releases or by the Banks
publications.
7) Introducing delivery vs. payment system (DvP): The payments in securities transactions
are handled manually though both stock exchanges, DSE & CSE have an automated
system for the trading of securities, which means that securities cannot be settled on a
delivery-versus-payment basis. Bangladesh may be benefited by introducing DvP
mechanism.
8) Developing bond index: An index is needed to compare the market participants
performance as well as the performance of different classes of assets. The government of
Bangladesh can establish the bond index which will reflect the benchmark of this sector.
9) Developing qualitative strength: Bangladesh should develop its poor performance in
macroeconomic environment, institutional environment, equity market development,
corporate governance, voice and accountability, political stability, financial stability and
regulatory quality.

Capital Market in Bangladesh 39

5.2 Recommendations

Capital market in Bangladesh is now going through a hard time currently as there are some
upheavals in the market and there exists an upsetting condition in the stock mar-kets. But as per
the past occasions, it is evident that our current capital market has a good ground now for future
developments. We should take this opportunity to boost up the market as well as contribute to
our economy. In addition, our mindset needs to be changed regarding earning profit from the
capital market overnight. Foreign investments also need to be increased to ensure a sound capital
and along with this, the government should make an authentic list of the companies that has
credibility and accountability. If we can develop our capital market, it will definitely enhance our
national economy.

5.3 Conclusion
Developing countries which accounts for 75% of the world's population, have an enduring need
to attract capital and technology to improve their infrastructure and standard of living.
Developing economies, thus, look forward to their capital markets as the engine for future
growth as its existence ensures mobilization of surplus funds to the ones suffering from deficit.
In Bangladesh we have a capital market that is yet to be further nurtured to get the fruit out of it.
Without doing this we cannot undergo heavy industrialization and other capital based
development. We have various problems like the market has been suffering from inadequacy of
good scripts. Out of around three thousands public companies, only two hundred and twenty
have issued securities keeping a large number away from the securities market. It is further
observed that Government is still holding lion portion of many blue chip company shares. We
must overcome these sort of problem to strengthen our capital market. Various methods and
policies may be adapted regarding this, but the investors mindset is one of the most important
things that must be changed to ensure the development of the market. If we can strengthen the
market properly, it is only then we can have a sound economy in terms of capital and related
developments in our country.

Capital Market in Bangladesh 40

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Capital Market in Bangladesh 42