Whither investor protection!

The separation of ownership and management has been done on Bangladesh's stock exchanges, but analysts say that has not improved quality of investor protection as yet.

Demutualisation of stock exchanges in Bangladesh, one of the recommendations to bring transparency in the capital market, has been effected after the biggest ever crash in 2010 caused by insider trading and manipulations.

Mizanur Rahman of Dhaka University's department of Accounting & Information says the transferability of ownership from members to non members has been successful through demutualisation.

"But inclusion of strategic investors on the stock exchange board to get technology and ideas has not yet happened," Rahman, an expert on Bangladesh capital markets, said.

“They fail to bring intellectual capital on the table.”

The regulatory framework of stock exchange should have been changed to ensure that, Rahman says, but insists it is yet to happen.

He says both Dhaka and Chittagong stock exchanges now had only limited capacity to enforce their regulatory roles.

Maintaining integrity, efficiency and transparency of stock exchange and supervision of the market should be its main task, but Rahman says they are failing to do that.

Stock exchanges have self regulatory functions like listing and disclosure of the company data, ensure effective surveillance on trading and compliance in operations by member firms (brokers).

“Even after demutualisation, stock exchanges are doing very little in fulfilling these responsibilities, exchanges need total transformation and restructuring in their management process to function properly,” says Mizanur Rahman.

“Broker members dominate the trading system here and that is always biased against the ordinary investor."

Demutualisation should eliminate the broker member from the trading management but that has not happened here, Rahman said.

Mizanur Rahman

He said the Dhaka Stock Exchange had changed their trading system recently claiming the new system was state of art technology.

"But they have not come out clearly on how the new system will protect the interest of the investors and what kind of built-in surveillance mechanism it has," Rahman asked.

“There should be a public disclosure of the technical characteristics of the trading system,” he insisted.

“In our country there is no transparency on the interface between the corporate management and the investor, though there maybe some transparency between corporate management and controlling share holders," Rahman said. "But the controlling share holders are few and mostly insiders, who are on the board. So the sponsors exercise absolute control over the management which serves their interest."

Rahman said that in most cases when issues are offered, the board members and top management have access to sensitive corporate information which outside shareholders are totally denied.

"The stock exchanges and Securities and Exchange Commission has obligations to ensure that but as of now, they are doing very little to address this problem," Rahman said.

“Our trading system lacks transparency, there are cases when suddenly some shares appreciate between 100 to 400 percent in a few days of trading. This is only possible if there is serial trading or insider trading."

Rahman said he could not recall any punishment meted out for that kind of insider or serial trading so far and fines were merely token in nature.

"Is it not funny to fine a broker Tk 500,000 when he has made Tk 100 million from suspect transactions," quipped Mizanur Rahman.