1. Chittagong Stock Exchange Limited
Seminar Paper on
Prospects and Challenges of Financing through Capital Market
Presented by
M. Shaifur Rahman Mazumdar, FCA, FCMA
Managing Director, CSE

2. Bangladesh Economy
Bangladesh is one of the largely agro-based developing countries in the world.
Over the years contribution of industrial sector in GDP has been increased.
The size of economy is currently USD billion which according to IMF will rise to USD 322 billion by the year 2021 creating enormous economic opportunities.
Bangladesh has made substantial progress in reducing poverty.
The capital market of Bangladesh is also developing gradually but not at par with the country’s economy.
If we consider the strength of the economy, the capital market has huge untapped opportunities.

3. Financing through Capital Market
Capital market is the engine of growth for an economy.
It is known as barometer of the economy.
It acts as an intermediary between savers and companies seeking additional financing for business expansion.
It boosts the investment capacity for infrastructure and other long-term projects needed to secure bright and sustainable future and help support finance for new innovations and start-ups companies.

4. Benefits of Financing through Capital Market
New capital
Almost all companies go public primarily because they need money to expand the business;
Future capital
Once public, companies have greater and easier access to capital in the future;
Establishes profile
Sharing history, business operations, strategy
and growth plans helps develop franchise value.
Enables branding and customer awareness;
lenders have higher comfort with listed entities.

5. Wealth creation
Ability to create wealth for promoters and shareholders
Provides a benchmark for Company valuation
The best way to raise fund for company
In the era of free economy and democracy, stock market provides an effective linkage between large pool of investors and entrepreneurs. Investors on their free will want to take risk and invest directly with the project and like to possess share of ownership and profit.
Reduced reliance on debt finance
Borrowing and their prescheduled compulsory debt servicing could be avoided if company is listed.
Enhancement of efficiency
The management of a public company must be accountable to their shareholders, which in turn play a role in ensuring that the company operates in an efficient manner. Shareholders will benefit from the enhancement of the company's operational efficiency.

6. Attract Foreign Investment
Tax Benefit
If a company is listed it pays less tax. At the current rate, listed companies pay 10% less corporate tax than those who are not listed.
Prestige
* Being listed in the stock exchange raises the prestige of a company immeasurably.
* A listed company presents a positive public image.
* This image plays an important role in boosting the company's credibility in local and foreign stakeholders.
Attract Foreign Investment
*Being a listed company can help attract foreign investment in the firm, opening up opportunities for business expansion and modernization.

7. Capital Market in Bangladesh
Stock Exchanges
* Dhaka Stock Exchange (DSE)- incorporated in 1954
* Chittagong Stock Exchange (CSE)-incorporated in 1995
Both the Exchanges provide automated trading facilities since 1998
Main Regulator-The Bangladesh Securities and Exchange Commission (BSEC)
Central Depository Bangladesh Limited (CDBL) – the only securities depository of the country introduced its first electronic book entry in 2004.
Market Intermediaries- The Market Intermediaries at present include: –
250 members of DSE and 148 members of CSE
391 Depository participants (DPs)
58 Registered Merchant Banks
30 Asset Management Companies
13 Security Custodians
8 Credit Rating Companies

8. Prospects
Many analysts and observers have high hopes for the growth prospect of Bangladesh in future.
Bangladesh will be 3rd fastest growing economy in the world in terms of GDP.
In its latest assessment, Pricewaterhouse Coopers (PwC), estimated that Bangladesh would maintain very good average annual growth for the next 32 years (by 2050)

9. Dominance of Banking sector
Fund raising through capital market is very low and insignificant in Bangladesh. Most of the funds are raised through banking sector.
Banking sector consists 32.63% of Free Float Market Capitalization to Total Free Float Market Capitalization as on 28 December 2017 at CSE, which is the highest among all sectors of the market.
Banking system of Bangladesh is badly impacted by non-performing loan (NPL).
The percentage of NPL to total outstanding loans in Bangladesh was 9.6% in the year 2016.
The current structure of NPL now at alarming stage.
It is highly important to ensure space for the capital market as an alternative and sustainable source of financing.
This will keep the money market as well as the economy as sound and stable.

10. Table: Sector wise Free Float Market Capital as on 28 December 2017
Name of the Sector
Free Float Market Cap (in BDT ml)
% of Free Float Market Cap to Total Free Float Market Cap
BANK
411,506.44
32.63
PHARMA N CHEMICAL
218,457.69
17.32
ENERGY
100,505.73
7.97
ENG N ELECTRICAL
73,492.41
5.83
TELECOMMUNICATION
67,947.59
5.39
LEASING N FINANCE
64,907.85
5.15
MISCELLANEOUS
58,138.87
4.61
TEXTILE N CLOTHING
52,663.61
4.18
CEMENT
51,570.90
4.09
FOODS N ALLIED
38,064.92
3.02
LIFE INSURANCE
24,663.64
1.96
MUTUAL FUNDS
23,654.14
1.88
SERVICES N PROPERTY
23,352.34
1.85
GENERAL INSURANCE
19,162.73
1.52
LEATHR N FOOTWEAR
11,576.80
0.92
CERAMIC
9,554.57
0.76
ICT
7,169.31
0.57
PAPERS N PRINTING
2,332.57
0.18

11. Lower Market Capitalization to GDP
Contribution of Market Capitalization to GDP in Bangladesh is very low, which is lower than other regional countries.
It is highest in Malaysia and the lowest in Bangladesh in the region.
Table: Market Capitalization (% of GDP): Year
Name of the Country
2014
2015
2016
2017
Bangladesh
24.32
24.04
18.42
21.62
India
79.61
69.90
72.75
86.34
Pakistan
30.20
28.46
27.13
28.25
Srilanka
30.89
28.39
22.61
23.68
Thailand
97.53
109.98
101.32
110.33
Malaysia
168.65
137.61
139.11
142.24

12. Less Listing Name of the Country At the end of the Year 2017
Number of listed companies in Bangladesh capital market is less than other regional countries.
Only 9 companies were listed in 2017, whereas listing of a good number of companies is a must for maintaining the present growth in Bangladesh capital market.
Number of listed companies were highest in India and lowest in Bangladesh after Srlinaka.
As per the statistics of Registrar of Joint Stock Companies and Firms(RJSC&F), around 150,000 companies are registered with the RJSC&F. Out of which only 301 companies are listed.
Table: Listed Domestic Companies (Numbers)
Name of the Country
At the end of the Year 2017
Bangladesh
301
India
5828
Pakistan
559
Srilanka
296
Thailand
538
Malaysia
903

13. Very good return
Return on Investment from Bangladesh Capital Market is much more than banking sector. CSE Selective Categories Index (CSCX) increased by 39.06% from the year 2013 to 2017 and stood at 11,649 at the end of 2017 from 8,377 at the end of It shows 39.06% gain in 2017 from 2013.
Index Name
Year
Closing Value
Closing Value Date
CSCX
2013
8,377
12/30/2013
2014
9,058
12/30/2014
2015
8,572
12/31/2015
2016
9,369
12/29/2016
2017
11,649
12/28/2017
% return in 2017 than 2013
39.06

14. Latest status of Capital market in Bangladesh (Chart from CSCX data from 2013-2017)

15. Future Products
Bangladesh capital market is at present Equity based market.
It has enormous opportunities to develop new products and services.
Among others development of Small Capital Companies market, Exchange Traded Fund (ETF), Clearing Corporation, Commodity Exchange and Derivatives are notable.
At present development of Small Capital Companies market and ETF are in the pipeline.

16. Major reforms took place in recent times
Demutualization of Exchanges-Stock Exchanges of the country became Demutualized in Demutualization converted stock exchanges “not for profit" organization to a “for profit” organization. It is a milestone development in country’s capital market, legally separating management & ownership and trading rights.
Special Tribunal-Bangladesh government established a special tribunal for speedy disposal of cases related to the capital market in early 2014 which is a significant progress in boosting investors’ confidence.
Public Issue Rules, 2015-New Public Issue Rules, 2015 which ensures more disclosure and better price discovery process in the capital market.

17. Corporate Governance Guidelines (CGG)-Revision of BSEC’s latest Corporate Governance Guidelines is in process. This will enhance better transparency, accountability and efficiency in the market as strong corporate governance has a positive impact on investor decisions. It will enhance investor confidence, increase reliability of financial information, reduce information asymmetry, and thus will ensure benefit of investors.
Financial Reporting Act, 2015-The much-awaited Financial Reporting Act-2015 got passed in the Parliament on September 6, The Act includes provisions for setting up an independent Financial Reporting Council (FRC). The FRC will be entrusted to ensure accountability and improve performance of the professional accountants of Bangladesh. The FRC will be the sole watchdog to monitor the functions of auditors and ensure transparency and accountability in accounting and auditing of organizations including various government, autonomous and non-government institutions.

18. Good quality companies not listing
Challenges
Good quality companies not listing
*A great challenge for the capital market in Bangladesh is to enhance listing of more quality companies.
*A large number of shares issued by companies from different sectors would help bring about better balance between demand and supply and enable investors to pick and choose on the basis of fundamentals rather than zooming on a limited number of existing shares, thus excessively inflating their prices and creating conditions for eventual downslide.
* Furthermore, adverse impact of manipulation by any errant market actor with respect to a few shares would be minimized.
*In order to ensure stability in the future, depth of the market needs to be increased by bringing in more IPOs.

19. Foreign companies not listing
*Foreign companies in Bangladesh are not interested to be listed in the country’s capital market.
*Moreover, as per existing BSEC notification and other laws & acts of different authorities including BTRC and BEPZA, foreign companies are not required to be listed mandatorily.
*Government should impose conditions for mandatory listing requirement based on profit margin or annual turnover.
*However, BEPZA authorities can also grant some extra incentives for listing of EPZ companies.

20. Good Govt. companies not listing
*There are only a few number of government companies listed in Bangladesh capital market.
*Though there are many good and profitable state-owned companies exist in the country, they are not coming to the capital market despite many efforts have been taken so far.

21. Reluctance in Fair Disclosure
and Presentation
*In the IPO process and during the time of post listing, it is required to ensure fair disclosure and presentation of financial activities.
*But it is observed that a mindset prevails from the side of entrepreneurs, whereby, they feel shaky or reluctant in ensuring such fair financial disclosures.
*This also creates a great hurdle in ensuring large numbers of quality companies to be listed.

22. Diversification of products and features
*Bangladesh capital market is mainly based on equity products.
*Other products like bond, derivatives, commodities etc. are also traded through Exchange platform at the contemporary markets in other regions.
*But, we are still behind in respect of regulatory and policy framing.

23. Coordination among Regulators
*Coordination among the different regulators and policy makers in formulating policy in the capital market is lacking.
*It is highly important to involve other regulators like Bangladesh Bank, NBR, BIDA, BEZA, BTRC etc.
*But still it remains a great obstacle.

24. Framing policies to attract good companies
Recommendations
Framing policies to attract good companies
* Policies to be designed in such a way so that good quality companies can be attracted to enlist in the market.
* Policies to be designed in the annual fiscal plan and also in five years’ plan.
* Coordination among the different regulators and policy makers in formulating policy is a must in this respect.

25. New products and features
* To make the Bangladesh capital market vibrant and sustainable, introduction of new products and features is an urgent need at the moment.
* Some advanced products can be designed and implemented at the earliest possible time.
* Bond market, derivatives market, currency market and commodity market to be included in the platform of Stock Exchange.

26. More Government companies to be listed
*At present, only a few government companies are listed in Bangladesh capital market.
*All profitable government companies to be pushed to enlist in the market through either IPO process or direct listing.

27. Regulatory guidelines to be reshuffled
* Foreign companies in Bangladesh are not coming to Bangladesh capital market due to present exemptions given to them.
* Regulatory guidelines to be reshuffled to enlist foreign companies.
* Special regulatory reforms are required in the structure and guidelines of Bangladesh Bank, BEPZA, BEZA, BIDA, Bangladesh Telecommunication Act and Bangladesh Energy Regulatory Commission Act.

28. Target basis listing
To reduce the present dearth of listed companies in the market, immediate steps should be taken to increase the number of listed companies by listing at least 50 to 100 companies within a very shortest possible time on target basis.

29. Conclusion
With the growing economy, the capital market of Bangladesh is also growing at the same time.
There are huge untapped opportunities in the capital market of Bangladesh. Currently the market is only equity based.
There are opportunities to establish other products and services like derivatives market, commodities exchange, clearing corporation, development of the bond market, Exchange Traded Funds, etc.
At present establishment of National Clearing Corporation, ETF and platform for Small and Medium Enterprises are in the pipeline.
Inclusion of such instruments will bring the capital market to a new level of international standard.
Moreover, the capital market of Bangladesh could be an effective source of financing for implementing sustainable development goals.
It can be made sustainable and model market in the globe if the challenges discussed in this paper can be handled efficiently and effectively.