FRAMING A NEW LAW BY THE REGULATORS WHICH IS COUNTERED BY MARKET PLAYERS

Framing a new law by the regulators which is countered by market players that creates market manipulation in insider trading

Abstract

The research paper hereby presented is on the topic titled ‘Explanation on frame a new law by the regulator which is counter it by market player which is create market manipulation in insider trading. The Securities and Exchange Commission (SEC) was established on 8th June 1993 under the Securities and Exchange Commission Act 1993.The Securities and Exchange Commission is the regulatory body of Bangladesh capital market. SEC provides working process, rules and policies from which the stock exchanges will generated.BSEC grants Public Issue Rule 2015.BSEC accepted prospectus IFIC Bank BSRM Steel and Dhaka Bank to float subordinated bonds to raise fund. The Securities regulator has taken initiative to strictly impose a provision to the sponsor directors of the listed company to hold a certain amount of shares.BSEC forms body to amend rules for (Z) category companies. Stock market regulator established punishment for Commerce Bank Securities and Investment as a stock broker because of its alleged role in manipulation of seven companies share prices.

Introduction:                                                                                                                                                                              

Securities and Exchange Commission is a government body under the ministry of finance established to regulate the securities market in BangladeshIt was established on 8 June 1993 under the Securities and Exchange Commission Act 1993. Prior to its establishment, the securities market was regulated under Capital Issues Act 1947. The main office of SEC is at Dilkusha Commercial Area, Dhaka.

The primary objectives of SEC are to protect integrity of the stock market and the interests of the investors in securities, to develop the securities market, to ensure proper issuance of securities and to promulgate new laws orders rules and regulation for controlling and guiding the security market. 

Securities and Exchange Commission (SEC):

Securities and Exchange Commission is the regulatory body of Bangladesh capital market. Stock exchanges are called capital market because capital is raises from here. SEC provides working process, rules and policies from which the stock exchanges will generate.[1]

History of (SEC):

The Securities and Exchange Commission (SEC) was established on 8th June, 1993 under the Securities and Exchange Commission Act, 1993. The Chairman and Members of the Commission are appointed by the government and its responsibility to regulate securities legislation. The Commission is a statutory body and related to the Ministry of Finance.[2]

Function of the members of (SEC)

  • Provide and monitoring its management.
  • Provide policy direction to industry and staff and set forth legally binding rules.
  • To take decisions on the capital market.
  • Commissions’ main function:
  • Generating the business of the Stock Exchanges or any other securities market.
  • Registering and generating the business of stock-brokers, sub-brokers, share transfer agents, merchant bankers, and managers of issues, trustee of trust deeds, registrar of an issue, underwriters, investment advisers and other intermediaries in the securities market.
  • Supervising and regulating all registered self-regulatory organizations in the securities market.
  • Forbidding fraudulent and unfair trade policies connecting to securities trading in a Securities market.
  • Increasing investors’ education and serving training for intermediaries of the securities market.
  • Forbidding insider trading in securities.
  • Generating the substantial earning of shares and take –over of Companies.
  • Regulating research and providing responsibilities to investigate and inspection and inquiries and audit of any issuers or dealers of securities ,the Stock Exchanges and intermediaries and self –regulatory organization in the securities market.[3]

Aim of Securities and Exchange Commission:

  • Secure the interests of securities investors.
  • Progress and maintain fair, clear and skilled securities markets.
  • Confirm proper issuance of securities and consent with securities laws.[4]

BSEC grants Public Issue Rules 2015:

Bangladesh Securities and Exchange Commission (BSEC) has provided consent to the Public Issue Rules 2015 after having over view on the public opinion.

The confirmation came yesterday at a commission meeting oversee by professor M Khairul Hossain, chairman of the stock market regulator.[5]

The commission also accepted prospectus of IFIC Bank, BSRM Steel and Dhaka Bank to float subordinated bonds to raise fund.

According to the confirmation, IFIC Bank will offload subordinated bonds of TK 350 crore with a maturity period of seven years.

The nature of the bonds are fully amendable and coupon handling which will mature will seven years and be issued through private placement to banks and non- banking financial institutions. The value of each bond will be 10 lakh and the coupon rate will be 10% to 12%.

BRAC EPL Investments   Limited and Trust Bank will work as lead arranger and trustee.

Dhaka Bank will offload Non- Convertible Subordinated Bonds of TK 300 crore with a seven – year maturity period.

The nature of the bond is non –convertible unwritten, fully amendable, floating – rated and subordinated bond. The coupon rate will be 10% to 13%.

The value of each unit of Dhaka Bank Non –Convertible Subordinated Bonds will be TK 10 lakh.

Standard Chartered Bank and Green Delta Insurance will work as mandated lead arranger and trustee.[6]

Violation of 2011 (BSEC) by sponsors and directors:

A total of 47 companies listed with the stock exchanges lack conformity with the minimum shareholding demand by their sponsors and directors.

According to a stock market regulator direction, all sponsors or promoters and directors of all listed company shall all time jointly hold minimum 30% shares of the paid- up capital of the company.

In violation of a 2011 Bangladesh Securities and Exchange Commission direction the sponsors and directors of the companies are holding their position.

The stock market regulator worried about the order when stock market crash in 2010.The stock market was missioned to make directors responsible and fair to small investors, so that before creating disaster many directors sold off their share right.

Recently, BSEC are meeting with different stakeholders, including merchant banks and Dhaka Stock Exchange, took a number of disapproving decisions to revive the infirm stock market.[7]

In the meeting, the securities regulator has taken an initiative to strictly impose a provision to the sponsor – directors of the listed company to hold a certain amount of shares.y

It also decided to take legal action against directors of the listed companies who were not holding at least 2% share of paid- up capital individually.

The investors of stock market have complained that many sponsors and directors have sold off their shares but still are holding the controlling power of the company.

Stakeholders have said that if sponsor and directors could be ensured minimum 30% shares then stakeholder could help comfort the existent liquidity crisis in the capital markets through the release of a substantial amount of funds in the stock market.

Stakeholder thinks that corporate governance would be established in the company.

Former BSEC chairman and economist AB Mirza Azizul Islam says: “Companies violating rules are not practicing governance. So BSEC should take measures to ensure that directors of all listed companies individually hold minimum 2% share.”

Stakeholder warns that “If listed companies do not pursue the rule, small investors may lose their interest in the company.

According to the Dhaka Stock Exchange data, 47 companies’ sponsors and directors jointly have less than 30% shares in their own companies.

The nine companies having less than 10% share held by sponsors and directors are Fine Foods, Intech Online, IFIC Bank, Agni systems.[8]

BSEC to scrap licenses of errant market players:

Bangladesh Securities and Exchange Commission (BSEC) will fragment licenses of the offending merchant banks brokerage houses and dealers its Chairman Dr M Khairul Hossain reiterated the warning on Tuesday.[9]

Speaking as the chief guest at a seminar, the BSEC chief told they have fact that many brokerage houses and dealers are not performing their duties properly.

“We will scrap their licenses soon. As the first step, we will delist them from the eligible investors’ category to stop their participation in the bidding process,” he said.

The BSEC chairman said there are some merchant banks, which carried licensees many years ago, but incapable to issue any IPO until now.

“We‘ll go for fragmenting their licenses as well “, he said, adding it will be done as part of a series of measures to further development the capital market.

The seminar titled ‘Role of capital market in long – term finance’ was jointly organized by Business hour 24.com and DSE, DBA at a city hotel.

Hinting at some capable changes in the remaining book building method , the securities regulator chief said they have been seen institutional investor s buying shares at the cut – off price although their immediate command offer was much higher.

The commission, from now on, will bound the investors to buy shares at their highest bidding price, he also said.

For strengthening the marker further, he suggested selecting 100 good companies, and providing them profitable incentives for the first two years instead of charging listing fee.

Md Sayadur Rahman, former president of Bangladesh Merchant Bankers Association, emphasized bringing reform in lending.

He suggested the banks to consider volume of business side by side their paid – up capital and equity to approve loans.[10]

BSEC forms body to amend rules for ‘z’ category companies:

The Bangladesh Securities and Exchange commission (BSEC) on Thursday create a committee to amend the rules for ‘Z’ category companies.[11]

BSEC made the decision at a commission meeting held at its office in Dhaka. BSEC chairman M Khairul Hossain oversee the meeting, said a press release.

BSEC director Md Mansur Rahman will regulate the three –member committee. Others members are deputy director of BSEC Md Nazrul Islam and Sheikh Md Lutful Kabir.

The committee will make necessary recommendations discussing the notification issued in 2002 for the ‘z’ category company.

According to the 2002 notification, there is a requirement to improve the company’s board of directors in the ‘z’ category for a period of one year through extra general meeting but in reality it is not followed.

‘z’ category companies are which have failed to hold the annual general meeting when due or have failed to hold the annual general meeting when due or have failed to declare any dividend based on annual performance or which are not in operation continuously more than six months or whose accumulated loss after adjustment of revenue reserve, if any, exceed its paid capital.

Recently, share prices in junk companies or ‘Z’ category companies have been posing a threat to the stability in the capital market.[12] 

Market Manipulation:                                                                                                                                                                          

Manipulation is the act of artificially inflating or deflating the price of a security or otherwise influencing the behavior of the market for personal gain. Manipulation is illegal in most cases , but it can be difficult for regulators and other authorities to detect . Manipulation is also difficult for the manipulators as the size  and number  of participants in a market increases . It is much easier to manipulate the share price of smaller companies , such as penny stocks , because they are not as closely watched by analysts and other market participants as the medium and large cap firms . Manipulation is variously called price manipulation , stock manipulation and market manipulation.[13]

 Methods of Market Manipulation:                                                                                                                                    

A number of the methods used include:

  1. Engaging in a series of transactions that are reported on a public display facility to give the impression of activity or price movement in a security.
  2. Improper transactions in which there is no genuine change in actual ownership of the security or derivatives contract Increasing the bid for a security or derivative to increase its price.
  3. Buying activity at increasingly higher prices. Securities are sold in the market at the higher prices.[14]

Objectives of Market Manipulation:                                                                                                                                  

The objective of manipulative conduct will normally be to make money either directly through transactions, or by other means. Some examples of how this motive is achieved include

  • Buy at a lower price.
  • Sell at a higher price.
  • Influence takeover bids, or other large transactions or
  • Combat competitive transactions
  • Influencing the price of a security underlying assets.[15]

Stock broker faces BSEC heat for market manipulation:

Commerce Bank Securities and Investment, a stock broker, looks set to face punishment from the stock market regulator for its alleged role in manipulation of seven companies share prices.

The companies are: Monno jute Stafflers, Monno Ceramic , Legacy Footwear,BD Autocrats , Queen South Textile , Alif Industries and Eastern Lubricants .

The stock broker enabled the manipulative transactions of its clients and created artificial demand, according to the report of the inquiry committee of Bangladesh Securities and Exchange Commission.[16]

The panel was formed on June 21 after abnormal price hikes of some shares.

Commerce Bank Securities and Investment also did not notify the suspicious transaction to the commission.

It also extended credit facilities to clients to buy shares of Queen South Textile and Alif Industries beyond the permissible limit in violation of the margin rules.

On the basis of their finding top official of the brokerage house were asked to come to a hearing on Monday.

A   top   official of the BSEC said they were not satisfied after hearing Commerce Bank’s side of the story .So the commission many take action against them, he said upon condition of anonymity.

Commerce Bank Securities had a dominant and influential role in the trading of Monno Jute Staffers shares that caused the price to rise abnormally according to the enquiryreport.

On July 8, Monno Jute Satfflers, a company with not the most solid of fundamentals, became of the most valued stock on the Dhaka Stock Exchange, British American Tobacco Bangladesh, a solid stock by all account.

In ninemonths, Monno Jute’s price soared 6.3 times to TK 5,430 at present. In contrast, BATB’s share was traded at TK 3,315 yesterday.

Legacy Footwear rose 3.5 times in five months to TK 262; it traded at TK 218 yesterday.

Eastern Lubricants went up 78.79 percent in five months to TK 1,686; it traded at TK 1,363 yesterday.

Alif Industries was volatile during the year; it traded at TK 72.9 yesterday. 

Conclusion:                                                                                                                                                                       

There is a wide range tools that are used to prevent and deter manipulative conduct in both securities and derivatives markets. The rules attempt to ensure that a price is set by the unimpeded collective judgement of buyer and sellers .In addition, the rules attempt to prevent introduction of misinformation into the market and abuse of market power. Such rules enhance a regulator’s ability to secure the independent trading and pricing mechanism of the marketplaces.

Rules imposing disclosure requirements should be considered as an additional tool for preventing manipulation .For example, requesting the issuer of listed securities to disclose timely price sensitive information is aimed, among other things, at reducing information asymmetries that can facilitate manipulation.

There are a number of other provisions and tools designed to prevent manipulation .Such as short selling rules, Rules limiting participation during offerings and Methods for calculation of index.

Bibliography:

  1. A) Reports

Addendum to this IOSCO report was published in April 2013

  1. B) News Paper

Dhakatribune.com published at December 28th 2015.

Dhakatribune.com published at May 20th 2019

Dhakatribune.com published at May 20th 2019

Dhakatribune.com published at April 12th 2019

  1. C) Others

https://www.assignmentpoint.com/business/finance/problems-prospects-bangladesh-capital-market.html

https://www.academia.edu/37787480/Capital_Market_of_Bangladesh_Problems_and_Prospects

https://smallbusiness.chron.com/objectives-sec-77600.html

http://today.thefinancialexpress.com.bd/first-page/bsec-to-scrap-licences-of-errant-market-players-1549992524

http://today.thefinancialexpress.com.bd/first-page/bsec-to-scrap-licences-of-errant-market-players-1549992524

https://www.dhakatribune.com/business/stock/2019/04/12/bsec-forms-body-to-amend-rules-for-z-category-companies

https://www.iosco.org/library/pubdocs/pdf/IOSCOPD103.pdf.

https://www.iosco.org/library/pubdocs/pdf/IOSCOPD103.pdf.

https://www.thedailystar.net/business/news/stock-broker-faces-bsec-heat-market-manipulation-1660252

[1] https://www.assignmentpoint.com/business/finance/problems-prospects-bangladesh-capital-market.html

[2] https://www.academia.edu/37787480/Capital_Market_of_Bangladesh_Problems_and_Prospects

[3]  Ibid.

[4] https://smallbusiness.chron.com/objectives-sec-77600.html

[5] Dhakatribune.com published at December 28th 2015.

[6] Ibid.

[7] Dhakatribune.com published at May 20th 2019

[8] Dhakatribune.com published at May 20th 2019

[9] http://today.thefinancialexpress.com.bd/first-page/bsec-to-scrap-licences-of-errant-market-players-1549992524

[10] http://today.thefinancialexpress.com.bd/first-page/bsec-to-scrap-licences-of-errant-market-players-1549992524

[11] https://www.dhakatribune.com/business/stock/2019/04/12/bsec-forms-body-to-amend-rules-for-z-category-companies

[12] Dhakatribune.com published at April 12th 2019

[13] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD103.pdf.

[14] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD103.pdf.

[15] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD103.pdf.

[16] https://www.thedailystar.net/business/news/stock-broker-faces-bsec-heat-market-manipulation-1660252

Submitted By: Kazi Farah Akther

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