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Capital Market

Capital Market the market, or realistically, the group of interrelated markets, in which capital in financial form is lent or borrowed for medium and long term and, in cases such as equities, for unspecified periods.

The capital markets, in distinction from other parts of the financial market i.e., the money markets, are those for long-term government securities, corporate bonds, stocks, municipal bonds issued by state and local government units, and mortgages. industry and commerce as well as government and local authorities raise capital from the capital market which performs several important functions in the process of economic development. Most important among them are the promotion of savings and investment and efficient allocation of funds among competing uses. 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, investment companies, investment clubs, pension funds, stock exchanges, security companies, underwriters, portfolio-managers, and insurance companies.

Capital market in Bengal was founded during the Mughal regime in the early 17th century. Although in a limited scale, there were money and capital market activities in Suba-e-Bangala throughout the 17th century. Bengal under the nawabs was fairly developed in trade and communication. An historian characterised Bengal of the Nawabi period as 'easy in its finances, moderate in its expenditure, free from charges and cares of independent dominion, its inhabitants enjoying in the occupation of agriculture and commerce, public peace and abundance'.

The prosperity of Nawabi Bengal was attributed to large investments by European nations and dispersal of Bengal raw silk, cloths etc. in vast amounts to the west and north and inland as far as Guzrat, Lahore and even Ispahan. Bengal exported large volumes of agricultural and industrial products to Asia and Europe. Asian merchants and Europeans, especially the English and Dutch East India Companies, invested their money to buy exportable goods and sometimes provided local producers with loan funds.

The volume of production of farmers and artisans were dependent on the supply of credit by local and foreign moneylenders and merchants. But the cost of borrowing money was very high. In 1720-21, the English companies' debt in Bengal amounted to Rs 2.4 million. The Dutch Company also borrowed from the local capital market. Its debt to the kasimbazar merchants with interest amounted to about Rs 1.5 million in September 1724. In March 1754, Dutch borrowing in Bengal stood at Rs 2.83 million. jagat sheth was the main creditor of the European companies. The French and the Ostend Companies also borrowed freely from the local money market. The Ostend Company borrowed money from local sarrafs and merchants. In the three years between 1755 and 1757, the Dutch debt to the Houses of Jagat Sheth amounted to Rs 2.386 million. At the time of the fall of Chandranagar in March 1757, the French owed Rs 1.5 million to the jagat sheth.

The capital market of the 17th century Bengal often faced scarcity of funds. Availability of investible funds depended on the exchange rate in Agra since local sarrafs and money merchants directed their money to Agra if the exchange rate there was higher than in the capital market of Bengal. Commercial banks established in the second half of the 17th century were engaged in providing short-term loans and trade financing. The growing trade of Bengal, the increase in activities of traders and mercantile communities, and the resultant increase in the circulation of money led to the development of banking throughout Mughal Bengal. Generally, moneylenders, moneychangers, village merchants (mahajans) and shopkeepers performed the function of banks and advanced both long and medium term loans to rulers when the latter were in financial hardship. Indigenous bankers also issued and discounted hundies (bills of exchange) and bank drafts. Apart from their financial transactions with government, these banking houses also extended loans to private parties. They gave loans on mutual trust, sometimes without a document, or even a witness. Loans were also granted on mortgages of lands, ornaments and other property.

The British east india company controlled both the administration and trade of Bengal until 1813. Subsequently, other British companies were allowed to enter into and conduct business in the area. To operate and manage production, and trade and commerce, the Houses of Agencies came into being under the partnership arrangements of the British private traders and Calcutta-based merchants. As these houses and private traders did not have sufficient money, technical knowledge and expertise - huge amount of capital and also technical know-how was imported from Britain for investment in Bengal. All new firms, private traders and agency houses also borrowed large amount of money from local sources. Issuance of paper certificates or bonds by the East India Company made the transfer of money easier. The flow of long-term capital started to increase in Bengal with British investment in the railway sector in 1854. Local moneylenders and landlords then lent their money to indigo planters. After 1850, banks in British India started to give long-term loans abreast of short-term lending. 17 loan offices were established throughout the Bangladesh region between 1850 and 1894. The capital was augmented significantly by the establishment of 15 new commercial banks in the region between 1896 and 1942.

Following the emergence of Pakistan in 1947, the country inherited a banking and credit structure consisting of 631 branches of various banks, including some foreign ones. As the headquarters of most of these bank offices were located in India, 436 bank offices had to shut down within six month of partition. Until July 1948, the Reserve Bank of India performed central banking functions for both countries under the partition arrangement. The State Bank of Pakistan was established in July 1948. Along with the normal central banking activities, the State Bank was entrusted with the responsibility of operating and fostering the growth of the country's credit system. It took significant steps to develop the banking system through setting up of commercial banks and credit institutions. Besides the progress in commercial banking, there has been other expansion to meet medium and long-term credit requirements of agriculture, industry, and housing through setting up of several specialised financial institutions during the period from 1947 to 1971.

With 81 companies including 40 indigenous ones, the insurance industry was a substantial supplier of long-term funds in the capital market of Pakistan. Of the 40 indigenous insurance companies, 10 were registered in East Pakistan. Life insurance became an important source of capital formation in Pakistan. Total investment of all insurance companies was Rs 386.81 million at the end of 1964. The capital market in Pakistan included the following: (a) post office saving banks, postal life insurance, defense saving certificates and prize bonds; (b) the National Investment (Unit) Trust; (c) the Industrial Corporation of Pakistan; (d) specialised credit institutions for agriculture, industry, and house-building viz. the Agricultural Development Bank, Industrial Development Bank, Pakistan Industrial Credit and Investment Corporation, and the House Building Finance Corporation; (e) insurance companies; and (f) stock exchanges.

There were two registered stock exchanges in Pakistan, one at dhaka, and the other at Karachi. Some organised limited dealings took place in Lahore also. The really active market, however, was that at Karachi registered in 1949. It provided a market place for gilt-edged securities as well as for equity issues of public limited companies. The East Pakistan Stock Exchange was established in Dhaka in 1954 but started functioning in 1956. It was later renamed as the Dhaka Stock Exchange (DSE) Ltd. on 23 June 1962.

Following its emergence in 1971, Bangladesh inherited from Pakistan a very small capital market consisting of 1130 branches of 12 commercial banks, the Dhaka Stock Exchange (DSE), 10 insurance companies established between 1958 and 1971, and the Samabaya (co-operative) Bank Ltd. The activity of DSE remained suspended until 1976, when it renewed operations with nine listed companies having paid up capital of Tk 137.52 million. This, along with the establishment of the investment corporation of bangladesh (ICB) in the same year, created a momentum in the country's capital market.

The ICB was entrusted with the responsibility of accelerating the pace of industrialisation, developing a vibrant capital market and providing institutional support to meet the equity gap of public limited companies in the industrial sector. ICB now underwrites public issue of shares and provides bridging loans to priority sectors. It also participates in direct purchase of shares, and the underwriting, purchase, and sale of debentures, and bonds. It has been managing investors' accounts, mutual funds and unit funds and participating in trade in the stock exchanges. In the mid-1980s, two private investment companies namely, National Credit Ltd. and Bangladesh Commerce and Investment Ltd., were permitted to participate in the capital market, although their activities remained limited.

The growth of capital market in Bangladesh was very slow because of the highly regulated economic regime and market imperfections. Long-term funds required by industrial enterprises were generally provided by government-owned development finance institutions (DFIs) at concessional and directed interest rates. The DFIs are the bangladesh shilpa bank, bangladesh shilpa rin sangstha, bangladesh krishi bank and the rajshahi krishi unnayan bank. The Bangladesh Small & Cottage Industries Corporation (BSIC) is another institution that provides medium and long-term loans to small industries either directly or through a consortium of commercial banks. bangladesh house building finance corporation provides long-term loans for construction of residential houses. DFIs generate their investible funds through allocations from government sources, credit from international financial institutions, and borrowings from the bangladesh bank. Co-operative banks in the country provide medium and long-term credit for purchase of land and agricultural equipment.

During the early 1970s, the debt-equity ratio in borrowings from the DFIs was relatively high. Yet, in the absence of a securities market, companies had to borrow from the debt market. They avoided the securities market even after its revival. Also, small savers were reluctant to invest their surplus funds in the capital market. DFIs were preferred sources of capital for people having proximity to power and the intention to appropriate public funds through defaults in payment. They took advantage of the environment in which the loan recovery mechanism was ineffective. There were no stringent measures to recover overdue loans or prevent their turning into bad debts.

The present day capital market in Bangladesh has an instrumental segment of securities market that includes two stock exchanges (one at Dhaka and the other at chittagong) and a non-instrumental segment of institutional investors such as commercial banks (45), investment bankers and companies, merchant bankers (26), insurance companies (39), pension funds and schemes, DFIs (5), postal saving schemes, postal life insurance, deposit pension schemes, employees insurance fund, security deposits, gift certificate deposits, sundry deposits, surcharge and development charges, leasing companies, non-bank financial institutions, and co-operative land mortgage banks.

At present, shares and debentures of 442 companies are traded in the equity market (258 in DSE and 184 in CSE. The number of mutual funds traded in the stock exchanges is 18 (9 in DSE and 9 in CSE) and that of debentures traded is also 18 (12 in DSE and 6 in CSE). Unit Certificates traded on 30 June 2000 numbered 42,985,690, the value of which was Tk 5.28 billion. The market capitalisation on 30 June 2000 in the two stock exchanges was Tk 80.86 billion and Tk 53.12 billion, equivalent to about $1.62 billion and $1.06 billion respectively.

The securities market instruments in Bangladesh include shares, debentures, unit certificates of ICB, mutual certificates, wage earners development bond, Fixed Deposit Receipts, and various saving certificates under the National Savings Schemes (5-years Bangladesh Sanchaya Patra, 5-years wage earners development bond, 3-years saving certificate, 3-years National Investment Bond, 5-years Family Saving Certificate, 8-years Pratirakkha Sanchaya Patra).

Institutions allowed to conduct merchant banking operations in Bangladesh are the Industrial Development and Leasing Company of Bangladesh (ipdc), uttara finance and investment, Banco Trans World (BD), Millennium Investment Management Company, Fidelity Assets and Security Company, Raspit Securities and Management Company, Capital Market Services, bay leasing and investment, Swadesh Investment Management, vanik bangladesh, Grameen Securities Management, South Asia Capital, Saudi-Bangladesh Industrial and Agricultural Investment Company (sabinco), prime finance and investment, EC Securities, Mercantile Securities, Bangladesh Mutual Securities, AAA Consultants and Financial Adviser, Pangaca Partners, Paramount Securities, Equity Valuation Research and Distribution, Prime Securities and Financial Services, MFH Financial Services, Satcom Securities and Management, and First Securities and Investment.

Non-bank financial institutions established under the Financial Institutions Act 1993 are the united leasing, Industrial Development and Leasing Company (idlc), Industrial Promotion and Development Company (ipdc), sabinco, phoenix leasing, union capital, Uttara Finance and Investment, uae-bangladesh investment company, international leasing and financial services, Prime Finance and Investment, bahrain bangladesh finance and investment company, Bay Leasing and Investment, delta-brac housing finance corporation, Vanik Bangladesh, peoples leasing and financial services, Infrastructural Development Company, Bangladesh Industrial Finance Company, national housing finance and investment, Midas Financing, first lease international, and Bangladesh Finance and Investment Securities business in Bangladesh is regulated by Capital Issues (Continuance of Control) Act 1947, companies act 1994, Securities and Exchange Ordinance 1969, Securities and Exchange Rules 1987, securities and exchange commission Act 1993, Securities and Exchange Commission (Amendment) Act 1993, Securities and Exchange Commission (Brokers, Stock Dealers, Sub-Brokers) Regulation 1994, Securities and Exchange Commission (Insider Trading) Regulation 1994, Securities and Exchange Commission (Merchant Bankers and Portfolio Managers) Regulation 1994, Initial Public Offering (IPO) Rules 1998, The Central Depository Bill 1999, Margin Rules 1999, Trust Act 1882 and Securities and Exchange Commission (Mutual Funds) Regulation 1994. Moreover, there are specific rules and regulations for controlling the operation of stock exchanges. The Securities and Exchange Commission (SEC), established in 1993, regulates overall activities of the capital market in Bangladesh. The objectives of the SEC is to protect interests of investors in securities, develop the securities market, and ensure compliance of laws relating to proper issuance and exchange/trading of securities.

The development of capital market got some momentum with shift in government policy towards privatisation. Key players in the capital market viz. the investors and the issuers responded positively and have become active in expanding the market. Bangladesh securities market statistics have been included in the Emerging Markets Fact Book of the International Finance Corporation (IFC). But the market is still very small and continues to suffer from imperfections. [Abul Kalam Azad]