Chittagong Stock Exchange,Bangladesh

Premier University

1 | P a g e Chittagong Stock Market

Portfolio Management


B.B.APortfolio Management

Assignment on:

Chittagong Stock Exchange

Submitted to

Associate Professor: Dr. S.M Sohrab UddinDepartment of finance and Banking

University of Chittagong

SUBMETTED BY

Md. Ariful Islam Saimon Chowdhury

ID : 1022114412

Semester :8th Section :A

Department of FinanceFaculty of Business Administration

Premier University, Chittagong.


Chittagong Stock Exchange

Introduction BACKGROUND

The Chittagong Stock Exchange (CSE) began its journey in 10th 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.

The Chittagong Stock exchange was established in 1995 as a public company limited by guarantee with an Authorized capital of 15 0’000’000 divided into 500 shares of Tk.300’000each. the second stock exchange in the country, and located in the port city of Chittagong in southeastern Bangladesh. The CSE trading system: CHITTRA has four modules including Broker’s Workstation (BWS), the exchange comprised of twelve board members and run by an independent secretariat from the first day of its beginning. Chittagong Stock Exchange (CSE) was formerly opened by then Honorable Prime Minister of Bangladesh on November 4, 1995. CHITTRA has four modules including Broker’s Workstation (BWS), Market Operations Systems (MOPS), Surveillance and VECTOR. Founder member of the proposed Chittagong Stock Exchange (CSE) approached the Bangladesh Government in January 1995 and obtained the permission of the Securities and Exchange Commission (SEC) on February 12, 1995 for establishing the countries second Stock Exchange. The exchange comprised of twelve board members and run by an independent secretariat from the first day of its beginning. The Exchange comprised of twelve Board members, presided by Mr. Amir Khosru Mahmud Chowdhury (MP) and run by an independent secretariat from the very first day of its inception. CSE was formally opened by then Hon'ble Prime Minister of Bangladesh on November 4, 1995.

CSE at a glance Type of organization: A Not-for-profit public limited company by guarantee. Authorized capital: TK. 150 Millions Paid up capital: TK. 38.7 Millions ($0.72 millions) Number of members: 129, all members are corporate bodies No. of listed companies: 212 No. of listed Mutual funds: 10 No. of listed Debentures: 04 CSE all share Index: 1586.65 CSE-30 Index: 1457.71 Market capital: TK. 56.36 Billions ($ 1.037 Billions) Trading days: Sunday to Thursday. Trading procedure: Automated Trading System. On line trading system: 30thmay, 2004.


MISSION

The Chittagong Stock Exchange believes that a dynamic, automated, transparent stock exchange is needed in Bangladesh. It works towards an effective, efficient and transparent market of international standard to serve and invest in Bangladesh in order to facilitate the competent entrepreneurs to raise capital and accelerate industrial growth for overall benefit of the economy and keep pace with the global advancements.

OBJECTIVES of CSE

Develop a strong platform for entrepreneurs raising capital Provide a fully automated trading system with most modern amenities to

ensure quick, easy, accurate transactions and easily accessible to all; Undertake any business relating to the Stock Exchange, such as a clearing house,

securities depository center or similar activities; Develop a professional service culture through mandatory corporate membership; Provide an investment opportunity for small and large investors; Attract non-resident Bangladeshis to invest in Bangladesh stock market; Collect preserve and disseminate data and information on stock exchange; Develop a research cell for analyzing status of the market and economy Increase business turnover Modernize trading system Ensure effective relationship management Achieve high level of confidence & professionalism Engage in product and market diversification Contribute to capital market policy development Ensure exchange related quality services

Milestones

12th Feb 1995: Bangladesh Government approved CSE

1st April, 1995: Incorporated as a limited company

10th October 1995 Floor Trading Started

1st January 1996: became corresponding member of

2nd June 1998: Automated Trading on WAN starts

16th January 2000 Convened SAFE

26th January, 2004 Central Depository Bangladesh Ltd. (CDBL) opened

30th May, 2004 Internet Trading Service (ITS) introduced

4th July, 2004 Over-the-Counter (OTC) market opened

20 Oct, 2013 NGTS and new website

Function OF CSE

CSE performs various functions for betterment of stock market and investors. These

functions can be classified as

- Core functions- Others functions


Core functions Trading Compliance & Monitoring Clearing & Settlement Research & Development

Others functions Listing functions Post-IPO functionsActivates of Various Department

There have various departments in Chittagong Stock Exchange. Some of the important

departments are given below:

Compliance Section:

Listing and Membership Department Market operation Department (MOP) Surveillance Department Inspection Department

Other Section:

System Department (IT) Clearing And Settlement department Account and finance Department Research & Development and Public Relation Department

Product of CSE

Current Products of CSE:

Listed Securities: 284

Equity (Share) : 239

Mutual Funds : 42

Corporate Bond : 4

Paid up Capital :Tk. 420.38b [$ 4.39b]

Market Capital : Tk. 1,773.61b [$ 25.31b]

Categorization of listed company CSE and DSE

Category CSE No. of CompaniesA 130 250B 13 14G 1 0N 14 4Z 72 24Debenture(A category) 2Grand total 232 296

Criteria of the share Category:


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 ormore in a calendar year. (Mutual fund, debentures and bonds are being traded inthis 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

Highest Records

Highest Records

Title Values DateTotal Trade Volume 49076786 Nov 25, 2013Total Traded Value in Taka 3,404,724,131 Oct 28, 2010Total Closing Market Capital in Taka 3,159,253,497,508 Dec 5, 2010

CSE 30 Index 22627.63 Dec 5, 2010CSCX Index 16122.42 Dec 5, 2010CASPI Index 16440.4048 Oct 12, 2014CSE 50 Index 1204.057 Oct 12, 2014CSI Index 1118.773 Oct 15, 2014Total Number of Trades 60645 Nov 25, 2010

LISTED Industry Of CSE

SL Industry Name No. of Companies SL Industry Name No. of Companies

1 BANK 29 11 LEASING & FINANCE 22


2 CEMENT 7 12 LEATHER & FOOTWEAR 5

3 CERAMIC 5 13 LIFE INSURANCE 12

4 CORPORATE BOND 2 14 MISCELLANEOUS 12

5 DEBENTURE 0 15 MUTUAL FUNDS 41

6 ENERGY 16 16 PAPERS & PRINTING 4

7 ENG. & ELECTRICAL 26 17 PHARMA & CHEMICALS 22

8 FOODS & ALLIED 12 18 SERVICES & PROPERTY 7

9 GENERAL INSURANCE 29 19 TELECOMMUNICATION 2

10 ICT 6 20 TEXTILES & CLOTHING 36

Indices Graph on 02 Jul, 2015Highest value : 11453.6385Lowest value : 11048.5257Date From : 02 Jun, 2015Date To : 02 Jul, 2015Trading Days : 21

Date From : 02 Jun, 2015 toDate To : 02 Jul, 2015

Highest value : 8633.9502Lowest value : 8333.777Date From : 02 Jun, 2015Date To : 02 Jul, 2015Trading Days : 21

Figure 1 shows the graph of return indices for the period of between 02.6.2015 and 02.7.2015. In the figure, what we notice atthe first glance is not the presence of a linear time trend. It is very difficult to get any idea about the stationarity of the series from this graph

A good market representative index should involve:

Scientific calculation formulas with clear adjustment procedure Logical scrip selection criteria Distinct base date Meaningful base value

The only index the CSE has been maintaining since 10th October 1995 is a ALL SHARE PRICE INDEX using Chained Paasche method. It faces question of clarity. This index was subject to unusual ups and downs and without a distinct base value. Therefore in need of a clean slate CSE finds the date 1 January 2000 is the best date to start new Indices:

An All Share Price Index with new formula and base date 30th December 1999 (the last day of the year) and new base index of thousand (to mark the millenium) will replace the have studied index of a number of existing one and A completely new Selective Index


incorporating 30 scrips with base date 30th December 1999 and base index 1000.

We bourses and found that the Laspayers Method to calculate index is regarded as the most transparent and scientific method. The method is described below in this write-up.The following conditions will be followed while calculating the All Share Price Index:

All Share Price Index does not necessarily mean that all the listed stocks should be considered for calculating the index. Inactive stocks not being traded for consecutive six months will not be considered in the calculation.

Only the active scrips will be considered for calculating the index. Mutual Funds and Debt securities will not be considered in calculating index. A newly listed scrip will be included in the index after five consecutive trading days. Only normal trades should be considered in calculating index. All share price index will be calculated only once in a day - after the trading hour in the on

line system. No changes in number of shares will be allowed during VECTOR session. Index committee will review the index - its criteria, performance, calculation method after

every six month. Index Base Date is 30th December 1999 Base Day index 1000

CRITERIA OF LISTED COMPANIES FOR INCLUSION IN THE

SELECTIVE INDEX (CSE-30)Two layer methods are followed for selection of listed companies in the CSE-30 Index. In the

first layer method, basic criteria are considered for primary selection.

CSE SELECTIVE INDEX (CSE - 30)

At the beginning of new millennium a selective Index will be introduced, which is found to be very popular in almost all the developed exchanges worldwide. Here the selection criteria play a very important role in forming an index.

Criteria for a Selective Index

It provides a discussion about the important criterion for an index, which is to be used as a benchmark of performance. The criterion is that the movement of the index fully represents the aggregate movement of the index's constituent assets and that the index's returns are realizable by an investor who has held a portfolio identical to the asset mix of the index. Value-Weighted Index satisfies the above criterion.Selection of stocks for the benchmark index should be such that it represents the whole market. In addition it will be guaranteed that the constituent stocks have high percentage coverage of the market in terms of market value. This will make it difficult if not possible for a few investors to manipulate the movement of the index.

CRITERIA FOR CSE-30 INDEX

(After revision in the Listing & Index Committee Meeting held on 28th Apr 2009)Two layer methods are followed for selection of listed companies in the CSE-30 Index. In the first layer method, basic criteria are considered for primary selection.


Basic Criteria

1. Must be listed with the Chittagong Stock Exchange.2. In case of IPO/New Issue, this should be on listing either with DSE or CSE for a minimum period of 2 years or remained in Commercial Production for the minimum same period prior to its listing.3. Companies that did not hold their Annual General Meetings regularly will not be considered.4. Minimum market capitalization must be Tk. 200 million.5. Must have at least 20% free floating share capital. Free floating share capital shall mean the share capital which will exclude Govt.'s holding (other than ICB), Sponsors/Directors & their Associates' holding plus other locked-in portions.6. Must have positive revenue reserve/ retained earnings.7. Must be traded for at least 20% days in trading.8. Paid dividend in any of the last 2 years.9. Company having negative Earning per Share (EPS) for last two consecutive years will not be considered.10. Financial Institution falling under the problem list of Bangladesh Bank will not be

considered provided such information is available from an acceptable source.11. Company failing to pay the listing fees and/or penalty imposed under the Listing

Regulations of CSE for a period of 2 years will not be considered.12. At least one company from each sector will be taken in the index if the scrip satisfies the

above criteria and achieves the minimum point as evaluated on the basis of the following Selection Criteria.

On being qualified on the basis of the Basic Criteria, the companies are required to meet the following further Selection Criteria to have the final berth in CSE-30 Index.Selection Criteria

1. Higher Net Assets Value (NAV) per share2. Higher rate of Earning per Share (EPS)3. Higher rate of dividend4. Higher rate of free floating in equity.5. Larger number of shareholders.6. Higher liquidity in terms of trading day.7. Higher percentage of market cap in terms of Paid-up Capital.8. Longer duration of continuous remaining in the CSE-30 Index.9. Regular payment of listing fees.


The Potential of the Bangladesh Capital Market

The capital market is the engine of growth for an economy, and performs a critical role in acting as an intermediary between savers and companies seeking additional financing for business expansion. Vibrant capital is likely to support a robust economy. While lending by commercial banks provides valuable initial support for corporate growth, a developed stock-market is an important pre-requisite for moving into a more mature growth phase with more sophisticated conglomerates. Today, with a $67 billion economy and per capita income of roughly $500, Bangladesh should really focus on improving governance and developing advanced market products, such as derivatives, swaps etc.

Despite a challenging political environment and widespread poverty, Bangladesh has achieved significant milestones on the social development side. With growth reaching 7 percent in 2006, the economy has accelerated to an impressive level. It is noteworthy that the leading global investment banks, Citi, Goldman Sachs, JP Morgan and Merrill Lynch have all identified Bangladesh as a key investment opportunity. The Dhaka Stock Exchange Index is at a 10-year high, however, the capital market in Bangladesh is still underdeveloped, and its development is imperative for full realization of the country's development potential.

It is encouraging to see that the capital market of Bangladesh is growing, albeit at a slower pace than many would like, with market development still at a nascent stage. The market has seen a lot of developments since the inception of the Securities and Exchange Commission (SEC) in 1993. After the bubble burst of 1996, the capital market has attracted a lot more attention, importance and awareness, that has led to the infrastructure we have in the market today.

Reasons behind the underdevelopmentAccess to high quality and credible corporate information remains a major problem in the market. While a handful of institutional investors may enjoy certain benefits since they have an investment unit manned with qualified officers, nothing exists for retail investors. And, in the absence of independent research houses, retail investors primarily focus on advice given by their brokers, which often consists of market rumours. This is not acceptable, and it often leads to enormous losses for small investors who are vital for a low-income and emerging market like Bangladesh. Filtering of information among different types of investors may leave scope for manipulation; this assumption had been proved right in the 1996 market meltdown at the cost of many individuals and households.

The market does not have an adequate number of fundamentally sound scraps. The authorities should not force major corporations to come into the market, without creating an enabling environment. The focus should be on the privatization of state owned enterprises through public offerings in the bourses. The market has to reach such a stage of development that companies will take it as a serious alternative to bank financing.

The government has reduced the interest rates on savings instruments, however this particular market is still limited to the commercial banks, and individual investors do not have access to these instruments. These savings instruments are considered risk-free, and since they are not present in the capital market, the overall risk of investment for an investor remains very high. A portfolio investor does not have the option of reducing his average portfolio risk by adding these risk-free opportunities.

Corporate governance of international standard is still lacking. Multinational corporations and institutions operating in Bangladesh often adhere to a very high international standard compliance regime. Parent companies of most of these corporations and institutions have


their scrips listed in developed markets. Unless the local market adheres to, and effectively enforces, a standard corporate governance system, there will not be a level-playing ground for international business houses vis-a-vis local operators.

An important aspect for capital market is reflection of fair value of scrips. This is not adequately present in the current scenario, and due to this reason the market is not receiving the attention of an important segment of investors, both foreign and local. Investors are perhaps depending more on speculative analysis, resulting in volatility in the market, as opposed to fundamental analysis, which could attract more stable long-term investors who are sure about their investment tenure and expectations.

1996 and nowThe bull-run that took place in 1996 has left a number of positives for the market. A lot of investment-friendly regulatory reforms have been implemented by the SEC. We now have stronger surveillance and improved rules relating to public issue, rights issue, acquisition, mergers and so on. All these fundamental developments, which were well overdue, followed the 1996 bull-run. It was a learning experience for Bangladesh, and the desired level of changes was initiated by the market watchdog subsequently.

In the secondary market, surveillance is more active and particular than before. These developments, that are widely appreciated, are actually the fundamental requirements that are in place today resulting from the continuous efforts of the government and multilateral agencies.

Trading has now become automated, led by the Chittagong Stock Exchange through the central depository. In the present automated trading environment, bids/offers, depth, and required broker particulars are all recorded and can be retrieved for future reference. The Central Depository Bangladesh Limited (CDBL) was created in August 2000 to operate and maintain the Central Depository System (CDS) of Electronic Book Entry, recording and maintaining securities accounts and registering transfers of securities; changing the ownership without any physical movement or endorsement of certificates and execution of transfer instruments, as well as various other investor services including providing a platform for the secondary market trading of Treasury Bills and Government Bonds issued by the Bangladesh Bank.

The stock market surveillance mechanics in place at present has no resemblance to that of 1996. There are strict rules and guidelines, trading circuit breakers and international standard surveillance to protect investor rights and ensure fair play.

The recent surge in the stock marketThe Dhaka Stock Exchange Index was at a 10-year high in the 2007 year end (up 66 percent), which made it Asia's top performer after China. The steady investment atmosphere prevailing throughout 2007 is considered to be one of the main reasons behind this surge. Good return prospects, stable market growth, and uninterrupted trading as a result of political stability attracted foreign investors to local securities. In 2007, foreign investors bought shares worth $205.7 million, while the amount of selling was $78.6 million, according to a DSE statistic. According to the DSE, in 2007, net foreign or portfolio investment on the Dhaka Stock Exchange surged 8.3x to $129 million. The banking sector, followed by the power, pharmaceutical and cement sectors, received the most foreign investment.

The caretaker government has also attracted investors by pledging to sell state enterprises. The state-owned companies -- Jamuna Oil Company Ltd. and Meghna Petroleum Ltd. -- debuted in the bourses early this month. Some analysts think that the market had been


undervalued before the surge, and the uphill trend, therefore, played the role of an upward correction of the market.

The P/E ratio now stands at 20x as compared to 14.1x for emerging markets. It seems sustainable if the planned big IPOs of a few SOEs and the top telecom companies take place. More such large issues are required, which can emerge out of the energy, infrastructure and public sectors.

OpportunitiesThe capital markets in Asia are getting more and more focus with the growing corporatization of the Asian economies. Eastern Asia has progressed a lot with respect to attracting western companies to get listed in Asian bourses as well as supporting innovative instruments, and Southeast Asia is also coming up with India leading the way. Comparing the local market scenario with that of the rest of the region, Bangladesh is in pretty good shape as we have most of the infrastructure in place. Our market capitalisation is relatively smaller and it currently stands at $9.3 billion, which is just over 13 percent of GDP. Higher liquidity is skewed towards a handful of scrips, while a stagnant situation exists for few less profitable issuers.

At present, the government is heavily focusing on developing a debt capital market. Such measures are certainly welcome as Bangladesh lacks a proper secondary market for bonds. The market is yet to support short-term capital requirements of corporations.

Debut trading of state-owned oil companies like Jamuna Oil Company Ltd and Meghna Petroleum Limited on the local bourses in January 2008 has spurred a lot of encouragement among investors. This initiative taken by the government to list SOEs will increase market capitalisation and improved liquidity.

SEC is also contemplating the introduction of the book-building method in the valuation of IPOs in order to ensure a fair price within this year. This will encourage companies with sound financial health to come into the market.

Regulatory pressures are mounting on telecom companies to get listed. It is estimated that the listing of the top telecom companies will attract more foreign investment, increase the market capitalisation by few folds, and bring about higher standards of corporate governance.

There is still huge potential in the market for securitisation and other debt instruments like commercial papers and corporate bonds, and derivatives, which will help foreign investors hedge their exposure.

Problems of Chittangong Stock Exchange:The unexpected rise and fall in share prices mostly followed from the general confidence of the investors about political stability, euphoria of investment in shares, prospect of quick capital gains, a vacuum in respect of institutional presence in the share market, monopolistic dominance of member brokers, inefficiency of the SECS to cape with the developments, existence to Kerb market , absence of proper application of circuit breaker etc. Delivery versus payment mechanism was used as one of the main vehicles of manipulation. Kerb market gave birth fake and forged share certificates. Although there are increasing trends in all the indicators, DSE, CSE are not free from problems, The problems of DSE, CSE may be summarized as under:


Price manipulationIt has been observed that the share values of some profitable companies has been increased fictitiously some items that hampers the smooth operation of Stock market.

Delays in Settlement:

Financing procedures and delivery of securities sometimes take an unusual long time for which the money is blocked from nothing.

Irregulations in Dividends:

Some companies do not hold Annual General Meeting(AGM) and eventually declare dividends that confused the shareholders about the financial positions of the company

Selection of Membership:

Some members being the directors of listed companies of DSE, CSE look for their own interest using their internal information of share market.

Improper financial statement:

Many companies do not focus real position of the company as some audit firms involve in corruption while preparing financial statements. As a result the shareholders as well as investors do not have any idea about position of that company.

OTHER

The concept of centralization of the securities market has not been implemented that areise technical problems and political infighting.

The intrinsic values for securities traded are sometimes estimated without considering the current market prices of the securities.

The absence of comprehensive legal and supervisory framework. Lack of skilled manpower as well as financial and non-financial institutions involved

in the securities market. The lack of proper policy framework that provides incentives and protection to

investors. The dominance of bigger public sector and borrowing of public sector as well as

government form the institutional sources rather than the market.

Suggestions to improve the activities of CSE: o To introduce automated monitoring system that may control price manipulation,

malpractice’s and inside trading.o To introduce full computerized system for settlement of transactions.o To force the listed companies to publish their annual reports with actual and proper

information that can ensure the interests of investors.o To control and abolish kerb market form premises of stock market.o To take remedial action against the issues of fake certificates.o The composite Quotation system(CQS) should be introduced and implemented that

available the exchange specialist bid-ask quotes to the subscribers.


o To make arrangement to set-up merchant banks, investment banks and floatation of more mutual funds particularly in the private sectors.

o Banks, insurance companies and other financial institution should be encouraged deal in share business directly.

o The brokers should not be allowed to deal in the Scripps on their own accounts.o The management of DSE and CSE should be vested with professionals and should not

in any way be linked with the ownership of stock exchange and other firms.

Major future prospects that will change the CSE:

Within 3 to 6 months 8 large profitable government enterprises are going to be listed under Direct Listing Method adding value worth another 1 billion Dollar.

The Telecom Giants in Bangladesh are finalizing their offers for IPO in the market.

Power and energy sectors demand for capital is 5 to 10 billion dollar within short time to meet the immediate needs of 5000 MW power demand.

A deep sea port requiring 1 billion dollar is going to start with a policy decision that it will also be listed.

The Pharmaceutical sector and API enjoying WTO benefit is growing sharply.

Textile sector as backward linkage to thriving export oriented garments industries is booming.

Export oriented food processing industry needs huge capital and technical capacity to meet the growing standards in global market for marine food, fruits and poultry.

IT sector with our talented developers, yet to demonstrate the massive potentials of software industry of the country.

Future Programs for Further Development

1. Active market of government, municipal and corporate bonds beside the corporate bonds to create alternative investment.

2. All securities to be brought under CDS within 2 years.

3. All major infrastructure companies, specially those in power, telecommunication and energy sector are to be listed ensure to broaden the market depth with at least US$ 15 billion market cap by 2012 having daily average turnover from current level of average of 10 to 15 million dollar to a level of 70 to 100 million dollar 2 years.

4. To strengthen merchant banks’ capacity to be more active.

5. Ensuring speedy disposal of decisions for market operation.

6. Ensuring greater degree of transparency in financial disclosure and management structure for better corporate governance.

Conclusion:

To expedite the market development process, it may be a good idea to decide on certain milestones and link them to the disbursement of Development Credit Support of the World Bank. The government is making good progress in other sectors, including monetary management, corporatization of public-sector banks and others through this linkage.


The missing link between the SEC, Bangladesh Bank, Bangladesh Telecom Regulatory Commission and other regulatory bodies is now getting established. Individually, they were not serving each others' interests, and there was no effective coordination among them, hence the country was deprived of great initiatives. A dedicated financial market cell at the Ministry of Finance could be formed to coordinate with these regulators as well as other ministries.

In terms of creating market depth, more profitable state-owned-enterprises should be listed. The supply of securities can be increased if the SOEs are allowed to operate through the stock exchanges. Floatation of SOE scraps is expected to expand the market by couple of times. Corporatization of SOEs will bring in transparency as well as confidence on the government financial system.The Bangladesh capital market still has a long way to go. The recent measures taken by the transitional government have already begun to positively impact the markets. If more investor-friendly policy reforms were to be implemented, the capital market will undoubtedly play a critical role in leading Bangladesh towards being the next Asian tiger with growth comparable to India, Vietnam and the other most dynamic economies in the region.

Chittagong Stock Exchange,Bangladesh

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