The days in 1996 still flashes through my memory. I was working for a foreign bank in the same street where the Dhaka Stock Exchange Building is located. The frenzy, the expectation among the traders/investors (mainly traders) was so infectious that the whole street covering more than two kilometres from The Ittefaq building to the Shapla square was jammed with people trading paper shares like a fish market. The custodial office of our bank became extremely busy and people from other departments were deployed to clear off the desk of custodial service. It was painful to see the numbers of advisors and traders with no qualification or educational background getting in the stock market helping create this bubble. At the end, the fateful eventuality caused many to get broke. To participate in share trading one must have the minimum qualification to read the financial and non financial aspects of a company enabling educated guess. Just on the basis of rumour of making some extra profit is like gamble which really is detrimental to the health and reputation of stock market. As Warren Buffet once said,Stock Exchange - Demutualisation and beyond
In the world of finance, there are two formal and clear distinct methods or ways from where a concern can meet the financial requirements, one way is to borrow money from money markets and the other is through capital markets
Masihul Huq Chowdhury
The days in 1996 still flashes through my memory. I was working for a foreign bank in the same street where the Dhaka Stock Exchange Building is located. The frenzy, the expectation among the traders/investors (mainly traders) was so infectious that the whole street covering more than two kilometres from The Ittefaq building to the Shapla square was jammed with people trading paper shares like a fish market. The custodial office of our bank became extremely busy and people from other departments were deployed to clear off the desk of custodial service. It was painful to see the numbers of advisors and traders with no qualification or educational background getting in the stock market helping create this bubble. At the end, the fateful eventuality caused many to get broke. To participate in share trading one must have the minimum qualification to read the financial and non financial aspects of a company enabling educated guess. Just on the basis of rumour of making some extra profit is like gamble which really is detrimental to the health and reputation of stock market. As Warren Buffet once said,
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. This is the temperament typical of any person involved in stock market activities. Our traders and investors therefore need to get the proper orientation and education in order to make the educated guess before getting involved in any transaction.
In the world of finance, there are two formal and clear distinct methods or ways from where a concern can meet the financial requirements, one way is to borrow money from money markets like banks or non banking financial institutions and the other is through capital markets (stock market) by way of raising equity or issuance of debentures. The supply side of the funds come from the savings (in form of savings and fixed deposits) in the banks/financial institutions and purchase of shares/debentures in primary/secondary market. While Central Banks of a country is the prime regulatory body for money markets, Security Exchange Commission works as the prime regulatory body for the capital markets of a country. The Money markets and Capital markets constitute Financial Market of a country.
The money markets are used for the raising of short term finance, sometimes for loans that are expected to be paid back as early as overnight. Whereas the capital markets are used for the raising of long term finance, such as the purchase of shares, or for loans that are not expected to be fully paid back for at least a year.Funds borrowed from the money markets are typically used for general operating expenses, to cover brief periods of liquidity. For example, a company may have inbound payments from customers that have not yet cleared, but may wish to immediately pay out cash for its payroll. When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods which will be used to help increase its income. It can take many months or years before the investment generates sufficient return to pay back its cost, and hence the finance is long term.
The Capital Market plays a pivotal role in the economic development of an economy. In brief the major areas include, Saving mobilization: Obtaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets.
Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same.
National Growth: An important role played by financial market is that, they contribute to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible.
Entrepreneurship growth: Financial market contribute to the development of the entrepreneurial claw by making available the necessary financial resources.
Industrial development: The different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well-being.
Hence, the stage of development of a Capital Market of any country is indicative of the economic development of any particular country.
Stock exchanges around the world have different ownership structures. The most common is a mutual structure in which the exchange is a membership organization run by and often exclusively accessible to its member organizations. The worlds largest exchanges--New York, London, Tokyo and Frankfurt--all began as mutual organizations. The New York Stock Exchange (NYSE), for instance, was a mutual organization from 1817 until 2006, and the London Stock Exchange was from 1801 until 1986. An exchange with mutual status is run as a nonprofit organization for the benefit of its members, which include stock brokerage companies, banks and trading organizations. Membership in the stock exchange usually is purchased and ratified by the board. Being a member provides exclusive benefits, such as trading access in the stock exchange, influence and management in the exchange and receipt of any trading surplus the stock exchange earns. The highest price paid for membership in the NYSE was $4 million, in December 2005, just before demutualisation.
The Stockholm Stock Exchange was the first exchange to demutualise in 1993, followed by Helsinki (1995), Copenhagen (1996), Amsterdam (1997), the Australian Exchange (1998) and Toronto, Hong Kong and London Stock Exchanges in 2000. The Chicago Mercantile Exchange became a shareholder-owned public corporation in 2000 through a public offering.
Demutualisation is the process through which a mutually hold stock exchange (may be a trustee or a limited, both private and public), the separation between the members (seat owners) and management body separates. The two key aspects of demutualisation are, conversion of a not for profit entity (stock exchange) to a profit making concern and the governance issue. The Stock Exchanges thus through process of demutualisation targets for more efficiency in term of profitability and level of governance. There are various ways through which a stock exchange demutualise, which are as follows.
In a full demutualization, the mutual completely converts to a stock company, and passes on its own (newly issued) stock, cash, and/or policy credits to the members or policyholders. No attempt is made to preserve mutuality in any form. However, in a full demutualization of a mutual saving banks, stock is issued to investors in the initial public offering , and the depositors, who theoretically owned the bank before demutualization, receive no stock unless they invest in the initial public offering.
A sponsored demutualization is similar; the mutual is fully demutualized and its policyholders or members are compensated. The difference is that the mutuality is essentially bought by a stock corporation. Instead of receiving stock in the formerly mutual company, stock in the new parent company is granted instead.
A mutual holding company is a hybrid concept, part stock company and part mutual company. Technically, the members still own over 50% of the company as a whole. Because of this, they are generally not significantly compensated for what would otherwise be viewed as loss of property. (This is also why many jurisdictions, including Canada disallow the formation of MHCs.) The core participants are isolated into a special segment of the company, still viewed as mutual. The rest is a stock company. This part of the business might be publicly traded, or held as a wholly owned subsidiary until such time that the organization should choose to go public.
The main revenue of a stock exchange comes from membership fees, listing fees and transaction fees. To increase profitability, there remains no option but to enhance the transaction volume. The increased use of electronic channels have brought disintermediation in the stock exchanges globally, which is helping increase in transactions but on the same page creating pressure on the revenue stream of stock exchanges by way of losing out on transaction fees which is the main source of revenue for stock exchanges in the demutualised environment. Thus this brings about another area of interest and challenge. The strategic alliance between various stock exchanges will help face this challenge in the coming days.
Dhaka Stock Exchange (DSE) was formed as a public limited company in 1954 and started operation in 1956. In 2004, Central Depository Bangladesh Ltd (CDBL) got birth which helped transformation of scrips paperless and ensuring the proper record of any scrips including ownership, whether unencumbered and so hence so forth. This helped the much required transparency in book keeping of the stock market. Gradually in 2013, DSE was demutualised. In 2015, DSE became member of World Federation of Exchanges. The successful transition to a fully functional demutualised environment and strategic alliance with major bourses will enable the growth of the premier bourse. Both the Government under Public sector wings and Private Sector can raise funding requirement both domestic and overseas markets. Along with the equity market, the debt or bonds market is also expected to expand to meet the requirement of these organisations. The proper launch of bond markets will also help required funding in various Public Private Partnership (PPP) projects including infrastructure, communication, health, education and other priority projects. Lets hope for the glorious days of DSE fuelling the engine of development and growth of the national economy.
The writer, a banker by profession, has worked both in local and overseas market with various foreign and local banks in different positions
