Dhaka stocks yesterday suffered the biggest drop in a decade, mainly because of the regulators' market-cooling tightening of credit.
The regulator's move to cap single-client borrowing, and the central bank's show-cause notice to seven banks -- for not adjusting their overexposure to the capital markets -- prompted a panic sale in the secondary market, stockbrokers said.
The benchmark index of Dhaka Stock Exchange -- DSE General Index -- nosedived 204 points, or 3.19 percent, to 6,200.
The benchmark index of Chittagong Stock Exchange -- CSE Selective Categories Index -- also plummeted by 366.47 points, or 2.98 percent, to 11,903.84.
The DSE's was the steepest drop since the 1996 crash, when the market bubbled and then burst. On November 5 of 1996, the index rose to 3,649 points from 957 points on July 2 of 1996.
But the market started plummeting from November 6 of the same year with the index shaving 233 points on the day. The index went down by some 600 points to 3,065 points on November 30, and the decline continued to May of 1999.
The stockbrokers blamed the regulators' intervention in controlling the credit flow into the market.
"Securities regulator's and the central bank's move pulled the market down," said Md Shakil Rizvi, managing director of Shakil Rizvi Stock Ltd, a brokerage house.
However, he said, the market should not panic over the latest measures. "The banks' exposure to the stockmarket will be less than 10 percent of their total market capitalisation," explained Rizvi, also president of the DSE.
He also said they may sit with the Securities and Exchange Commission (SEC) to discuss its latest regulatory measures, which are eroding the investors' confidence.
The SEC stepped in at least four times in the last two months to calm the market through controlling the credit flow.
The latest measure -- capping credit exposure to a single-client borrower at Tk 10 crore for merchant banks and Tk 5 crore for the stockbrokers -- came into effect yesterday.
Prior to that, the SEC also tightened the credit facilities by reducing the loan margin ratio to 1:1 from 1:1.5, and slashing the price-earnings (PE) ratio for marginable securities to 40PE from 50PE.
Last week, Bangladesh Bank (BB) served notice on seven banks for not complying with its directive on adjusting their overexposure to the stockmarket. Earlier, BB also asked all commercial banks not to invest more than 10 percent of their liabilities in the stockmarket, and to adjust their exposure by August.
Yesterday's shock, which reigned over the entire trading session, also prompted the SEC to increase single-client borrowing to Tk 10 crore from Tk 5 crore for the stockbrokers.
The SEC also extended the deadline to September 30 from August 31 this year for adjusting the margin loan for those clients whose credit exposure is over Tk 10 crore.
Most investors came to know about the latest move after the trading session.
Panicked by the cooling measures of the SEC, many rushed to sell shares, even at huge losses.
"I incurred Tk 6 crore losses today [yesterday], as I had to start selling to adjust my portfolio in line with the SEC directive on single-client exposure," said Md Sabuj Mia, an investor.
"Now I heard of an increase in single-client exposure and expansion in the deadline for adjustment. Who will take the responsibility for my losses?"
The premier bourse's four major sectors -- banking, non-bank financial institutions, fuel and power, and engineering -- contributed heavily to the dip in the market.
All sectors, except mutual funds, closed lower, as selling pressure dominated the board.
Source: thedailystar.net
