In an exclusive interview with the Dhaka Tribune’s Niaz Mahmud, Chief Executive Officer (CEO) of LankaBangla Investments Limited Hassan Zabed Chowdhury discusses the current state of Bangladesh’s capital market and the role of merchant banks in encouraging good companies to get listed on the bourses.
Hassan was the chief operating officer for four years at the same company before being promoted to CEO. He has more than 15 years of experience working in multinational companies, including GrameenPhone, DHL and Mobil Jamuna Lubricants Limited. He has a master of business administration (MBA) degree in accounting from Chittagong University.
What role do merchant banks play in getting companies listed on the capital market?
Merchant banks play a vital role in bringing good companies to the [capital] market, thus, increasing market depth and liquidity. Therefore, these institutions have to find good companies that can provide fair and sustainable returns to shareholders.
Furthermore, merchant banks should also groom prospective companies and teach them to practise proper corporate governance before entering the market through IPO (initial public offering).
Bringing a company to general investors through IPO is challenging, as it forces companies to be accountable to those investors. Sometimes, we have to provide practical suggestions to shape regulations related to our scope of services. Apart from that, merchant banks have a crucial role in promoting financial literacy among investors so that they can make correct decisions, and also provide professional portfolio management services.
There are allegations of merchant banks being involved with serial trading in the capital market. At the same time, some have also played a role in getting bad companies listed on the market. What do you think about these allegations?
The overall volume of our capital market needs to be increased with greater number of good IPOs each year. The overall accounting practices of private companies is a major issue, which needs to be addressed as soon as possible. Importance should be given to the authenticity of financial statements, and all stakeholders must promote financial literacy among retail investors.
Few small merchant banks in the market are bringing IPOs without due diligence, which is making the market volatile, while reputed merchant banks, like LankaBangla Investments Ltd, are working hard to continue bringing good companies to the market.
It is necessary to create a culture that promotes pulling good companies to become listed, rather than pushing merchant banks to list companies.
Although, the government has made good regulations to combat bad practices in the market, more oversight and enforcement is necessary for them to work. Sometimes, we also see a lack of coordination among the regulators.
What are the prospects of foreign investment, and what changes are expected in the market if the consortium of the Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE) get involved in our capital market?
Foreign investment in the market is linked to global interest rates, which are on a rising trend. High interest rates discourage capital market investment and lower the valuation of equities. Foreign investors generally lessen exposure in the market in order to reduce risks during an election year, which could be seen in 2018. But it is likely to increase in 2019, since the parliamentary polls are over.
Firstly, it is important to build the necessary infrastructure required to attract foreign investment. However, Bangladesh’s robust growth is likely to attract global attention. Foreign investment is also linked to other factors, such as interest rates in global markets. Although, in order to increase investments, the DSE [Dhaka Stock Exchange] will need to attract more good companies to get listed.
The number of high-quality companies in our capital market is very low. Do you think better companies will get listed after the Chinese consortium joins us?
While it is certainly true that a more efficient capital market will encourage companies to opt for equity financing, regulatory incentives and a change in corporate culture will also play a crucial role in attracting good companies.
It is natural for companies to assess the costs and benefits of becoming publicly listed before opting for such a major decision. If the costs are greater than the benefits, then directors are unlikely to get their companies listed.
What initiative can be taken to increase the capital market's contribution to our gross domestic product (GDP)?
If the indices are positive and the market gives good return to investors, stakeholders will be more confident—which will have a far-reaching impact on the overall financial sector and the economy as a whole. Higher valuation will allow existing companies to borrow money at cheaper rates to expand business activities, while new companies will be encouraged to enter the market. Listing good companies will provide fair and sustainable returns, thereby, contributing to the GDP.
Why do you think multinational companies (MNCs) and state-owned companies are not getting listed?
Bureaucracy, red tape and lack of proper directives for mandatory listing are the main reasons behind that. For companies with higher dividend paying capacities, reducing the multilayer tax on dividends may encourage them to come to the market.
Do you think Bangladesh's capital market is mature enough to have a derivatives market?
There is no reason for the Bangladeshi capital market to refrain from using financial derivatives, which are undoubtedly a core part of financial innovations. The significance of these instruments for increasing market depth and promoting healthy growth of commercial banks cannot be denied.
What can we do to strengthen the capital market?
The need for a functional capital market for inclusive growth is evident. Banks cannot lend for long term with their relatively short-term deposits. If they do so, the unhealthy practice will ultimately create turbulence in the market. A lot can be done to enhance investors’ confidence, which is key to strengthening the market. But, the first initiative has to come from the key regulators.