The Floor Price Lifting in Bangladesh Stock Market

In a pivotal move, the Bangladesh Securities and Exchange Commission (BSEC) recently lifted the floor price, a groundbreaking measure implemented to stabilize a stock market facing global and domestic uncertainties. This bold decision sent shockwaves through the Dhaka Stock Exchange (DSE), ushering in both excitement and apprehension among investors. Let’s delve into the unfolding saga of Bangladesh’s stock market as it ventures beyond the era of floor prices.

As Bangladesh’s financial landscape navigates this new chapter, staying informed, analyzing market trends, and advocating for responsible investment practices are vital components of active participation. The story is still unfolding, and investors are encouraged to keep their eyes on the market, learn from expert opinions, and actively contribute to the ongoing conversation.

Floor Price Story in Bangladesh

The floor price in the Bangladesh Stock Market was set by the Bangladesh Securities and Exchange Commission (BSEC) in July 2022 to halt the free fall of the market indices amid global economic uncertainties. The floor price was the average of the closing prices on the date, and the preceding four days.

Here is a timeline for the floor price mechanism in the Bangladesh Stock Market:

• March 19, 2020: The Bangladesh Securities and Exchange Commission (BSEC) imposes floor prices on all listed securities, calculating their average prices of the preceding five days.
• April 2021: Floor price lifted in phases.
• December 2022: The BSEC lifts the floor price for 169 companies to bring vibrancy to the market.
• March 2023: The BSEC reintroduces the floor price for 169 companies, and all stocks come under the floor price curbs.
• January 18, 2024: The BSEC lifts the floor price for most stocks after 18 months, except for 35 companies to bring back vibrancy to the market. The floor price will still apply to 35 companies, and for others, the upper limit and lower limit will apply according to an order of the BSEC. 357 scripts out of 392 ( 355 stocks and 37 mutual funds) were on market-based trade.
• The Giant 35: The companies that remained under the floor price mechanism include Anwar Galvanizing, Baraka Power, British American Tobacco, Beximco Ltd, Bangladesh Submarine Cables, BSRM Ltd, BSRM Steel, Confidence Cement, DBH, Doreen Power, Envoy Textiles, and Grameenphone, HR Textile, IDLC Finance, Index Agro Industries, Islami Bank, KDS Accessories, KPCL, Kattali Textile, Malek Spinning, National Housing Finance, National Polymer, Orion Pharmaceuticals, Padma Oil, Renata Ltd, Robi, Siham Cotton, Shasha Denim, Sonali Paper, Sonarbangla Insurance, Shinepukur Ceramics, Shahjibazar Power, Summit Power, and United Power.
• January 22, 2024: The BSEC lifts the floor price from more than 23 scripts keeping the floor price only on 12 scripts. 380 scripts started trading without floor price on January 23, 2024.
• The 12 Floor carriers: Anwar Galvanizing, British American Tobacco Bangladesh, Beximco Limited, BSRM Limited, Grameenphone, Islami Bank, Khulna Power, Meghna Petroleum, Orion Pharma, Renata Limited, Robi Axiata, and Shahjibazar Power Company.
• February 6, 2024: The BSEC lifts the floor price from another 6 scripts keeping the floor price only on 6 scripts. Orion Pharmaceuticals, Anwar Galvanizing, and Renata Ltd started trading without floor price on February 7, 2024. Meanwhile, British American Tobacco Bangladesh, Grameenphone, and Robi — will have the floor price until their forthcoming record date.
• The Last 6 Floor mates: Beximco Ltd, BSRM Ltd, Islami Bank, Khulna Power, Meghna Petroleum, and Shahjibazar Power are the last 6 to trade with floor provision.

Living with the Floor’s Crutches:

Implemented on July 28, 2022, amidst global turmoil, the floor price acted as a safety net for investors, preventing panic-driven selloffs and offering a semblance of security. However, its prolonged existence led to a mixed bag of outcomes:

1. Dampened Activity: Limited price flexibility resulted in a contraction of trading volume, creating a sluggish market struggling to find its natural rhythm.
2. Market Skewed: The true values of stocks remained obscured under the artificial props of floor prices, hindering efficient resource allocation and raising concerns about market manipulation.
3. Eroded Faith: Despite temporary relief, doubts lingered about the market’s ability to function naturally once the floor was removed.

Floor Price Lifting in Bangladesh: The D-Day

After nearly 18 months under the influence of the floor price, the BSEC, responding to a changed economic landscape and market sentiment, made a decisive move. The floor was lifted, and the market faced the first day without restraints:

1. Volatility Unleashed: Prices began to fluctuate freely, reflecting pent-up demand and market forces that had been suppressed for months. The DSE witnessed both dramatic gains and losses as investors adjusted to the new normal.
2. Revived Trade: Trading activity experienced a substantial jump, signifying renewed investor interest and a more responsive market. The surge in volume indicated investors were ready to engage with the dynamic nature of a free-floating market.
3. Gradual Equilibrium: Amidst initial excitement and significant swings, the market gradually found its footing in a new equilibrium. Investors adapted to dynamic price movements, fostering a sense of cautious optimism.

The Market Reactions

Following the removal of the floor price, stocks experienced a significant downturn on the first trading day i.e. January 21, 2024, causing jittery investors to sell off holdings amid fears of portfolio erosion. Within five minutes, the Dhaka Stock Exchange’s key index plummeted by 214 points but later recovered most losses. It is very expected and usual as sale pressures from many stuck sellers were in place. However, with a bit of patience, the market is expected to stabilize with correction.

The prime index, DSEX, concluded at 6,240, down by 96.50 points (1.52%). Other indices, DS30 and DSES, also faced selling pressure, dropping 7.48 points to 2,137 and 14 points to 1,374, respectively.

The Chittagong Stock Exchange (CSE) also closed lower, with CASPI losing 476 points to 18,329.

Anticipated by market operators due to a lack of price discovery, the majority of traded shares saw erosion, with 296 issues ending lower, 54 higher, and 36 unchanged out of 386. The daily turnover on the Dhaka bourse decreased by 7.50%, amounting to Tk 5.89 billion. The Bangladesh Securities and Exchange Commission (BSEC) lifted the floor price after 18 months, excluding 35 stocks considered at risk of freefall.

However, the market has regained the real vibe and experienced huge turnover after the floor price withdrawal.

Why Floor Price Lifted?

The floor price was lifted in the Bangladesh Stock Market for several reasons:

1. Lack of trading activities: The prolonged floor price mechanism significantly minimized trading activities on the market, stuck a large sum of money, and created a barren equity market.
2. Frustration among investors: Investors, especially institutional ones, became frustrated over the market trend, as their investments were stuck in the market, and they were unable to sell their shares.
3. Artificial mechanisms: Experts cautioned that any artificial mechanisms in the financial sector, such as the floor price, could be harmful and may backfire.
4. Market recovery: The Bangladesh Securities and Exchange Commission (BSEC) lifted the floor price for most stocks after 18 months to bring back vibrancy to the market.
5. Liquidity improvement: The lifting of the floor price is expected to improve liquidity significantly in the immediate term, as normal trading will resume.
6. Capital market development: The lifting of the floor price may increase trade in the secondary market, but it is inadequate to bring about qualitative change to the capital market and boost its development
7. Institutional Survival: As the trade volume has been very insignificant for many institutions have to cover their necessary expenses, it was very urgent to remove the artificial mechanism to ensure the normal flows of the stock market.
8. Ensure the Nature of the Market: The stock market is called very liquid but most of the stocks are stuck on the floor without liquid ability. It was against the standard philosophy. So, lifting the floor price was an urgent call.

Challenges and Promises: The Road Ahead:

While the removal of the floor price holds promise for increased efficiency and long-term growth, it also presents new challenges:

1. Managing Volatility: Risk-averse investors might be wary of increased price fluctuations, requiring regulatory measures and investor education to mitigate concerns.
2. Combating Manipulation: Stringent regulations and vigilance are crucial to prevent unfair market practices and ensure a level playing field for all.
3. Building Trust: Transparency and accessible data are key to building trust and fostering a healthy market environment where investors feel confident to participate.

Conclusion:

The floor price removal marks a significant chapter in the ever-evolving story of the Bangladeshi stock market. The BSEC’s decision signifies a shift towards a market-driven approach, bringing both opportunities and challenges. Stakeholders play a crucial role in shaping a sustainable and prosperous future for the Bangladeshi capital market.