On the face of it, the tie-up between the Dhaka Stock Exchange and a Chinese consortium comprising two of the country’s three stock exchanges follows a trend of cross-border mergers or acquisitions between exchanges as capital markets become more integrated globally. In this increasingly globalised world, investors can move money around easily so cross-border mergers between exchanges are said to “make sense” to facilitate the flow of funds. The latest bout of merger bids has focused very much on derivatives trading, which is much more profitable for exchanges than equities trading.
At its root though, the partnership is the result of the far more specific and difficult experience endured by Bangladeshi investors who went through the debacle that hit the DSE in December 2010, when from an all-time high, the main index nearly halved, representing a loss of 22 percent of GDP and wiping out $27 billion in market capitalisation by October 2012.
Following the market debacle, a high-level probe was established by the Government of Bangladesh in 2011 to examine the deficiencies that led to the crash. The probe also highlighted limited enforcement of regulation by the Bangladesh Securities and Exchange Commission (BSEC) and commercial banks’ excessive investment in stock markets.
The way back from those boondocks was set out in the development of a capital market master plan (2012–2022). Through a strong partnership between the Government of Bangladesh and the Asia trhe n Development Bank (ADB), which has been involved with capital market development in Bangladesh for over 25 years, reforms have been rolled out, and the market is building confidence as the new policies and regulatory incentives under the Second Capital Market Development Program (CMDP 2) and ongoing Third Capital Market Development Program (CMDP 3) “gain traction”, according to the Manila-based lender’s own assessment.
Edging out the challenger
The decision by the Chinese consortium to purchase, and also to scrap for it to the extent necessary once the rival bid from India’s biggest stock exchange leading a consortium that also included the US-based NASDAQ materialised, to assume the role of DSE’s strategic partner should encourage capital market enthusiasts, even if the newly installed index for the bourse has not ended a single trading day in May higher than it started it. The clarity and steadfastness also displayed by the Shanghai and Shenzhen stock exchanges through their consortium in completing the purchase of their strategic stake in DSE can be seen as a vote of confidence in the reforms undertaken by DSE since 2013.
And indeed they have paid a premium for it. For comparison, we can look at the deal struck by the same consortium members for a 40 percent stake in Pakistan’s National Stock Exchange just last year, in January.
Goodbye Home Boys Club
One of the agreed reforms the Bangladesh government undertook was to correct the governance structure through demutualization of the Dhaka and Chittagong stock exchanges. This served to align the broader incentives of market development with those of what might be termed the “members of the club,” mainly the brokers and dealers. By strengthening market governance in capital markets, the CMDP 2 enhanced market efficiency and transparency, as well as improved investor protection. The timely and effective completion of the demutualization process at the stock exchanges represented another key milestone of the program in countering strong vested interest and challenging the status quo. The brokers and dealers have historically resisted any reforms that could reduce their control over the stock exchanges.
The demutualization of the stock exchanges is meant to segregate ownership, management, and trading rights of members and convert the two exchanges into commercial and more professionally run organizations while enabling them to pursue their strategic interests, including market development, with more vigor. The exchanges are now less susceptible to members’ vested interests, according to the ADB. Numerous steps have been taken to effectively implement and conclude the demutualization process, such as the enactment of the Demutualization Act in April 2013, followed by the submission of the demutualization schemes by both stock exchanges (i.e., operational plans), and the approval of these schemes by BSEC in September 2013.
As part of completing the demutualization process, it was decided to facilitate the development of crucial new technology infrastructure through alternative methods of raising capital, such as the entry of a strategic investor into both stock exchanges by June 2017.
Leaving CSE aside for the time -being, the fact that it is happening just a year behind schedule for DSE can be no reason to gripe, given the long road back to viability that it has endured.