Stock price manipulation in Bangladesh market | Empty promises keep investors holding the bag | Share market news

Share prices of Sea Pearl Beach Resort and Spa Limited have surged from Tk 60 to Tk 320 on the Dhaka Stock Exchange (DSE) in just a year after wild speculations in 2023 that a foreign investor would buy a significant stake in the company.

Interestingly, the sudden speculation turned out to be prophetic.

In late October 2023, the equity regulator announced in a price-sensitive disclosure that it had granted GEM Global Yield approval to buy approximately 10 percent of the company’s shares during the year.

“The price of a company’s shares is positively influenced by its announcement that a foreign company will buy its shares. Therefore, the regulator should monitor the progress of companies’ disclosure of price-sensitive information and check whether there is any malicious motives.

— Faruq Ahmad Siddiqi, former chairman of BSEC

Interestingly, after the disclosure of price-sensitive information (PSI), the company’s share price dropped dramatically.

Over the last few years, it has become a common scenario for stock prices to rise manifold due to speculation. It is also common that when such assumptions are confirmed by a PSI disclosure, share prices begin to decline.

According to Saiful Islam, president of the DSE Brokers Association, if the share price triples before the PSI is disclosed, it indicates the existence of insider trading.

“Definitely anyone who trades a stock like this knows some PSI and spreads it to people to drive up stock prices,” he said.

He added that investors will suffer most if the plans revealed in such disclosures are not implemented, which is what happened in the case of Sea Pearl.

A year has passed since the information was disclosed, and the sale of shares to a foreign investor has not yet been completed.

Meanwhile, Sea Pearl’s share price dropped to Tk 33.

In such cases, if investors buy shares after seeing price-sensitive disclosures, with the assumption that prices may rise, they suffer huge losses.

The Sea Pearl case is not the only example of unfulfilled promises in price-sensitive disclosures. There are plenty of similar incidents. Take the case of Deshbandhu Polymer Limited.

The polypropylene woven bag maker announced in 2021 that it plans to raise Tk 500 crore by issuing Sukuk bonds abroad to repay loans and fund business expansion.

Before the announcement, the company’s share price had increased by 178 percent to Tk 27 in six months.

Later, the company did not bother to provide further information on this matter.

Currently, the company’s share price has fallen to Tk 16.

Moreover, the DSE and the Bangladesh Securities and Exchange Commission (BSEC) have not taken any action on the failure of such companies to follow the recommendations made in the disclosures.

The companies have also done nothing to shed light on the status of these plans.

Another company that has used similar tricks is Central Pharmaceuticals Limited.

In February 2017, the pharmaceutical company announced that a local group would buy shares of its sponsors, which caused the share price to almost triple from Tk 13.6 to Tk 36.1 in four months.

However, the share price fell significantly after the company later announced that the deal would not be signed.

This sudden turnaround caused huge losses for general investors, but no one was held accountable.

Currently, the company’s shares are trading at Tk 8.50 each.

“The information provided in price-sensitive disclosures may not be applied for business reasons. However, when it happens time and time again, it indicates that the PSI has been fabricated as part of a scam,” added Islam, president of DSE Brokers Association, also a director at Brac EPL brokerage.

He stressed the need for DSE and BSEC to strengthen monitoring of price-sensitive disclosures and their implementation, adding that this is nothing more than a simple monitoring issue.

Faruq Ahmad Siddiqi, former chairman of BSEC, said a company’s share price is usually positively affected by the disclosure that a foreign company will buy its shares.

“Sometimes publicly traded companies disclose such information intentionally to influence share prices. However, the initial transaction may also fail due to business reasons,” he said.

He suggested that the BSEC investigate whether the disclosed plans are being implemented and investigate any unmotivated decisions.

BSEC has an obligation to get to the bottom of such matters and inform investors, Siddiqi added.

Sharif Anwar Hossain, former president of DSE Brokers Association, said executives sometimes leak information to boost share prices.

He added that such directors then sell their shares and buy back shares on someone else’s behalf.

Hossain suggested that the BSEC should rethink its disclosure rules and consider allowing companies to make such disclosures only when a deal is close to closing, especially since it has a major impact on investors.

He added that the stock market regulator should severely penalize directors if it finds they disclosed information only to boost share prices.

“Without exemplary punishments, such activities will not stop,” added Hossain, also managing director of Sahidullah Securities.

A senior official at a leading publicly traded drugmaker said on condition of anonymity that companies are not legally obliged to disclose information if their plans are not implemented by a certain date.

However, the official said listed companies should inform investors regardless.

“It’s a matter of good management and responsibility on the part of the company.”

Under the rules, listed companies must provide up-to-date information on price-sensitive disclosures, whether they implement them or not. However, they can do this in various ways, for example by reporting it in their financial statements, and are not required to make another disclosure.

The official recommended that the government make changes here, saying that if the company fails to implement its plans, it should be required to issue another disclosure.

Mohammad Rezaul Karim, executive director and spokesman of BSEC, said the regulator will take action against such companies if they do not provide updated information through disclosures soon.

Stock exchanges are also responsible for monitoring listed companies. Stock exchanges can identify those who are not implementing the plans outlined in the disclosures and inform the chief regulator to take action, he added.

Sattique Ahmed Shah, CFO and acting managing director of DSE, said it was difficult for stock exchanges to monitor these issues due to lack of manpower.

However, not all cases are necessarily malignant.

For example, in 2021, BD Finance announced that it had signed an agreement with US-based Sovereign Infrastructure Group (SIG) to attract $2 billion in investment in infrastructure projects over two years.

Within six months of the announcement, the company’s share price doubled to Tk 69.

However, three years later, the investment has not materialized and the company’s shares are now trading at just Tk 11.

Md Kyser Hamid, managing director and CEO of BD Finance, said the company invited the then chairman of BSEC and some government officials to the signing ceremony and the chairman informally broke the news to several newspapers.

“The president told me that this would have a positive impact on the entire stock exchange. So he revealed it to the media.”

The DSE then sent a notice asking about the matter and why the news suddenly appeared in the media.

In response, the financial company sent the details of the MoU to the DSE, which was later published as part of the price-sensitive disclosure, he added.

He also explained why the transaction did not take place.

“When we signed the MoU, it was agreed that the rate would be the Secure Overnight Financing Rate (SOFR) and would be 4 percent. At that time, SOFR was 0.59 percent,” he explained.

“Later, SOFR increased to 5%. Therefore, if we took out a loan, it would be a huge burden for the company. As a result, we refrained from taking out a loan and tried to obtain funds in the form of equity capital. However, obtaining funds in the form of equity capital is very difficult.”

The Daily Star approached Deshbandhu’s company secretary Liakat Ali for comments, but he did not answer calls or respond to email and text messages.

Md Azaharul Mamun, corporate secretary of Sea Pearl Beach Resort, said he could not comment on the issue.

Managing director Aminul Haque Shamim’s phone was found to be switched off. He did not respond to messages even though seven days had passed since The Daily Star first contacted him.