Flawed DSE index and indulgent regulator

The index of a major bourse represents the performance of the stock market of a country and, to a great extent, highlights the investors' sentiment on the state of its economy.

However, there could be exceptions. The stock market developments, primarily based on investors' interest in stocks, sometimes may not reflect the situation prevailing in other areas of the economy. Bangladesh market is a testimony to that fact.

But what if the indices of the country's premier bourse are calculated deliberately on flawed premises, ignoring internationally accepted practices?

Newspaper reports have revealed that the Dhaka Stock Exchange (DSE) has been, deliberately or otherwise, following a flawed system to calculate its daily index. The securities regulator -- the Securities and Exchange Commission (SEC) -- was aware of the folly but ignored it.

The point that the newspaper reports have highlighted is that the DSE has been counting index points in the case of a debutant company from the very first day of its trading. Moreover, while calculating index it takes into account the face value of a stock, not the premium value, if there is any.

The incumbent chairman of the SEC has admitted that the index calculation by the DSE is flawed since the first day trade of a company on a stock does not provide benchmark from where points could be calculated.

The SEC has already asked the DSE authorities to start counting index points in the case of a debutant company from the second day of its trading.

But why have the internationally accepted best norms of index calculation -- that the DSE had agreed to introduce back in 1998 -- been ignored this time?

The securities regulator, too, cannot shirk its responsibility. It is expected to see that information given by the bourses for the consumption of the investors are correct, not manipulated ones.

Had the DSE followed a correct method of calculation, its index would not have reached the present high level.

For instance, on the first trading day of Grameenphone, the largest ever issue listed with the country's bourses, the DSE took into account the face value of its share at Tk. 10, not its premium value of Tk. 60, for index calculation. This has resulted in the skyrocketing of the general index of DSE (DGEN). A total of 764 points were added to the DGEN on the day and the GP alone contributed more than 400 points.

Interestingly, the Chittagong Stock Exchange (CSE), country's second yet smaller bourse, however, did follow the standard practice of index calculation. It did calculate the index points of GP on the second day of its trading to give a correct picture.

This quantum jump of the price-weighted index, where price movement of even a single security does heavily influence the value of the index, did otherwise send wrong message to general investors, particularly the small ones. Encouraged by the market-trend, more and more people, in the meanwhile, have been attracted to a market where most stocks are highly over-priced and, the possibility of ordinary investors' being burnt in the event of the worst happening, can not be ruled out.

Many small investors have already lost a large part of their investment but they are still hanging on with a hope to recover the loss.

It is not befitting for anyone, particularly among the DSE top brass, to bask in the glory of high growth of the market, genuine or otherwise. They do need to advise the investors to be cautious in making investments in an overheated market and not appear before the media all the time when the index is up.

The SEC in a meeting with the chief executive officers of the bourses Tuesday asked to follow the method of calculating index for a debutant company from the second day of its trading. The SEC order will be applicable in the case of next debutant issue.

So, the present index calculated wrongly would not be corrected. That is what, actually, the authorities of the bourse did, perhaps, want the most. For, if the wrongs are righted the DGEN would come down to around 3000. The DSE cannot afford such a drastic fall in index since it would leave a negative impression among the investors about the market. For the greater interest of the market, one might accept the latest SEC directive.

But, at the same time, one will have some valid reasons to question the 'wisdom' of those, past and present who missed up the issue of index calculation. It is a technical matter and most investors, institutional investors included, are not aware how it is done. But the regulator must be having the requisite expertise to examine the issues involved in index calculation. It should then explain why it has not been able to apply this expertise when mistakes, deliberately or otherwise, were committed while calculating the index.