Raising the investment of institutional investors takes time. There is no way to force them to engage in the market legally

— Faruq Ahmad Siddiqi a former chairman of the BSEC.

When the stock market goes through a bearish trend, the regulator usually prods institutional investors, mostly unofficially, to pour money to revive it and some of them respond positively.  

But as the stake of the institutional investors in the stock exchanges is languishing at a very low level and the retail investors are ruling the roost and are causing volatility through panic sales, the Bangladesh Securities and Exchange Commission (BSEC) has officially asked them to increase their share.

This has led analysts and industry stakeholders to call on the regulator to ensure a congenial investment climate with a view to drawing institutional investors.

An institutional investor, widely considered to be sophisticated money manager, is a company or organisation that invests money on behalf of other people. They include asset management companies, brokerage houses, merchant banks, mutual funds, pensions, and insurance companies.

In Bangladesh, retail investors dominate the market. 

The problem with the domination of the retail investors, as assumed by the regulator, is that individuals are driven by panic. As a result, they go for selling spree at the slightest hint of troubles, amplifying volatility.

This has prompted the commission to write to institutional investors recently to urge them to augment their participation in the market. 

"Raising the investment of institutional investors takes time. There is no way to force them to engage in the market legally," said Faruq Ahmad Siddiqi, a former chairman of the BSEC.

In Bangladesh, he says, asset management companies, brokerage houses and merchant banks make up the majority of the institutional investors. But their capacity is not big.

"Our market is still dependent on banks, but they should not be forced to raise their stake in the stock market. Rather, it should be up to them whether they want to park their funds into risky stock investments."

At present, general investors account for 80 per cent of the total turnover, while institutional investors represent the rest 20 per cent, according to the BSEC. This is half the global average.

Institutional investors hold 41 per cent of global market capitalisation, said a report of the Organisation for Economic Co-operation and Development in 2019. Key institutional investors include mutual funds, pension funds and insurance companies.

Institutional ownership currently accounts for more than 75 per cent of US outstanding shares, according to a 2021 research paper of the Swiss Finance Institute.

Institutional investors dominate the ownership of listed companies in the United Kingdom and Canada as well, both at the aggregate level and at the company level, holding 63 per cent and 47 per cent of the listed equity, respectively.

Even in India, institutional investors make up 55 per cent of the turnover at the National Stock Exchange. It is 35 per cent on the Karachi Stock Exchange in Pakistan.

Arif Khan, a former commissioner of the BSEC, calls the commission's target commendable.

"As institutional investors shun short-term trading and don't sell shares out of panic, volatility goes down when their participation increases. Now a time-bound action plan is necessary along with proper follow-up."

He thinks the bond market needs to be strengthened and new products have to be rolled out to attract institutional investors.

"Besides, the mutual fund sector should be reformed so that it can widen its footprint. The mutual fund sector plays a vital role in the developed stock markets," added Khan, also the vice-chairman of Shanta Asset Management.

The mutual fund sector contributes 0.73 per cent to the total market capitalisation of the Dhaka Stock Exchange, according to the data of UCB Stock Brokerage.

Richard D' Rozario, president of the DSE Brokers Association, says the government might coerce institutional investors to enhance their investment but such an approach would not bring much good.

A perfect environment needs to be offered by creating transparency in the whole market in a bid to attract institutional investors, he said.

"If investors can trust listed firms' financial reports, institutional investors will feel confident and invest in the market. Besides, foreign investors will also be active."

Good instruments and well-performing companies should be included in the market, Rozario added.

Abu Ahmed, a former chairman of the economics department of the University of Dhaka, thinks the BSEC is not addressing the real problems facing the market.

He argued that asset management companies lack funds to make investments, while several stock dealers are largely focused on dealing with initial public offerings (IPOs).

"If the BSEC is serious about raising the participation of big investors in the market, it needs to curb manipulation first. Because of the manipulation, big investors feel discouraged."

He recommended introducing an IPO quota for large individual investors with at least Tk 2 crore in investment.

"This will incentivise them to invest more and behave like institutional investors."

A stockbroker, preferring anonymity, says manipulation is widespread in the stock market, so the prices of many low-performing stocks have reached a higher level.

In contrast, the prices of the well-performing stocks have been low for years, amplifying fears among institutional investors.

"The stock market regulator should take stern measures to stop rampant manipulation," he added.

The stockbroker also criticised the BSEC move where it organised roadshows in a number of countries in recent years in a bid to attract investments.

"You don't need to hold such roadshows. If the environment is congenial and there is scope to make a profit, investors will come automatically."

A number of analysts called for bringing in life insurance funds and pension funds to the market as they can invest for a longer period.

Siddiqi also called for creating a congenial investment environment and ensuring corporate governance in the whole ecosystem in order to woo both local institutional investors and foreign investors.