The floor price dilemma

On July 28, the Bangladesh Securities and Exchange Commission (BSEC) reimposed floor prices on all shares to contain the free fall of listed securities after the key index dropped below the 6,000-point mark.    

The positive impact of the floor price is that it protects investors from buying a security at an excessively low price. This is important because if investors were allowed to purchase securities at any price, unscrupulous sellers could take advantage of them. The floor price ensures that investors are not taken advantage of and receive a fair price for the securities they purchase.

The negative impact of the floor price is that it can limit the price at which a share can be sold. This can be a problem for investors who need to sell their shares quickly and at any price. This is designed to protect investors from losing too much money quickly.

Due to the floor price, there is a liquidity crisis in the market, and the seller could not sell the shares for the absence of the buyer. It's not the right tool to implement in the stock market. We can't even control the commodity market by setting a ceiling. How could we then control the artificial prices in the financial markets?

Due to the Russian invasion of Ukraine, Bangladesh's economy is under tremendous pressure. Because of the instability in the foreign exchange market, foreign investors predicted the devaluation of the taka against the US dollar long ago. As a result, stock brokerages face massive sell pressures and struggle to sell off shares due to oversupply.

For the first time, we have seen a changing exchange rate significantly affect the value of transnational stock deals. Due to the fluctuation of the currency exchange rates and shortage of the US dollar, foreign clients tend to sell off shares. As a result, many blue-chip companies' shares are trading at the floor price. As such, the regulator didn't find any other tool except floor price to prevent such an unanticipated financial crisis.

Retail or institutional investors have the right to liquidate their assets at the right price. If the investors value liquidity more than the right price, they should be allowed to sell off their shares.

Some investors may speculate that it's the right time to buy the shares due to the lower price and expect a high percentage of capital gain in the future. That's how the demand-supply is created in the market, and the stock market runs.

In Bangladesh, most of the foreign funds come through foreign asset management companies (AMCs), and the AMCs are bound to comply with rules while investing in a frontier market like Bangladesh.

The BSEC is in a dilemma because it can neither withdraw the floor price nor continue it for an infinite time due to its negative impacts. Yet, for the betterment of the investors, it needs to address the issue urgently.

The floor price is a temporary solution. If it continues for a longer period, it will negatively affect the market as no investors are willing to purchase the shares at the floor price. Thus, the liquidity of the market will be squeezed.

Simultaneously, it will also affect the turnover and overall growth of the industry. The stock regulator immediately needs to find an alternative to ensure the market's liquidity and the fair values of the stock prices.

The author is head of internal control and compliance at UniCap Securities Limited. He can be reached at shahriar@unicap-securities.com. Views are personal.