An unhappy year as stock investors bear the cost of market reforms

The capital market opened 2025 with a tentative sense of hope.

The mass uprising in August last year had left the country in a mood for change, and investors expected that long-promised reforms would bring accountability, stronger financial institutions, and a fairer, more transparent market.

Some of those reforms finally arrived. New rules for mutual funds and margin loans were introduced, cash dividend processes were streamlined, and authorities reduced annual BO account fees.

Several figures, once considered untouchable, faced punishment for market violations.

Yet, as with any major surgery, the early days appeared to be painful and uncomfortable. Forced sales, portfolio losses, and falling share prices left investors nursing the wounds.

The market, in effect, entered a post-operative room, waiting to see whether recovery would take hold.

The DSEX, the benchmark index of the Dhaka Stock Exchange (DSE), began January above 5,200 points. Then it fell sharply within months, recovered to 5,636 in September, and slipped again below 5,000 after announcements of bank mergers and liquidation of non-bank financial institutions.

These movements reflected more than routine volatility. They revealed a market and its participants struggling to adjust to a new reality.

For investors, reform delivered mixed signals. Many agreed that long-standing weaknesses had to be addressed, but uncertainty over the pace of change and who would bear the cost created hesitation.

This hesitation was most visible in the financial sector. Five banks entered into the merger process, while eight listed non-banks among nine institutions moved towards liquidation.

Based on face value, the loss for shareholders of these banks and NBFIs amounted to around Tk 5,500 crore.

Apart from the financial losses, trust itself was hurt by the merger and liquidation move.

Investors had been relying on audit reports and credit ratings of the banks and non-banks. Those did not detect any misdeeds over the years.

"People invested seeing that auditors certified them as healthy and credit rating agencies gave them good ratings," said Richard D' Rozario, a director of DSE. "But overnight, their financial condition fell apart."

The problems were not confined to the financial sector. Over the past decade, many companies have been listed with high expectations.

But by 2025, a large number of them became low-performing or were widely seen as poor-quality stocks. This gradual decline continued to weigh on sentiment.

The situation was compounded by the absence of new listings.

Not a single initial public offering came to the market during 2025. Investors holding weak stocks had few alternatives, leaving portfolios stuck and fresh interest low.

Regulatory activity was high throughout the year. Mutual fund regulations were gazetted, introducing changes that asset managers welcomed. However, they are advocating for some more changes that could have long-term effects.

Margin loan rules were revised, dividend distribution was streamlined, and annual BO account fees were reduced from Tk 450 to Tk 150.

Punitive actions were also taken against individuals and firms accused of market manipulation, including former BSEC chairman Shibli Rubayat Ul Islam and former private sector adviser to the previous prime minister Salman F Rahman.

For investors, this marked a break from periods when enforcement had been questioned.

However, those reforms carried immediate costs. "The immediate impact of reform is always painful while it benefits in the long run, and we are crossing the painful episode," said Saiful Islam, president of the DSE Brokers Association of Bangladesh (DBA).

For instance, changes to margin loans triggered forced sales and added pressure on prices.

In the mutual fund sector, the regulator stopped approving new closed-end funds, a move Islam described as necessary. Expectations for open-ended funds were not fully met.

Another disappointment was the failure to bring state-owned enterprises to the market.

"We have missed a big opportunity to bring well-performing state-run companies despite clear direction from the chief adviser," Islam said.

Demand for new IPOs was strong, but no company was listed in 2025. For a market short of quality stocks, the absence of these listings reinforced concerns that reform was not matched with measures to deepen the market.

"A cumulative failure was that we all failed to bring confidence back," commented Islam. "The market did not grow, and the ecosystem became unsustainable."

Trading activity reflected this lack of confidence.

Average daily turnover at DSE fell to Tk 510 crore in 2025 from Tk 566 crore the previous year.

The legacy of the floor price regime also weighed on liquidity. "The floor price left suffering for the whole market," said D' Rozario.

He said institutional investors were forced into low-performing but liquid stocks simply to continue operations.

"After August last year, the market began moving again, particularly in fundamentally strong stocks, but many investors remained locked in weak shares, limiting recovery," he added.

By year-end, the bourse responded less to earnings and more to uncertainty. That uncertainty included the pace of reform, treatment of shareholders during restructuring and timing of quality listings.

DBA President Islam said the national election slated for February 2026 could help restore confidence, as political parties have publicly committed to supporting the capital market.

Meanwhile, BSEC spokesperson Abul Kalam said the commission requested government support for shareholders of troubled banks and non-banks.

"Work is underway with ministries to bring new companies, including state-owned enterprises, to the market," he told The Daily Star.

The spokesperson said public issue rules are ready and expected to attract stronger listings once gazetted, and public interest entities may be allowed to list directly without raising funds.

"There was a time when the commission could not act against everyone," Kalam said. "Now, a level playing field has been ensured. No one receives calls from the BSEC to buy shares or raise the index, which allows us to punish wrongdoing."