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Bangladesh creates $700mn fund to prop up stocks

DHAKA, March 7, 2011 – Bangladesh will create a $700 million mutual fund, the country\’s biggest ever, in a bid to stabilise the highly volatile Dhaka stock exchange, the head of a state-owned investment bank said Monday.

The plan is part of the government\’s drive to restore calm to the market, after sharp falls triggered angry protests by investors in the capital Dhaka and across the country.

Eight state-run financial institutions will invest cash to create the planned 50 billion taka ($700 million) Bangladesh Fund, said M. Fayequzzaman, chief executive officer of the Investment Corp. of Bangladesh.

"It is the largest ever mutual fund in the country\’s history. It is aimed at stabilising the country\’s stock exchange and boosting liquidity in the crisis-hit market," Fayequzzaman told AFP.

The Dhaka Stock Exchange has shed more than 40 percent in the past three months, wiping over $16 billion off the share market\’s capitalisation since its benchmark index hit a record high of 8,918.51 points on December 5.

Tens of thousands of small investors have been worst hit as they started buying shares when prices were peaking.

The benchmark DGEN index was trading up 2.90 percent, or 160 points, at 5,697 points in morning trade on the back of Sunday\’s announcement of the fund\’s creation.

Monday\’s gains came on top of a 1.99 percent rise in the index on Sunday, a trading day in mainly Muslim Bangladesh.

The fund is in addition to a reform package that includes tighter regulation and other measures announced by the government to prop up the market and boost investor confidence.

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Anxious to assuage investor anger, the government has also ordered a probe into the sharp fall.

The Dhaka Stock Exchange has been one of the best performing markets in the world with the DGEN index climbing 400 percent between 2007 and 2010. In 2010, it soared 80 percent despite repeated warnings that the market was overheated.

Experts welcomed the announcement of the Bangladesh Fund but urged the authorities to use it carefully.

"No doubt, this is some good news for the stock market," said Mahud Osman Imam, a Dhaka University finance professor.

"A fund of this staggering size will make a positive impact and restore stability that we haven\’t seen for months," he said.

"But it remains to be seen whether the fund is used judiciously. If it is used to buy overheated stocks, there is a possibility that it won\’t achieve its goal. But at least it will boost liquidity in the market," he added.

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