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A good number of stocks will be downgraded to junk status soon, as the securities regulator is going to lift the bar that it imposed during the pandemic on category change of listed companies.
An order will be issued in the regard this week, confirmed a senior official of the Bangladesh Securities and Exchange Commission (BSEC) to the FE.
According to a 2020 order, any listed company shall be transferred to ‘Z’ category over its failure to declare cash dividend for two years in a row from the date of declaration of last dividend, or the date of listing on the stock exchanges.
The order was immediately followed by a letter, in which the BSEC said that if any listed company did not give cash dividend for restrictions by other regulators, that company would not be labeled as junk stock.
Since the securities regulator has always been in favour of cash dividend, DSE officials said the instruction had alluded to banks and financial institutions that often kept from paying cash due to discouragement from the central bank.
There was another letter issued by the BSEC, where it removed confusion by saying that any move to transfer stocks to Z category would require its approval first.
As the pandemic waned and businesses began recovering, the DSE sought permission of the BSEC to transfer some companies to `Z’ category for not distributing cash dividends for two consecutive years, but failed to get any response.
After a long break, the securities regulator in June this year, contradicting its previous instructions to the DSE, issued a show-cause notice demanding an explanation as to why 19 companies had been allowed to keep "false appearance" without giving any cash return to shareholders.
In response, the DSE gave references to the BSEC letters preventing transfer of the companies from ‘A’ and ‘B’ categories.
BSEC Commissioner Dr. Shamsuddin Ahmed said the regulator would soon repeal its earlier directives.
Now, if the restriction is finally withdrawn, 17 non-performing companies would be shifted from ‘A’ and ‘B’ categories to ‘Z’ category. Two other companies in the meantime released cash dividends.
Of the ‘A’ stocks, Renwick Jajneswar & Co (Bd) did not distribute any cash dividend for the four years through FY23.
There is no record of cash payment by Ring Shine Textiles on the DSE website. The company issued 15 per cent stock dividend in 2019 for the last time. Miracle Industries did not give any cash dividend after FY20.
CVO Petrochemical Refinery has recommended 5 per cent cash dividend for FY23 breaking a three-year pause.
Kattali Textile paid no cash to investors since FY21.
Of the ‘B’ category non-compliant companies, Delta Spinners distributed 5 per cent cash dividend for FY15 for the last time.
Of the other companies, Yeakin Polymer, Regent Textile, Intech, Atlas Bangladesh, Aziz Pipes, and Khulna Printing & Packaging distributed 1-5 per cent cash dividend for FY20 for the last time.
Zaheen Spinning has recommended only 0.25 per cent cash dividend for FY23 to stop its transfer to the group of junk stocks.
Dividend declaration to manipulate stock price
Eight more companies of ‘A’ and ‘B’ categories should lose their existing status as they failed to disburse dividends, as recommended by the company boards, even after receiving approval of the securities regulator.
The companies are Fortune Shoes, Taufika Food and Lovello Ice-cream, Advent Pharma, Lub-reff, Safko Spinning Mills, Associated Oxygen, Pacific Denims, and S. S. Steel.
In a letter issued in June, the securities regulator said non-payment of dividends within the stipulated timeframe was tantamount to "market manipulation". The regulator also asked the companies to explain as to why they would not be transferred to ‘Z’ category.
A BSEC official said, wishing not to be named, that the companies had replied to the show cause notice. A decision will be taken upon a hearing on the matter before the enforcement department.
C & A Textile unveils policy loophole
The DSE website has no record of dividend by C & A Textile after FY16. Hence, the company was in ‘Z’ category.
At the end of July this year, it recommended 0.40 per cent cash dividend for FY22.
As per the listing requirement, the company was then supposed to be shifted to `B’ category from `Z’ category. But the DSE was reluctant to do so as the company’s auditor pointed out that the organisation’s financial strength did not support giving cash back to investors.
DSE’s Chief Operating Officer M. Shaifur Rahman Mazumdar said there was no restriction on upgrading a company’s status if the requirement of cash dividend was met.
However, a DSE analysis too found that the dividend recommended by C&A Textile was not rational, considering its business performance.
The securities regulator was informed of the findings, but the regulator asked the bourse to move the company up to `B’ category.
Asked, BSEC spokesperson Mohammad Rezaul Karim said the regulator had no scope to go beyond the eligibility criteria set in the rules for categorising companies.
Managing Director of Midway Securities Md. Ashequr Rahman said ‘Z’ category companies did not qualify for margin loans.
"The nominal cash dividend raises a question whether the intention was to secure margin loan facility," he said, adding that the BSEC should have evaluated DSE’s observation.