The Dhaka Stock Exchange (DSE) is set to conduct inspections of 14 companies due to their non-compliance with securities laws and listing regulations. The Bangladesh Securities and Exchange Commission (BSEC) has recently granted permission to the DSE to investigate the reasons behind the non-compliance.
The 14 companies under scrutiny are:
- Fortune Shoes
- National Feed Mills
- Central Pharmaceuticals
- CVO Petrochemical Refinery
- Dulamia Cotton Spinning Mills
- Family Tex (BD)
- Keya Cosmetics
- Khan Brother PP Woven Bag Industries
- Northern Jute Manufacturing Company
- Regent Textile Mills
- The Dacca Dyeing and Manufacturing Company
- Usmania Glass Sheet Factory
- Zaheen Spinning, and Zaheen Tex Industries.
Fortune Shoes, a company, announced its dividend distribution plan for fiscal year 2021-22, offering a combination of cash and stock dividends to its shareholders. The declaration included a 10% cash dividend and a 5% stock dividend. However, as of the present time, the actual distribution of these dividends to the shareholders has not taken place yet. Similarly, the other companies have also failed to comply with securities laws.
M Saifur Rahman Majumdar, the chief operating officer at DSE and acting managing director, stated that the non-compliant companies have been neglecting to hold annual general meetings (AGMs) and submit quarterly financials regularly. Additionally, some of these companies have not distributed the dividends they declared on time.
After conducting the inspections, the Dhaka Stock Exchange (DSE) will prepare reports on the 14 companies’ operational status and related issues due to their non-compliance with securities laws and listing regulations. These reports will be submitted to the Bangladesh Securities and Exchange Commission (BSEC). Following the submission, the BSEC will take appropriate actions in accordance with the securities laws, as stated by officials.
DSE’s downgrades and BSEC’s investigative blitz
It has come to light that 42 companies in total are non-compliant with the laws, and the DSE has already sent a list of these companies to the BSEC. M Saifur Rahman Majumdar, the Chief Operating Officer at DSE and acting Managing Director, mentioned that some listed companies have failed to adhere to the securities laws. Consequently, seeking the regulator’s approval to investigate these companies and determine their actual situation, the DSE has communicated with the BSEC.
Due to their non-compliance, the DSE has downgraded some companies to the Z category. The BSEC plans to inspect the head office and factory premises of the 14 companies listed on the stock exchanges to gather information about their operational status and associated issues.
Some of these companies, as per the DSE official, are not fully operational or are running at partial capacity, but they are concealing this fact. To address this situation, the DSE has decided to investigate these companies. However, conducting such an investigation requires approval from the stock market regulator, which is the BSEC.
Among the companies under scrutiny, most of them fall into the B category, indicating that they pay dividends below 10%. Four companies are classified as Z category, meaning they have not paid any dividends to their shareholders. Two companies belong to the A category, having paid at least a 10% dividend to their shareholders.
According to a source, half of the companies under investigation were listed on the stock market between 2011 and 2016, while four were listed with the bourse before the 2000s. This indicates that some of these companies have been operating for an extended period without adhering to the necessary securities laws and regulations.
At the beginning of the month, both bourses and stock investors have been facing confusion and uncertainty regarding when a listed company should be categorized as a “Z” category stock and when it should not be. There have been significant discrepancies between the regulations and the practices being followed in this regard.
The ‘Z’ Dilemma
Around 23 listed firms were deemed to be eligible for downgrading to the “Z” category much earlier in the last fiscal year. This determination was based on a notification issued by the Bangladesh Securities and Exchange Commission (BSEC) on 1 September 2020, which relaxed the criteria for companies to be placed in the “Z” category. However, despite meeting the requirements for downgrade, these companies continued to trade as “A” or “B” category shares, surprising investors and bourses alike.
Responding to criticism and the realization of the oversight, five of these companies were eventually downgraded to the “Z” category on 25 June. Such a downgrade can have negative implications for secondary market trading and may lead to a decline in the stock price, causing another shock to the investors.
In the aftermath of this event, on the next day, the BSEC questioned the Dhaka Stock Exchange (DSE) regarding the reasons why the 23 companies were not regularly reviewed and placed in the “Z” category as per the regulations. The DSE has responded to the regulatory inquiry, according to M Shaifur Rahman Mazumdar, the acting managing director at DSE.
The confusion regarding the categorisation of listed companies arose after the 2020 regulations change. The DSE had been seeking BSEC’s approval for downgrading companies to the “Z” category in cases where they met the eligibility criteria. However, there seems to be an unpublished BSEC letter dated November 2020, directed to both the Dhaka and Chattogram bourses, prohibiting category downgrading, and this order was not repealed later.
Stock exchange officials, who chose to remain anonymous, have pointed out that this prohibition order from the BSEC is the key reason behind the misleading categories assigned to sick or non-compliant companies on the bourses. They are now compelled to provide explanations for the delay in downgrading these companies despite fulfilling the criteria for “Z” category placement, as they were seemingly bound by the BSEC order.
This situation has caused uncertainty and dissatisfaction among investors and market participants, highlighting the importance of clear and consistent regulatory guidelines to maintain transparency and trust in the stock market.
Navigating uncharted waters
The relaxations introduced in 2020 were implemented in the best interest of the capital market, listed firms, and their investors, particularly considering the unusual circumstances during the pandemic. The primary aim was to provide exemptions for firms facing accidental tough times in paying dividends, rather than addressing every single non-compliance issue, according to BSEC Executive Director and Spokesperson Rezaul Karim.
The BSEC’s job involves seeking explanations from entities under its jurisdiction as a regular practice. If the explanations provided by the concerned parties are satisfactory, appropriate solutions can be found for exceptional problems. The BSEC, therefore, intends to address issues by understanding the context and the reasons behind certain actions or non-compliances.
Recently, the BSEC has asked both the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) to explain why they did not monitor, take action, and report on the Z-category companies. Z-category companies are those listed firms that have failed to meet certain operational and financial requirements, and they face comparative inconveniences in the trading of their shares, including restrictions on leveraged trading, a longer settlement cycle, and a weaker image among investors.
Prior to the November 2020 letter issued to the bourses, BSEC had issued a notification in September 2021 specifying the criteria that could lead to downgrading companies to the “Z” category. These criteria included the absence of cash dividends, negative operating cash flow for two consecutive years, negative net asset value, failure to hold an annual general meeting within six months of the fiscal year-end despite no legal complexities, and no operations for more than six months without any factory modernization project. Downgrading a company to the “Z” category required prior approval from the regulator.
Since the issuance of the November 2020 letter, no company had been downgraded to the “Z” category until 25 June. Consequently, the stock exchange officials question the need for reporting when no company had entered the “Z” category during that period.