18 more stocks at risk of plunging into Z category
DSE has downgraded five firms to the Z category due to being out of production for more than six months
Eighteen more companies listed on the Dhaka Stock Exchange (DSE) are at risk of being downgraded to the Z category due to their failure to declare dividends for at least two years and hold annual general meetings (AGMs) within the stipulated time.
On 25 June, the country's premier bourse already downgraded five non-compliant companies from the A and B categories to the Z category due to being out of production for more than six months.
Despite being non-compliant, the DSE had been showing the companies in the A and B categories for years, thereby misleading investors.
The Bangladesh Securities and Exchange Commission (BSEC) has sought an explanation from the DSE regarding the non-compliant companies being shown as A and B categories instead of Z categories on its website.
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"Such type of false appearance of the category is very much misleading to the investors," read the BSEC letter sent to the DSE on 26 June, asking it to reply within three working days.
The five companies that have already been downgraded to the Z category are Nurani Dyeing & Sweater, Northern Jute Manufacturing, Shurwid Industries, Ratanpur Steel Re-Rolling Mills, and Appollo Ispat Complex.
Among the other 18 non-complaint companies, Ring Shine Textiles, New Line Clothings, Kattali Textile, CVO Petrochemical Refinery, and Renwick Jajneswar & Co. (BD) Ltd are still classified in the A category.
Miracle Industries, Delta Spinners, Yeakin Polymer, Regent Textile Mills, Intech Limited, Keya Cosmetics, Atlas Bangladesh, Aziz Pipes, Central Pharmaceuticals, Khulna Printing & Packaging, Libra Infusions, Zaheen Spinning, and Zahintex Industries are classified in the B category.
The commission said that, among the 23 companies, 21 were unable to declare dividends for two consecutive years, 14 have pending AGMs, and five have been non-operational for more than six months.
According to the BSEC directive, a company will be downgraded to the Z category if it fails to comply with the following conditions: not declaring a cash dividend for two consecutive years; not holding AGMs within the stipulated time, not being in operation for a maximum of six months; and having negative net operating cash flow for two straight years.
Market insiders said investors who had been profiting from low-quality stocks received a shock last week when five ailing companies were downgraded to the Z category.
Ultimately, shares of Shurwid, RSRM, and Northern Jute had no buyers, despite their prices surging by 50% or more in the previous few weeks.
However, the timing of this action became a topic of discussion on Sunday, as many believed that the bourses could have taken such measures much earlier when the stocks were experiencing a rally, despite weak business fundamentals, which in turn led to stronger competitors remaining at floor prices.
Some investors also blamed the September 2020 relaxation by the BSEC, which created more trading opportunities in junk stocks. The relaxed rule basically made it tough for most of the listed firms to be downgraded to Z, thanks to the radically loosened criteria to remain in the A and B categories.
During the pandemic, the commission said a company failing to pay cash dividends for two consecutive years could be sent to Z, while failure to hold an AGM due to legal consequences or force majeure could be exempted for two years.
The relaxation helped a few dozen weak firms float in the B or A category without paying dividends or paying the minimum.
BSEC Executive Director Mohammad Rezaul Karim said Investors are being misled into making investment decisions. The commission has sought an explanation in this regard.
"The commission will take action if a satisfactory reply does not come from the stock exchange," he added.
"Our team has clearly found the five companies were out of production for more than six months alongside other irregularities that made us downgrade their category," said M Shaifur Rahman Mazumdar, acting managing director of the DSE.
"We did not get any letter in this regard until now. But the DSE is working on the other 18 companies that could not comply with the regulatory requirements," he added.
He further said the DSE always discusses with the regulator any changes to any category for listed companies. So, it must discuss the 18 companies with the regulator.
It has been common that when the entire market tends to fall due to technical or economic reasons, some low-cap stocks take the lead in rallies to let the bull survive in the average investor's mind. And it becomes easier due to the need for much less capital to control stock prices.
In the recent leg of market recovery since April, junk stocks bounced back much earlier and faster while most of the quality company stocks were hibernating on the floor prices.
