Century of 'Z' stocks
The number of Z-category stocks on the Dhaka Stock Exchange (DSE) has surged to a record high of 100, accounting for around 25% of the capital market's listed companies as of today.
Z-category stocks, or junk stocks, are considered fundamentally weak due to their failure to pay regular dividends, prolonged periods of inactivity, and failure to hold annual general meetings (AGMs) on time.
Recently, DSE, the country's premier bourse, downgraded around a dozen companies that failed to disburse approved dividends to shareholders within the stipulated timeframe mandated by listing regulations, to comply with a directive of the stock market regulator.
Later, upon dividend disbursement, the bourse also reinstated some companies that submitted their dividend compliance reports.
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The Bangladesh Securities and Exchange Commission (BSEC) issued a directive in May 2024, set to take effect in July of that year.
On that directive, the commission barred the sale of stocks by the sponsor-directors of the Z-category companies without the approval of the regulator.
However, due to the rise of student movements, a government change, and shifts in the regulatory body, the bourse is now downgrading companies to the junk category that were previously misclassified under the A- and B-category, creating a misleading market appearance.
Market analysts recommend stricter regulatory actions and improved corporate governance to curb this growing trend, as the rising number of junk stocks raises concerns for investors and the overall capital market.
A senior DSE official, on condition of anonymity, told TBS, "The companies are being downgraded in line with the commission's directive as part of stringent measures to ensure governance and accountability among listed companies."
"Some company owners declare dividends but fail to pay them, depriving investors. As the primary regulator of the capital market, the bourse is taking action against these companies. Once the dividends are disbursed, their category will be changed accordingly," he added.
Today, the DSE downgraded five listed companies to the Z-category from the A- and B-categories. The companies are – Genex Infosys, Saif Powertec, Aramit Ltd, Shepherd Industries, and Alif Industries.
Later on the same day, the DSE decided to reinstate Shepherd Industries to its previous B-category, effective 12 February, after it disbursed a 1% cash dividend for the 2023-24 fiscal year.
The bourse also decided to reinstate Rohima Food Corporation, Beach Hatchery, and Union Insurance to the A-category, effective 12 February, from the Z-category, as they disbursed their dividends.
If a firm is downgraded to the Z-category, its share settlement faces delays, no margin loans are provided for purchases, and transactions can only be made in cash.
While the share settlement cycle for A- and B-category stocks follows a T+2 system, Z-category stocks follow a T+3 settlement cycle.
According to the settlement of transactions regulations of the DSE, A-category stocks are those which hold AGMs regularly and declare dividends at the rate of 10% or more. B-category stocks are those which regularly hold AGMs but fail to declare dividends at least at the rate of 10%.
Till today, A-category stocks were 212 and B-category stocks 82.
Z-category companies are those which failed to hold AGMs, failed to declare any dividend based on annual performance, were not in operation continuously for more than six months, and accumulated loss after adjustment of revenue reserve exceeds its paid-up capital.
Analyzing the stocks of Z-category, the highest amount was from the textile sector with 24, and 13 companies from engineering and non-bank financial institutions.
The DSE could not change the categories as per a BSEC directive issued in September 2020 that barred bourses from taking such a decision.
In the context of the challenging business and profit scenarios during the pandemic, the commission decided to halt the downgrade to the Z-category for companies even if they failed to meet the required criteria according to the settlement of transaction regulations.
