Confusion over defining Z stocks sends panic among investors

TBS Illustration

A recent directive by the securities regulator redefining Z-category companies has sparked confusion among investors, leading to a significant sell-off of shares, according to market analysts and insiders.

The Bangladesh Securities and Exchange Commission (BSEC) issued the order in mid-February, aiming to improve transparency and protect investor interests. However, the order's broad definition of non-compliance has created confusion. Clause 2 of the order states that any listed company can be downgraded to the Z category for violating any securities laws, regulations, or listing requirements.

Market insiders say the ambiguity of the clause has caused fear and pressure among investors, resulting in a substantial sell-off and a subsequent plunge in stock prices. This bearish trend coincides with the lifting of the floor price in January, another regulatory move that some believe has contributed to investor jitters.

Since 3 March, the benchmark index, DSEX, of the Dhaka Stock Exchange (DSE) has fallen by 386 points, and market capitalisation has shrunk by Tk73,735 crore.

The DSE estimates that over 50 listed companies are currently non-compliant with listing rules or other BSEC regulations. These companies could face downgrades in the long run for issues like failing to pay dividends, holding annual general meetings (AGMs), or maintaining operations for more than six months.

Previously, such non-compliant companies were often traded under categories A or B, creating a misrepresentation of their financial health. Following the BSEC order, the DSE downgraded 22 companies to the Z category due to negative retained earnings exceeding paid-up capital and inactivity exceeding six months.

Six other firms faced downgrades on March 3rd for failing to hold AGMs within the stipulated two-year timeframe.

At present, over two dozen companies are on the potential downgrade list for not paying dividends for the past two years, although the downgrading will be implemented after their next annual declarations.

A senior official of the DSE told TBS, "The stock exchange will do whatever the BSEC directive said, and will comply with the directive."

Ashequr Rahman, managing director of Midway Securities, said that there is confusion regarding the non-compliant issue, which may lead to the downgrade of stocks to the Z category.

He mentioned that the BSEC has not provided any clarification on how a company will be considered non-compliant if it violates any laws.

Ashequr further added that any company, whether good or bad, can become non-compliant by violating securities rules. Since there is no proper definition of non-compliance, it has become very difficult to make investment decisions in any company.

When asked how to decide whether to invest in such a situation, he said, "We generally do not invest in companies that do not pay regular dividends, do not hold AGMs, stop production, and are in losses for a long time."

When asked about the issue, DBA President Saiful Islam told TBS, "The stock market runs on the accurate and clear information of the companies, letting investors make proper decisions for investments. If any order or directive is not clear to investors, there is a chance of creating confusion."