Disparity in regulators' dividend policies hurts investors

Infographic: TBS

Dividend related policies of different regulators are creating issues for the investors of listed companies that are simultaneously regulated by multiple regulators – such as the Bangladesh Securities and Exchange Commission (BSEC) and the Bangladesh Bank (BB).

For instance, publicly traded non-bank financial institution Bay Leasing and Investment declared a 5% stock dividend for its shareholders for 2021, despite its negative retained earnings.

The BSEC cancelled the stock dividend as it was not declared in compliance with the commission's stock dividend policy.

In such a situation, even though 2022 is coming to an end, Bay Leasing could not make any decision about the dividend declared for 2021.

On similar grounds, the BSEC cancelled the stock dividend of Rupali Bank as well.

But the capital market regulator has finally approved the stock dividend following instructions from the Bangladesh Bank, as the lender has a capital shortfall and is not able to pay a cash dividend.

The BB does not allow any lender to pay cash dividends if it has a capital shortfall.

The shareholders of financial sector companies face procrastination in getting dividends due to the different policies of the two regulators on dividends.

While the BSEC encourages cash dividends, the central bank is in favour of paying stock dividends to help banks and financial institutions retain their profits and consolidate a stronger capital base.

Following on from the same circular issued in 2020, the central bank issued a circular in 2021 to maintain liquidity by strengthening capital and keeping bank profits undisbursed as much as possible in order to deal with the pressure on the banking sector caused by the Covid-19 pandemic.

In that directive, the ceiling on dividend payments by banks was fixed.

On the other hand, the BSEC issued a separate directive in August 2021 reining in stock dividends to encourage cash dividends.

According to the directive, listed companies can declare stock dividends from profits for balancing, modernisation, rehabilitation, and expansion.

Besides, such stock dividend cannot be issued out of capital reserve or revaluation reserve or any unrealised gain or out of profits earned prior to incorporation of the company or through reducing paid-up capital or through doing anything so that the post-dividend retained earnings turn negative.

Bay Leasing and Investment

According to its financial reports, Bay Leasing and Investment Company's financial position is not in good shape.

The NBFI posted a loss in 2021 despite making a profit the previous year. Its retained earnings went negative due to the loss, and it was unable to pay cash dividends.

According to its annual report, the finance company posted a profit of Tk16 crore in 2020 and paid a 10% cash dividend to its shareholders.

And in 2021, the total operating income of the company increased by 63% but it incurred a loss of Tk13.92 crore owing to an increase in its provisioning because of defaulted loans.

The financial institution posted a loss of Tk17.80 crore in the first nine months of 2022 compared to a profit of Tk38.74 crore in the corresponding period of last year.

According to data from the Bangladesh Bank, Bay Leasing's disbursed loans amounted to Tk967.76 crore as of June 2022, of which Tk247.85 crore was non-performing loans.

Defaulted loans account for 25.61% of disbursed loans.However, there is no provisioning shortfall against defaulted loans.

BSEC Executive Director and Spokesperson Rezaul Karim told TBS, "Bay Leasing's retained earnings are negative. As a result, it will not be able to pay stock dividends. For which reason, its stock dividend has been cancelled. If no new dividend is declared, that year will be treated as a no-dividend one."

Sharmin Akhter, company secretary of Bay Leasing and Investment, told The Business Standard, "After the BSEC cancelled the stock dividend, no further decision was made in this regard."

Usually, when no dividend is declared, the listed company falls into the "Z" category that year.

However, if the dividend is not paid due to bad business for one year, the share price of the company may be affected once it is included in the "Z" category. Considering that, the commission issued a directive in September 2020 regarding the inclusion in the "Z" category.

According to the directive, listed companies will fall into the "Z" category once they do not pay any dividend for two consecutive years.

As a result, even if there is no dividend in 2021, there will be no change in the category of Bay Leasing and Investment, but the shareholders of the company will be deprived of dividends.

Also, the company would be under pressure to pay some dividends for 2022 to avert category deterioration on the bourses.

Rupali Bank

Rupali Bank had announced a 2% stock dividend for 2021 on 5 May, but the shareholders received the dividend in November due to differing positions of the two regulators.

As per the listing rules, shareholders usually receive declared dividends after a maximum three months from the annual general meeting.

Rupali Bank logged a profit of Tk50 crore in 2021.

The board declared 2% bonus dividends per BSEC instructions, but the commission cancelled them and directed that a 2% cash dividend be paid, which was approved at the annual general meeting on 7 August.

In a stock exchange filing on 8 April, the lender said that the Bangladesh Bank did not approve the 2% cash dividend. For which, Rupali Bank once again applied to the commission seeking approval to issue a stock dividend.

Then on 3 October, the lender told it that BSEC has given permission to pay a 2% stock dividend.

According to the central bank data, Rupali Bank disbursed loans amounting to Tk38,261 crore as of 30 September 2022, of which Tk6,726 crore were non-performing loans.

Defaulted loans account for 17.58% of total loans. The bank has a provision deficit of Tk3,013 crore.