DSEX plunges 1.7% as 28 companies downgraded to Z

Dhaka stocks tumbled to the red due to heavy sell-offs right from the opening bell today as investors slashed their exposure in a rising interest rates environment while the category downgraded 28 companies' falling shares created a panic on the trading floors. 

DSEX, the broad-based index of the Dhaka Stock Exchange (DSE), opened 1.4% lower and tried to recover twice in the first 90 minutes, riding on banking stocks. However, profit booking from blue chip shares alongside freefall in the fundamentally weaker stocks, had dragged the index down by more than 2% before 1pm.

Islami Bank Bangladesh shares that faced profit-booking pressure after the launch of a regulatory enquiry into an over 100% gain since 5 August, triggered profit booking and consequentially did not help retain the indices. 

However, First Security Islami Bank, Global Islami Bank, ICB Islamic Bank and Union Bank shares hit the top circuit and closed there.

Of the 28 stocks that became "Z category" ones from today, only Shepherd Industries, National Tubes, National Bank and Union Insurance averted the extreme downward pressure that dragged down the other 24 to the lowest price limit for the day. 

"Investors adversely reacted to the regulatory decision of reclassifying 28 stocks into the Z category and decided to trim their equity exposure amid uncertain market momentum," wrote EBL Securities in its post-closing market commentary. 

Some 299 scrips on the DSE declined against 72 gainers while 26 of the losing scrips hit the lower limit of fall for the day which is not more than 10%. 

Turnover in the premier bourse fell by a third to Tk530 crore as many of the perplexed investors refrained from triggering their buy-sell decisions.

Most of the sectors displayed dismal returns, out of which textile, services and non-bank financial institutions faced the biggest falls of 4.1%, 3.5% and 2.9% respectively. Jute, paper and IT sectors gained by 4.9%, 1.8% and 0.9% respectively. 

Analysts also mentioned that Tuesday's 50 basis point rise in policy rate by the central bank, the uncertainty looming around the upcoming season of corporate earnings, dividends announcements as the factors hurting stocks. 

The "Z" debate  

The street was heated up amid debates regarding the justification of the regulatory decision's timing that hurt portfolios of the investors holding the downgraded stocks. 

In a unique manner Bangladeshi bourses categorize companies in "Z" if they fail to pay dividends, or remain of operations for more than six months, or fail to arrange annual general meetings or their retained losses exceed their paid-up capital. Z category stocks are punished through a longer trading settlement cycle alongside non eligibility for margin loans. 

Many investors told TBS that they have been tired of predicting the unusual regulatory moves, both in terms of formulating rules and enforcing them. 

A Motijheel-based stock trader Mahbub, who was holding two of the category downgraded stocks said after the closing bell today, said, "The extreme unpredictability of regulatory factors should end, we want stable rules and their straight enforcements."

The decision to downgrade eligible listed firms to Z category was deferred for long both by changing regulatory directives and deferring their enforcements several times.  

The Bangladesh Securities and Exchange Commission (BSEC) under the chairmanship of Professor Shibli Rubayat Ul Islam in 2020 relaxed rules for company downgrading to Z category in the bourses and the regulator then was criticized when it was revealed that the regulator, alongside relaxing the downgrading criteria, also had written to the bourses not to downgrade any stock without the regulator's prior approval. 

The BSEC until Shibli was replaced was also verbally instructing the bourses to avoid downgrading of many deserving stocks. Dozens of companies, deserving to be downgraded were being traded as superior ones, for more than two years. 

For instance, the latest directive in May this year had asked the bourses to downgrade stocks to Z category on 02 July and the firms that failed to disburse a minimum 80% of the announced dividends made a list of over three dozen companies. 

However, regulatory push and some extra time helped a few firms comply and avert their fall into Z, according to stock exchange officials. 

Verbal instruction from the securities regulator forced the bourses from triggering the decision in July as they were giving firms a chance to comply with, while investors 

"The category factor became a tool for stock market manipulation where the average people always remain in a disadvantageous position as they don't have insider information," Ahmed Asif Akhter, a Dhaka-based retail investor told TBS, demanding abolishing the categorization system completely. 

The reconstructed BSEC that promised good governance wrote to the bourses on 19 September to send deserving firms to Z category in seven days and the bourses did it for 28 firms, effective from today. 

The market on Wednesday morning was going higher and later nosedived, most probably due to the selloff by investors who, before others were informed about the after hour  announcement of Z reclassification, said Ahmed Asif Akhter. 

DSE Brokers Association former senior vice president Md Sajedul Islam said how the category tool was misused by the regulator under the previous chairman hurt the investors and again a sudden, delayed enforcement triggered on Thursday further hit the market. 

"Better late than never as it distinguishes between strong and weak companies, we hope for a strict adherence to regulations alongside stability in regulations while the timeliness also should be in the decision makers' mind," he said.