Listing more govt firms won't strengthen capital market unless reforms come first

The idea of listing state-owned enterprises (SOEs) on the stock market has long been promoted as a way to improve transparency and governance. Bangladesh has already listed several SOEs, such as Power Grid Company, Titas Gas, Jamuna Oil, Padma Oil and Meghna Petroleum. But despite their public status, these companies remain largely uninvestable in their current form.

Initially, the motivation for listing SOEs was to encourage better governance through market discipline. However, no meaningful effort has been made to assess whether listed SOEs actually outperform their unlisted peers. More recently, the justification has shifted towards increasing the supply of "good companies" to deepen the market. But this logic falls flat when the companies being listed offer poor returns and weak governance.

In practice, rational investors steer clear of these entities. For many, these companies are considered uninvestable. Here's why:

1. Poor capital allocation: Listed SOEs often hoard cash rather than paying reasonable dividends. These funds are then invested in questionable financial institutions – likely driven by internal kickbacks rather than fiduciary duty.

2. Disregard for minority shareholders: Regulatory bodies like the Bangladesh Energy Regulatory Commission (BERC) set prices and margins for these SOEs without any consideration for their listed status or the rights of minority investors. In public hearings, stakeholders openly argued that these companies shouldn't make profits – an absurd stance for entities with public shareholders.

3. Incorrect capital raising: A glaring example is the Bangladesh Submarine Cable Company, which raised capital from the government without first setting a fair price. The price was later fixed at a steep discount to the market, blatantly violating governance norms.

4. Extraction without dividends: A past proposal to extract surplus cash directly from SOEs – without routing through dividends – highlighted the bureaucracy's disregard for shareholder rights. While this scheme never materialized, it exposed a dangerous mindset.

In this environment, listing more SOEs will not deepen the capital market; it will only weaken investor confidence. That said, these issues are not insurmountable. With political will and the right policy framework, reform is possible. Here are three key steps:

1. Establishing a dividend policy: All listed SOEs must adopt and publish clear dividend policies. These should define surplus cash (after accounting for working capital and capex) and mandate its distribution. This benefits both minority shareholders and the government, which can then factor this income into its budget.

2. Creating a unified treasury policy: SOEs often lack the expertise to manage large cash reserves. A standardized government treasury policy should define where and how SOEs can invest – be it in vetted banks, T-bills, or mutual funds – along with transparent criteria for fund manager selection. Initial restrictions can be eased over time.

3. Performance improvement plans: Each SOE, listed or not, should undergo a high-level financial review. This should be followed by benchmarking against international peers and crafting actionable, time-bound KPIs. Resistance to reform – particularly from loss-making SOEs – should trigger serious consideration of privatization or shutdown.

Starting with just a few reform-driven success stories could build the momentum needed to transform the sector. Without these steps, listing more SOEs is not only futile – it could be counterproductive for the country's capital markets.

The author in the president of CFA Society Bangladesh and chairman of EDGE AMC Limited.