Why 27 stocks downgraded to Z category 

Over two dozen firms listed on the Dhaka Stock Exchange (DSE) have been transferred to the Z category due to non-compliance with securities rules, including failure to pay declared dividends and not declaring dividends for two consecutive years.

With the permission of the Bangladesh Securities and Exchange Commission (BSEC), the country's premier bourse decided to transfer 27 companies to the Z category on Wednesday (25 September). 

The downgrading of the stocks will take immediate effect on 26 September, according to DSE officials.

At the Dhaka bourse on Wednesday, most of the 27 stocks experienced a sharp decline in share prices following the announcement of their downgrade to the Z category.

Despite these non-compliances and the inflated appearance of their stocks, the DSE was previously not permitted to transfer them to the Z category due to intervention by the stock market regulator under its former chairman Shibli Rubayat-Ul Islam.

Four months prior, the commission issued a directive setting criteria for shifting non-compliant stocks to the Z category, which was scheduled to be effective in June.

Stocks in the Z category face delays in share settlements compared to stocks in other categories, and no margin loans are provided for buying these stocks. The settlement cycle for Z stocks is set at T+3, while for others, it is T+2, according to the DSE.

A top official of the DSE told The Business Standard that the shifting of non-compliant stocks was overdue, but the DSE was not allowed to proceed with the transfers until now. "As we received permission, we decided to execute the downgrading in line with the directive," the official stated.

According to the DSE, 27 stocks are now being transferred to the Z category, primarily for violating two major issues – failure to pay at least 80% of declared dividends and failure to declare dividends for their shareholders.

According to the BSEC notification, if any company fails to pay at least 80% of the declared or approved dividend within the stipulated timeframe, it will be shifted to the Z category.

The notification also mandates that any company that fails to declare dividends for two consecutive years from the last dividend will also be shifted to the Z category.

As per the DSE, 14 companies violated the directive issued by the BSEC as they failed to pay dividends to their shareholders, while the remaining 13 companies failed to declare any dividends for their shareholders for the last two consecutive years.

DSE officials noted that the number of non-compliant companies was around 35, but some paid off dividends, leading to a decline in the total number.

"If the others, which are now facing a shift to Z due to failure to disburse dividends, pay the declared dividends, their category will be changed after the dividend payment," the official added.

After implementing the downgrading, the number of Z stocks will surge to 83 out of around 390 listed stocks. Currently, there are 56 companies in the Z category.

Previously, in December last year, the DSE identified 59 companies listed on the bourses that were eligible for downgrading to the "Z" or junk category due to non-payment of dividends, accumulated losses exceeding their paid-up capital, and failure to hold annual general meetings despite the end of the financial year.

These companies were positioned in the "A" and "B" categories on the stock exchange, which, experts said, sends the wrong message to investors.

To eliminate the false appearance of these stocks, the DSE downgraded 22 companies in February this year, following an order issued by the market regulator.

The companies that failed to hold their annual general meetings on time, had not been operational for more than six months, and had accumulated losses or negative retained earnings exceeding their paid-up capital were included in this downgrade.

According to the DSE, the 14 companies now facing downgrading to Z for failing to disburse declared dividends within the stipulated time are – Associate Oxygen, Indo-Bangla Pharma, Beach Hatchery, Advent Pharma, Khulna Power, Pacific Denims, Fortune Shoes, Energypac Power, VFS Threads, Shephard Industries, SK Trims, Lub-reff (Bangladesh), and Libra Infusion.

On the other hand, the 13 companies that failed to declare dividends for two consecutive years are – Western Marine, Phoenix Finance, Olympic Accessories, National Tubes, National Bank, Miracle Industries, GSP Finance, Far Chemicals, Central Pharmaceuticals, BD Thai Aluminium, Bay Leasing, Atlas Bangladesh, and Anlimayarn Dyeing.

The DSE could not change the categories due to a BSEC directive issued in September 2020 that barred bourses from making such decisions.

In light of the challenging business and profit scenarios during the Covid pandemic, the commission decided to halt downgrades to the Z category for companies, even if they fail to meet the required criteria according to the transaction settlement regulations.