Z-category relegation triggers mass sell-off in 9 stocks

Shares of nine listed companies suffered sharp price corrections today (4 January) after the Dhaka Stock Exchange (DSE) downgraded them to the Z category, reflecting renewed investor concern over corporate governance and compliance failures. 

The downgrade was primarily triggered by the companies' failure to hold annual general meetings within the stipulated timeframe, as required under the listing regulations, according to the disclosures filed today at the DSE.

Among the affected companies, Best Holding, Gemini Sea Food, Alif Industries and Beach Hatchery each saw their share prices tumble by around 10% following the downgrade. 

Fu Wang Food and Oimex Electrode also faced steep loss, while S Alam Cold Rolled Steels and Kattali Textile posted notable declines after being moved down from the B category. 

Gemini Sea Food recorded one of the steepest falls, losing nearly 10% of its value in a single session.

First Security Islami Bank was also placed in the Z category; however, its shares are no longer traded as the bank has already been merged into a newly formed entity, Sammilito Islami Bank. So, there was no immediate market reaction to the classification.

Z-category stocks, commonly referred to as junk stocks, are considered fundamentally weak by investors due to persistent compliance issues and poor financial health.

Companies are placed in this category if they fail to declare dividends based on annual performance, do not hold annual general meetings on time, remain inactive for more than six months, or accumulate losses that exceed their paid-up capital after adjusting revenue reserves. 

The downgrade often signals heightened risk and reduced investor confidence, which typically results in sell-offs.

Trading conditions also become more restrictive once a company is downgraded to the Z category. Unlike A and B category stocks, which follow a T+2 settlement cycle, Z-category stocks are settled on a T+3 basis.

In addition, transactions in these shares are limited to cash settlement only, further reducing liquidity and making them less attractive to investors.

Market participants said the sharp price declines following the downgrade were expected, as many institutional and retail investors tend to avoid Z-category stocks due to their higher risk profile and settlement constraints. 

The downgrade also serves as a warning signal to shareholders about the governance and operational challenges facing these companies.

Regulatory oversight of Z-category firms has increased in recent years. In May 2024, the Bangladesh Securities and Exchange Commission issued a directive—effective from July—that bars sponsor-directors of Z-category companies from selling their shares without prior approval. 

The measure aims to protect general investors from sudden insider exits and to push sponsor-directors to address compliance and governance problems.