Banks relieved from contradictory regulatory pressures regarding dividends

Banks got relief from stock category downgrade in cases of their failure to pay cash dividends amid bars from their primary regulator.

It came because the central bank does not allow banks to pay cash dividends in cases of inadequate capitalisation or provisioning and both local stock exchanges punish them by treating them as inferior Z category stocks.  

The Bangladesh Securities and Exchange Commission (BSEC), in a letter on Thursday, asked the bourses not to place any listed securities in the Z category if they fail to pay cash dividends for two consecutive years due to any regulatory restrictions or for the sake of regulatory compliances.

Right now, only the lenders are the apparent beneficiaries of the relaxation as the Bangladesh Bank is the only primary regulator that restricts regulated firms' cash dividends if they lack sufficient capital or provisions.  

For example, four listed commercial banks could not pay any cash dividends to their shareholders for 2020 and only paid some stock dividends. They would be placed in the Z category in the stock exchanges this year in cases of failure to pay any cash dividends for 2021.

BSEC relaxation granted it a big relief as its shares will not be treated as Z category in the bourses.

Z category stocks face multiple problems as margin loans cannot be distributed against those, their trading settlement cycle is longer than A, B or N category stocks and very importantly many institutional investors face regulated restrictions in buying Z category stocks – all meant to discourage the demand for such stocks.   

In a meeting with the Bangladesh Bank and the BSEC on 1 March, bankers sought the relaxation among some others while discussing the reasons behind banks' ongoing low appetite for stock investments.

The Z category is a unique creation to punish companies that lack regularity in shareholders' general meetings, dividends payout and operations. 

Other potential beneficiaries  

DSE Chief Operating Officer M Shaifur Rahman Mazumdar told The Business Standard, "Listed companies facing any regulatory restriction on cash dividends would enjoy the waiver, it is clear."

"Right now it is the banks. It may be applicable for non-bank financial institutions or insurers too," he added.    

Insurers, primarily regulated by the Insurance Development and Regulatory Authority (Idra) also have some compulsion to ensure certain paid-up capital – Tk30 crore for life insurers and Tk40 crore for general insurance firms – as said in the Insurance Act and their licences.

However, the Idra is yet to compel the undercapitalised insurers to restrict their cash dividends and prescribe stock dividends, but it might come in future, analysts said.

A group of stock market analysts and investors seemed to be confused about the second point of waiver – no cash dividends with a compliance purpose.  

For example, the over five dozen listed small-cap firms submitting their plans to ensure the minimum of Tk30 crore in paid-up capital to stay on the mainboard of the bourses might need cash retention and issue more stock dividends or right shares in the coming days, of course, for the sake of compliance with the BSEC instruction for the adequate capital base.

DSE operations chief Mazumdar does not think the companies would enjoy the waiver by default, because "no regulation restricts their cash dividends." 

BSEC Commissioner Professor Shaikh Shamsuddin Ahmed told The Business Standard, "In such cases, eligible companies must apply to BSEC and explain their reasons for stock dividends instead of cash dividends and the regulator would decide if it would be for the betterment of shareholders and the market."