The Bangladesh Securities and Exchange Commission (BSEC) is to take action against sponsors and directors of 40 listed companies who have violated the rule on joint ownership of a minimum of 30 percent shares in their own firms.
The BSEC has given the Dhaka Stock Exchange (DSE) instructions to prepare a list of the companies that have flouted the rule.
The DSE has begun to draw up the list.
The BSEC, meanwhile, has already issued letters to some companies for not abiding by the rule.
The DSE list will be presented at one of the BSEC's regular meetings, following which the commission will decide on the next steps.
The BSEC in May last year amended the rules relating to shareholding of sponsors and directors in the Securities and Exchange Ordinance 1969, but could not implement it as yet. The rule was originally introduced to ensure a significant stake of the sponsor and directors in companies so they are motivated to ensure the health of the company.
Reluctance to meet shareholding requirement
The sponsors and directors of some of the 40 companies have been unwilling to buy the minimum number of shares in their firms as per BSEC rule.
The sponsors and directors of 28 companies have not taken any initiative to comply with the BSEC directive in the last seven months since the amendment of the rule took effect.
The sponsors and directors of the remaining 12 firms increased their stakes to comply with the rule but they are still below the requirement.
Experts say sponsors and directors normally declare purchases of shares when their companies are doing well. As a result, share prices of the companies play a positive role in the capital market at the time.
There is a downward trend in the market at present, and some sponsors and directors are not complying with the BSEC rule, added experts.
If sponsors and directors do not jointly own the required number of shares, investors may not have confidence in the shares of that company, analysts have said.
Professor Abu Ahmed, a stock market expert, told The Business Standard that some companies get listed with an ill motive of manipulating share prices.
"They stay on the sidelines after selling shares to investors at higher prices. For this reason, small investors always lose by holding shares of such companies," he said.
He also said the BSEC must compel those companies to comply with the rule.
Holdings of seven firms below 10 percent
Of the 40 companies, sponsors and directors of 16 own less than 20 percent of shares in their firms.
At the same time, sponsors and directors of seven companies own less than ten percent shares. Intech Limited's sponsors and directors hold 3.97 percent shares while it is 4.02 percent in Familytex, 4.16 percent in United Airways, 5.09 percent in Fine Foods, 5.33 percent in Fu-Wang Ceramic, 8.62 percent in Fu-Wang Foods and 9.39 percent in Agni Systems Ltd.
Under Section 2CC of the Securities and Exchange Ordinance, sponsors and directors of a company failing to meet the 30 percent shareholding requirement will not be able to execute any type of sale or transfer or transmission or pledge of shares until acquisition of the required amount of shares, except transfer of pledged shares in case of confiscation for loan default or transmission of shares in case of death.
Additionally, the firm will not be able to raise capital through rights share offer or repeat public offer or bonus shares or amalgamation of companies or any other mode of raising capital.
The 40 companies are already facing these consequences.
Md Nazimuddin, executive director and company secretary of Olympic Industries Limited, told The Business Standard, "We do not meet the 30 percent shareholding requirement at present. That is why we have been deprived of some stock market facilities."
"We want to buy the required number of shares. However, we need a large amount of money to do that. That is why we are waiting for money to buy the shares," he added.
Ujjal Kanti Dhar, chief financial officer of Northern Jute Manufacturing Company Limited, said his company is not currently complying with the 30 percent rule.
"However, we do not need the facilities that we will have if we comply," he added.