BSEC's U-turn on firms downgrading to Z category  

In a series of demonstrations of regulatory indecisions, the Bangladesh Securities and Exchange Commission (BSEC) has yet again changed its rout to treat weaker companies as Z Category ones.

The U-turn, initially from its September announcement, was followed by further deviations from its Thursday's first order as it came up with another order on the same day.

A top official at a brokerage firm said, "Inconsistent decisions made without any discussions with stakeholders will put investors in a difficult position when making investment decisions. Such indecisions can turn the market speculative and create opportunities for manipulators to influence junk shares."

The new directive is exactly the opposite of the directive issued two and a half months ago. According to that directive, companies would be classified into the Z category if dividends were not paid at the end of the financial year.

However, under the new directive, a company that fails to pay dividends for two years will be demoted to the Z category. Furthermore, the directive will not come into effect until further declaration of the dividend.

As per the commission's instructions, failure to pay dividends for two consecutive years, failure to hold the Annual General Meeting (AGM) on time, or cessation of production for more than six months will result in downgrading to the Z category.

The commission issued a directive on 30 September last year to demote non-compliant companies that failed to pay dividends and hold AGMs to the Z category, which was supposed to be effective on 28 February.

However, the new circular was supposed to take effect on Sunday, but shortly afterward, the commission changed the timing of its implementation. As a result, companies that have not paid any dividends for the last two consecutive years will not face a category change for now.

According to stock exchange listing rules, a company is downgraded to the Z category if it fails to pay dividends at the end of the financial year. The stock exchange itself could have changed the category.

However, fearing that the businesses of listed companies may be affected during the pandemic, the commission issued instructions in 2020 to change the category if companies fail to pay dividends for two consecutive years.

Due to such directives from the commission, more than fifty non-compliant stocks remain in the A and B categories, even though they are supposed to be moved to the Z category as per listing rules.

Under the new guidelines, stock exchanges cannot change the category without the prior permission of the commission.

BSEC spokesperson Rezaul Karim said, "The companies' category will be changed based on the declaration of dividends for the next financial year."

According to the new directives, if a company remains out of production for more than six months, it will be moved to the Z category. However, the category will not change if the closure is due to balancing, modernization, rehabilitation, or expansion.

Additionally, no sponsor or director of a Z category company, excluding financial institutions, shall be allowed to transact any shares without prior approval from the commission. The trading settlement of Z stocks will be completed in three days, whereas the settlement cycle for other stocks completes in two days.

The order stipulates that if the negative balance of retained earnings exceeds its paid-up capital, the company will be downgraded to the Z category.

However, if accumulated losses exceed its paid-up capital, but the company has declared dividends, including interims, out of the current profits in the last fiscal year, the category of the company will not be changed, according to the order.

Currently, there are 27 companies in the Z category. Investors are not eligible to take margin loans to buy shares of those companies if they belong to the Z category, and share trading is settled as per T+3.