The Bangladesh Securities and Exchange Commission has failed to rein in bonus dividend declarations by the listed companies due to lack of financially sound companies on the market, monitoring and proper punitive action.
According to the Dhaka Stock Exchange data, around 132 companies issued 341.91 crore bonus shares to raise Tk 3,419.19 crore in 2019.
Of the 299 companies that declared dividends in the year 2019, 73 companies declared stock dividend along with cash dividend and 59 companies declared only stock dividend for the year 2019.
The market regulator has been trying for years to control declaration of bonus dividend by the companies with imposing several restrictions on them.
But, the companies are still declaring bonus dividend indiscriminately, upsetting the investors mostly.
The BSEC on May 21, 2019 tightened issuance of bonus shares by the listed companies, saying that no listed company could declare stock dividend except the reasons for business expansion, modernisation, reform and development of its quality, and the company must provide price sensitive information regarding the issue.
The bonus shares are not declared from capital reserve or any unrealised gain or through doing anything so that the post-dividend retained earnings become negative or a debit balance, it said.
In separate rules, the BSEC said that the companies non-compliant with 30-per cent shareholding rules would not be allowed to raise capital through bonus shares.
Moreover, the new tax measures imposed on the listed companies’ stock dividend declaration and retained earnings were expected to tighten the bonus dividend declaration. The tax imposition will be applicable to the entities’ income for the current fiscal year 2019-20 with effect from next fiscal year (2020-21).
Market experts said the lapses in the law paved the way for the companies to declare no dividend or low dividend.
Around 32 companies declared no dividend for the year of 2019 where some 10 companies declared no dividend for the first time. Around 20 companies declared less than 5 per cent dividend.
In the case of stock dividend issuance, the total value of equity remains the same from both the investor’s perspective and the company’s perspective.
Companies declare bonus dividend when they want to reward their investors but either do not have the capital to distribute or they want to hold onto its existing liquidity for other investments.
Most of the companies listed on the stock exchanges in Bangladesh do not have potential to continuously accumulate profits every financial year, experts said, adding that some companies showed profits in their financial statements but the profits did not exist in reality.
Therefore, the companies declare bonus dividend to protect themselves from the investors’ wrath, they said.
The BSEC has been facing criticisms for approving many fundamentally weak companies in the market.
Market experts said the retail investors in the country usually did not like to have bonus dividend in lieu of cash dividend that eventually put an impact on the share prices of the company concerned.
They said companies continuously declared stock dividend that swelled their paid up capital and minimised possibility of cash dividend in future as they hardly expanded their business and increase profits by raising funds through bonus shares.
Lack of monitoring and incapacity of the market regulator encouraged the companies to continue doing the ill practices, they said.
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