Listed companies' dilemma over increasing paid-up capitals

Many companies have been navigating the current adverse business climate with commendable agility; however, expansion is not in their foreseeable plan. Meanwhile, many others have been sinking into a deluge of losses, making fresh investments out of the question.

So, when they are busy contemplating how to overcome immediate challenges, they receive a letter from the securities commission saying that they have to meet the minimum paid-up capital of Tk 300 million.

As many as 60 companies are yet to comply with the regulatory obligation, including multinational organisations, such as Reckitt Benckiser, Bata Shoe, and Linder BD and local shoemaker Apex Footwear.

In the letter issued at the end of May, they were asked to submit a roadmap as to how they will boost their paid-up capitals.

The regulatory move came against the backdrop of price manipulation of small-cap stocks. When a company has insignificant free float, scrupulous investors can easily influence the stock price through unlawful means.

The Bangladesh Securities and Exchange Commission (BSEC) has been insisting on increasing paid-up capitals to stop the malpractice.

A company representative wishing not to be named said the regulator had threatened to transfer non-compliant companies to the SME boards or ATB from the bourses' main boards.

Representatives of several companies while talking to the FE refused to make any comment fearing reprisals.

In the meantime, companies have sought intervention of the Bangladesh Association of Publicly Listed Companies (BAPLC) to escape punitive actions.

Kyser Hamid, a member of the BAPLC's executive committee (EC), said the imposition is unfair when companies fear a dilution of profits after injection of fresh money or when they do not see an environment conducive to expansion.

Profitable companies, such as Reckitt Benckiser and Linde, do not need more capital because they already have huge cash flow.

Linde Bangladesh distributed a record cash dividend of 4,500 per cent for 2024, while Reckitt Benckiser paid 3,330 per cent cash dividend for the year ended in December last year.

On the other hand, there are many poorly-performing companies, such as Savar Refractories, Jute Spinners, Aziz Pipes, and Meghna Pet Industries. They have been incurring losses for the last few years.

The paid-up capital of Aziz Pipes is Tk 53.47 million. It had been in the red for the four years to FY24. Its losses will balloon further if its paid-up capital is increased. Shareholders will also be among the losers.

Companies need capitals only when they go for expansion. But they are highly unlikely to expand when there is insufficient gas and electricity supply.

The declining private sector credit growth corroborates the concern that the scope of business expansion is thin.

So, additional cash to be raised will not have any purposeful use.

"Without containing stock price manipulation through enforcement and market monitoring, the securities regulator puts pressure on the companies to increase paid-up capitals," said Mr Kyser.

He gave reference to listed companies that experienced irrational rallies despite high paid-up capitals. Khan Brothers PP Woven Bag Industries is an example with a free float worth Tk 980.80 million.

The company had witnessed losses for the four years to FY23, and then earned a nominal profit of Tk 0.86 million in FY24. Its stock had undergone a 975 per cent price surge in just four and a half months through January last year on the Dhaka bourse.

Regulatory actions failed to stop the stock's rally.

That means only large paid-up capital is not enough to contain stock price manipulation unless the regulatory vigilance is strong in the market.

Mr Kayser highlighted the concern that companies may not be able to maintain their growth trend, with paid-up capitals increased.

On the threat of transferring good companies to SME boards or Alternative Trading Board, he said good companies are encouraged to come to the market. "It would be a breach of the regulatory promise if a good company is transferred to the SME boards or ATB."

"It's not like 'one shoe fits for all'. Paid-up capital should be determined based on the needs of individual companies," Mr Kayser said.

Previously, the securities regulator in December 2021 asked companies to comply with the mandatory paid-up capital, saying it is obligatory under the regulation 9(i) of the Dhaka/Chittagong stock exchange.

But the issuers find the regulation 9(i) irrelevant for them as it speaks about direct listing that is applicable only for state-run companies.

Nevertheless, the BSEC referred to the same rule in the latest letter.

mufazzal.fe@gmail.com