Investors putting money in closed companies raises alarm

The recent recovery of the stock market shows promise but raises alarm at the same time as non-operational companies' stocks have been flying high on the Dhaka Stock Exchange (DSE) alongside blue-chip scrips.

Most of these small-cap firms have been witnessing losses pile up and there is no sign of recovery in the foreseeable future. These firms have failed to pay dividends for years. Still, their stocks have been soaring, mostly driven by speculation.

The price appreciation of the junk stocks gives a message that market manipulators are still active in the secondary market despite stricter punitive measures taken by the newly-formed commission against wrongdoers.

Some of the companies have not been in operation for years and avoided making any earnings disclosure.

To expose the real operational status of the companies, DSE inspection teams visited at least three companies -- Aramit Cement, Ratanpur Steel Re-rolling Mills, and Nurani Dyeing this week, recently and found their factories shut.

Though business operations had remained suspended, the stock of Aramit Cement surged 16 per cent, Ratanpur Steels jumped 23 per cent, and Nurani Dyeing rose 10 per cent on the Dhaka bourse in the month to Tuesday.

Analysts suspect price manipulation behind the price appreciation.

Without manipulation, such kind of stock price jump of closed companies is not possible, said Md Sajedul Islam, managing director of Shyamol Equity Management.

"A stock exhibits rally when a certain group of people influence the price while others join the rally not to miss out on the opportunity to make quick bucks," said Mr Islam.

General investors keep chasing stocks when they fly on the bourses to make capital gains overnight, a tendency that manipulators cash in on by selling off overvalued stocks to general investors.

The exchanges have to be empowered to delist junk companies from the trading board; otherwise vested groups will repeatedly gamble with such stocks, added Mr Islam.

"Investors have been turning to junk stocks in the past few weeks, with hopes of higher returns from lower investments, taking advantage of the ongoing market rally," said a merchant banker, requesting not to be named.

In September 2023, the DSE identified 14 poor-performing companies in attempts to expose their real financial status to investors. Some had kept operations halted but they refrained from providing any information to shareholders.

DSE probe teams had already visited more than 10 companies until Tuesday and found their factories closed.

One of those, Khulna Printing & Packaging has been producing nothing since October 2021. The company's cumulative losses reached Tk 960 million until FY22.

The loss-making company failed to declare any dividend for the last four financial years. It disbursed only 0.25 per cent cash dividends for the last time in FY20.

Despite the grim performance, the stock of Khulna Printing jumped 25 per cent in the month to Tuesday. The stock earlier exhibited an unusual rally in January this year. At the time, it skyrocketed to Tk 33.2 per share from Tk 7.2 per share within a month with no price sensitive information.

Dulamia Cotton's stock price jumped 42 per cent in the month to Tuesday although the company has been suffering losses for years.

Meghna Pet Industries, which reported losses and negative retained earnings, scaled up 32 per cent in the month.

Meanwhile, the benchmark equity index continued its bullish momentum for the sixth straight session on Tuesday, as investors' buying interest remained resilient-particularly in large-cap stocks.

The DSEX, key index of the Dhaka bourse, went up by 51 points or 0.97 per cent to 5,270 on Tuesday. It gained 209 points in the past six sessions while the market cap surged by Tk 225 billion.

The DS30 index, a group of 30 prominent companies, gained 33 points to 2,030 and the DSES Index, which represents Shariah-based companies, added 15 points to 1,161.

However, turnover dropped 16 per cent to Tk 7.22 billion from the 10-month high turnover the day before.

The Chittagong Stock Exchange also ended higher, with its All Share Price Index (CASPI) increasing by 81 points to 14,654, while the Selective Categories Index (CSCX) rose by 58 points to 8,956.

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