Re-labelling of stocks: Regulator to put emphasis on financial strength

The regulator considers dividing listed securities into two categories -- one for non-performing stocks and the other for the remaining securities -- to encourage investors to assess them based on companies' fundamental strength.

At present, stocks are labelled as 'A', 'B', 'G', 'N' and 'Z' securities. Except for 'G' and 'N' categories, stocks belong to other groups depending on annual cash dividends paid to shareholders. 'N' category is meant for newly listed companies and 'G' for the companies that had not gone into operation until listed.

The existing labelling system does not indicate any difference between two stocks from two separate categories, save cash returns to shareholders, said Prof Shaikh Shamsuddin Ahmed, a commissioner of the Bangladesh Securities and Exchange Commission (BSEC).

"Investors should judge a company considering their financial positions.

"We are thinking about two categories under which listed companies will be traded on the bourses."

If the regulator finally introduces the changes, a junk category will be set for non-performing stocks, while all other stocks will be traded under one single category, Mr Ahmed added.

Now, a company is listed in 'A' category for distributing 10 per cent or more cash dividends, while listing in 'B' category points to disbursement of less than 10 per cent cash dividends by the company.

As per the rules, a company will be transferred to 'Z' category for failure to pay cash dividends for two years in a row. Stocks in this category may have other issues of non-compliance as well.

A major problem with the prevailing system is underlying deception. For example, any two companies can hold onto their status as B stock despite a gulf between them when it comes to financial strength.

For example, multinational company Robi Axiata and little known Zahin Spinning are now listed as B stocks for paying cash dividends less than 10 per cent.

The second largest mobile operator, Robi has to conform to the global accounting standards while the auditor of Zahin Spinning has pointed out financial mismatches in its earnings statements for FY22.

Zahin Spinning has been able to maintain its status as 'B' stock by distributing only 0.25 per cent cash dividends to shareholders for FY23.

So, the labelling can create a false impression about a company, and investors are at risk of making unwise decisions just by looking at the category a stock belongs to.

In such a scenario, the BSEC looks to simplify the categorisation of stocks, separating only junk stocks from the rest.

Md. Ashequr Rahman, managing director of Midway Securities, said existing categories give scope for misuse of margin facility.

"Margin facilities should be given based on the threshold of paid-up capitals." The regulator may, for example, allow an investor to invest 50 per cent of a margin loan in large-cap companies, 40 per cent in mid-cap companies and the remaining 10 per cent in low-cap companies.

Large-cap companies obviously would include blue chip stocks, such as Grameenphone and Square Pharmaceuticals.

"Subsequently, credit risks would decline" for investments in fundamentally strong stocks, said Mr Ashequr Rahman, adding that larger fund flow into such securities would also help stabilise the equity market.

As of now, margin facility is available for A and B stocks.

The problem arises when a non-performing company remains under B category by paying a nominal cash dividend despite its weak fundamentals.

Many listed companies have done so to avail of advantages that are not applicable for 'Z' companies.

Investors do not get netting and margin loan facilities against 'Z' category stocks. The trading cycle of such stocks is also longer than those of other categories.

The trading cycle of junk stocks is T+3, whereas it is T+2 for stocks of the remaining categories.

The FE found that some eight companies, including Zaheen Spinning, announced 0.25-1.0 per cent cash dividends while nine other companies decided 1.25-2.0 per cent cash dividends for FY23 just to stick to their listing status.

Financial strength of some of them did not support the recommended cash dividends.

Zaheen Spinning had incurred losses for the three years through FY22. Reporting a profit of Tk 14.80 million for FY23, it again went into the red. The company experienced losses in all three quarters of FY24 until now and the aggregate amount of losses stood at Tk 32.64 million in the nine months through March.

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