Transfer from OTC to SME board: Regulator has more things to fret about

Sponsor-directors of Wonderland Toys offloaded a significant amount of the company's shares within just two years and three months after listing on the SME board of the Dhaka Stock Exchange in September 2021.

By December 2023, their stake in the company, which had been delisted from the main board and transferred to the OTC (Over-the-Counter) market before its migration to the SME platform, plunged from 47.02 per cent to a little over 31 per cent.

According to the data available on the SME platform, shares of Wonderland Toys were traded at Tk 27.30 to Tk 57.7 per share between July 14, 2022 and April 30, 2023. The stock then exhibited a sharp upward trend, soaring to Tk 112.7 per share on July 12, 2023, with a rise of 312 per cent. By Thursday, the stock plummeted to Tk 48.40 per share.

Market operators fear that sponsor-directors dumped shares at inflated prices while denying investors information about the company's business operation based on which they could make investment decisions.

The securities regulator in September 2021 approved proposals of seven companies, including Wonderland Toys, to get listed on the SME board, considering their return to operation and that listing would create scope of trading in the shares of the entities. Five of them -- Apex Weaving and Finishing Mills, Bengal Biscuits, Himadri, Wonderland Toys, and Yousuf Flower-- were finally listed.

Recently, it has issued a directive saying that the companies, which want their transfer from the OTC market to the SME platform, will have to meet a mandatory requirement of 35 per cent publicly tradable shares in the "interest of the investors".

Experts, however, believe stringent rules and scrutiny are necessary to prevent business entities from materialising ill motives behind re-listing in the equity market. They speak in favour of increasing the lock-in period for holdings of sponsor-directors of SME enterprises. It is three years for the companies on the main board.

Listed SME companies are required to disclose yearly earnings, instead of quarterly as is the case for the companies listed on the main board. But Wonderland Toys has not made any financial statement public for nearly three years.

The relevant window (financials) on the website of the company reads, "Coming soon." The news portal of the SME board has only replies of Wonderland Toys to three queries made by the Dhaka exchange over abnormal price hikes.

So, when sponsor-directors sold off hundreds of thousands of shares in the market after the expiry of their two-year lock-in period, investors were completely in the dark about the financial performance of Wonderland Toys. They still do know nothing about the business operation.

In the latest directive, the Bangladesh Securities and Exchange Commission says a 35 per cent free float would enhance liquidity and investors' participation in trading in SME stocks.

Experts, however, say that only companies that have good prospects should be allowed to float shares on the SME board. Otherwise, investors will face high investment risk. Asif Khan, chairman of EDGE Asset Management, says a proper audit should be conducted to assess the business potential of the OTC companies before they are given permission for listing on the SME board.

"Otherwise, they [sponsor-directors] would exit the company, offloading shares upon abnormal price surges," he added. Consequently, the regulator would fail to achieve its goal set during the introduction of the SME board. The SME board came into being on September 30, 2021 to facilitate the growth of small and medium enterprises (SMEs). The higher target was to help them strengthen in terms of corporate practices and earnings and then move to the main board, rendering an expansion of the equity market.

Of the five companies that already shifted from the OTC market to the SME platform, Himadri experienced a 25 per cent year-on-year decrease in profit to Tk 4 million in FY22 and a 43 per cent year-on-year increase in earnings to Tk 5.72 million in FY23.

Bengal Biscuits witnessed a 12 per cent year-on-year decline in profit to Tk 5.5 million in FY22 and then a 112 per cent year-on-year growth the following year.

Apex Weaving is yet to come out of the red. It reported a loss of Tk 175.70 million for FY21. The yearly loss fell to Tk 68.77 million in FY22 and then to Tk 11.61 million in FY23.

Annual profit of Yousuf Flower jumped nearly five times year-on-year to Tk 15.03 million in FY23 while its earnings had declined about 41 per cent year-on-year to Tk 3.36 million in FY22.

Several stocks of SME companies surged abnormally on the Dhaka bourse.

Himadri shot up to Tk 8941.2 per share from Tk 38.80 per share between April and November last year. Recently, the regulator slammed fines on a handful of investors for manipulating the stock.

Meanwhile, the board of the premier bourse cancelled the request of three OTC companies -- Rangamati Food Products, Al-Amin Chemical Industries, and Quest BDC -- for listing on the SME board for lacking transparency in financial reporting, confirmed a DSE official wishing not to be named.

Mr Khan said, "It would be wise to allow companies to upgrade their status once they turn profitable and it has to be verified by a trust-worthy auditor."

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