The Financial Express

Fund diversion by listed companies  

| Updated: November 06, 2020 22:43:32

Fund diversion by listed companies   

The securities regulator has got the right issue -- diversion of the fund by the listed companies at the cost of their shareholders.

It is, however, one of many financial moves that a section of the listed companies have been making without any regulatory approval.

A report published in this paper on Wednesday last said that the Bangladesh Securities and Exchange Commission (BSEC) is likely to bar the listed companies from giving interest-free loans to their subsidiaries and non-listed companies.

The Commission thinks that such transfer of funds does deprive their shareholders of their due financial benefits.

The move, if and when implemented, would amount to disciplining the financial operations of the listed companies to protect the interest of their shareholders.

Such regulatory monitoring of the financial operations of the listed companies is most essential.

Until recently, proper scrutiny of the financials of the listed companies, a must-do job on the part of the securities regulator, used to be bypassed. It was no secret that an unscrupulous section of listed companies, aided by equally dishonest audit firms, does play with numbers in their annual financial reports. Yet regulatory actions in this connection have been scanty. Lately, the issue has evoked some noise, but remedial measures are found wanting. The formation of the Financial Reporting Council (FRC) has not helped much as its actions are not widely felt. The Council must be handicapped by some problems.

Listed companies are supposed to follow certain rules and regulations in the matters of their financial operations in the greater interest of shareholders. It is hard to say that is happening. Regulatory monitoring has not been as effective as it should have been. 

The listed issues need to utilise properly the funds they mobilise from the general shareholders and banks. For the securities regulator, it is also vital to see how the funds are used by the companies. In the case of default or deviation, appropriate punitive measures against the errant companies are necessary.

The incidence of diversion of funds has been aplenty. The BSEC would be doing the right thing if it decides to put restrictions on providing interest-free loans to subsidiaries and non-listed companies. But, it will be equally important for it to see how the funds are taken from the general investors by floating the initial public offerings (IPOs) and used. 

On top of everything, what appears to be an important task on the part of the securities regulator is the proper scrutiny of all the financial reports produced by the listed companies.

One of the major weaknesses of the country's capital market is that the vast majority of investors do not have faith in the financials of the listed companies. There are valid reasons for that.

Some listed companies in their prospectuses tend to project a very rosy financial picture. They promise an attractive rate of annual return on investment. But, soon after their listing, most of the profit just melts away. It proves that the financials submitted with the IPO proposals are doctored ones. Under such circumstances, the relevant companies, audit firms and issue managers do deserve punishment and the BSEC should ensure it.


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