Energising the capital market  

Md Ashraf Hossain     | Published: April 12, 2019 22:10:52 | Updated: April 13, 2019 22:12:26

Basically two types of capital finance are required for formal industrial, commercial and service oriented ventures-long-term capital and short-term working capital. Long-term capital is required for capital expenditures to set up a venture and short-term working capital is required for operation of that venture. A venture starts operation, getting finance as working capital from commercial bank. Sponsors collect additional long-term capital from capital market offering shares to public and institutional investors. That is to say, long-term capital expenditure is collected from sponsors and general shareholders, and short-term working capital is collected from commercial banks.

In Bangladesh, the capital market is not vibrant. Sponsors are reluctant to go to the capital market and general public do not consider it a good place for investment. They do not get lucrative dividend from investing in capital market, i.e., purchasing shares, mutual bonds and debentures. The listed companies of Bangladesh origin are reluctant to pay maximum possible dividend to shareholders. From whatever net profit they make, they keep a big chunk of profit as retain earning and distribute a negligible portion of profit to shareholders as dividend. When one looks into the case of multinational companies listed with the stock exchange, it is usually seen that the maximum net profit is distributed amongst shareholders as dividends and a small portion is kept as retain earning. This is one of the basic reasons why market prices of shares of multinational companies are shooting up. On the other hand, prices of local companies are continuously declining.  Directors who administer companies are, in general, interested to take financial and materiel benefits in informal ways. For instance, directors enjoy full time vehicle facility at the cost of the company, that is, a company purchases vehicles, employs drivers, pays for fuel, maintenance and other costs. It is shown that vehicle is used for the company's purpose. In practice, the vehicle is used by the director for personal and family purposes.

To make the capital market vibrant, the board of directors of public limited companies (PLCs) are to be encouraged to pay the maximum dividend to shareholders from net profit. Reduced corporate tax is imposed on profit of publicly listed companies now-a-days. The government should design provisions for corporate tax and income tax in such a way that directors are encouraged to pay the maximum profit to all share holders.  Corporate tax at lower rate is to be imposed on profit earned by the company and distributed to shareholders in cash. On the undistributed profit, corporate tax at higher rate is to be imposed. For instance, 25 per cent corporate tax is imposed on net profit of a listed company and 30 per cent corporate tax is imposed on net profit of a non-listed company in the same sector. It does not encourage directors of local listed companies to pay the maximum possible profit of the company to its shareholders. If 12.5 per cent corporate tax is imposed on net profit that is distributed among shareholders as dividend and 30 per cent corporate tax is imposed on the remaining profit as retain earning, the directors will be encouraged to recommend maximum dividend to share holders. Income tax at the rate of 10 per cent from individual shareholders and 25 per cent from institutional shareholders on dividend income from company may be deducted at source. After deducting that tax at source, the amount may be treated as tax-paid income of shareholders. Net dividend income from a listed PLC of a shareholder will not be added to other taxable incomes of a shareholder to determine tax amount. In such an event also, the board of directors of locally listed plc will recommend declaring the maximum possible portion of net profit of the company as dividend. People will be interested to invest in shares of the local PLCs. The capital market will be vibrant. Entrepreneurs will get their long-time finance from the capital market and short-time finance from commercial banks.




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