In a bid to protect the interests of investors, the Bangladesh Securities and Exchange Commission (BSEC) is going to make it mandatory for listed companies to provide valid reasons for issuing stock dividends.
Often, many companies issue stock dividends year after year and keep profits in their own hands in the form of retained earnings, thus depriving investors of their right to cash dividends.
A company will now be able to declare stock dividends only by complying with respective rules, and only when it decides on expansion, modernisation, and reinvestment for a better business future.
Stock dividends are paid to shareholders in the form of additional shares in the company, rather than cash. It's like a stock split. Stock dividends dilute share prices, but like cash dividends, they also do not affect the value of the company.
A top Bangladesh Securities and Exchange Commission (BSEC) official said the regulator is going to impose restrictions on issuing stock dividends in order to bring an end to this practice by many companies.
The commission believes most companies declare stock dividends without valid reasons, taking advantage of an option in securities laws, and managements increase their paid-up capital intentionally.
As a result, companies are losing the capacity to declare cash dividends for their investors and they are not able to comply with the listing rules of stock exchanges.
Finally, such companies turn into weak performers and ultimately investors suffer.
The top BSEC official posing a rhetorical question said, "What will investors do with bonus shares? They are always in trouble with bonus shares."
Some companies declare stock dividends intentionally and raise their paid-up capital, which is not fair for general investors, he added.
Many of them show reasons in favour of stock dividends, which have no validity in conditional or business terms.
Sources said a company will not be able to declare stock dividends within three years of its listing and before full utilisation of its initial public offering (IPO) funds.
Furthermore, it will not be allowed to declare stock dividends within three years of issuing rights shares, and a full utilisation of the proceedings.
The company won't be eligible to declare a stock dividend if it fails to declare a 10% cash dividend for two consecutive years.
The firm may not declare a stock dividend if it has remained closed throughout the year, and it may not declare stock dividends if it remains in the Z category or the over the counter market (OTC).
Saif Powertec Limited raised Tk36 crore from stock exchanges in 2014, when its paid-up capital was Tk43.89 crore. After seven years, the paid-up capital rose to Tk357.87 crore.
Keya Cosmetics Ltd raised Tk5 crore in 2001 for business expansion. The company increased its paid-up capital by issuing bonus and right shares. Presently, its paid-up capital is Tk1,102.32 crore.
National Bank got listed on the Dhaka Stock Exchange in 1984. Now, its paid-up capital is Tk3,066.42 crore.
IFIC Bank has also not declared any cash dividends since 2003 and is now showing paid-up capital of Tk1,619.87 crore on the DSE website.
In 2019-20, 95 listed companies issued 183.17 crore worth of bonus shares to raise their paid-up capital, which was 330.51 crore in 2018-19.