The Bangladesh Securities and Exchange Commission (BSEC) has imposed another round of restrictions on stock dividends issued by publicly listed companies.
From now on, companies listed on the country's stock exchanges will have to secure approval from the securities regulator before issuing any stock dividend, in certain circumstances believed to be inappropriate for capital enhancement.
The market regulator in its latest gazette published on 31 August said companies must receive the regulator's approval if they want to issue stock dividends in the first three years following their listing.
The same will be applicable if a company wants to issue stock dividends before it fully utilises the fund collected from investors through public offers.
The regulatory approval will also be mandatory for companies seeking to issue stock dividends in the first three years of raising capital through issuing the right shares or repeat public offers (RPOs).
Also, they will need consent until the funds raised through the right offers or RPOs are utilised.
In right offers, companies raise funds from their existing shareholders in exchange for giving them new shares in proportion to their held shares, while usually failing to raise the needed capital from existing shareholders, companies go for repeat public offers.
Companies failing to pay out at least 10% cash dividends for two consecutive years will also need the regulator's approval to issue stock dividends.
Companies that are out of operation for a year will have to secure consent to issue stock dividends, popularly known as bonus shares unless the unwanted status is due to renovation work or in the event of force majeure.
'Z' category companies that fail to pay cash dividends for two consecutive years, or remain out of operation for six consecutive months, will need the consent to issue bonus shares.
If the regulator directs, any company, other than these, will have to write to the BSEC for its consent before handing out stock dividends to shareholders.
Companies will have to apply for the BSEC's consent within five working days from the shareholders' general meetings where the stock dividend plans are approved.
The regulator may call a company to clear deficiencies and, if dissatisfied, may finally reject the stock dividend plan, and the risk must be communicated with the shareholders during the dissemination of price-sensitive information.
The record date to identify shareholders who will avail bonus shares must be in 5-10 days since getting the regulatory consent and the company must give the bonus shares in 30 days from the record date.
Unwanted stock dividends
Stock dividends are a mode of companies' payback to customers where a company converts its retained profits into its shares, and shareholders get new shares instead of cash dividends.
Usually, companies do it when they need to widen their capital base.
But in Bangladesh, historically, too many companies had been abusing the option through issuing stock dividends out of their questioned profits mainly to deprive their shareholders of cash dividends, and to retain their window-dressed position as A or B category in the bourses.
Also, many sick companies had been issuing stock dividends to manipulate stock price because when a Z category company upgrades its category its stock price tends to soar abnormally.
The securities regulator and the government addressed the issue in 2019.
The Finance Act 2019 encouraged the listed companies to pay at least an equal percentage of cash dividends against their stock dividend issuance as companies now have to pay a 10% additional tax on the stock dividends that exceed the cash dividends for a specific fiscal year.
Also, the BSEC prohibited issuing bonus shares out of fishy assets. Still, the same persists.
BSEC's gazette includes companies' allowable purposes to issue stock dividends. Companies must have a purpose of BMRE (Balancing, modernisation, rehabilitation, and expansion), or a profitable investment or reinvestment plan out of the converted capital.
BSEC also allowed stock dividends meant for listed companies' regulatory compliances regarding their capital structure. Banks, non-bank financial institutions, and insurers will be the beneficiary of it, as they have their primary regulators, too.