The abuse of bonus shares

Companies listed on the stock exchanges of the country are found to be unusually enthusiastic in issuing bonus shares for their investors, though in most cases, their earnings per share do not support such dividend declarations. Nor have they business plans commensurate with the generation of additional equity through the issuance of bonus shares.

This tendency is found more with the local companies than the multinational ones listed on the bourses. In fact foreign or multinational companies (MNCs) listed on the Bangladesh stock exchanges rarely issue stock dividends.

That prompts one to ask a question whether the listed local companies really require additional capital which they usually generate through the issuance of bonus share or are guided by some other motives.

 Normally, a company issues bonus shares if it needs additional capital. Additional capital is needed when it has a plan for business expansion. When bonus share is issued the reserves or retained earning which has been accumulated through undistributed profit gets capitalised. This, in other words, means company's equity base gets broadened.

 Another way of raising additional capital or broadening the equity base of a company can be done through the issuance of right shares. In case of right share issuance, the existing shareholders have the priority right over others with regard to subscription at the offered price. If the existing shareholders do not buy any portion of the issued right shares, the unsubscribed shares are taken over by the underwriters.

However, the foreign companies and MNCs are usually not interested in the issuance of bonus shares out of the urge to repatriate the maximum amount of profit back home.

In case of right issue, the pricing matters. The issue manager normally sees whether the issue is subscribed or not at the asking price. Through repeat issuance of IPOs, the equity share can also be increased, but this is practised rarely in the Bangladesh market as the regulator is more stringent about it.

What is seen in the Bangladesh stock market is that a number of companies after selling their IPOs to the public, issue bonus share in the following years. What does lead them to take such an action? Is there any ulterior motive of sponsors of the companies behind such a move?

 In fact, ordinary investors suspect that there is a hidden motive behind such issuance of bonus shares. Definitely, they do not issue the bonus shares just to satisfy demand for good dividends by the minority shareholders. Sponsors of the companies who are also in the management of companies issue the bonus shares for their own gains.

By selling bonus shares immediately after selling of IPOs they become enormously rich. Declaration of stock dividends or increasing the equity capital of business all over the world is tied to the needs of the business expansion of a company.

If the company needs additional capital to give support to new business or to install new structures, it goes for bonus or right share issuance. In Bangladesh, companies are found to be issuing such shares not for beefing up the equity capital. They are not even needed to propose a business plan for the purpose, as the regulator's nod is required neither for such plan nor for issuance of bonus shares.

Only in the case of right share issuance the regulator's permission is needed - that too mainly for fixing the 'right price' of the issue. By taking advantage of the non-fulfilment of any obligation, in most cases, newly listed companies are found to be too eager to issue bonus shares to best serve the interest of the sponsors.

It is suspected that manipulators have almost a free hand in Bangladesh stock market. Manipulation allegedly takes place in case of the market prices of particular stocks. In the manipulated market or in an artificially hyped market sponsors come up to offload the bonus shares. It is to be mentioned that, there is no cap with regard to time or lock-up period for holding of shares received through bonus issue.

The sponsors are always free to sell or transfer their shares and get rich by selling the shares received through bonus issues. Interestingly, the sponsors who are on the company's management board are the decision makers, they become beneficiaries of the bonus share issues. They become more rich by selling of the bonus shares to the investors in the market.

So, even without any need for increasing the equity capital of the company, sponsors or directors can create additional shares, sell the same to the investing public to become rich. This is only possible in a market like Bangladesh. In other markets of the world this kind of crude way of becoming rich by creating additional shares is not permitted.

After the issuance of bonus shares, the earning per share comes down, as there is no commensurate increase in the business of the companies concerned. With a slide in the earning per share, the market price of the concerned share goes down which ultimately leads to investors' loss.

To plug a major hole in the securities trading system, the Bangladesh Securities and Exchange Commission (BSEC) should regulate the issuance of bonus shares. One way of doing that could be the locking up of bonus shares, received by the sponsors of the companies, for a certain period. Otherwise, this process of cheating the ordinary investors will continue to be widely used by the sponsor-shareholders.

The writer is professor of Economics at the

University of Dhaka. abuahmedecon@yahoo.com