Of junks and shady promoters

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Shamsul Huq Zahid
Disagreement between and the bourses and the securities regulator over various issues, for obvious reasons, is a very natural outcome. But, at least, on one issue, their thought process, apparently, is going along the same line. Both are bent upon removing all junk shares through delisting, if not liquidation.
The bourses and the Securities and Exchange Commission (SEC) have found the presence of the junk shares, placed in the worst-performing 'Z' category, rather irritating. So, they have created a separate window --- over the counter trading (OTC), at the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) for the trading of junk shares.
The SEC issued OTC market rules in 2001 but it took the DSE more than eight years to put in place the facility. The CSE created the OTC market ahead of the DSE in 2004 but it has remained more or less non-functional.
Until now, 79 'z' category shares have been de-listed and sent to the OTC market and 17 more issues of the same variety are still being traded in the main markets. It is most likely that a good number of the latter would soon be despatched to the OTC market.
But the moot question is: How does the OTC scheme benefit the investors?
Before the existence of the OTC market, an investor could not sell or buy shares of the companies de-listed by the bourses. The OTC has, at least, given the investors an opportunity to trade their junk shares.
But the performance of the OTC market has been as dismal as that of the issues traded on it. Many sale orders placed in the market soon after its launch in the middle part of last calendar year are yet to be settled.
The volume of transactions at the OTC market has been highly insignificant. For instance, on Tuesday last, only a couple of sale contracts worth a meagre Tk.37500 was carried out despite the fact the total issued capital of 75 issues placed on the OTC market is worth over Tk.6.4 billion. The placement of four more de-listed issues on the OTC market would increase further the value of the issued capital.
There was a time when the SEC allowed many companies to float their initial public offerings (IPOs) without scrutinizing the fundamentals properly and the bourses, too, were very much lenient to list those issues. Many companies took advantage of the 1996 boom-time to get listed on the bourses and gradually vanish in thin air with the capital they had raised from the market.
The regulator and the bourses are now trying to take credit that they have almost cleaned up their Augean stables by delisting many erring companies. But that is being done at the cost of the investors. Investors are now paying the price for the lax rules which allowed shady promoters to collect money and disappear.
The examples of gross indifference on the part of the securities regulator and the bourses are well highlighted in granting permission to fake companies to float shares and get listed on bourses. A good number of these companies did not even have fixed assets including factories or production plants. How the crook sponsors did manage permission from the SEC or the bourses can be anybody's guess.
Suggestion does often come to go for liquidation of the errant or de-listed companies. But will the investors get back their money in the case of liquidation of junk issues? Most unlikely. Even the secured creditors, in all probability would not get anything out of liquidation.
If the SEC decides to take a move for liquidation of the de-listed or the 'Z' category issues that are still being traded in the main market, the court would appoint liquidator who would take charge of the assets, if there is any. In that case, secured creditors such as banks and other financial institutions would receive priority in repayment and little would be left out for general investors.
The general investors also cannot be assured of the performance of all the companies that have raised capital and got listed on the bourses in recent years. It is hard to have total faith in what is written on the prospectuses of the companies prior to their going public.
The investors while putting in their money in the shares of these companies basically remain dependent on the scrutiny done by the securities regulator, which, in turn, makes its decision, to a great extent, on the basis of audited financial statements and other documents.
Thus, onus lies more with the SEC and the audit firms to help the investors avoid investment in companies floated by shady promoters. The integrity of a section of audit firms, unfortunately, does often come under question. It is expected that the SEC would exercise utmost caution to stop the entry of companies that have all the potentials to turn junks in the future. One of the most important ways of doing that would be making a thorough probe into the track records of the sponsors of the companies willing to go public.
Zahidmar10@gmail.com