DESCO to issue shares to govt, with retail investors’ interest ‘protected’

After Power Grid, the stock market regulator has given permission to the Dhaka Electric Supply Company (DESCO) to issue preference shares to the government against share money deposits.
The preference shares will not be incorporated into the paid-up capital and so general shareholders will not experience any impact, the argument put forth in their favour, but these shares will get priority over common stocks during the sharing of profits.
"The company prefers issuing preference shares to ordinary shares, considering that existing shareholders will not be affected," said an official of the company, requesting not to be named.
However, preferred stocks would require the company to pay dividends against those before giving common stock dividends. That might affect the company's ability to pay dividends to general shareholders since fixed payment liabilities may increase despite the size of equity remaining unchanged.
The state-run power supplier will issue more than 607.69 million shares at the face value of Tk 10 each in favour of the power division secretary. The move has been taken to comply with a regulatory directive, according to a stock exchange filing on Wednesday.
Existing shareholders' return on investment would be slashed by the dividend payout to the government against preference shares, said Md Sajedul Islam, former senior vice president of the DSE Brokers Association of Bangladesh.
Usually, the dividend payment is made at a fixed rate against preference shares, but in this case it will vary according to the company's earnings.
As per the regulatory approval, the dividend will be determined by multiplying the ratio of preference share capital out of the total capital (ordinary share capital plus preference share capital) with 15 per cent of the profit after tax.
That means the lion's share of profits will be distributed to general shareholders.
The company has not paid any dividend to the government yet, but after the issuance of preference shares, DSECO will have to start paying back.
Until now, general shareholders have reaped the benefit from investment of the share money deposits, said Mr Islam.
The preference shares will be non-cumulative in nature, meaning the government will not be entitled to miss dividends.
The government injected funds into DESCO on several occasions for the implementation of several projects since its inception in 1996.
According to the company's audited financial statement for FY23, it had received more than Tk 6.10 billion in total from the government as share money deposit, the money paid in exchange for shares that have not been acquired yet.
In a 2020 gazette, the Financial Reporting Council (FRC) directed state-run entities to convert share money deposits into paid-up capital against the backdrop of such funds piling up.
The FRC in the order said such funds should be incorporated into the share capital within six months after the money was deposited in a company's bank account in order to prevent fund anomalies.
The directive was given since the government had been and still is deprived of returns from its equity investment.
The DESCO official said the company decided to issue preference shares instead of ordinary shares after consulting with the Ministry of Finance.
FINANCIAL PERFORMANCE
Meanwhile, DESCO endured a record loss in FY23 due to losses in foreign currency transactions and the mismatch between the hikes in bulk electricity price and the price at the retail level.
About 80 per cent of the total annual loss of Tk 5.41 billion came from transactions in foreign currency. The company earned in the local currency but paid back debts in dollars.
The US dollar has appreciated 38 per cent against the taka since the Russia-Ukraine war began in February 2022, making DESCO pay Tk 4.28 billion in excess to foreign lenders in FY23 against debts equivalent to Tk 29 billion.
DESCO, responsible for electricity distribution to the capital's west and north-eastern areas, is still in the red with a loss of Tk 2.71 billion in the nine months through March this year. The loss was Tk 1.36 billion in the same period a year ago.
The poor financial performance drove the company's share price down. The stock fell almost 28 per cent since the removal of floor price in January this year to Tk 26.1 per share on the Dhaka Stock Exchange.

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