Persuasion, not coercion, remains the better option
Monday, 1 February 2010
Shamsul Huq Zahid
The Securities and Exchange Commission (SEC), according to a report published in the Financial Express, has prepared a proposal requiring the private companies with paid-up capital of Tk 500 million and above to get listed on the bourses. The offloading of stakes, however, would vary, depending on the size of the paid-up capital of the respective companies.
The securities regulator would soon send the proposal to the finance ministry. The SEC proposal, apparently, is being floated in the backdrop of opposition from various stakeholders to a finance ministry proposal that requires mandatory offloading of stakes equivalent to 40 per cent of the paid-up capital of a company willing to go public.
Though an SEC high official has claimed that compulsory listing of a company would not contradict any provision of the existing company law but such a provision, if put in place through new securities regulations, is unlikely to go unchallenged.
Similar move was initiated in the early part of 2008, but the businesses had dismissed the idea calling it 'regressive'. The Metropolitan Chamber of Commerce and Industry (MCCI) held a discussion with the then chairman of the SEC, advised to drop the idea and offer better incentives, fiscal or otherwise, so that the companies feel the urge of going public voluntarily.
Going public or not should be left to the choice of an individual company. Compulsory listing, possibly, is not practiced in countries following the principles of free market economy.
True, Bangladesh capital market company has been experiencing a serious dearth of listed companies despite the fact that the number of companies registered with the Registrar of Joint Stock Companies and Firms (RJSC&F) is over 81000. Only 236 companies-a small number of them, however, owned by the government, are listed on the bourses.
There is no denying that many of the RJSC&F registered companies do not exist and many of them are marginal and small entities. But even then many more companies are eligible for coming to the capital market.
One might be wondering why the private companies are not in a rat race to get them listed on bourses when investors have gone crazy. Investors, it seems, are now ready to swallow everything that get in their way.
The reasons for a large number of companies not feeling tempted to come to the capital market and offer equity to the general public are many.
Private companies do enjoy several advantages. They do not have to make public disclosures, comply with SEC regulations and make the expenditures on publishing price-sensitive information every now and then. Besides, there are hassles like organizing annual general meetings that does very often turn out to be highly troublesome. Inadequate disclosure requirement coupled with a culture of keeping the ownership hold by families do also discourage many private companies from going public.
But there are some disadvantages for the private companies in their need for sizeable funds either for expansion or taking up BMRE programme. They can opt for borrowing from the banks. But that is not hassle-free. Banks would, naturally, ask for collateral.
The state of the capital market is one of the major indicators of the economy. The Bangladesh capital market that suffered a serious jolt at its formative stage due to the bubble bust of the 1996 has been able to overcome the sluggishness during the last couple of years. The market capitalization- GDP ratio, which was as low as 6 to 7 per cent some years back, has now increased to about 30 per cent.
At the moment market is booming and, to some extent, a bit over-heated. The trend does suggest the need for continuous listing of new companies on the bourses to help absorb an unending flow of funds, individual and institutional. The government has identified 26 of its companies for offloading through direct listing. But those are unlikely to come at a time. What is needed most is listing of more and more private companies on bourses.
The government instead of giving rise to resentment among private sector by asking large and medium private companies to get listed compulsorily, should offer enough incentives, fiscal and otherwise, so that the companies feel tempted to go public on their own.
Tax incentives are valued most by private companies. Under the current tax regime, the listed companies barring the banks, insurance companies, financial institutions and telecom companies, pay 10 per cent less tax than the unlisted ones. The listed banks, financial institutions and telecom companies have to pay tax at the rate of 45 per cent. However, a listed company enjoys a tax rebate of 10 per cent if it declared dividend more than 20 per cent.
The government might consider bringing down the tax rate for publicly traded companies other than banks, insurance, non-banking financial institutions and telecom companies to 25 per cent. An identical tax rate is being offered in Thailand and Vietnam to entice more private companies to the capital market.
The government might shy away from any tax cut out of the fear that it would leave a negative impact on its revenue earning. Actually, the opposite might happen. The financial disclosures of private companies are more transparent compared to those of the private companies, which, in turn, would fetch higher revenue for the government. The government can well compare the tax payments by the private companies and listed companies.
The government might also consider creation of an atmosphere where companies would not find it rewarding to remain private. It should make necessary rules and regulations under which the private companies would be required to make transparent financial disclosures. In that case, either the government would have to strengthen the RJSC&F as a regulatory body or create a separate regulator for the purpose.
However, many companies would feel tempted to go public if the benefits of getting listed outweigh the risks and hassles.
The Securities and Exchange Commission (SEC), according to a report published in the Financial Express, has prepared a proposal requiring the private companies with paid-up capital of Tk 500 million and above to get listed on the bourses. The offloading of stakes, however, would vary, depending on the size of the paid-up capital of the respective companies.
The securities regulator would soon send the proposal to the finance ministry. The SEC proposal, apparently, is being floated in the backdrop of opposition from various stakeholders to a finance ministry proposal that requires mandatory offloading of stakes equivalent to 40 per cent of the paid-up capital of a company willing to go public.
Though an SEC high official has claimed that compulsory listing of a company would not contradict any provision of the existing company law but such a provision, if put in place through new securities regulations, is unlikely to go unchallenged.
Similar move was initiated in the early part of 2008, but the businesses had dismissed the idea calling it 'regressive'. The Metropolitan Chamber of Commerce and Industry (MCCI) held a discussion with the then chairman of the SEC, advised to drop the idea and offer better incentives, fiscal or otherwise, so that the companies feel the urge of going public voluntarily.
Going public or not should be left to the choice of an individual company. Compulsory listing, possibly, is not practiced in countries following the principles of free market economy.
True, Bangladesh capital market company has been experiencing a serious dearth of listed companies despite the fact that the number of companies registered with the Registrar of Joint Stock Companies and Firms (RJSC&F) is over 81000. Only 236 companies-a small number of them, however, owned by the government, are listed on the bourses.
There is no denying that many of the RJSC&F registered companies do not exist and many of them are marginal and small entities. But even then many more companies are eligible for coming to the capital market.
One might be wondering why the private companies are not in a rat race to get them listed on bourses when investors have gone crazy. Investors, it seems, are now ready to swallow everything that get in their way.
The reasons for a large number of companies not feeling tempted to come to the capital market and offer equity to the general public are many.
Private companies do enjoy several advantages. They do not have to make public disclosures, comply with SEC regulations and make the expenditures on publishing price-sensitive information every now and then. Besides, there are hassles like organizing annual general meetings that does very often turn out to be highly troublesome. Inadequate disclosure requirement coupled with a culture of keeping the ownership hold by families do also discourage many private companies from going public.
But there are some disadvantages for the private companies in their need for sizeable funds either for expansion or taking up BMRE programme. They can opt for borrowing from the banks. But that is not hassle-free. Banks would, naturally, ask for collateral.
The state of the capital market is one of the major indicators of the economy. The Bangladesh capital market that suffered a serious jolt at its formative stage due to the bubble bust of the 1996 has been able to overcome the sluggishness during the last couple of years. The market capitalization- GDP ratio, which was as low as 6 to 7 per cent some years back, has now increased to about 30 per cent.
At the moment market is booming and, to some extent, a bit over-heated. The trend does suggest the need for continuous listing of new companies on the bourses to help absorb an unending flow of funds, individual and institutional. The government has identified 26 of its companies for offloading through direct listing. But those are unlikely to come at a time. What is needed most is listing of more and more private companies on bourses.
The government instead of giving rise to resentment among private sector by asking large and medium private companies to get listed compulsorily, should offer enough incentives, fiscal and otherwise, so that the companies feel tempted to go public on their own.
Tax incentives are valued most by private companies. Under the current tax regime, the listed companies barring the banks, insurance companies, financial institutions and telecom companies, pay 10 per cent less tax than the unlisted ones. The listed banks, financial institutions and telecom companies have to pay tax at the rate of 45 per cent. However, a listed company enjoys a tax rebate of 10 per cent if it declared dividend more than 20 per cent.
The government might consider bringing down the tax rate for publicly traded companies other than banks, insurance, non-banking financial institutions and telecom companies to 25 per cent. An identical tax rate is being offered in Thailand and Vietnam to entice more private companies to the capital market.
The government might shy away from any tax cut out of the fear that it would leave a negative impact on its revenue earning. Actually, the opposite might happen. The financial disclosures of private companies are more transparent compared to those of the private companies, which, in turn, would fetch higher revenue for the government. The government can well compare the tax payments by the private companies and listed companies.
The government might also consider creation of an atmosphere where companies would not find it rewarding to remain private. It should make necessary rules and regulations under which the private companies would be required to make transparent financial disclosures. In that case, either the government would have to strengthen the RJSC&F as a regulatory body or create a separate regulator for the purpose.
However, many companies would feel tempted to go public if the benefits of getting listed outweigh the risks and hassles.