Budgetary measures for stock market

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Mohammad Mufazzal | Published: June 15, 2019 21:44:53

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The market operators and experts have expressed their mixed reaction over the measures announced for the country's capital market in the proposed budget for the fiscal year (FY) 2019-20.
Hailing the proposed budgetary measures, some of them have said investors will enjoy the benefits of incentives while others said good companies may face difficulties over the proposed tax on reserve and retained earnings.
The finance minister has proposed, among others, imposition of 15 per cent additional tax on so much of retained earnings and reserves as it exceeds 50 per cent of the paid up capital of the company.
The government announced this measure to ensure proper distribution of profits among the investors.
Former chairman of the securities regulator Dr. AB Mirza Azizul Islam said the increased limit of tax-free dividend income is a positive sign for the capital market.
"Most of the companies go for expansion through issuance of stock dividend. That's why the companies may face problems in case of expansion due if 15 per cent tax is imposed on the stock dividend," said Mr. Islam, also an advisor to the last caretaker government.
He said the proposal of imposing 15 per cent tax on retained earnings and reserves may be a reason of difficulty for good companies as they retain profits for future investments.
"Particularly, I am not optimistic about the outcomes of the proposed measures," Mr. Islam added.
The finance minister's budget speech mentioned that investors expect cash dividends from their investment in the shares of a company.
"From that point of view, cash dividend plays an important role in increasing the value of the share and also strengthening the share market," according to budget speech.
"But we observed that the companies are generally distributing stock dividend instead of cash dividend.
As a result, investors are deprived of their well-deserved return. In order to encourage the distribution of cash dividend, I propose imposition of 15 per cent tax on stock dividend distributed to the shareholders by any listed company, according budget speech.
In his reaction, the former president of the Dhaka Stock Exchange (DSE) Md. Rakibur Rahman said it's a good sign for the country's economy as the government has realised the importance of the capital market.
"This is the most capital market will enjoy the benefit of the measures announced in the proposed budget for the FY 2019-20," said Rahman, also an incumbent director of the DSE.
In the proposed budget, the tax free dividend income for individuals has been increased up to Tk 50,000 from the existing Tk 25,000.
To encourage the recommendation of cash dividend, the finance minister has also proposed a 15 per cent tax on stock dividend distributed to shareholders by any listed company amid the ongoing practice of recommending stock dividends frequently.
Md. Shakil Rizvi, a former DSE president, said real investors will enjoy the benefits of the proposed  budgetary measures.
"Many companies issue stock dividends year after year. But their expansions are not visible and earnings decline following increased number of shares. That's why tax has been proposed to encourage the recommendations of cash dividend," Rizvi said.
Md. Moniruzzaman, managing director of IDLC Investments, said another weapons could be utilised by the stock exchanges and the securities regulator to encourage the recommendation of cash dividends.
"A provision of recommending at least 10 per cent cash dividend could have been included in the rules to remain listed as an 'A' category company," Moniruzzaman said.
He said due to bad practice of recommending only stock dividend by some companies other good companies may face difficulties.
"A company's sustainable growth will not be ensured if it fails to retain its earnings. Good companies should not be penalised following the practice of bad companies," Moniruzzaman said.
Ahsanul Islam Titu, a parliament member, said the governments' focus on the capital market is the most positive side of the budget proposed for the fiscal year (FY) 2019-20.
"The capital market failed to get focus in the previous budgets. But the market got enough focus in this year," said Titu, also a former president of DSE.
He said the proposal of imposing 15 per cent additional tax on retained earnings and reserves is a penalty proposed to come out of a negative practice.
"Good performing companies may difficulties if they fail to retain profits. It's also true that the government has taken this initiative following the suggestions made by the DSE," Titu said.
He said the capital market will not be flourished unless different initiatives are taken to bring companies having good fundamentals.
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