Readymade garment (RMG) companies are among the major targets for new listings to help the secondary market grow, but they have not been offered any incentives to go public.
A major purpose of listing is to get tax benefits but RMG companies, irrespective of their status as listed or non-listed, pay taxes at a much higher rate than the rates applied to listed firms of other sectors, except for telecom and tobacco firms.
Reza Uddin Ahmed, an executive director of City Group, explained why that is the case.
As per the existing provision, RMG companies have to pay taxes amounting to 1 per cent of the export value or 12 per cent of its profit, whichever is higher.
For example, if a company's export value is Tk 100, its bank will deduct Tk 1 from the export proceeds unless 12 per cent of the profit earned is higher than Tk 1.
With all expenses tied to operations and administration deducted, it is found that most companies' profit before tax is not more than Tk 3. That means tax on profit would be Tk 0.36, lower than the tax calculated on export value.
So, the 1 per cent tax at source will be settled as final tax. In that case, the effective tax rate is 33.33 per cent.
"So, there is no tax incentive for RMG companies in the capital market. This is one of the key factors that discourage the companies from going public," Ahmed said.
However, if a company secures 4 per cent profit, its final tax rate would come to 25 per cent.
RMG companies effective tax rate will fall if profits are higher.
"The reality is that a majority of the RMG companies incur losses. Only a small fraction makes profits," Ahmed said.
The cash incentives that RMG companies are entitled to get may be considered as income but that is hard to get.
Export-oriented companies are offered with an 1.5 per cent incentive or above on their export values.
But such incentives depend on various factors, for example whether there was value addition in the production or usage of locally produced raw materials.
RMG manufacturers, however, are bound to use raw materials imported from countries selected by buyers, which is why they fail in most cases to apply for cash incentives.
Moreover, manufacturers can apply for incentives on completion of a long process and audits, said Md. Morshedul Hoque, chief financial officer of Bitopi Group.
"There is also a queue of applicants for incentives. So, it takes around three years to realise the incentives," Hoque said. And the companies that run operations on a subcontract basis are not entitled to get export incentives.
That means most companies fall off the list for export incentives.
Other factors that discourage RMG companies from listing include owners' reluctance to transfer ownership and a lack of proper valuation in the equity market.
Besides, the asset bases of RMG companies are not as strong as that of other companies.
Such companies are mainly backed by orders and L/Cs (letters of credit).
So, the securities regulator becomes skeptical about the companies' assets while evaluating their IPO (initial public offering) proposals.
In absence of stability in the equity market, good companies also fail to get market value as expected, another factor to keep good companies from going public.
Presently, the number of listed companies under the textile sector on the Dhaka Stock Exchange is 58 and the sector has below 4 per cent share in market cap. The reason behind such nominal share in market cap is that most of the listed textile companies are small cap.
The notable companies include Square Textiles and Envoy Textiles.
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