Stock exchanges' main boards should be cleaned up removing the companies that fail to maintain minimum financial standards.
The boards have so many poor-performing companies that they engender a bad impression about the market to both local and foreign investors. Some of the companies have remained non-functional for years or even a decade or more, state-run Shyampur Sugar Mills for example, and some others have stirred controversy by committing loan scams or other financial frauds.
Other issues of non-compliance include irregular submission of financial results, and failure to hold annual general meetings timely.
Market experts say such companies should be delisted from the main boards and sent to other boards, such as alternative trading board (ATB) and OTC (over-the-counter) board.
Meanwhile, Prime Bank Securities has submitted a proposal to the task force, formed by the securities regulator to work out ways to develop the market, regarding an overhaul of the boards.
Md. Moniruzzaman, managing director of Prime Bank Securities, said investors in other markets could easily assess the financial strength of the companies listed on the main boards.
"But here many companies in the main board do not even deserve investor participation in their stocks. It's not possible to have a general idea about the quality of our companies on the main boards," he said.
Usually, there are two boards of the bourses of other countries -- main board and alternative board.
The companies on the main boards should meet some conditions, such as minimum paid-up capital, net worth, profitability and market capitalisation.
Even the Bangladeshi blue chip company Beximco Pharmaceuticals, which is listed on the Alternative Investment Market (AIM) of the London Stock Exchange, has to meet stringent criteria.
It has to comply with higher standards in regard to financial disclosures for the AIM of the London Stock Exchange, compared to the main boards of Dhaka and Chittagong bourses.
Many exchanges of other countries have a minimum price that a stock must maintain. If a stock price goes below the threshold, the relevant company may be given a period of time to bring the stock to an accepted level.
For example, on the New York Stock (NYSE), a stock trading below $1 per share for more than 30 consecutive days risks being delisted. Similarly, Nasdaq has thresholds and timeframes set for stocks to conform to.
In Bangladesh, a large number of junk stocks, which have been unable to give any return to investors and have been associated with fabricated financial statements, are on the main boards of the bourses.
Many companies even have not paid listing fees.
Faulty and weak companies obscure the strength of the market.
Al Amin, an associate professor of the Department of Accounting & Information Systems of Dhaka University, said an OTC company is required to have a paid-up worth Tk 500 million to be re-listed on the main board.
"So, Tk 500 million may be set as the minimum paid-up capital of companies on the main board," he said.
He, however, quickly added that the size of paid-up capital should not be the only factor for judging a company's financial strength.
Mr. Al Amin, a member of the task force, said the committee would recommend criteria to be met by companies on the main boards.
Possible solutions
Presently, there are four boards on both the stock exchanges -- main board, alternative trading board, SME board and OTC (over-the-counter) board.
Moniruzzaman said the main boards should be strictly limited to companies compliant with certain financial conditions and matters tied to good governance. One possible criterion may be dividend yields, excluding stock dividends, instead of dividend per share.
The minimum return on equity (ROE) of a company should be 10 per cent, said Moniruzzaman, adding that ROE helps measure the profitability of a corporation in relation to stockholders' equity.
Liquidity threshold, such as average daily turnover, annual sales volume of around Tk 1 billion, and market capitalsiation worth Tk 1 billion may be set as other conditions for remaining on the main boards of the exchanges.
Deshan Pushparajah, country head of CAL Bangladesh, a joint-venture brokerage firm in Bangladesh, said initially non-compliant companies of the main board might be given some time to ensure compliance.
Companies will be delisted from the main board for failing to ensure compliance with regulatory obligations.
"And the companies that are out of operations for a long time should be delisted from the main board," Mr Pushparajah added.
At present, there are 360 companies listed on the main board of the Dhaka Stock Exchange (DSE). Of them, 193 belong to 'A' category, 79 to 'B' category, four to 'N' category and 84 to 'Z' category.
The conditions, such as minimum dividends, which can be as low as 0.1 per cent, and the permissible time for operations to remain suspended (six months), do not reflect financial performance of companies.
Companies in the junk category are non-compliant. Moreover, there is wholesale misuse of benefits that come with the stock categorisation, for example margin loans available for A and B category stocks.
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