Mixed reaction to new measures for the capital market

The budget proposal to encourage cash dividend instead of stock was criticized by market analysts and welcomed by stock exchange officials.

Capital market experts however lamented the fact that no reform proposal has been made to lower high tax on trading bond, corporate taxes or address the liquidity crisis.

National Board of Revenue (NBR) said on Thursday that listed companies will have to pay a 15 percent of tax on the nominal value of issued bonus shares as stock dividend.

NBR also declared, if a listed company’s total retained earnings, reserve and surplus without it’s paid up capital exceeds 50 percent of the company’s total paid up capital, it must pay 15 percent tax on the amount of the excess.

Rakibur Rahman, a director of Dhaka Stock Exchange (DSE), welcomed the new policies. He argued that it will help to discourage the widely criticized practice of merely increasing the number of shares through stock dividend instead of cash.

“Lots of listed companies’ entrepreneurs have been issuing stock dividend with a mala fide intention to dump these in the secondary market dominated on uninformed or financially less literate retail investors in a manipulative game plan,” he said.

Another DSE Director Minhaz Mannan Emon said, “More than one hundred listed companies’ managements and boards are maintaining their status as ‘A’ category, without even paying a minimum amount of cash dividend to investors. If those bonus shares are issued without a good reason it amounts to nothing more than splitting assets into further numbers of stocks.”

Both the directors expressed their satisfaction with the government’s proposal to impose new tax on listed companies’ excessive profit retention.

They said, these proposed regulations will motivate listed company officials to cash out more of their annual profit as cash dividends.

They welcomed government declarations to increase annual tax free limit on dividend income from listed companies for local individuals to Tk50,000 from Tk25,000.

The government also said that double taxation on dividend income from foreign investor companies will be eliminated from the next fiscal year. Bangladesh has solved this issue for local companies from this year after a long criticism by experts and stakeholders.

Critics said that government’s emphasis on cash dividend will hurt upcoming companies.

“Encouraging cash dividend and discouraging stock dividend will definitely bring some positive changes for capital market investors. But these policies are going to punish true growth-stars in local stock exchanges,” said equity analyst Md Mahfuzur Rahman, a director at United Securities Limited.

Sonchoy Saha, a Chartered Financial Analyst (CFA) working as head of institutional sales at UCB capital management said, “the government is imposing a policy where profitable companies have to increase their paid-up capital just to avoid new retained earning tax. On the other hand, they must pay a 15 percent tax if they decide to increase paid-up capital after listing. The only remaining option is to distribute excess reserve and surplus as cash dividend, which going to punish growing businesses listed in exchanges.”

“Through the second tax (on high reserve) policymakers are going to push dozens of growing listed companies towards bank borrowing, instead of capital accumulation from stock exchanges,” he added.

“All over the world growing companies don’t pay much cash dividend,” said Md. Abdul Muktadir, a CFA society of Bangladesh member and CEO of merchant bank PLFS Investment Limited, “if they can assure their shareholders that the company is reinvesting the profit in a business that can return more than the usual cost of capital. In Bangladesh these companies are going to pay more taxes irrespective of whether they have increased their paid-up capital.”

“We hope the proposed retained earnings tax will not be imposed finally. There must be a way to cater to growing companies. Above all, both of the taxes are going to affect the companies’ bottom-line (net profit).”

Meanwhile, several experts have expressed their frustration for government’s lack of proposals to vitalize the capital market in the budget.

“Development of a vibrant Bond Market is a significant capital market agenda nowadays. High tax on trading bond units has already been identified as a major hindrance here. We are surprised not to see anything in this regard. We hope the final budget will address this issue,” said M. Saifur Rahman Majumder, CEO of Chittagong Stock Exchange.

Bangladesh Merchant Bankers’ Association (BMBA) Secretary and CEO of MTB Capital Khairul Bashar Abu Taher Mohammed expressed concerns over the lack of any new incentive for companies to be listed in stock market.

“Corporate tax could be lowered for listed companies to attract best businesses to the capital market. It’s a must to push the market to the next level of development,” he said.

A top equity research team also observed that there were no serious measures to address the liquidity crisis in the stock market.

“The government support fund of Tk860 crore has already been disbursed. The stock market is suffering from a serious liquidity crisis and it was looking for something super positive in line with hints from top finance ministry and NBR officials,” they wrote in a private note to their clients.

DSEX, the Dhaka bourse’s broad index lost more than 23 points today and was trading at 5450, a 0.43 percent fall from the previous session’s closing number.