The Z shock to arrest junk stock euphoria

Investors who had been celebrating their gains from junk stocks got a shock on Sunday as the bourses downgraded five such stocks to the "Z" category so that there's an inconvenience in trading those. 

That certainly helped ring an alarm bell on both the bourses reminding investors of the risk factors within the prevailing junk stock euphoria.   

Each of the five stocks downgraded to "Z" category—Appollo Ispat Complex, RSRM Steel, Shurwid Industries, Northern Jute, and Nurani Dyeing—fell to their lower limits on Sunday. 

Shurwid, RSRM, and Northern Jute shares had no buyer ultimately, while their prices had surged by 50% or more in a few weeks till the middle of June.  

"Our team clearly found the five companies out of production for more than six months alongside other irregularities that made us downgrade their category" said M Shaifur Rahman Mazumdar, acting managing director of the Dhaka Stock Exchange (DSE). 

Also, the Chittagong Stock Exchange (CSE) downgraded four of the five stocks to "Z" as Northern Jute was not listed with the port-city bourse.  

However, the timing of such action was the talk of the street on Sunday as many believed that the bourses could have done it much earlier when the stocks were rallying in contrast to their business fundamentals, leaving most of their stronger competitors at floor prices. 

Some investors also blamed the September 2020 relaxation by the Bangladesh Securities and Exchange Commission (BSEC) that created more trading opportunities in junk stocks. The relaxed rule basically made it tough for most of the listed firms to be downgraded to "Z", thanks to the radically loosened criteria to remain in "A", "B" categories. 

For instance, previously, companies failing to conduct annual general meetings (AGMs) in time, paying dividends in one season used to be sent in the "Z" category. 

During the pandemic, the BSEC said a company failing to pay cash dividends for two consecutive years could be sent to Z, while failure to hold AGM due to legal consequences or force majeure could be exempted for two years. 

The relaxation helped a few dozen weak listed firms float in B or A category without paying dividends or paying the minimum. 

The criteria of not being in operations for more than six months to become a Z category company remained the same, but there created some room for exemptions in cases of factory renovation, modernisation or force majeure. 

Also, the regulator's consent made mandatory before a bourse downgrades a stock to Z made it more arbitrary, believe market people.  

The relaxation initially was hailed by average investors as it let the junk or struggling company stocks breathe in the market. On the other hand, some also critique the unique idea of the A, B, Z category of listed companies as they create more burden of regulations and also a better ground for stock price manipulation by the cartel of dishonest management and market players. 

It has been widely believed that junk stock players ensure a series of bad news during their share accumulation phase and the opposite during their share selling after rallies. 

However, the decision for category downgrading on Sunday drew criticism from many investors as they believed it was another form of regulatory weapon to control the market behaviour. 

It has been common that when the entire market tends to fall due to technical or economic reasons, some sets of low-cap stocks take the lead in rallies to let the bull survive into the average investors' mind. And it becomes easier due to the need for much less capital to control the stock prices. 

In the recent leg of market recovery since April, junk stocks bounced back much earlier and faster while most of the quality company stocks were hibernating on the floor prices. 

However, not all the low-cap or junk stocks were falling free on Sunday and that helped 88 scrips stay afloat while 87 declined on the DSE. 

A reported threat for a "Z" shock was powerful enough to drag some company shares down on Sunday which failed to payout the announced dividends. 

Also, the DSEX managed to stay afloat amid the last hour bargain hunting in some oversold large and mid-cap stocks. 

DSEX closed 0.1% higher at 6,326 on Sunday, while less trading participation dragged DSE turnover down by 19% to Tk640 crore. Turnover in the CSE declined by 27% to Tk235 crore.