At a seminar on February 25, the Chairman of the Bangladesh Security Exchange Commission (BSEC) regretted that the BSEC, which is share market watchdog, was made responsible even for price fall in the secondary market (stock exchange). Does the BSEC have no responsibility when the stock market price index falls consistently over the months and years?
Let's try to take stock of the factors that determine prices or influence functioning of the stock market. In fact, stock exchanges perform in an economy to facilitate sales and purchase of securities such as shares and mutual fund units. Members of the public and institutional investors buy shares and mutual fund units from the secondary market (stock exchange) primarily to get higher dividends than they could earn by drawing interest from deposits with banks and non-bank financial institutions (NBFIs).
The investors also want to make capital gain by disposing of shares and mutual fund units in the long run. They try to sell shares and mutual fund units when they observe that they are not getting competitive dividends. They also dispose of shares and mutual fund units when they observe that prices in the secondary market are falling on a regular basis. Of course they dispose of shares and mutual fund units to get cash to meet personal, family or better investment needs.
However, listed companies, mostly local ones, often deprive shareholders of expected dividends; even when the companies earn attractive profits. In the last cople of years, listed companies were transferring 50 per cent to 90 per cent earned profits to retain earning (reserve) accounts of the companies, Thus the shareholders are not getting competitive dividends.
Banks and NBFIs often offer higher interest against deposits. And owing to the low dividend yield, shareholders and mutual fund holders rushed to stock exchange to dispose of their shares to avoid further loss. Oversupply of shares and mutual fund units too pulls down the price index of stock exchange. Observing certain capital loss, shareholders and mutual fund unit holders gather in stock exchange to sell securities they hold. Selling pressure causes further fall in prices index.
The falling share market trend could have been addressed, had the listed companies distributed dividends reasonably. Decisions made by directors of companies to deprive the shareholders of dividends, could have been stopped by the BSEC. The regulator could still make regulations to compel the board of directors to pay at least 80 per cent earned profits and transfer maximum 20 per cent earned profits to reserve for expansion of business and for rainy days.
But the BSEC did not compel board of directors to behave rationally to serve the interests of the shareholders. As mutual funds usually invest a mentionable portion of the fund in shares, those could not earn competitive profits. As a result, they could not pay competitive dividends to fund unit holders.
So, it's obvious that BSEC could have made regulations to make sure that investors would get reasonable dividends from shares and mutual fund units. Has the BSEC not avoided its responsibility, in that case? If shareholders and mutual fund unit holders get higher dividends, most of them would not go to stock exchange to sell in masse and the price index could have been stable.
It may, therefore, be recommended that the BSEC should make regulations to compel the listed companies to pay at least 80 per cent earned profits to shareholders as dividends and cap transfer of earned profits in reserve to a maximum of 20 per cent earned profits in a financial year.