The proposed national budget could really help our capital market
Thanks to the government for realizing the basic problem with our capital market.
The finance minister rightly stated that the listed companies have been depriving shareholders by transferring a major portion of its net profit as retain earning or reserve, and distributing a negligible profit as dividends to shareholders for years together.
Some have been issuing stock dividends, or bonus shares, but not cash dividend without proper reason. As a result, shareholders are losing interest in sticking with the capital market.
They are sealing their shares in through way price. Thus the capital market is experiencing continuous price fall.
To develop the capital market, the proposed budget 2019-20 has declared a few important measures to address the basic problems.
To encourage shareholders Tk50,000 dividend income was declared as income tax-free income instead of Tk25,000. It will encourage a small share of investors.
Directors in general are reluctant when it comes to distributing optimum profit as cash dividend, and instead opt to keep major portion in reserve or retain earning.
To discourage keeping large swathes of profit in reserve,an additional 15% tax has been proposed to be imposed on retain earning over 50% of paid-up capital.
It is fact that a few companies kept four to five times amount of paid-up capital as retained earning depriving shareholders.
If a 15% additional tax is imposed,large amounts will be drained out from the companies as there is a large amount of retained earnings in the reserve accounts of listed companies.
Much hue and cry has been made by directors of those listed companies to have this provision be withdrawn.
Instead of imposing a 15% additional tax, a provision could be made where, when retain earning of a listed company exceeds paid-up capital amount, full net income of the company could be distributed among the shareholders as cash dividend, or a combination of cash and stock dividend -- but in a financial year, stock dividend must not exceed cash dividend.
The proposed budget has made provision to impose a 15% tax on issuance of stock dividends to discourage giving stocks as dividends. There are listed companies which have been issuing stock dividends without rational.
The practice has to reduce the share price abnormally low in the stock exchange. Those companies seldom give cash dividends.
A listed company may require increasing paid-up capital for expansion business. The 15% tax will discourage them. This tax may be withdrawn.
At the same time, a provision could be made where it states that, in a financial year, a listed company could not issue stock dividend more than cash dividend.
It will stop the unnecessary nuisance of the stock dividend. Additional tax on reserve and issuance of stock may discourage companies to get listed in stock exchanges.
The changes in the proposed budget will contribute to the vibrant Bangladesh capital market in the years to come.
Md Ashraf Hossain is Company Secretary at Power Grid Company of Bangladesh Ltd.