AIn January this year, the Securities and Exchange Commission (SEC) issued orders to the Dhaka and Chittagong stock exchanges and 'Z' category companies to suspend trading or transfer of shares of the sponsors or directors of 'Z' category companies until further instruction. This was done to prevent the sponsors or directors of the low-profile companies from taking any moves prior to the implementation of the notification. However, sponsors or directors of 'Z' category banks, non-bank financial institutions and insurance companies, will remain out of the purview of the directive. The waiver was given to 'Z' category financial institutions and insurance companies as the commission thinks there is scope for improvement in these companies.

SEC also directed the bourses to put Circuit Breaker on transaction of the shares of the Z category companies from 17 January 2008. Circuit Breaker, a price-slab set on the basis of the previous day's closing price of a company's share, restricts the upper and lower limits of the share price of the company.

The SEC notification asked weakly performing companies to improve their performances, or in the event of failure, to reconstitute their boards by holding extra-ordinary general meetings within six months, that is by June 2 this year. Earlier, on 3 December 2007, the commission had regained authority to implement the 2002 notification, which gives the commission authority to discipline the defaulting companies listed on the bourses, as the High Court vacated its previous stay order on the effectiveness of the SEC notification.

Companies are put into Z category when they have failed to hold current annual general meetings or declare any dividends or have declared dividends but failed to pay them off within 60 days from the date of declaration or have failed to submit the requisite compliance report to SEC regarding disbursement of dividends within seven working days from the completion of such disbursement date for whatever reason, or if the companies have not been in operation for more than six months or whose accumulated loss after adjustment of revenue reserve, if any, is negative and has exceeded its paid-up capital. In case of a company that has already been placed in the Z-category but declares dividends, its shares shall be placed in 'A' or 'B' category, as the case may be, from the day following the submission of the requisite compliance report to SEC confirming paying off the declared dividends.

By April 2008, 98 companies had been listed as Z category in the Dhaka Stock Exchange (DSE). What is noticeable is that the Food sector/ Agro-product has the highest number of companies listed in the Z category, even though it is one of the thrust sectors and enjoys a number of incentives. There are 25 food companies now listed in the Z category including Alpha Tobacco, Amam Sea Food, Bengal Biscuit, Meghna Shrimp and Tripti Industries. Next comes the Textile sector, which is also considered a very healthy sector. Altogether, 21 textile companies are listed in the Z category. Perhaps more shocking is the case of the Pharmaceutical sector which has its 9 companies listed in the Z category. This is really unexpected as the pharmaceutical sector has been experiencing a boom and bright opportunities for export in recent years. Some analysts are shocked to see as many as 7 companies in the Insurance sector including Delta Life Insurance, Janata Insurance and People's Insurance listed in the Z category. The others in the category are 5 banks including Social Investment Bank, UCBL and Shahjalal lslami Bank, 6 companies in the Engineering sector including Bd. Thai Aluminium, 6 companies in Paper and Printing, 5 in Tannery, 4 in Cement including Aramit Cement and Niloy Cement, 3 in Jute, 1 in IT, 1 in Service & Real Estate, 1 in Fuel and Power, 1 in Ceramic industry (Bengal Fine Ceramics) and 3 in others sectors.

Orion Infusion, which was listed in the A category in June 2007, is now a Z category share. In the similar situation is People's Insurance, which was listed in the A category last year is now in the Z category. On the other hand, there are some companies that were able to jump from Z to A category in 2008. Some examples of these companies are Information Services Network, BDCOM Online Ltd, Quasem Drycell, Asia Pacific Gen Insurance, Pragati Life Insurance and IFIC Bank.

Some of the Z category companies are already taking some steps to improve their situation to avoid any serious penalties by SEC. In May, Mona Food, a Z category company, reconstructed its board of directors at an extra-ordinary general meeting (EGM). They did this realizing that it was not possible to improve performance in the six months period. Another Z category company Niloy Cement is expected to reconstitute its board soon while Tripti Industries and Olympic Industries are expected to be merged by June this year.

As per the SEC notification, the new boards would be given a maximum of 24 months to improve the situation of the companies. The reconstituted board will identify the specific reasons for the company's failure to operate profitably and also identify the persons including its directors and auditors responsible for such failure. If a company fails to improve its situation, it will face liquidation in six months.

Farhad Ahmed, Executive Director of Securities & Exchange Commission (SEC) says, "Unlike A, B, G and N categories, the 'Z' category shares had no circuit breakers earlier; we tried to make people understand that it will be risky to invest in Z category company shares as there are no circuit breakers for this category. We tried to discourage investors, but in vain."

It is due to the lack of awareness on the part of the people that prices of the 'Z' category shares increased several times illogically, especially when the commission moved to discipline the defaulting companies listed on the bourses, observes Farhad. "In the absence of a circuit breaker there was over fluctuation of price in this particular group. We have put the circuit breaker on the share trading of 'Z' category companies to limit the share price movement."

So is the breaker working? Farhad says, "It is difficult to answer as we don't have all the information right now. Until and unless we communicate with the organizations we can not say anything officially. If the companies violate the rules then they will be penalized, but we expect every company will abide by the notification."

Abu Ahmed, Advisor of SEC, Director of CSE, and Professor in the department of Economics, University of Dhaka, says, "SEC gave six months to improve their (Z category companies') situation or otherwise to reconstruct their board, but I think this will not work properly because those people who have been depriving general investors year after year will not willingly leave the post of Chairman, MD or Director. Special audit can be carried out for these non-performing companies and some of their business houses should be brought under special inquiry. If SEC finds serious faults with these companies, then the Commission should give exemplary punishment. SEC should not be so modest in such cases."

Mohammad Musa PhD, Professor of School of Business, United International University & Ex Pro VC of East West University says, "The regulatory authority should not put much weight on Z category companies; they will die down any way. Most of the Z category shares are thinly traded; people have already dumped them. SEC should say 'we will stop the trading of your share if we don't see consistent effort on your part to alter the situation'. SEC should warn the investors that the particular company is a losing concern. Changing board would not be fruitful in Bangladesh."

The SEC executive director says, "We are observing that some banks and insurance companies are in the Z group; this is very unfortunate. As a regulator we don't want to see any company in Z category. This is now very disturbing that some companies have internal problems -- conflicts. I think they have to resolve these problems as quickly as possible."

Abu Ahmed thinks Z category companies don't care for anybody. "These companies show profits when they are in need of taking loan and in other cases they just show the thumb! They remain in the Z category intentionally; SEC should look into it."

In response to the above, Farhad says, "Business of any company can slow down temporarily, but a company can not be in that position continuously. If we find any proof we will definitely take action against those companies."

Farhad further observes, "Companies should not work only to avoid punishments, they should think of their future if they want to sustain themselves in the long run. In future if they come up with new IPO nobody will subscribe. They are just shutting their business opportunity door."

In our country there are many Band Wagon Investors. "As most of the investors are non-knowledgeable there is someone out there who might spread rumor about Z category companies to motivate the investors to buy those companies' shares. Ultimately the investors are the losers so they should be very careful," warns Musa.

Farhad says "Share market has to be information based; historically risk is higher in share business compared to other business. Investors have to see the fundamentals. Risk will be higher if anyone doesn't analyze the fundamentals."

SEC provides training free of cost to investors to enhance knowledge. "Anyone can register their name and get training and we are doing this activity outside Dhaka as well," says Farhad.

The SEC executive director suggests that shareholders should come forward to improve the week position of Z category shares. "According to company act, shareholders have power to appeal for liquidation of a non performing company. Unfortunately no shareholders gave any objection and appealed to court for liquidation of a company. We know about the Enron Company of America. I think at least one example should be created."

ET Report by Chy Asaduzzaman