Siddique Islam and Mohammad Mufazzal

Directors of most listed companies have expressed their mixed views on an order of the securities regulator relating to the holding of minimum 30 per cent stakes of any listed company by its sponsors/directors.

A section of directors of the listed companies have termed the order ‘impractical and illogical,’ saying that a good number of directors, particularly those of banks and financial institutions, may lose their directorship because of the order.

Others have, however, welcomed the order and said that it would help boost the country’s flagging stock market.

On November 22 last, the Securities and Exchange Commission (SEC) issued an order making the holding of 30 per cent of shares of a listed company by its sponsors/directors mandatory. The acquisition of such shares would have to be completed within next six months. The order has been sent to the Bangladesh Government Printing Press for publication as a Gazette notification.

According to the order, individually each of the directors, other than independent ones, of any listed company must hold a minimum of 2.0 per cent shares of the company’s total paid-up capital, and in total the directors will have to own, at least, 30 per cent stake.

The SEC’s latest move was a part of a series of measures announced by the SEC last Wednesday to help revamp the stock market.

Directors of different listed companies welcomed the SEC’s latest move, saying that it would help bring back the much-needed stability in the country’s stock market.

“Raising the quota of directors’ holding will help prop up the stock market by increasing the demand for specific companies shares,” former Chairman of the Bangladesh Insurance Association (BIA) AKM Rafiqul Islam told the FE.

He also said the SEC should have introduced such rules much earlier to ensure stability in the country’s stock market.

“Directorship is not a permanent thing. It’s a transferable phenomenon,” Mr. Islam said while replying to a query.

Welcoming the decision, some market observers said this requirement on the part of the sponsors/directors to hold a minimum of 30% of paid-up capital of a company to plug the holes that create the scope for hybrid types of “insider trading” and “share-price manipulations”. However, some other observers said that the SEC should make a detailed probe into the matter and legal actions should be taken against such wheeler-dealers if such cases of irregularities, flouting the laws of the land, are unearthed on a substantive basis.

The secretary of a leading listed company considers the SEC move a right one to bring a positive impact on the market in the near future. But he also said most of the listed companies will face difficulties in implementing the order within such a short period.

“It will be very tough to comply with the SEC order within six months,” the company secretary said, adding that the directors particularly of companies having large paid-up capital might fail to comply with the order.

“The sponsors/promoters and directors holding less than 30 per cent shares must acquire the rest amount with six months of issuance of this notification,” the SEC has said.

Besides, each director other than independent ones of any listed company will hold a minimum 2.0 per cent shares of the paid-up capital, otherwise there will be a casual vacancy of director, it warned.

Some of the directors of different companies have however opposed the move, saying that the SEC move will create an adverse impact on the overall financial sector.

They also raised questions about the legal authority of the SEC regarding issuance of a notification relating to the imposition of stake-holding quota on the listed company directors.

“The SEC should issue a clarification specifying the positions of sponsor-directors, sponsor-shareholders and directors of a listed company,” former president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) Abdul Awal Mintoo told the FE.

Mr Mintoo, who is holding directorship in a number of listed companies, also said the percentage of holding shares will be determined in line with the existing company act.

Talking to the FE, Chairman of the Social Islami Bank Limited (SIBL) Kamaluddin Ahmed said the SEC rules will cause a negative impact on the financial sector through losing of directorship.

“The rule is impractical. It will not be possible to implement by listed companies, particularly the big ones in term of paid-up capital, including commercial banks and non-banking financial institutions,” Mr Kamaluddin said.

He also said more than 50 per cent of the directors of banks and financial institutions may lose their directorship because of a large huge financial involvement will be needed to implement such rules.

In a bank having not less than Tk 5.0 billion in paid-up capital, a director will need to have shares worth of Tk 100 million at face value to retain his or her directorship, he said, adding that the market value of the 2.0 per cent shares would be around Tk 400 million or more.

“In most cases, it will be impossible on the part of directors,” the SIBL chairman noted.

“We’ll comply with the SEC order as well as we will look into the existing bank company act. If there exists any conflict than we will seek legal opinion,” Chairman of the City Bank Limited Aziz Al Kaiser told the FE without elaborating.

The SEC has issued the directive against the backdrop of offloading of bulk of their holding by a section of directors without caring about the market.

“We’ve imposed restriction on selling shares by sponsor directors on September 21 last to avoid such situation in the market,” a SEC senior official told the FE.

He also said the SEC lifted the restriction after issuing on November 22, the latest notification relating to holding of shares by the directors.

“In India, the sponsors and directors hold a minimum 20 per cent of the total equity of their respective shares for three years from the date of their listing with the stock exchanges,” the SEC official said.

“We’ve taken the latest move aiming to make the directors much more accountable to their companies,” he said, adding that it will also help to ensure discipline in the country’s corporate sector including, those relating to, among others, banks, NBFIs and insurance companies.

The notification also said any individual, holding shares amounting to five per cent or more of the company’s paid-up capital, will be eligible for becoming a director in its next annual general meeting (AGM) in case of, what the notification said, casual vacancy of director(s) for non-holding of the required amount of shares.

“If the sponsors/directors of any listed company fail to hold the aforesaid amount of shares, the respective company would not be able to declare right shares and raise capital through repeat public offering (RPO),” the notification noted.

Currently, the sponsors/directors of 54 listed companies including six state-owned enterprises and eight commercial banks, out of a total of 232 listed companies in the bourses, own less than 30 per cent of shares of their respective paid-up capital.

According to available DSE data, the sponsor-directors of In Tech Online own 2.56 per cent shares, Beximco Pharma, 3.48 per cent, Fu Wang, 5.04 per cent, Apex Adelchi Footwear, 5.19 per cent, Kay and Que, 5.22 per cent, Agni System, 5.29 per cent, Eastern Bank, 6.73 per cent, Dulamia Cotton, 7.68 per cent, Uttara Bank, 8.19 per cent, Fine Foods, 8.40 per cent, Apex Tannery 8.84 per cent and Meghna Life Insurance 9.61 per cent as of October, 2011.

The sponsors/directors of such companies owned between 19 and 50 per cent stakes in the paid-up of their companies in 2006, reflecting, what the analysts pointed out, the off-loading of a considerable amount of their shares until now. Most such off-loading of shares did take place during the bull period of the market in 2010, according to some market insiders.

Besides, the sponsors/directors of Aziz Pipes own 10.86 per cent, Pubali Bank, 10.98 per cent, Bangladesh Industries, 12.18 per cent, United Airways, 12.44 per cent, City Bank, 12.88 per cent, Beximco, 13.45 per cent, Monno Ceramic, 15.52 per cent, BGIC, 17.29 per cent, Green Delta Insurance, 17.77 per cent, AB Bank, 13.90 per cent, First Lease Finance and Investment, 17.85 per cent, BD Thai Aluminium, 17.92 per cent, Active Fine Chemicals, 18.23 per cent, Fu Wang Ceramic, 19.20 per cent, Monno Jute Stafflers, 19.39 per cent, Karnaphuli Insurance, 19.52 per cent, Information Services, 19.54 per cent, Monno Jutex, 20.29 per cent, BDcom Online, 21.29 per cent, Salvo Chemical Industries, 22.69 per cent, National Polymer, 22.73 per cent, Social Islami Bank, 22.96 per cent, Confidence Cement, 23.47 per cent, Al-Haj Textile, 24.02 per cent, Mercantile Insurance, 24.79 per cent, Fareast Islami Life, 24.98 per cent, Deshbandhu Polymer, 25.00 per cent, Makson Spinning, 25.44 per cent, Sinobangla Industries, 25.98 per cent, Metro Spinning, 26.21 per cent, Southeast Bank, 27.22 per cent, Beacon Pharma, 27.27 per cent, National Bank, 29.20 per cent and Continental Insurance, 29.96 per cent, according to the DSE data.

Currently, the listed companies whose sponsors/directors own maximum stakes in paid-up capital include, among others, Berger Paints (95%) in miscellaneous sector, National Housing Finance and Investment (90.38%) in financial institution sector, Grameenphopne (90%) in telecommunication sector, Marico Bangladesh (90%) in pharmaceuticals and chemicals sector, Gemini Sea Food (83.08%) in food and allied product sector, Glaxo SmithKline (81.98%) in pharmaceuticals and chemicals sector, RAK Ceramics (80.65%) in ceramic sector, Rahim Textile (80.17%) in textile sector, Summit Alliance Port (80%) in service and real state sector, Malek Spinning (75%) in textile sector, Khulna Power (75%) in fuel and power sector, Singer Bangladesh (75%) in engineering sector, RN Spinning Mills (66.14%) in textile sector, BSRM Steels (65.52%) in engineering sector, Bangladesh Lamps (61.03%) in engineering sector and BOC Bangladesh (60%) in power and fuel sector, according to data available from the DSE.

According to a rough reckoning of market sources, the fulfillment of the minimum requirement on the part of sponsors/directors of the listed companies to hold 30 per cent of the paid-up capital to retain their sponsorship/directorship will involve, at least, an aggregate amount of Tk 50 billion at current market prices.

However, this amount may rise or fall, depending upon the ups-and-downs of stock prices in the market. All such shares by the sponsors/directors will have to be bought from the secondary market to comply with the terms and conditions of the SEC’s notification to retain the statues quo about their present position in the listed companies concerned.

The involvement of the funds for such directors/sponsors will be larger for big cap companies than that of small cap ones.