'Categorise companies on governance, not dividend'

Listed companies should be categorised based on the quality of their governance instead of their dividends as governance has a long-term impact for investors, said Ahsanur Rahman, CEO of BRAC EPL Stock Brokerage.

"While dividend is an important metric when considering a business, we should also consider the growth aspect of a business," he told The Daily Star during a recent interview.

"For a high-growth company, it will be more appropriate to allow retention of more cash and use it to accelerate growth and increase shareholder value and not to go for a higher stock dividend, which also results in dilution," he said.

"Instead, like many developed markets, we may introduce share buybacks, which would also benefit investors," he said.

If a company holds annual general meetings regularly, provides disclosures timely, and abides by all norms of corporate governance, it should be kept in a higher stock category even if it refrains from paying dividends, said Rahman.

"To protect general investors in the long run, good governance should be the focus," he said.

Even if the trade settlement period is taken into consideration, sending a company with a poor performance record to the Z category does not significantly discourage investors, he said.

The trade settlement period is the time it takes for shares or funds to be recorded with associated accounts after a transaction.

It is four days for Z category companies and three days for companies in other categories.

In 2020, the regulator reduced the trade settlement period for Z category companies to four working days instead of the previous 10 days.

However, the rules have further been modified, which would make trading of the shares by sponsors more difficult. The positive aspect is that it also caters to sub-judice matters affecting annual general meetings.

Last week, the BSEC redefined the criteria for companies to be considered and listed as junk.

According to the order, a listed company will be shifted to the Z category if it fails to declare any dividend for two consecutive years instead of one year.

On the other hand, if any company is able to provide interim dividend on the basis of audited financial reports, it can be upgraded from the Z category.