The Bangladesh Securities and Exchange Commission (BSEC) is taking strict measures to maintain minimum shareholding among directors of listed companies in a bid to revive the country's stock index.
DSEX, the benchmark index of the Dhaka Stock Exchange, has been hovering under 4,000 points since the end of May.
If the BSEC order to conduct minimum shareholding is followed in earnest, it would have a positive impact on the index, according to a merchant banker.
On December 22, 2011, all the directors of listed companies, sans the independent ones, were told to hold at least a 2 per cent stake in their own firm to revive the ailing stock market after the big crash of 2010.
However, since many directors refused to follow the order for the past nine years, BSEC warned those concerned to follow the directive or face dire consequences, the merchant banker said.
"We gave them a grace period of 45 days to begin minimum shareholding. Plus, share prices are very lucrative right now, so why don't they engage in minimum shareholding with their own company?" said a senior official of the country's stock market regulator.
If a director does not follow the order, he or she will be terminated from the board, he added.
Directors should post their share purchase announcements with the stock exchanges within the next 15 working days, the BSEC said in a letter.
As of this February, 61 directors of 22 listed companies failed to hold minimum shareholding and so, they are required to address the issue within the stipulated timeframe, the letter read.
Of the 22 companies, 14 are insurance brokers.
The BSEC amended this directive back in 2019, making it so that any director who fails to hold 2 per cent of his own company's shares would be forced to immediately vacate his position. Directors should be removed from their posts if they don't control the minimum share, said Masum Ahmad, a stock investor.
"If they don't show faith in their own companies, then why would the investors?"
Conversely, when a director holds a large share, then that person would work extra hard for the betterment of his company instead of being callous, he added.
Although the index would react positively if the minimum shareholding directive is correctly implemented, there is an argument to be made for the converse, said a top official of a leading asset management company preferring to remain anonymous.
The argument is based on the fact that such directives are not usually seen in the global stock market arena.
"If sponsors are efficient, then they are chosen to run the company based on their merits and not because of their ownership rights," he said, adding that this is a good move for the local stock market nonetheless.
When a company's sponsor holds a majority stake, then that company performs better while dividends are also very lucrative.
On the other hand, when a company is drowned in junk stocks, it is usually seen that the firm's sponsor has a very minimum shareholding. Considering the facts, it seems that high shareholding among directors is a good sign for any company, the broker said.
The companies whose directors do not hold a minimum 2 per cent stake in their own firms are: Continental Insurance, Purabi General Insurance, Mercantile Insurance, Prime Islami Life Insurance, Meghna Life Insurance, Asia Insurance, Bangladesh General Insurance, Dulamia Cotton, Eastern Insurance, Exim Bank, Imam Button, Intech Bd, Karnaphuli Insurance, Kay & Que, Progressive Life Insurance, Provati Insurance, United Airways, Fu-Wang Ceramic, Standard Insurance, Wata Chemicals, Bangaldesh National Insurance and Paramount Insurance.