The delisting, suspension of trading in shares and the regulators
On 18 July 2018, the Dhaka Stock Exchange Limited (DSE), delisted the shares of Rahima Food Corporation and Modern Dyeing Limited. Most analysts have hailed the decision as a note of caution against 'gamblers' gambling in the name of trading on shares and also for companies which are failing to declare any dividends for consecutive years. Since the delisting, the price of shares of some companies who have not commercially operated for a long time or failed to declare dividends seemed to have taken a significant beating for some time. Although that trend did not last too long nor did it apply to all the listed companies who would fit these categories.
As per Rule 51 of the Listing Regulations, 2015 of Dhaka Stock Exchange Limited, a company's shares may be delisted for several reasons. One of those reasons is the company stopping 'its commercial operation/production/exploration for a period of three years'. Other grounds for mandatory delisting includes not holding the annual general meetings or declaring dividends or failing to pay the annual listing fees or failure to comply with regulatory orders. At the outset, it should be noted that the DSE enjoys a discretionary power which is clear from the wording in Rule 51 that '[a]ny listed securities may [implying it may not be as well) be de-listed', if it falls under the various grounds of forced delisting. However, even when the power is discretionary, it should be used consistently. It is even more or so in the context of a market, like the share market, where the action of regulators may have a bearing on the loss or profit of innumerable shareholders and other stakeholders of the company.
However, despite the DSE's action being in line with the law, it cannot remain unnoticed that its approach has sometimes lacked consistency. If the regulators follow a flexible approach in delisting or suspending trading i.e. some companies continue trading for years after violating the listing requirements and others being removed almost immediately or within a very short span, the traders' faith in the regulators would take a further beating. For instance, on 7 August 2018, the DSE declared that it would review the performance of 13 listed companies because of their failure to declare dividends for five consecutive years.
However, it would seem that as per Rule 51 of the Listing Regulations, they can be delisted without any review. This is apparent from the wording in Rule 51(2) of the Listing Regulations that “[i]nstead of suspending trade of any listed securities instantly upon closure of operation of the issuer, the Exchange shall regularly disseminate on the trading monitor to the effect that if the situation of the issuer which failed to hold its Annual General Meeting(s) and issue Annual Report(s), and simultaneously the operation of the issuer remains closed for more than six months, is not improved within the next six months from the 1st date of such dissemination, the Exchange shall de-list the securities upon completion of the said six months of dissemination.' It would appear that when a listed company has failed to declare a dividend, it may be delisted subject to the fulfillment of condition spelt out in Rule 51(3) requiring that it has been given an opportunity of being heard.” The apparent rationale would be that failure to declare a dividend is a simple self-evident factual issue and upon fulfillment of this, no further inquiry should be needed to decide on the delisting. It is also an important question whether or not all of these 13 companies would be subjected to the same regulatory treatment if they are to be found in a similar situation.
One ostensible reason cited by the DSE for suspending the trading of shares of companies has been to investigate possible price manipulation induced by insider trading. However, it is not at all clear how the suspension of trading for a period can be the effective response of regulators to insider trading. If insider trading is taking place, it is the job of the DSE and Bangladesh Securities and Exchange Commission (BSEC) to act against the responsible persons. Because, it is quite likely that by the time the DSE suspends the trade, the persons engaged in insider trading may have pocketed sufficient gain to remain unscathed by the suspension of trading. For engaging in insider trading, one must be within the inner circle of the company's management or very closely connected with them. Thus, all moves by the regulators and the counter-moves by the respective company would likely be known to those persons ahead of the public, and hence, they would be better placed than the public about the actions of the DSE or the BSEC. And in any case, the regulators cannot just wash its hands away with delisting or suspending trade without punishing the persons engaged in insider trading.
Another point not so much discussed in our country is that the delisting of the companies would not only decrease the liquidity of the shares but also would bereave shareholders (and not to forget the creditors too) the advantages of more extensive mandatory disclosure obligations. This would be conducive to more secrecy about the state of affairs of the concerned company. And thus, it would cement the lack of transparency which is opposite to what the regulators would expect to happen. For the exchange and even for the revenue of the trading houses, the delisting also means lesser earnings from the commissions and the same applies to the government revenue earned from trading in listed securities. Thus, the regulators should be watchful, even-handed, and consistent in its delisting or suspension of trading decisions. The delisting of shares has some similarities with the winding up of companies and it should be taken as a matter of last resort. Possibly an action is better than inaction, however, inconsistent or rushed action or pulling the trigger when less lethal option could do the job better is perhaps not only unnecessary but also reckless and destabilising.
The writer is an Associate Professor, Department of Law, North South University.