A pervasive issue has afflicted the primary stock market of the nation for an extended period. Numerous companies, often referred to as “zombie firms” by analysts, have remained stagnant in the Dhaka Stock Exchange’s (DSE) disreputable “Z” category for five or more years. This situation goes beyond mere oversight, indicating a lack of regulatory action that poses a threat to the overall integrity of the stock market. These firms have been burdened by persistent losses, failure to pay dividends, negative net worth, and a lack of adherence to basic governance practices like conducting annual general meetings or maintaining up-to-date contact information. Despite their concerning financial status – with 27 of these firms collectively accumulating losses amounting to Tk 27,000 crore until June 2024 – their shares continue to be actively traded. This scenario highlights a dysfunctional environment that encourages and rewards speculative activities.
The crux of the issue stems from the regulatory approach embraced by both the Bangladesh Securities and Exchange Commission (BSEC) and the DSE. Their historical stance leans towards non-intervention, citing the “Z” category designation as a sufficient cautionary signal, asserting that investors should shoulder the responsibility for their speculative decisions. However, this hands-off strategy may not align with the market conditions in Bangladesh, where financial literacy levels are often limited. Merely relegating underperforming companies to a “junk” category without further action creates a breeding ground for market manipulation and enables financially distressed entities – which are essentially insolvent – to masquerade as legitimate investment options.
Experts in the industry echo the sentiment that permitting these financially defunct firms to operate is akin to allowing “zombies to freely roam the market.” In their view, if a regulatory body determines that a company has no prospects of survival as a viable business, it should be liquidated and removed from the market. Delisting, therefore, serves as a crucial step in ensuring market integrity. Companies that have been in financial distress for a decade or more undeniably fail to meet the criteria of being a “going concern” and should forfeit their privilege of accessing public capital. Any reluctance from regulators to facilitate the exit of such failing firms under the guise of potential harm to general investors is misguided, as the greater harm lies in diverting investments from flourishing enterprises towards nonviable entities.
The solution to this predicament is straightforward. The DSE must rigorously enforce existing regulations to expel companies that have failed to conduct annual meetings for three consecutive years or distribute dividends for five years. Concurrently, the BSEC should actively support any initiatives by the DSE to initiate delisting procedures. Regulators should also ensure accountability by penalizing top executives in cases where failures can be attributed to misconduct by sponsors and directors. The establishment of a reliable capital market necessitates the long-overdue cleansing process outlined above.