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Paying maximum dividend to shareholders

Investors turning their face from capital market

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12th-Apr-2019       
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Md.  Ashraf  Hossain :
Basically two types of capital finance are required for formal industrial, commercial and service oriented ventures; one is long term capital and other is short term working capital. Long term capital is required for capital expenditures to set up the venture and short term working capital is required for operation of the venture. Usually sponsors initially provide finance for capital expenditure subscriber in memorandum of association purchasing shares. The venture starts operation getting finance as working capital from commercial bank. Sponsors collect additional long term capital from capital market offering shares to public and institutional investors. That is, long term capital expenditure is collected from sponsors and general shareholders while short term working capital is collected from commercial banks.
In Bangladesh, capital market is not vibrant. Sponsors are reluctant to go to capital market and general public do not consider capital market as a good place for investment. They do not get lucrative dividend from investing in capital market, that is, purchasing shares, mutual funds and debentures. In Bangladesh, the listed companies of Bangladesh origin are reluctant to pay possible maximum dividend to the shareholders. Whatever net profit Bangladesh origin listed companies make, they keep a big chunk of profit as retain earning and distribute a negligible portion of profit to shareholders as dividend. Whereas when any one looks into the scenario of multinational companies listed in stock exchange in Bangladesh, it is usually seen that maximum net profit is distributed amongst shareholders as dividend and a small portion is kept as retain earning. It is one of the basic reasons, the market price of shares of multinational companies are getting high.
On the other hand, price of Bangladesh origin companies' shares are continuously getting down. For instance, in June end financial year of 2018, Rangpur Foundry earned net profit per share Tk 4.38. It distributed Tk 2.30 dividend per share. In June end financial year of 2018, BSRM Steel earned Tk4.20 per share but it distributed 10% bonus share. Bengal Windsor in the same year earned Tk1.30 per share, it distributed Tk 0.50 dividend per share. Accordingly, Padma Oil earned Tk28.36 net profit per share and distributed Tk13.00 as dividend per share. Summit Power in the same time earned Tk 5.08 per share but distributed Tk 3.00 as dividend per share. Dhaka Electric Supply Company earned Tk 3.52 and distributed dividend Tk 1.00 dividend per share. Titas Gas earned Tk 4.28 per share but distributed dividend Tk 2.50 per share. United Commercial Bank earned Tk2.37 net profit per share but distributed Tk 1.00 per share for year 2018. Amraa Technologies earned Tk 1.96 per share and gave dividend Tk 1.00 per share.
The directors who administer the companies are, in general, interested to take financial and materiel benefits in informal ways. They are not interested to take reasonable profit from possible maximum dividend to all shareholders, irrespective of small or large shareholders. In different ways they unofficially take benefit from plc. For instance, the directors enjoy full time vehicle facility at cost of the company, that is, company purchases vehicle, employs driver, pays fuel, maintenance and documentation cost. It is shown that the vehicle is used for the company's purpose. In practice, the vehicle is used by the director for personal and family purpose. The directors take materiel and financial benefit at cost of company but not in a formal way.
 In Bangladesh when any one looks into the performance of multinational companies (MNCs) enlisted with stock exchange the opposite scenario is seen. They provide dividend in such a way that maximum portion of net profit is distributed amongst shareholders. For instance, Reckitt Benckiser BD in June financial year end of 2018 earned Tk 55.84 and distributed Tk 79.00 per share. Berger Paints had earned Tk 35.52 per share and gave 100% bonus share and Tk 20.00 cash per share as dividend. Marico Bangladesh earned Tk 65.85 per share in March 2018 and distributed dividend Tk60.00 per share. Heidelberg Cement in June year end of 2018 earned Tk 15.59 per share and distributed dividend Tk 15.00 per share. Like way, Singer Bangladesh had earned Tk 11.96 per share and gave dividend 300% bonus per share. In-fact there is dearth of MNCs. Small investors' do not have opportunity to invest in share of MNCs.
To make the capital market vibrant Board of Directors of Bangladesh origin plc are to be encouraged to pay maximum dividend to shareholders from net profit. Reduced corporate tax is imposed on profit of publicly listed companies nowadays. Government can design provisions for corporate tax and income tax in such a fashion that directors encourage paying maximum profit to all share holders.  Corporate tax at lower rate is to be imposed on profit earned by the company and distributed to shareholders in cash. On the undistributed profit corporate tax at higher rate is to be imposed. For instance, 25% corporate tax is imposed on net profit of a listed company and 30% corporate tax is imposed on net profit of a non-listed company in same sub-sector. It does not encourage the directors of Bangladesh origin listed companies to pay maximum possible profit of the company to its shareholders. If 12.5% corporate tax is imposed of net profit that is distributed amongst shareholders as dividend and 30% corporate tax is imposed on the remaining profit as retain earning (non-distributed net profit). And so, the directors will be encouraged to recommend maximum dividend to share holders.
 Income tax at 10% from individual shareholders and 25% from institutional shareholders on dividend income from company is to be imposed at source. After deducting that tax at source the amount is to be treated as tax paid income of shareholder concerned. Net dividend income from a listed plc of a shareholder will not be added to other taxable income of the shareholder to determine tax amount. In such event, Board of Directors of local listed plc will also recommend possible maximum portion of net profit of the company as dividend. Public will be interested to invest in shares of plcs. Capital market will be vibrant. Entrepreneurs will get their long time finance from capital market and short time finance from commercial banks.
Millions of potential investors are turning their face from capital market. Sponsors are losing opportunity of collecting essential long-term finance from capital market. Commercial banks are hesitant for long-term financing to any venture as they connect deposit from clients for short time. BSEC, DSC, CSC and other institutional stakeholders have been suggesting different measures but capital market is not improving as desired. When directors of listed companies will behave rationally and provide possible maximum dividend to all shareholders, public having small saving individually but huge saving collectively will opt for purchasing shares of listed companies.
In long run as a consequence capital market will be vibrant. This way economy will progress fast. BSEC on last 20 June 2018 issued a notification where listed companies were directed not to pay dividend from retained earnings. As per the notification, dividend only could be declared from current year's profit. It will discourage directors to pay dividend in a year when profit earning will be less even retained earning deposit remains good. I like to urge BSEC authority to review the notification and to make such provision that will encourage directors to pay maximum possible dividend to shareholders.
(Md Ashraf  Hossain, Company Secretary, Power Grid Company of Bangladesh)

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