Basically two types of capital finances are required for formal industrial, commercial and service oriented ventures; one is long term capital and the other is short term working capital. Long term capital is required for capital expenditures to set up the venture and the 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 banks. 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 and 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 a good place for investment. They do not get lucrative dividend from investing in capital market, that is, purchasing shears, mutual funds and debentures. In Bangladesh the listed companies of Bangladesh origin are reluctant to pay possible maximum dividend to shareholders. Whatever net profit listed companies of Bangladesh origin 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 multi national companies listed in stock exchange in Bangladesh, it is usually seen that maximum net profit is distributed among the 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 multi-national companies are getting high. On the other hand, prices of shares of companies of Bangladesh origin are continuously getting down. The directors who administer the companies are, in general, interested to take financial and materiel benefits in informal ways. They are not interested in taking reasonable profit from possible maximum dividend to all shareholders, irrespective of small or large shareholders. In different ways they unofficially take benefit from PLCs. For instance, the directors enjoy full time vehicle facility at the cost of the company, that is, the company purchases vehicles, employ drivers, pay fuel, maintenance and documentation cost. It is shown that the vehicles are 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 the cost of company but not in formal way.
In Bangladesh, when any one looks into the performance of multi-national 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 end 2018 year earned Tk55.84 and distributed Tk79.00 per share. Berger Paints in 2018 earned Tk35.52 per share and gave 100 per cent bonus share and Tk20.00 cash per share as dividend. Marico Bangladesh earned Tk65.85 per share in year end March 2018 and distributed dividend Tk60.00 per share. Heidelberg Cement in year end June 2018 earned Tk15.59 per share and distributed dividend Tk15.00 per share. Like way, Singer Bangladesh in year end June 2018 earned Tk11.96 per share and gave dividend 300 per cent bonus share per share. In-fact there is dearth of MNCs. Small investors’ do not have opportunity to invest in share of MNCs overhear.
To make the capital market vibrant, board of directors of Bangladesh origin PLCs 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. The 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 per cent corporate tax is imposed on net profit of a listed company and 30 per cent corporate tax is imposed on net profit of a non-listed company in the 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 per cent corporate tax is imposed on net profit that is distributed amongst shareholders as dividend and 30 per cent corporate tax is imposed on the remaining profit as retain earning (non-distributed net profit) the directors will be encouraged to recommend maximum dividend to share holders. Income tax at 10 per cent from individual shareholders and 25 per cent 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 listed PLCs 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 PLCs will also recommend possible maximum portion of net profit of the company as dividend. The members of the public will be interested in investing 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. It will facilitate formation of new companies and increase business as we as employment. It would aid to achieve SDG.
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. As a consequence, the capital market will be vibrant in the long run. 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 retain earning. As per the notification, dividend only could be de-cleared from current year’s profit. It will discourage directors to pay dividend in a year when profit earning will be less even retain earning deposit will remain good. I like to urge BSEC authorities to review the notification and to make such provision that will encourage directors to pay maximum possible dividend to shareholders. It would aid to achieve SDG.
The writer is a Company Secretary, Power Grid Company of Bangladesh Ltd.