Smart reforms a must to strengthen capital market

Although the government in its proposed national budget pledged to build a ‘Smart Bangladesh’ there was no provision for the capital market there, an integral part of the economy and the key source for long-term financing.

Smart economy, which is one of the key three pillars of Smart Bangladesh requires a smart capital market to ensure long-term financing, experts say.

But it came to them as a surprise that the government has not put any provisions in the budget for the development of the country’s stock market, some experts told when talking to The Business Post.

Finance Minister AHM Mustafa Kamal on Thursday placed a Tk 7.6 trillion national budget for the fiscal year 2023-24 at the parliament with a focus on tackling skyrocketing inflation, employment generation, the fourth industrial revolution, and ultimately building a Smart Bangladesh.

The country’s capital market, however, was completely overlooked in the proposed budget.

Stock market experts and analysts said you cannot expect a smart capital market unless smart reforms are made to overcome the challenges prevailing in the country’s stock market.

Khondaker Golam Moazzem, research director at the Center for Policy Dialogue (CPD), a think tank said, “There is no word about the stock market in the proposed national budget for FY24.”

“We have always said we have objections regarding the transparency of BO accounts. We have reservations about secondary market transactions. We also have objections about the valuation of our listed companies, while we have concerns regarding the transparency of financial reporting,” he added.

“So, you cannot expect a smart capital market amid all these objections unless smart reforms are made to address these issues.”

“I think we need smart reforms to get the capital market out of this kind of grant-based structure,” Khondaker Golam Moazzem continued.

The proposed budget for the upcoming fiscal year is neither good nor bad for the capital market investors, according to market stakeholders’ budget reactions.

Although stakeholders demanded some provisions in the new budget to woo investors as well as bring good firms to the market, their urges remained unheard in the proposed budget, they said.

Market insiders believe the budget has not reflected the requirements of the stock exchanges, brokers, merchant bankers, listed companies, and investors.

Professor Abu Ahmed, a capital market analyst, told The Business Post, “The size of the proposed budget has increased. But there is a huge discrepancy between where the money comes from and where it is spent.”

On the question of what the budget is for the capital market, he replied saying, “I am not in favour of this policy that new opportunities should be given in the budget for the capital market every year.”

“Nothing is given, which is also good. In the previous financial year, corporate tax relief was given and that’s why many good companies came to the capital market.”

“Rather than taking opportunities from the budget, it is important to take policy initiatives from the regulatory body for the development of the capital market,” Professor Abu Ahmed continued.

Faruq Ahmad Siddiqi, former chairman at the Bangladesh Securities and Exchange Commission (BSEC) said, “Every year ahead of the national budget, expectations are erupted concerning incentives for stock investors and listed companies. I think such expectations are not rational because national budget is an estimation of realisations and expenditures.”

“However, it is appreciated that the tax rebate benefits remain unchanged in the budget document due to stabilising the capital market and investment.”

Earlier, all stock market stakeholders urged a 10 to 15 per cent gap in corporate tax between listed and non-listed companies in the national budget for the 2023–24 fiscal year to attract healthier firms to the market.

Currently, the corporate tax rate for listed companies is 20 per cent while it is 27.5 per cent for non-listed companies. These rates are not applicable for banks, insurance companies, non-bank financial institutions (NBFIs), telecommunications companies, or tobacco companies.

The tax rate for listed banks, insurance companies, and NBFIs is 37.5 per cent, while it is 40 per cent for the non-listed firms in the same categories.

Meanwhile, the current tax rate is 20 per cent for listed companies that issue shares worth more than 10 per cent of their paid up capital through an initial public offering (IPO), and the rate is 22.5 per cent for companies that issue shares worth 10 per cent or less of their paid up capital through an IPO.

But in this case, the tax rate would be 22.5 per cent instead of 20 per cent and 25 per cent instead of 22.5 per cent for applicable listed companies if they fail to comply with the conditions that all expenses, investments, receipts, and income, except fixed annual cash expenditures and investment, must be made through bank transfers.

Earlier, from fiscal years 2020–21 to 2022–23, the corporate tax rate had been reduced by the government.

Al-Amin, an associate professor of Accounting and Information Systems at the University of Dhaka, said that the new year’s budget is similar to the current year’s one.

“We always wanted to take the capital market to a place where equity financing would happen and big companies would come in. But no such incentive was provided by the government in the proposed budget,” he added.

“Now it is the responsibility of the investors to keep this sector afloat because a large chunk of the market stake belongs to them. If institutional investors can independently make it a sector for themselves, stability will prevail in the market. Then there will be no need to rely on government assistance.”

“The stock market is a long-term investment option. The retail investors should plan future investments without thinking about what is in the budget for the stock market. Whoever owns the shares of a good company, will benefit in the long run,” the Dhaka University professor opined.