The market operators and experts have expressed their mixed reaction to the measures announced for the country's capital market in the budget proposed for the fiscal year (FY) 2019-20.
Hailing the proposed budgetary measures, some of them said investors would benefit from the incentives while others said good companies might face difficulties with the proposed tax on reserve and retained earnings.
The finance minister proposed, among other measures, imposition of 15 per cent additional tax on retained earnings and reserves, only if the amount exceeds 50 per cent of the paid-up capital of the company.
The government announced the measure to ensure proper distribution of profits among the investors.
Former chairman of Bangladesh Securities and Exchange Commission (BSEC) Dr. AB Mirza Azizul Islam said the raised limit of tax-free dividend income is a measure that will benefit the capital market.
"Most of the companies go for expansion through issuance of stock dividend. That's why the companies may face problems in case of expansion, if 15 per cent tax is imposed on the stock dividend," said Mr. Islam, who was also a former caretaker government adviser.
He said the proposal of imposing 15 per cent tax on retained earnings and reserves may be a cause of concern for good companies as they retain profits for future investments.
"Particularly, I am not optimistic about the outcomes of the proposed measures," Mr. Islam added.
The finance minister's budget speech has mentioned that investors expect cash dividends on their investments in the shares of a company.
"From that point of view, cash dividend plays an important role in increasing the value of the share and also strengthening the share market," says the budget speech.
"But we observe that the companies are generally distributing stock dividend instead of cash dividend."
"As a result, investors are deprived of their well-deserved return. In order to encourage the distribution of cash dividend, I propose imposition of 15 per cent tax on stock dividend distributed to the shareholders by any listed company," the budget document says.
In his reaction, former president of Dhaka Stock Exchange (DSE) Md. Rakibur Rahman said it is a good sign for the country's economy that the government has realised the importance of the capital market.
"This is the most capital market-friendly budget. The market will enjoy the benefit of the measures announced in the proposed budget for the FY 2019-20," said Mr Rahman, also an incumbent director of the DSE.
In the proposed budget, the tax-free dividend income for individuals has been increased up to Tk 50,000 from the existing Tk 25,000.
To encourage the distribution of cash dividend, the finance minister has also proposed 15 per cent tax on stock dividend for shareholders by any listed company amid the ongoing practice of recommending stock dividends frequently.
Md. Shakil Rizvi, a former DSE president, said real investors would enjoy the benefits of the proposed budgetary measures.
"Many companies issue stock dividends year after year. But their expansions are not visible and earnings decline following an increased number of shares. That's why tax has been proposed to encourage the recommendations of cash dividend," Rizvi said.
Md. Moniruzzaman, managing director of IDLC Investments, said another weapon could be utilised by the stock exchanges and the securities regulator to encourage the recommendation of cash dividends.
"A provision of recommending at least 10 per cent cash dividend could have been included in the rules to remain listed as an 'A' category company," Moniruzzaman said.
He said due to the bad practice of recommending only stock dividends by some companies the other good entities might face difficulties.
"A company's sustainable growth will not be ensured, if it fails to retain its earnings. Good companies should not be penalised for the bad practices of other companies," Moniruzzaman said.
Ahsanul Islam Titu, a parliament member, said the government's focus on the capital market is the most positive side of the budget proposed for the fiscal year (FY) 2019-20.
"The capital market failed to get any focus in the previous budgets. But the market got enough focus this year," said Titu, also a former DSE president.
He said the proposal of imposing 15 per cent additional tax on retained earnings and reserves is a penalty proposed to force some companies to shun bad practices.
"Good performing companies may face difficulties, if they fail to retain profits. It's also true that the government has taken this initiative following the suggestions made by the DSE," Titu said.
He said the capital market would not flourish, unless different initiatives are taken to bring companies having good fundamentals into the market.
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