Overhauling delisting system: What DSE proposes to fix junk stocks

After years of cautious enforcement in dealing with weak and non-performing listed companies, the Dhaka Stock Exchange (DSE) is now pushing for a comprehensive overhaul of its delisting framework, aiming to clean up a capital market increasingly burdened by "junk" stocks and strengthen investor protection.

The move comes as nearly one-third of listed securities have now been pushed into the Z category, reflecting widespread compliance failures and long-standing operational weaknesses among several firms. Against this backdrop, the bourse has submitted a set of reform proposals to the stock market regulator to make the delisting process more structured, transparent, and enforceable.

At present, stock exchanges have the authority to delist companies that fail to comply with listing regulations. However, market stakeholders say the absence of a clear procedural framework particularly regarding rehabilitation, investor safeguards, and enforcement steps has made action difficult. 

As a result, delisting has remained largely inactive despite repeated violations by many listed companies.

Rehabilitation-first approach before delisting

Under the proposed framework, the DSE has suggested introducing a rehabilitation phase before any compulsory delisting. In this stage, struggling companies would be required to submit a detailed operational recovery plan outlining how they intend to restore financial stability and regulatory compliance.

The exchange would monitor the execution of these plans over a specified period. Only if a company fails to implement its recovery roadmap, or if the plan is deemed unfeasible, would compulsory delisting be initiated.

The proposals also identify clear triggers for delisting, including prolonged business closure, failure to declare dividends for extended periods, and repeated non-compliance such as not holding annual general meetings.

Tougher accountability measures for sponsors

Beyond procedural reforms, the DSE has also proposed stricter accountability mechanisms for company sponsors and directors. One of the key recommendations includes conducting special audits to determine the true financial condition of distressed firms and identify individuals responsible for financial irregularities.

If sponsors or directors are found guilty of mismanagement or fund diversion, the exchange has proposed barring them from serving as directors in any other listed company and restricting their access to bank loans.

In more stringent cases, the DSE has suggested provisions to attach or seize personal assets of responsible directors if company funds are found to have been siphoned off mirroring existing legal provisions used in bank loan recovery cases.

Chairman explains rationale for reform

DSE Chairman Mominul Islam said the proposed changes aim to address long-standing gaps in the existing regulatory framework.

"We have proposed amendments to address issues that are not clearly defined in the current delisting rules," he said. "Although the rules allow delisting, they do not clearly outline the process or ensure adequate protection for investors. That is why we have placed these proposals before the regulator."

He emphasised that the reforms are not intended for immediate implementation.

"This is essentially an upgrade of the system. It will not be enforced right away. Once the market becomes more vibrant and new listings increase, we will proceed with delisting in a structured manner," Mominul Islam added.

The chairman also stressed a preference for negotiated exits over forced delistings. 

According to him, mutual delisting where sponsors voluntarily buy back shares would be prioritised to avoid market disruption.

"We are prioritising mutual delisting over compulsory delisting. The idea is to ensure a win-win outcome for both sponsors and investors," he said.

He added that delisting decisions would only be taken once a company is deemed genuinely non-viable after rehabilitation efforts are exhausted.

Z-category stocks surge after stricter rules

According to DSE data, out of 360 listed securities excluding mutual funds and corporate bonds, 196 are in the A category, 75 in the B category, and 125 in the Z category.

The sharp rise in Z-category stocks followed a regulatory directive issued in May 2024, which introduced stricter classification criteria for issuer companies. 

Before the directive, the number of Z-category stocks stood at around 30, but increased sharply as companies were downgraded for failing to meet compliance requirements.

Market observers say the proposed reforms, if implemented effectively, could mark a significant shift in Bangladesh's capital market discipline potentially removing long-standing weak assets while improving transparency and investor confidence.