The securities regulator recently allowed mutual funds to issue stock dividend (referred as re-investment plan), which benefits the fund managers instead of rewarding the unit holders, analysts say.
Before modification of the mutual fund rules, the funds launched before 2008 were allowed to issue stock dividend.
Stock dividend, popularly known as bonus share, is a payment made in the form of additional shares, rather than a cash payout.
Issuing stock dividend causes the net asset value (NAV) and price of the unit to go down as it splits the shares. The split lowers the value of the market lot and slightly increases the liquidity in the market of the fund units. “This, however, is an insignificant benefit for the investors,” said market experts.
The only other advantage of stock dividend is the gain from the tax exemption unlike cash dividend. But most unit holders will not enjoy the gain as it is already 100% tax exemption for investors who hold units amounting to a maximum of Tk25,000, according to mutual fund guideline.
On the other hand, stock dividend will increase the paid up capital for the mutual funds instead of increasing the investable funds. Meaning, stock dividend is not creating any fund that can be invested – thus it is same as giving no dividend at all, for the unit holders.
“Stock dividends benefit the fund managers more than the unit holders,” said Shahidul Islam, CEO of VIPB Asset Management Company Limited.
Suppose, he explained, a fund is managing Tk1bn and the asset management company (AMC) charges a fee of 1.4% annually. Now, if in following year the fund under management becomes Tk1.1bn, then the AMC will charge the same fee of 1.4% but it will be higher in amount. “This will happen if stock dividend is given to the unit holders instead of cash dividend.”
Khandakar Safwan Saad, senior research analyst at Brac EPL Stock Brokerage Limited, said when a mutual fund gives out cash dividend, investors get cash which they can use as per their necessity - they can reinvest the cash in the capital market or spend it elsewhere.
The investors’ attraction to stock dividend causes problems including overvaluation of a particular fund which results in fluctuations of the fund prices, as seen in the past, said an analyst.
At times, it might lead the sector towards the boom and bust cycle that will not be healthy for the fund unit holders and the market as well, he added.
Saifur Rahman, executive director of Bangladesh Securities and Exchange Commission, said it would not be easy for asset management companies to manipulate the option of reinvestment plan and he refrained from commenting any further at the moment.
With more than 93% of the funds are trading at prices below NAV, permission of giving stock dividend for the funds is likely fail to revamp the sector as well as the market.
Since, the AMCs have failed to generate a healthy return of the funds under management in the past few years (mainly because of the under-performing market), the eligibility to pay stock dividend hardly matters.
At presently, there are 41 listed closed-end mutual funds in operation with almost half of these under government-owned ICB and the remaining under the management of private AMCs.
