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Listed firms build huge reserve of Tk 153,000cr
Analysts say it’s a strength but should have logic
AHSAN HABIB
Listed companies in Bangladesh have built up reserves of Tk 153,000 crore collectively from their respective earnings for use in expansion and to weather out rainy days, when they would otherwise be forced to raise fresh funds from investors or borrow from lenders.
Of the 298 listed companies that have kept reserves, 44 set aside more than Tk 1,000 crore each from their profit while 28 have a reserve of Tk 500 crore each, according to their published financial data compiled by Shanta Asset Management Company.
Local electronics giant Walton Hi-Tech Industries holds the highest reserve of Tk 9,042 crore followed by Square Pharmaceuticals with Tk 7,999 crore and the Titas Gas Transmission and Distribution Company with Tk 5,983 crore.
A reserve and surplus fund is a liquid asset that is normally set aside from the company’s profit to meet any future costs, including expansion projects, and financial obligations such as debt repayments.
Analysts say that maintaining reserves is a good practice worldwide as companies can use these funds to tackle any unforeseen shocks as well.
Companies in Bangladesh have similar intentions for their reserves but some investors are sceptical in this regard as some firms are not expanding even though they have held a good amount of reserve for several years.
In addition, the real income from reserve funds kept in banks or invested in other securities is low at times when inflation is high.
AB Mirza Azizul Islam, former finance adviser to a caretaker government, said general investors want an immediate cash dividend and so, they do not like the idea of retained earnings.
On the other hand, companies always think about the future, so they want to keep a portion of their profit for use in case of emergency or expansion, he said .
“But if investors have any qualms about the reserve, they can talk about it in during the annual general meeting,” he said.
“All the companies should not be blamed for the actions of a few that have been accumulating reserves year after year without expanding,” added Islam, also a former chairman of the Bangladesh Securities and Exchange Commission.
Echoing the same, Shahidul Islam, chief executive of VIPB Asset Management Company, which manages Tk 280 crore worth of mutual funds, said there should always be a logical reason to keep reserves.
Some companies are keeping huge sums of money as reserves each year even if their capital expenditure and rate of expansion is low.
“So, their dividend activities are totally puzzling,” he added.
Besides, some companies with good performance records and good profit growth are making investments but the size of their reserves is much too high considering their needs, he said.
“I asked for an explanation in this regard from a company’s directors during their annual general meeting last year but they did not give an answer,” Islam said.
Of the 44 companies with a reserve of more than Tk 1,000 crore each, 24 are banks and non-bank financial institutions, five are fuel and power companies, four are pharmaceutical companies, three are engineering companies and the rest are from other sectors.
Anis A Khan, a veteran banker who is a former managing director of Mutual Trust Bank, said banks have to have high amounts of capital to increase their lending. Moreover, they need to have a large reserve against default loans, he said.
“So, banks are always hungry for raising capital,” he added.
As banks cannot lend more than a certain percentage of their capital to a single borrower, it tries to increase its capital so that the lending limit increases as well, he said.
Having high amounts of capital also helps increase the trade finance limit with foreign banks, he said.
“More capital means more potential and that is why keeping higher retained earnings is good for banks’ investors,” Khan said.