Bringing multinationals to the stock market
Bringing multinationals to the stock market is one of those long-standing policy challenges regulators have been grappling with for many years now. On the surface, it appears to be an issue of designing the right incentive structure. But what it eventually boils down to is political will. Political will to overrule resistance from influential quarters and do what's right for the financial sector, and the broader economy.
No one needs reminding that the stock market in Bangladesh has long been called a "casino" or a "gambler's den". People bitterly blame inadequate corporate governance, unfriendly or weak regulations, lack of foreign investment and unscrupulous traders for the state of affairs that led to such amusing analogies. But at the end of the day, if a stock market is not showing the same dynamism as its economy then it's primarily because the majority of corporations serving in the country are not listed in the market. And when a few big multinational corporations (MNC) dominate entire sectors but are not listed, the disconnect between a seven-plus percent growing economy and a listless equity market is inevitable. The telecommunication sector is a good example where all but Grameenphone remain detached from the market.
Grameenphone was the last MNC listed in the market, some eight years ago. Since then, our GDP has more than doubled: from USD 100 billion in 2009 to around USD 240 billion today. And more than 50 MNCs profited from a burgeoning middle-class and rising consumerism that drove economic activity for much of the last decade. If anyone is keeping count, only 13 have been generous enough to come to the stock market and share a sliver of their hefty profits with the common people (through dividends and capital gains). Yet these few corporations hold around 25 percent of total market capitalisation, clearly indicating that the ramifications of merely doubling the total number of MNCs in the market are massive. They will undoubtedly bring market stability, vibrancy, attract foreign investment and raise public confidence in stocks.
To be sure, some profit-maximising CEOs will remind us that their firms are already contributing to higher employment, better wages and greater consumptions rates. Why do they need to do more for the country and bear additional costs?
First, let's not forget that these MNCs are here because there is demand here. If one leaves, another will soon take its place. Second, while it is true that these corporations do pay higher wages than their domestic counterparts, undeniably, the total number of employees in these firms—especially in "white-collar" jobs—is still miniscule compared to our huge population. As long as profits from these businesses are restricted to a small group of owners and employees, these MNCs are in all likelihood contributing to, and not reducing, income inequality. That the recently published data by the Bangladesh Bureau of Statistics ("Household Income Expenditure Survey", 2016) showed income inequality has risen since 2010 despite higher economic growth lends credence to such a view.
Not that it should be surprising. Employees in these organisations most likely receive better access to credit, Worker's Profit Participation Funds, and discounts when buying their own products. What do the common people get except for overpriced products from oligopolistic firms in sectors like telecom or consumer packaged goods?
Those of us observing the market are, to some extent, encouraged to see that the government had requested on numerous occasions that the MNCs go public. Commerce Minister, Tofail Ahmed for one, has long advocated bringing these firms to the stock market. So much so that he stated outright in media that "these firms are taking profits away by doing business here while the country benefits very little from it." But the government's actions are clearly not enough.
So what will it take to bring them to the market? Let's recall that a listed company already enjoys a tax rate 10 percent lower than its non-listed counterpart (except for banks, telecoms and tobacco manufacturing firms). Some argue that owners don't want to relinquish control of their corporations. So the Bangladesh Securities and Exchange Commission requires that these firms only offload 10 percent of their shares to go public, which can hardly be called any real "dilution" of ownership. But none of these have enticed MNCs.
Paradoxically, some of these same corporations are listed in the bourses of neighbouring countries like India and Pakistan where tax incentives are comparable to ours. Clearly then the cost of disclosing financial statements and following other regulatory guidelines is not so great that it damages profits. So the upshot of all of this is that MNCs are not coming to the market simply because they don't have to. Not in Bangladesh at least.
So the way forward can be considered in two stages. First, the government can offer further reductions in tax rates (suppose 20 percent) to MNCs, and this should be equal for all sectors including banks and telecoms. They can offer additional reductions of 15 percent if the company offloads, let's say, 25 percent of shares instead of just 10 percent.
In the event that this still does not attract MNCs, the government has to seriously consider what could well be its last option. Implementing a law that requires mandatory listing of MNCs after they operate in Bangladesh for a certain period of time, say 10-12 years. This idea was floated before, but never gained momentum, and time is ripe for regulators to seriously consider pros and cons of this option. Needless to say, the hefty profits these firms enjoy year in and year out will ensure that they will not pack up their bags and leave if forced to come to the market.
To be sure, the top management of some of these firms who have influential connections in the government will try to pour cold water over mandatory listing. So the government will need substantial political capital to fend off such resistance. But history reminds us that when it comes to political will to do what's right for our economy, we have fallen woefully short. Those of us hoping to see a more dynamic and stable stock market ardently hope that the government will seriously consider this option and muster the grit needed to do what needs to be done.
Sharjil M Haque is former Research Analyst at the International Monetary Fund, Washington DC and currently Doctoral student in Economics at the University of North Carolina, USA.
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