Kay & Que, listed on the Dhaka Stock Exchange as a Z category share, rose a staggering 293 percent in 2017. Likewise, Dulamia Cotton Mills gained 223 percent and Savar Refractories 193 percent in the same year.
On the other hand, the blue-chip share index, DS30, representing the stocks of the large, well-established and financially sound companies, gained 25.32 percent.
Officials of the Bangladesh Securities and Exchange Commission pointed out two factors behind the unusual rise in the price of the Z category shares.
First, some investors prefer Z category shares. Second, a few stockbrokers assist investors in buying the worst-performing shares, giving them margin loans and share netting opportunities in a breach of rules.
The margin loans and the share netting opportunities create hype about the Z category shares, said an official related to the investigation of the BSEC.
The Z category is a trading platform for worst-performing companies. A share is grouped in this category if a company is out of operation, does not announce a dividend for a year or does not hold annual general meeting.
In 2009, the BSEC gave a directive not to extend margin loans to buy Z category shares in order to rein in their abnormal price hike. A BSEC investigation team found that at least 10 brokers extended margin loans to investors to buy Z category shares in 2017 and 2018 and were duly penalised.
The regulator also found that Dynamic Securities Consultants, Hedayetullah Securities and Associated Capital gave share netting opportunities to buy Z category shares, again in violation of a BSEC directive. They were penalised too.
Share netting is a financial adjustment facility that permits investors to buy and sell shares of the same company on the same day.
“These stockbrokers don't represent the wider stockbroker community,” said Mostaque Ahmed Sadeque, president of the Dhaka Stock Exchange Brokers Association.
Sometimes a few officials resort to wrongdoing but it brings bad repute for all stockbrokers, he added.
“The remedy is the small-cap board that is followed worldwide,” said Mohammed Rahmat Pasha, chief executive of UCB Capital Management.
Institutional investors would make transactions in the small capital board only, which could curb the abnormal price hike of Z category shares. The DSE is working to set up a small capital platform.
“We can't stop people from buying these types of shares. We can only raise awareness,” said Saifur Rahman, spokesperson for the BSEC.
But, if a broker assists investors in buying Z category shares the BSEC will penalise them, he added.