The country’s capital market is witnessing a strange development leading to over valuation of stocks of the listed companies.

In three years, between 2015 and 2018, the total market capitalisation has increased by Nu 11B. The market value of shares of 21 listed companies increased from Nu 24B in 2015 to Nu 35B in 2018.

Market capitalisation is determined by multiplying total number of shares by prevailing market price. This means either the number of shares or the market price has to increase.

In absence of any initial public offering (IPO) or without any new listing, the number of shares in the market hardly increased with small amount of rights and bonus issue. Market capitalisation, in Bhutan’s context is primarily driven by an upsurge in market price.

“This is because the demand for shares in the market is increasing without supply for the last three years,” the chief executive officer of Royal Securities Exchange Limited, Dorji Phuntsho said.

Capital market has two components, primary market and the secondary market.  

In the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors trade securities among themselves. This trading in the secondary market determines the market value of shares.

Dearth of new IPOs in the last three years has triggered the secondary market in the country, where majority of trading was recorded. This has resulted in exorbitant increase in market price of shares.

In 2015, a total of 7.28M shares worth Nu 193.77M million were traded in the secondary market compared 4.58M shares worth Nu 181.87M in 2014, recording an increase of 37.13 percent in terms of volume. In 2018, 11.82M shares worth Nu 384.26M were traded in the secondary market.

However, figures from the RSEBL show that shareholders’ account in the central depository kept decreasing.

Are the listed companies being overvalued?

Like any other commodity, share prices are driven by demand and supply. It is in the interest of the companies to divest shares to expand the business because shares are generally cheaper than borrowing.

While other factors like efficiency and productivity of a company fuels demand for its shares in the market, such factors are irrelevant to players in Bhutan’s capital market. Irrespective of companies’ performances, share price in the market keeps increasing.

Dorji Phuntsho said the demand is propelled by short supply of shares in the market. He said that it also indicates that people have the money to invest but limited avenues to do so.

Figures from the stock exchange also show that market value of shares of some companies has increased by almost 200 percent in the last three years. This unusual increase in market value of shares has left some companies doubling their market capitalisation in three years.

But delving into the growth in net asset and earnings per shares, the performance of most of the listed companies is nothing extraordinary. This means the companies’ growth in net asset is not proportionate with the increase in share price.

Since market capitalisation denotes the size of a company, such upsurge in share price is leading to over valuation of the listed companies, according to a local economist.

This over valuation would hit the latecomers, primarily retail and individual investors, because they would have to buy shares at inflated price and the returns may turn out to be bleak. This could discourage the public from investing in shares and impede the growth of capital market.

Capital market and private sector

If private sector is clichéd as the engine of growth, capital market is clichéd as locomotive of private sector.

The country is yet to feel the influence of the latter. However, big players in the private sector do not find any incentive to list their companies.

But law obliges a listed company, to incorporate under the companies Act. A listed company is subject to compliance with regulations including governance standard, statutory audit and accounting standards.

A representative from the private sector said that government stands to benefit by incentivising listing of companies, not necessarily the strategic companies but private companies. “Private sector development is not only about promoting CSIs and retailers. For big returns, big companies should be encouraged,” he said.

For instance, he said, the public owns Bhutan National Bank and a team of professionals runs the company. Regulations, laws and governing bodies ensure efficiency and transparency. “The benefit is accrued by all the stakeholders and more than that it is in the interest of the company to ensure that public investors get some form of return, ”he said adding that even farmer own shares.

The CEO of RSEBL also said that unless a company has proven track record and meet all the standards as per the regulation the stock exchange would not facilitate listing.

From the revenue perspective, of the total tax revenue for FY 2017-18 amounting to Nu 27B, corporate income tax contributed more than Nu 9B and business income tax contributed Nu 1.49B.

While the primary contributor to the CIT were the DHI companies, in 2017 alone, 19 listed companies has paid a CIT of Nu 1.26B almost equal to tax paid by 31,551 BIT payers. There is also an opportunity to curb revenue leakage by encouraging more businesses to list.

From the employment perspective, employees of listed companies enjoy more credibility and security. While unemployed youth are not attracted to the private sector, listed companies, despite promoters owing majority of shares, attract talent, skills and qualified people.

Double taxation

Private firms have the opportunity to expand their business by raising fund from capital market through  divestment.

But the promoter and shareholders are double taxed. For instance, a promoter divests 50 percent of his shares to the public. The company makes some profit and it pays 30 percent CIT on the profit. Effectively, the promoter pays half of the CIT, for owning 50 percent of the shares. Then the promoter gets his dividend from shares and this too is taxed. This means that a promoter owning 50 percent of the shares is taxed about 45 percent. The same applies to other shareholders because the company pays the tax and declares dividend to its shareholders. Shareholders are again taxed on dividend it receives.

Many countries provide tax imputation credit on the dividend. This means that if a company makes any profit, it passes tax credit to shareholders, which would reduce or eliminate the tax shareholders to pay on dividends.

Double taxation is also one of factors that deters private firms from incorporating under the companies Act. 

DHI and its subsidiary companies are also caught in the double taxation trap. 

Tshering Dorji