A division bench of the High Court (HC) has vacated the stay order on the Securities and Exchange Commission’s move to reconstitute the board of directors of Z-category companies, the worst performing issues in the stock market, to help improve their financial health.

The SEC directive had a provision to include a representative from the general shareholders in the board of directors of a Z-category company.

“The reconstituted board will prepare specific/detailed proposals for devising appropriate action plans for improving the operational and financial performance to run a Z-category company profitably,” said the directive, issued five years back.

The SEC notification will now come into force with retrospective effect from November 29,2007, when the HC vacated the stay order, said an SEC source.

“We will formally send notices to the companies concerned after receiving the HC order,” the SEC source added.

The SEC directive was challenged by the directors of some Z-category companies immediately after its gazette notification on August 1,2002 and the subsequent stay order by the HC.

According to the SEC notification, the existing board of directors of a Z-category company will be reconstituted by holding extra-ordinary general meeting (EGM) within six months from the date of gazette notification of the order.

“The reconstituted board of directors will include directors from among the sponsors (institutional and general public shareholders’ group-wise proportion) in the company on the date of the EGM,” the SEC notification said.

As per the SEC notification, the reconstituted board will identify the specific reasons for the company’s failure to operate profitably and also identify the persons, if any, of the company concerned, including its directors, auditors, responsible for such failure.

The reconstituted board is also empowered to take appropriate measures, including legal actions, if applicable, against the persons identified for the company’s failure.

“In case the issuer fails to show improved operational and financial performance of the Z-category company within 24 months from the date of the reconstitution of the board, the company will take appropriate measures for dissolution of the entity, including merger or winding up, as per law, after taking the shareholders’ approval by holding an EGM,” the SEC directive stated.

The EGM will take place within three months of expiry of the stipulated 24 months, the SEC said.

Currently, out of 266 listed companies, 95 are in the Z-category in the Dhaka Stock Exchange.