12 April 2004	Monday	21 Safar 1425

The government is to come up soon with a new law to liquidate bankrupt or non-functioning companies which are too many in the country and foul up the corporate environment.

The governor of the State Bank of Pakistan, Dr Ishrat Hussain, says the new corporate bankruptcy law would enable unsuccessful companies wind up their business in an orderly manner.

Under the law the bank loans of the companies would be frozen and the financial liability of the failing companies would be re-negotiated with the banks concerned, as is done elsewhere in the corporate world. The total number of companies registered with the Securities and Exchange Commission of Pakistan until June 20 last year was 41,828 of which 22,403 belonged to the Punjab, 16,476 to Sindh, 2,550 to the NWFP and 399 to Balochistan.

The annual increase in the number of companies registered is neither too small or two large. They were 1,169 in the year 2001, 1,183 in 2002 and 1,553 in 2003, which meant an increase of 31.28 per cent over the number of companies registered in 2002.

But when the SECP came up with the Easy Exit Scheme last year to enable dormant companies have their names struck off the register of companies, the Commission tried to complete the formalities in respect of 2,860 companies. But they were found to be doing neither any business nor had any assets or liabilities as reported by the board resolutions and auditors certificates.

When the government set up a task force under the late Shaukat Mirza, then chairman of the PSO, to help revive the sick companies, said then to be 4,000 in number, he could not find the whereabouts of many companies.

And when he ultimately tracked down some of the owners they were not interested in the revival of their companies nor in any financial assistance for that purpose from the Task Force or the banks designated for that purpose.

Young businessmen say the easiest thing to do in Pakistan is to set up a company, with them as chief executive or chief operator and their wife as chairman. If far more paper companies are not coming up now that is because of the demands or scrutiny of the SECP, the income tax officials and sales tax officers.

It is good that the corporate register is being cleaned up. If the failing companies are wound up early the minority shareholders or junior partners may be able to get at least a part of their investment or left-over assets of the company.

If instead the company had gone to wreck and ruin altogether, they will get nothing at all and they will be helpless against the management of the company who use company resources to defend their mala-fide action.

Winding up the companies before their assets vanish altogether is good for the economy as well as the new owners can try to rehabilitate the company and achieve results earlier than if they try to set up new companies. The demand for early and easy liquidation of failing companies has been there from various quarters, including courts but the owners of such companies have stood in the way. They did not want to run the companies any more nor welcome an enquiry into their mal-administration and misappropriation.

Sometimes the banks themselves had blocked or discouraged early liquidation as their senior officers had obtained large kickbacks at the time of giving the initial loans and then failed to recover the loan instalments.

The SECP has come up with several modern facilities to help genuine businessmen set up companies. It has come up with a law for a single member private limited company essentially to help the proprietors to have their own companies. Prior to that a private company had to be incorporated by at least two persons. But a single member private company could now be incorporated "which enables the entry of any individual businessman into the corporate sector."

Former chairman of the SECP Khalid Mirza who introduced this measure said it would "benefit the investors and go a long way in the expansion of a disciplined private sector."

On the other side when it comes to the public companies listed on the stock exchanges of Pakistan they can now buy back the shares of their minority share-holders if the companies are financially healthy, and have a debt-equity ratio of 60:40 and the share holders approve of such re-purchase of shares. Several companies listed on the Karachi Stock Exchange have made use of this provision and bought back their shares at far higher prices than quoted on the exchange.

This provision enables management's which do not want to share their profits with minority share-holders or answer critical questions at the annual share-holders meetings to go their own way with their assets.

There is a tendency among the sponsors of companies now to do without going to the stock exchange and selling shares to the general public. The fact they can raise large loans through Term Finance Certificates or as outright bank loans make this process easy.

That mean more and more small investors will be seeking the help of mutual funds which are increasing in number, and getting more popular, while the original mutual fund, the NIT, is doing very well after its recent debacle following the failure of the stock market earlier.

Last year 46 single member companies were set up following the new legal provision for that. And out of them 41 came up in the Punjab and only four in Sindh. The number of foreign companies registered in Pakistan is 550, out of which 271 are in the Punjab and 267 in Sindh. Nine of them are in the NWFP and three in Balochistan.

The number of foreign companies set up in the country last year was only 26 out of 1,553 companies and out of that 16 companies came up in the Punjab and 4 in Sindh. Contrary to the general impression, incorporated companies number in Sindh is less than in Punjab.

India too is taking firm steps to do away with bogus companies or companies which are unfair to their minority shareholders. The SECP has done well in stipulating that an official liquidator should not deal with more than three companies at a time and if the liquidation is not done within the stipulated or agreed time, their fees should be cut.

Banks which cover up prolonged default should also be penalised particularly after they had given large loans following kickbacks obtained from borrowers who had no intention of returning the loans which was the practice in the 1980s and 1990, particularly after the nationalisation of banks in 1974 and the bureaucratic take over of the banks.

Liquidation of failing companies in thousands annually is common in the US and Japan. They do not wait for total bankruptcy before moving in for liquidation and suffer the consequences.

Hence Pakistan should not have been so slow to adopt the same process. But the company owners have been too reluctant to move in for liquidation and presumed they can get away with almost any misdeed or needless failure.