A major issue confronting the country's economic managers is how to induce a sizable portion of the country's population to embrace shareholder capitalism. Indeed, the number of shareholders is put at a mere 1.8 million in an estimated population of 150 million
and is a dismal low when compared to the ratios in developed markets.
In the USA and Australia, 50 per cent of the population directly or indirectly owns shares. The underlying issue is how to develop shareholder capitalism.
If the example of the United States can serve as a guide, shareholders capitalism has to be delinked from shareholder democracy. It is the corporate boardroom where decisions are taken and where the majority votes of the shareholders do not count. What works is market democracy.
Similarly, new company rules in Pakistan allow owner- managers to issue different classification of shares in any quantity for public subscription that does not impact on either ownership or management of the company.
The Companies' Share Capital (Variation in Rights and Privileges) Rules,2000 have amended the Companies Ordinance 1984 under which only ordinary shares with equal rights and privileges could be issued by a company.
But to put things in perspective, the problem on the supply side needs to be dealt with first. Industrial ownership is not broad based as the number and volume of listed shares available for the general public for trading is too small. Pakistan is semi-industrialized state and an emerging market.
Besides, the number of listed companies at the Karachi Stock Exchange has dropped from 781 in 1997 to 690 in early April 2004, a sharp fall of 91 listed shares. Much of it can be explained both by market reforms and corporate failures.
As the corporate tax for private and listed companies are being brought at par, there is hardly any incentive for the firms to float their shares in the stock markets, says KSE managing director Moin Fudda.
In a pre-budget seminar organized by the Management Association of Pakistan last week, two leading chartered accountants Syed Masoud Ali Naqvi and Ibrahim Sidaat pleaded with CBR Chairman Abdullah Yousuf to restore the ten per cent differential in corporate tax between private and listed companies, not by raising but lowering the tax rates.
Then, there is the issue of free float of shares. In developed markets, the free float (shares available for general public) is estimated at 86 per cent and in emerging markets 47 per cent. In Pakistan, it is about half of that of emerging markets (26).
Addressing investment professionals at a local hotel here recently on "Trends in global investing: Implications for Emerging Markets," Khalid Ghayur, managing director of Morgan Stanley Capital International (MSCI) advised regulators and stock exchanges in Pakistan to persuade local listed companies to increase their free float substantially like other countries in the region have done.
He identified only eight local companies that could meet the minimum size requirement to remain in MSCI index. The country's weighing in the MSCI was 0.17 per cent. It is likely to slip further if large listed companies do not increase their free float. The weight of Pakistan in the MSCI Emerging Markets Index has decreased over the last 10 years.
Currently, the good scrips are tightly held by sponsors, financial institutions and major players. The core income stocks are not available in plenty. The limited number of tradable shares quoted on the stock exchange provides an excellent opportunity for speculation that also discourages small investors.
In recent months, the government has started IPOs of state enterprises like the NBP, the OGDC, the Sui Southern etc to increase the number of small shareholders by allocating a proportion of shares for them.
Next on the agenda is the off- loading of the Pakistan Petroleum Ltd shares. Now, the smallest lot has been reduced to 500 shares instead of 1000 shares for the benefit of small investors.
Given the corporate culture, the listed companies are not reducing their share-holdings to enlarge free float of their shares though they profit from sale and purchase of their own shares.
Perhaps, they have not given much thought to implications of the Companies' Share Capital (Variation in Rights and Privileges) Rules,2000, says the managing director of a leading brokerage house.
The Rules 2000 lays down that a company may have more than one kind of share capital and may have different classes of shares under each kind. These have to be specified in the company's memorandum and articles along with their different rights and privileges which have been listed as follows:
(a) voting rights; voting rights disproportionate to the paid up capital value of the shares held; voting rights for specific purposes only; or no voting rights at all;"
(b) different rights for entitlement of dividend, right shares or bonus shares or entitlement to receive notices and to attend general meetings; and "
(c) rights and privileges for an indefinite period, for a limited specified period or such periods as may for time to time may be determined by the members through special resolution."
In case share capital of a company has different classes having different rights and privileges and the same is to be offered to the general public, the fact shall be distinctly mentioned in the offering document and difference in the rights and privileges of any class of share capital shall be conspicuously mentioned in the offering document, prospectus etc."
But for all this, the company would have to seek approval of the Security and Exchange Commission of Pakistan. Our economic managers tend to follow the United States as a role model for developing the country's market.
America is considered, to quote The Economist," the most successful exponent of shareholder capitalism. But when it comes to shareholders democracy, America has barely moved beyond the corporate equivalent of rotten borough."
The shareholders have been electing board members and voting resolutions." Given how little difference such votes can make, they might as well not have bothered- which is why shareholders typically vote unthinkably for what the incumbent board wants, much as the citizens of the Soviet Union used to vote for their leaders.... As far electing directors, there is rarely a genuine contest for a board room seat."
Unlike in Britain. Share holders of the American firms cannot typically call an extraordinary general meeting to vote a new board. Indeed, in sixty per cent of the American firms, only one-third of the board seats are up for elections each year. In the ultimate analysis, it is the board, not the votes of the shareholders, which nominate one candidate per seat, says the weekly journal.
