More companies are today lined up on the exit door of the Karachi Stock Exchange than at the point of entry. From 762 in the year 2000,the number of listed companies has dropped to 690.
And this in the face of an unprecedented bull run that has seen prices of listed companies multiply by more than three times in less than three years - aggregate market capitalisation has soared from Rs 296 billion at the start of 2002 to Rs 1.2 trillion by the beginning of 2004.
There are as many as 43,500 companies presently registered in Pakistan. One would have thought that all those 43,000 private companies out there, would fall over one another in an effort to be the first to enter the capital market by offering equity to the general public when the time is so ripe. That, however, is not happening.
And it is scarcely difficult to understand why? One can clearly see method in this madness. The finance minister delivered a prepared speech at a seminar in Islamabad the other day, asking private companies also to opt for listing. That may not be enough.
There is all the talk of strict enforcement of code of corporate governance on listed companies. The chief corporate watchdog is talking about extending the code beyond listed companies.
But until that happens, it would only be the stock market quoted companies that would have to tred carefully under the watchful eye of the regulators. If the benefits of getting listed could outweigh the risks and the hassle, companies might be tempted to enter the capital markets and mobilse funds from the general public.
But that hardly is the case. The Karachi Stock Exchange (KSE) in its proposals for federal budget 2004-05 has asked for tax incentives for the listed companies; measures for reduction in cost of production so as to promote industrialization and market development incentives.
It is all very well for the government to propose reduction in corporate tax rate from 35 to 25 per cent. But that would be all across the board. Until a couple of years ago, unlisted companies were subjected to income tax rate of 45 per cent, whereas listed companies had to pay 10 per cent less, i.e 35 per cent. But then some wise guy in the finance ministry convinced others that it would be best to bring listed and unlisted companies at par in terms of taxation.
People may continue to wonder what might be his reasoning, but beginning with the budget of 2002-03, the government began cutting down tax rate on unlisted companies by 2 per cent a year, which would place listed and unlisted companies at the same level by financial year 2006, leaving no tax incentive for listed companies.
In the low interest atmosphere, it is hardly surpising that instead of turning to mobilse funds from the stock exchange by offering equities, companies are nogotiating loans from banks and opting to raise funds through Term Finance Certificates.
It makes sense then for the stock market to have sought a gradual reduction in tax rate of listed companies to maintain the difference of at least 5 per cent between listed and unlisted companies bringing tax rate for listed companies at 30 per cent by financial year 2007.
The stock exchange has also argued that tax on dividends of listed companies be exempted from tax since the dividend distributed by companies is out of profits earned after payment of corporate tax. Taxation of dividend income in the hands of shareholders, as such, tantamounts to double taxation.
The bourse has proposed that if the government can not entirely do away with tax on dividends, it could at least cut down the tax rate from 10 to 5 per cent, which would be a relief to investors in equities.
Exemption of capital gain tax is almost a 30-year old issue. Since 1975, the government has been gracious to exempt capital gain tax for a specified period. The exemption is now available until financial year ending June 2005 and the bourse is asking that it be extended for five years.
In respect of capital gain tax exemption, insurance companies have continued to be treated a pariah. In spite of repeated cries from all sides, the exemption is not availeble to the insurance sector and no one really knows why?
"The biggest direct beneficiary of the stock market boom in the country has been the government of Pakistan itself as 50 per cent of the equity market is owned by it directly and indirectly", stated the Karachi Stock Exchange in its budget proposals for financial year 2004-05.
The exchange observed that there was a need not only to provide consistency in the current economic policies but to announce more incentives to attract larger industrial investment in the country.
The KSE has suggested that in order to attract industrial investment, the government should announce (a) gradual reduction of tax incidence on utilities and (b) zero duty on import of labour intensive industrial machinery.
The bourse has also sought measures to protect local industries for which it has asked the government to expedite expertise in the enforcement of anti-dumping law. The stock exchange decries blanket restriction put by the government on individual members of the stock exchanges and their spouses to become directors of listed companies.
"This denies the fundamental right of individual members of the stock exchanges and their spouses to list companies owned by them or they cannot become directors of listed companies majority owned by them", argues the bourse, urging that restriction placed under subclause J of Section 187 of Companies Ordinance, 1984, ought therefore to be removed.
This looks to be government's fear of 'conflict of interest'. The government could re-examine, whether it would be fair and equitable to let all individuals with "substantial interest"- which is considered to be 10 per cent or more of holding of equity- to be eligible to become directors, without compromising on the interest of the companies concerned.
Attracting multinationals and big, profitable private companies from among the 43,000 unlisted firms to join the stock exchange is perhaps of paramount importance. That would expand the equity base and increase the much desired "free float" of stocks.
Thanks to the OGDC experience, where the government divested 5 per cent of its holding in the Oil and Gas Development Company - and those who subscribed doubled their investment in a couple of months - the number of small investors in equities has recorded a phenomenal jump from under 40,000 some months ago to over 300,000, currently.
