THE Karachi Stock Exchange Index was soaring until mid-March before its peak was chopped off after it touched 10,303 points, but that obscured the fact that only 40 per cent of the listed companies gave any dividend, including nominal amounts. Shareholders of 60 per cent of the companies denied any dividend.
While the KSE index of 100 shares was soaring, the number of firms listed with the KSE was declining fast. Their number was 747 in 2002, 712 in 2003 and 663 in 2004. In fact, the operating companies in 2004 were only 536, according to the Annual Report 2004 of the Securities and Exchange Commission (SECP). And out of them only 214 companies gave any dividend and 322 or 60 per cent of them depriving the minority share-holders of any benefit.
The number of companies has become small though liberal buy-back arrangements or buying back their shares from small minority share-holders and through mergers, as those of the ICP Mutual Funds and Lawrencepur group of companies. Last year 14 companies were de-listed after buying back their shares from the share-holders and eight companies are in the process of de-listing following buy-back arrangements and two companies were de-listed for violation of the KSE rules.
Normally, if the companies are not viable, the management should have sought liquidation. Instead of doing that, the management is paying good money to buy back the shares and then getting out of the stock exchange and the critical scrutiny of the SECP, and making their company their plaything. And of course, de-listing frees the management from the obligation to share the profits with the minority share-holders or face a hostile crowd at the annual general meeting which is obligatory.
The several advantages of listing their companies and disadvantages of non-listing are not there for the investors any longer. Good investors can get all the money they need from banks which have plenty of cash to lend. In addition, far more could be raised through Term Finance Certificates with a fixed rate of return. The earlier 10 per cent tax penalty for not listing and later five per cent difference, is eroding fast. And both kinds of companies are coming to be treated on par by the tax authorities.
By not listing the companies do not have to pay a heavy listing fee to the KSE, send it many reports and conform to the varied demands of the KSE. The SECP has also a limited formal approach to the non-listed companies. Finally the investors keep all the profit and do not have to share it with the minority share-holders. So an increasing number of firms have got themselves de- listed from the KSE. And they include foreign companies units as well. And more companies may go the same way unless the advantages of listing and disadvantages of non-listing are enhanced.
Meanwhile, the SECP is being blamed for not looking into the reasons why 60 per cent of the listed companies did not declare any dividend in the boom year when many companies in the KSE-100 declared far higher profits than before with the Unilever making a record of 450 per cent.
Among the companies which did not declare dividend are some who had claimed having made large profits. Why did not such companies declare dividend? The SECP should have looked into that aspect diligently.
The KSE index is far more representative of the shares trade, than the Mumbai Exchange whose SENSEX covers only 30 shares. But that did not mean the 322 companies that defaulted in payment should go scot-free, without a proper investigation of at least 10 per cent of them. On that basis, half the defaulting companies would have been investigated within five years, while the other companies would have mended their ways or got themselves de-listed after paying substantial amounts to buy back their shares.
Managements of listed and non-listed companies in Pakistan can afford to be arbitrary or high handed as they own a majority of 60 to 80 per cent of the shares. And if they declare a large dividend they are the big gainers. In addition, they will get trophies from the KSE and the Management Association of Pakistan for giving themselves large dividends. They can have large profit with public honour.
In India, the average share holding of the managements is about 30 per of the capital; but in Pakistan it is often like sole proprietorship.
In what is supposed to be boom year for the textile industry, out of 223 companies listed on KSE only 75 declared any dividend — or just one third of the companies.
In recent years, says the SECP report, the number of companies declaring divided has been dwindling. It was 255 in the year 2002, 245 in 2003, and 214 last year. In a boom year for industry that is not the kind of negative results which the small share- holders expect.
On the one side, there is pressure on the SECP to make its over sight of companies very rigid and systematic, and on the other side, more and more majority share-holders of firms want to buy back their shares from others and become the sole king of their industrial kingdom.
Among the many defaulters are textile companies, cement factories, telecom companies, vegetable ghee and oil companies and sugar mills. The sugar companies in spite of the market price of Rs28 per kilo, after it had shot up from Rs22, give dividends only in a minority number of cases. No single ghee or vegetable oil company had given a dividend last year.
There is a variety of textile companies. Among them 121 listed companies belong to the spinning sector, 20 to weaving sector, 55 are to textile composites, 22 synthetic units and five are woollen manufacturing units. And yet out of a total of 223 listed textile units or 40 per cent of the listed companies only 75 declared any dividend in a year.
And yet the SECP has not tried to dig into the reasons why, or if it did that, that has not been mentioned in its annual report and that has disappointed the small share-holders who have been holding onto the shares of such defaulting companies for very long unrewardingly. And they finally blame the SECP for such a bleak situation.
They feel wronged or ignored by the Karachi Stock Exchange as well as the SECP, and the auditors who certified their accounts as fair.
The only punishment the KSE can give such companies is to include them in its defaulters list if they did not give dividends for five years. A company can also avoid the hook by paying five per cent dividend in the fifth year, as an investment bank did recently.
The managements of such companies are clever. Through their annual reports they promise better results next year and paint a bright picture of the future. The small share-holder is deceived or lulled into silence for one more year. They even come up with right shares on the basis of such a bright picture of the future they get far more money.
Among the listed, the management of the UNICAP Modaraba vanished to Dubai with the total capital of that ill-fated Modaraba and its shares are now quoted are 80 paisa per share.
It is now for the KSE and the SECP to see how the interests of the wronged share-holders of the 60 per cent companies, who have been denied a dividend for long, could be saved or served and the corporate sector as a whole has a clean operation.
Meanwhile, the government is reported to be reducing the corporate tax from 35 per cent to 30 per cent, and even 25 per cent. It is supposed to be doing away with excise duty and even considering reducing sales tax to 10 per cent.
The benefits of such varied fiscal concessions will go to the managements of companies, and they may not pass them on to the minority share-holders. The government and the SECP should hence consider the steps essential to protect the rights of the minority and small share-holders.
