INVESTORS in a capital market look for better yield. Many of them think that the capital market will make them millionaire in a fortnight. The outcomes may be quite different. However, their investment should not be based on rumours and speculative activities should be avoided. Financial analysts do research required for sound investments. This investment criterion mainly revolves around performance of the listed companies and firms with track record which sustain payment of reasonable dividend over time. The dividend yield should be higher than the interest and inflation rates to encourage genuine investment and discourage speculation.

Prior to 1999, many companies were distributing nil or meagre dividend to their shareholders in spite of huge profits. After a strong demand from small investors, a new clause 12-9(A) was inserted in the Income Tax Ordinance, 1979. According to this law, the company having more than 50 per cent reserves of its paid-up capital was required to distribute 40 per cent of its net profits among shareholders; otherwise 10 per cent tax was levied on its reserves which exceeded 50 per cent of their paid-up capital.

Before implementation, this law was duly approved by all federations/chambers of commerce and industries.

After this law was implemented, many companies especially those in the textile sector— started to pay record dividends to their shareholders. Not only the shareholders but even the government was also a beneficiary of this law as 10 per cent withholding tax on record dividends was deposited in the government treasury.

In the year 2000, some influential groups started to oppose this law as the payment of high cash dividend, they thought, would affect their liquidity position and pleaded that the rate of dividend must be reduced. As result, the rate of distribution for dividend was reduced to 40 per cent of net profits or 50 per cent of paid-up capital— whichever was lower.

Some groups neither agreed on the implementation of 12-9(A) nor were satisfied with its amendment. They stepped up their efforts for complete omission of section 12-9(A). As a result, section 12-9(A) was not included in the repealed Income Tax Ordinance, 2001.

Managements were happy on the removal of 12-9(A) but small investors were ruined, as many companies did not pay any dividend in spite of record profits. Government was also deprived of 10 per cent withholding tax.

Now, it is proposed that government should re-insert the omitted section 12-9(A) in the repeated IT Ordinance 2001 in its original form in the coming budget. There must be some compulsion for those companies which avoid to pay dividend in the name of their expansion programme, to declare stock bonus under the above mentioned law. It will be one of the most beneficial decision in the interest of both the government and minority shareholders.