Companies trying to stave off ‘defaulters’ counter
By Dilawar Hussain
KARACHI, Nov 8: Dozens of companies have sent explanations to the Karachi Stock Exchange (KSE) this week and before, in an effort to save themselves from being relegated to the KSE’s ‘defaulters’ counter. The explanations and excuses are in response to the show-cause notices of Oct 10 issued to those companies by the KSE.
Back on August 6, 1997, the KSE had set up a ‘defaulters’ counter on which companies with bad track record were relegated and in some instances, trading in those shares were suspended. A total of 134 companies had been initially placed on that counter. At the time the response of most companies seemed as if they couldn’t care less. But the approach is changing.
Listed companies are making efforts to remove their defaults so as to get off the hook. Incidentally, almost the same number (134) companies are today languishing on the counter. But the difference is that names keep changing: as old companies get bailed out (after removal of the defaults), new ones are put to shame.
Companies are placed on the ‘defaulters’ counter for violations under section 32 (1) of the listing regulations. Six charges under section 32(1) include (where companies): are quoted below 5 per cent of the face value for a continuous period of three years; failed to declare dividend/bonus for five years from the date of last declaration; failure to hold Annual General Meeting for a continuous period of three years; under liquidation; failed to pay annual listing fee for a period of two years and failed to join the CDS after its securities having been declared eligible securities by the CDC.
It has to be conceded that the ‘corporate governance’ measures are quietly sinking in to do some good. A few years ago, the standard procedure was to ‘suspend’ delinquent companies and subsequently ‘de-list’ them. On one occasion in the days of the first ‘independent’ managing director at the KSE, as many as thirty-five companies were suspended and de-listed in one go. That naturally went to create uproar among small shareholders, who lamented that all their investment in those companies had gone down the drain.
The number of 35 companies looked phenomenal, compared with only 11 companies that were suspended in the three earlier years combined. The ‘suspended’ and later ‘de-listed’ companies were picked up from the defaulters’ counter. But small investors contended that suspending the delinquent companies was akin to bailing them out, for the sponsors of those companies simply stepped out without paying a rupee to the small shareholders.
Old practices also began to die when regulators intervened to stop companies chiefly in the textile business that were deep in debts and deficit began to announce sale of their assets. The companies were asked to first buy-back small shareholders’ stake. The idea worked and companies who opted to quit had first to pay a stock exchange brokered price to small shareholders in exchange of their holdings. There were interesting examples. One was Karim Cotton Mills, which had not declared dividend for the shareholders for as many as 24 years and its share sat on the ‘defaulters’ counter at Rs3.50. The company agreed to buy-back shares held by minority shareholders at a price as high as Rs16 per share.
During the year 2005 (up to September), around 13 companies were de-listed after the sponsors’ agreed to buy-back small shareholders’ holding at a fairly agreed price. Another five companies were in various stages of buy-back. The replacement of de-listing corporates without any compensation to small shareholders by ‘buy-back’ is one giant step in protecting the interest of minority shareholders; it is to be hoped that many more would follow.
