July 19, 2006	Wednesday	Jumadi-ul-Sani 22, 1427

KARACHI, July 18: The Karachi Stock Exchange intends pushing another 21 companies on the “defaulters’ counter”, making the total number of companies on that section to 154 companies. That works out to a quarter of the total 657 companies listed on the stock exchange.

A notice issued by the bourse on Tuesday identified the companies that would be relegated to the defaulters’ counter from August 1, as follows: Dominion Stock Fund; Investec Mutual Fund; First Investec Modaraba; Dadabhoy Leasing; Interasia Leaasing; Prudential investment Bank; Dadabhoy Insurance; Pakistan Guarantee Insurance; Raja Insurance; Al-Azhar Textile; Al-Qaim Textile; Elahi Cotton Mills; Service Industries Textiles; Al-Jadeed Textile; Caravan East Fabrics; Fateh Sports Wear; Kaiser Arts & Crafts; Usman Textile; Adil Polypropylene Products; Ansari Sugar Mills; Bawany Sugar Mills; Sakrand Sugar Mills; Gauhar Engineering; Sind Alkalis; Ghulam Muhammad Dadabhoy; Regal Ceramics.

Under provisions of section 32(1) of the KSE Listing Regulations, the bourse has the authority to name companies as ‘defaulters’ of the exchange, if they contravene all or any of the following regulations: if a company is quoted below 50pc of face value for a continuous period of three years; it has failed to declare dividend/bonus for 5 years from the date of last declaration or failure to hold Annual General Meeting for a continuous period of three years; if the company is under liquidation; if it has not paid annual listing fee for a period of two years and if an eligible company fails to join the Central Depository System (CDS).

As per the rules, the bourse first issues show-cause notices (which in the above case were issued on October 10, 2005) and gives the companies time to rectify the error or give a valid reason for the defaults.

Most companies who receive show-cause notices ask for an extension in time and sometimes forward tearful tales of how bad the business is and promise to rectify the error as soon as possible. But sometimes interesting comments are given at the hearings, such as some companies outrightly refuse to pay listing fees, saying that their nil turnover does not justify such payments.

The bourse says the defaulting companies are separated from the rest "in public interest”, where investors are able to sift the laggards from the properly working companies. Whether meticulously followed in all cases or not, the reform has benefited small shareholders. Scores of companies that wished to avoid being thrown to the “defaulters’ counter” on account on non-payment of dividends have managed to make payouts to small shareholders, while skipping the sponsors’ share in case profits were insufficient. Those payouts, though at most times as small as 5 per cent, investors have at least seen some remuneration after years of waiting.

The defaulters’ counter had been set up years ago so as to put to shame companies that do not comply with regulations, pertaining mainly to small investors’ rights. Even before that, many years ago, scores of defaulter companies were quietly ‘de-listed’ and they disappeared without paying a paisa to the small shareholders.

The companies wishing to exit the bourse are now required to pay small shareholders value for their investment. A buy-back price is brokered and paid to the small investors, before a company goes off the quotation board. Liquidation of companies is not an ideal situation for shareholders, for as owners in the equity, they stand last in the row, after all interests such as dues of banks, creditors and employees are satisfied. That almost always leaves nothing for the shareholders.

Sending companies on the ‘defaulters’ counter’ is punishing, not only for the scar that becomes visible but also as they find difficultly in striking credit deals with banks and other business partners. “It is better if the list of quoted companies gets to be lean and thin,” says an ex-chairman of the stock exchange. He observed that it would be better if the defaulters were asked to leave, after paying reasonable buy-back price to the small investors.

A cursory glance at the stock exchange quotation and trading pattern each day would indicate that at least in 200 companies no trading takes place as no one wishes to touch those stocks with a pair of tongs or where almost all of the shares are held by sponsors in large frozen blocks. Of what use are they to the small investors, though for the benefit of the exchange, they do add to the total market capitalisation that the bourse is able to display.