In four months of this calendar year, the Karachi Stock Exchange has placed no fewer than five companies under ‘suspension,’ bringing the aggregate number of firms suspended since October 2000 to 89.

Dost Steels Limited, Libass Textile Limited, S.G Power Limited, Yousaf Weaving Mills Limited and Dadabhoy Cement Industries Limited are the entities that have been suspended this year.

Under the KSE’s listing regulations, a company could be suspended for: failure to commence commercial production for three years from the date of formal listing; refusing to join the Central Depository System (CDS); revocation of CDS eligibility by the CDC; failure to pay the annual listing fee for two years to the bourse; failure to hold annual general meeting for two consecutive years; and in cases where winding-up proceedings have been initiated and an official liquidator appointed.

When the bourse announces the suspension of a company, the firm’s shareholders start fretting about the loss of their investment in the stock of that entity. Suspension is a bar on trading in shares of a company, virtually bringing the value of those shares to naught.

“The exit route for delinquent companies run the all-too-familiar course,” complained an investor. “First, they are placed on the defaulters’ counter, then suspended and finally delisted.”

But KSE officials have continued to defend and justify suspension and delisting for being in the public’s interest. One such official argued that delinquent companies are suspended to protect new unsuspecting investors, who might enter into such dead stocks and find themselves trapped.

A fund manager who also has public money stuck in two recently suspended firms argues that suspending and delisting defaulter companies is akin to bailing them out

An investor who has been watching the phenomenon for years mused that it would be difficult to argue with the logic offered by the KSE. But he insisted that there still ought to be a way to compensate investors who hold shares of companies that are barred from trading.

“I held 5,000 shares of Zeal Pak Cement Factory Limited, which was suspended in 2009, and I know nothing about its fate,” he said.

Enquiries showed that the company was suspended on July 13, 2009 owing to “restriction on movement of shares by the Honourable High Court of Sindh”.

There has been no information about whether the case has moved forward in the last six years. And investors believe that some reasons for which companies are suspended — such as failure to join the CDS or to pay the stock exchange listing fees — are almost ridiculous.

“Why must my holdings be lost in the regulatory tussle between the bourse and the company,” a beleaguered investor raised a pertinent question.

A fund manager who also has public money stuck in two recently suspended firms argues that suspending and delisting defaulter companies is akin to bailing them out. He insists that this is cruel for investors if the defaulters are let go free.

Shareholders are served only after all other liabilities, such as bank debts and other sums owed to creditors, and employees’ compensation, have been satisfied

Many such companies possess fixed assets like land, building and machinery. These could be sold for the benefit of all stakeholders, including shareholders as well as the company’s creditors and employees.

Suspension and delisting of a company is scarcely an ideal situation for stockholders, as they are the last in the line to receive their share where any amount is realised. Shareholders are served only after all other liabilities, such as bank debts and other sums owed to creditors, and employees’ compensation, have been satisfied.

But with suspended companies, such proceedings involve a lot of haggling for which the regulators neither have the time nor the inclination to proceed. And it is only when a company offers to voluntarily delist itself that the KSE goes into discussion with it to get shareholders a fair buy-back price of the stock.

As more and more companies continue to voluntarily de-list or are suspended, the number of those listed on the bourse gets thinner. In the last five years, the number of listed companies has declined from 638 in 2011 to 561 at the moment. This is almost negligible when compared with the tens of thousands of companies that are registered with the regulator.

While concern is expressed on the lack of depth of the market, no serious attempts have been made to persuade more corporates to mobilise capital from the equity market. The government has almost always turned down the KSE’s budget proposals, which seek incentives for listed companies over private enterprises.

A senior stockbroker asserted that firms that derive huge earnings from the public should be attracted, coaxed or even forced to list on the stock exchanges and to share their fortunes. “The simplest way is to set a base for earnings, assets or capital, and big private companies that go above that level should be pushed to float their shares.”

But not everyone agrees to such coercion. “There would be legal complexities in forced listing and many foreign firms may threaten to pull down their shutters and walk out of the country,” cautioned a lawyer.

The corporate head of a cellular company was also critical of the query. “If the earnings of private telecom companies are flying through the roof and they are reluctant to enter the capital market and share the benefits with the general public, blame the government’s taxation policies and the stringent corporate governance regulations, not the telecoms,” he said.

Published in Dawn, Economic & Business, April 27th, 2015

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