THE heavy hand of the law has finally fallen on the companies that have long been languishing on the ‘defaulters’ counter’ of the stock exchanges.

Last Thursday, the Securities and Exchange Commission of Pakistan (SECP) warned the 77 companies on the defaulter segment of the three bourses to rectify their defaults within two weeks or be prepared to face stiff penalties.

“In case of non-compliance, the company or its chief executive and directors shall be liable to action under Section 159 (5) (a) and (c) of the Act, which includes penalties of up to Rs100m in case of an individual and up to Rs200m in case of a company. The failure to rectify the default can even lead to the winding up/liquidation of the company,” the regulator announced.

The warnings have been issued under Section 100 (b) of the Securities Act2015. The various reasons that forced the stock exchanges to send companies packing to the ‘defaulters’ counter’ included their failure to hold two consecutive annual general meetings, pay outstanding annual listing fee, pay penalties or any other dues payable to the stock exchanges, and to join the Central Depository System (CDS).

The decisions should be made on a case by case basis. The circumstances of companies differ and there is the possibility of a firm not being a wilful defaulter — former SECP chairman Khalid Mirza

“The measure is aimed at enhancing the rights of minority shareholders and promoting a culture of regulatory compliance,” Akif Saeed, the SECP’s Securities Markets Division Commissioner, told Dawn.

He said default over non-payment of dividend for five or more years was removed after it was taken care of by the government through the Finance Act 2015-16.

The budget 2015-16 stipulated that “in the case of a listed company other than a scheduled bank or a modaraba, which does not distribute cash dividends within six months of the end of the said income year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of 100pc of its paid-up capital, the excess amount may be taxed at the rate of 10pc”.

But instead of paying the stiff penalties, wouldn’t the defaulter companies opt for delisting from the bourses?

Akif believes that going for delisting will put these companies between a rock and a hard place. To delist, the companies will first have to buyback the minority stakes in their firms, which will mean paying a generous amount of cash to shareholders at a price that will be worked out and bargained by the exchanges.

However, former SECP chairman Khalid Mirza reckons that such ‘draconian decisions’ can go on to create unintended consequences, and that slapping penalties across the board is not at all an act of prudence.

“The decisions should be made on a case to case basis and on their own merits.” He adds that the circumstances of companies differ and there is the possibility of a firm not being a ‘wilful defaulter’. It is therefore worthwhile to separate the wheat from the chaff, he stresses.

But this is not to sympathise with the wilful defaulters, who have been enjoying the advantages of being listed without complying with the regulations. There are a host of perks that the listed companies enjoy, including paying tax at lower rate of 32pc instead of the 35pc paid by unlisted companies, and escaping from the liability of tax on dividends (which has been raised to 12.5pc from 10pc).

Former SECP chairman Tariq Hasan says he stands with the regulator’s decision about defaulter companies, since it is not wise to appease defaulters.

“Apart from the securities market, offering incentives to bank defaulters by writing off loans, for instance, is also morally wrong”. He adds that the imposition of penalties on defaulters will help stabilise the market in the long term. And he does not agree with the view that this will drive away companies who might want to get listed at the bourses.

“The quality and not quantity of companies should be the aim for a strong corporate sector.” He also believes that the regulator’s fundamental duty is to reform and not to develop the market. “A strong-willed regulator backed by the government can only bring about meaningful reforms in the capital market,” he says.

Khurram Schehzad, director research and investment strategy at Arif Habib Corporation, muses that the levying of penalties should be the measure of last resort. He thinks that the stocks of distressed companies on the defaulter counter have a chance of ‘price discovery’. A similar thing had happened in the last few years to a host of companies in all sectors, particularly in textile and cement.

He also believes that neither the suspension nor delisting of errant companies is the right solution. He admits that ‘accountability’ of companies should be an ongoing process. “As a first option, the SECP should consider and strive to resolve the issues that plague such defaulter companies.”

He adds that the apex regulator should give enough time to the defaulter companies to regularise themselves, along the lines of what the State Bank of Pakistan did by giving banks quite a few years to comply with the capital adequacy ratio and minimum capital requirements.

Published in Dawn, Economic & Business, September 7th, 2015

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