THE number of companies seeking registration with the apex regulator — Securities and Exchange Commission of Pakistan — is increasing, not only indicating the pace but also diversity of investment in the formal economy in a changing business environment.

In the first six months of the current financial year (July-Dec), 2,747 companies got themselves registered with the regulator, which is a quantum leap from 1,950 companies that sought to enroll in the corresponding period of the previous year. Figures released by the SECP on Thursday stated that as many as 514 new companies were registered In January, up from 23pc over the same month last year.

The SECP did not disclose the total number of companies it had registered so far but that must be close to 80,000, though many of them are reported to be dormant.

Among the total 42 foreign companies incorporated during financial year 2015, the largest number of firms (17) were China-based

Among the firms registered last month, 89pc were registered as private limited companies. The firms opting to get registered encompass wide range of sectors, including services, information technology, trading, tourism, construction, food and beverages, power generation, fuel and energy, education, real estate development, communications, corporate agricultural farming, pharmaceutical, transport and textiles.

An official at the SECP claims: “Since the inception of SECP, a number of operational changes have been introduced and a friendly environment has been created at the Company Registration Offices (CROs). Incorporation of companies has been made much easier, smooth and swift.” So be it. But the choice rests clearly on the firms; unless they themselves line up to register, the regulator can scarcely pull them aboard.

Seeking registration with the SECP brings those companies in the fold of the formal economy, which entails compliance with a set of rules and regulations of running businesses and making proper disclosures. So why would businesses sacrifice freedom that they enjoyed as unregistered businesses? “There are the obvious advantages. A registered company can establish sound reputation with its customers and suppliers and find it easier to hire competitive employees, as they are considered more reliable,” says proprietor of a small-sized company.

But Zubair Motiwala, a former President of Karachi Chamber of Commerce and Industry is unimpressed. He believes that the number of registered companies is just the tip of the iceberg as far as the business entities in informal economy are concerned. He stressed that in order to encourage the expansion in formal economy, the government has to formulate policies to get non-filers (of income tax returns) understand and facilitate them. “Adhocism will achieve nothing and non-filers will stay out of the net”.

While the number of registered companies is increasing by leaps and bounds, market watchers often complain that a few firms have sought listing at the stock exchange. In the last five years, in contrast to the growth in registration of companies, the number of firms going public has declined. Only eight companies came up for listing in 2015.

But despite the lack of incentives and bound to a host of regulations and the dreaded ‘code of corporate governance’, initial public offering market has started to heat up. Unlike the sulking investing public, Kashif Shah, MD Investment Banking at Arif Habib Limited, holds an optimistic view about the new entrants in the capital market in near term. He counts the blessings. Compared with the unlimited liability of a sole proprietor or partner in those businesses, the liability of sponsors is limited to their holdings in public limited companies. Banks also find comfort in doing business with listed companies which makes it easier for such companies to secure loans.

Some analysts believe that corporates have no penchant to seek listing when cheap money is available from banks in declining interest rate scenario. But Kashif Shah disputes such assertion. He argues that corporates do seek cash from banks for working capital requirements but they have to turn to the stock market to mobilise funds when financing is required for projects which takes several years to reach completion. “The interest rate scenario over that long period is always unpredictable”, he says.

As an example, Amreli Steels Limited entered the capital market to raise funds for its expansion. The company first watched the investors’ response to the initial public offering of another steel company, Mughal Iron and Steel Industries. Flush with liquidity, the investors rapidly picked up that stock, resulting in an over-subscription for Mughal’s IPO. Amreli Steels Limited’s (ASL) declared that it would use the IPO proceeds to expand the company’s re-bar and billet manufacturing capacity with a total cost of Rs3.4bn.

With huge projects coming up, likely triggered by the China-Pakistan Economic Corridor (CPEC), steel mills and cement manufacturers have taken a lead in going public or asking shareholders for cash through right issues.

A market watcher pointed out that among the total 42 foreign firms incorporated in Pakistan during financial year 2015, the largest number of firms (17) were China-based, which he believed was another indication of firms sprouting to take first mover advantages of the CPEC.

Published in Dawn, Business & Finance weekly, February 15th, 2016