The Karachi Stock Exchange (KSE), taking seriously, the non-compliance of the Listing Regulations (LR) by the listed companies had, in 1997, initiated the concept of placing defaulting companies on defaulter’s counter.

Accordingly since then it has shifted more than 100 companies from the ready board to the defaulter’s counter. It also had suspended 35 companies in 2001. Again it has recently shifted 43 companies from the regular to the defaulter’s counter for being in default of LR, particularly regulation No.32 which provides circumstances for a listed company that may be delisted, suspended or placed on defaulters’ counter that is (a) if the securities of a company are quoted below 50 per cent of the face value for three years, (b) if it failed to declare dividend or bonus for five years, (c) or if it failed to hold AGM for three years and such other matters.

The KSE action against a defaulted company to suspend, delist and shift it to defaulters counter may be inevitable, but such action proves a blow to the investor’s confidence. Because their investment goes down the drain as a result of such action. The non-compliance of such companies in fact stems from weak governance and disregard of sound business practices by the management of the companies.

As a mater of fact the said action against delinquent companies is not in the interest of the minority shareholders, rather it serves the object of the management who had brought these companies to such a situation. Therefore the management should made liable, jointly and severally,to make good the company the damages caused as a consequence of their misdeeds.

The LR must force the sponsors or management of such delinquent companies either to buy back shares or to initiate action for change of management as provided in the Companies Ordinance 1984 (CO).

The Securities and Exchange Commission of Pakistan (SECP) has also announced its decision to initiate liquidation proceedings against 19 listed defunct companies out of 24 companies which did not hold AGM within the prescribed time thereby their management did not keep their shareholders informed about the affairs of the companies.

Although the Companies Ordinance does not make a company defunct simply because of not holding AGM, however section 158 provides for financial penalty on the company and its every officer for its default in compliance with its provisions. The liquidation of a company will not protect the rights of investors and creditors, therefore the ordinance has provided series of alternative measures to safeguards their interest.

The liquidation of a company is the last resort as it does not benefit the shareholders, rather such a step will protect the interest of the sponsors and the management of the company. The placing of a company by the KSE on the defaulters counter and finally delist or suspend it and liquidation of a company by the SECP virtually has similar effect; in both cases the small shareholders lose their investment.

The question arises that how these companies reached to the last stage where their liquidation became inevitable. Of course these companies did not reach this situation in a month or so, it’s a result of long-time mismanagement. It transpired that they had escaped scrutiny as provided in the CO, starting from S.242 requiring a company to submit the copies of audited accounts to the regulator. The objective of the statute is to scrutinize their accounts and to call further explanation u/s 261 in case on non-satisfaction. Moreover to undertake u/s 231 inspection of their books of accounts, if the regulator feels necessary.

The regulator thus has been vested with wide powers to detect the default or any irregularity committed by a company or their directors or even by an auditor at a very early stage. Enforcement of these powers consistently would enable the regulator to arrest the menace of misdeeds of the companies at very initial stages and may go a long way to improve the working of the corporate sector and thereby the interest of minority shareholders will be safeguarded.

Although the provision of S.305 justifies the action of the SECP to initiate liquidation proceedings against a company who did not hold two consecutive AGM’s. But at the same time section 309 (c) imposes conditions on the SECP that it is not entitled to present such petition unless appropriate investigation into the affairs of the company has been undertaken as provided in the CO. Section 265 authorizes the SECP for appointment of inspector to investigate the affairs of a company who on the conclusion of the investigation makes report u/s 269 to the SECP who, from the report submitted by the inspector, if found a person in relation to the company guilty of any offence for which he is criminally liable, it can prosecute such person.

Further it may apply the court u/s 271 and the court may change the management of the company. These measures as provided under CO are required to be initiated against the directors and management of the companies which will protect the interest of small shareholders and the creditors, instead of winding up a company as a result of their being guilty of offence and are criminally liable for the non-compliance and finally are responsible of bankruptcy of the company.

The delisting or liquidation of a company are the measures which spare the defaulters who have enjoyed the free lunch with the investor’s money.

Moreover, the SECP may consider to invoke suo moto action u/s 295 for appointment of an administrator which would pave the way for inducing efficient management who will enforce the financial discipline in the company. Like the small shareholders of the delinquent companies who are suffering due to default on the part of the management of their companies, the depositors and in final analysis the tax-payers are paying heavy price for giving protection to the loan defaulters by the State Bank of Pakistan by offering them relief by way of loan write-offs by nationalized banks.

The National Accountability Bureau (NAB),the Corporate and Industrial Restructuring Corporation (CIRC) and the Committee for Revival of Sick Industrial Units (CRSIU) are also engaged in recovery of money from the defaulters.

The CIRC has offered to the delinquent borrowers around 90 per cent relief on total amount of loan recoverable from them; yet only 77 borrowers with outstandings against them of Rs9.46 billion have shown their eagerness to repay Rs938 million only, equal to 10 per cent of their entire liability. The CIRC came into being in the last quarter of 2000; during the last three years it has resolved 183 cases having outstanding liability of Rs29.682 billion out of 719 cases with an outstanding amount of Rs130 billion.

Thus its achievement is around 25 per cent of the cases referred to it despite settlement of loans at the heavy cost to the depositors. Further the SBP guidelines to the borrowers to make deal with their banks directly, makes its existence unjustifiable at the cost of the depositors and tax payers. The CRSIU has revived 163 sick industrial units out of over hundreds assigned to it.

From the key note address of the governor of the SBP at the prize award ceremony of the Institute of Bankers, where he dealt in detail with banks write-offs, it appears that he has realized the failure of the aforesaid institutions and has decided to get rid of this problem at any cost, irrespective of its social and economic impact.

He disclosed that 11 public sector banks/DFI’s have written off/waived defaulted loans of Rs23.5 billion during the last three years since 1999 out of which Rs20.3 billion i.e 86 per cent have been written off/waived during the military regime since October, 12, 1999. Further he said that these government owned banks/DFI’s are set to write off/waive another Rs25-30 billion loans during the next three years out of Rs266 billion outstanding loans as of today. Thus over a period of six years, the cumulative amount of write-off would be around 90 to 100 billion. Advising write-off he said: “Write-off/waiver of irrecoverable loans and clean-up of their balance sheets is a normal practice of banks all over the world”. His suggestion to clean the balance sheet in such a simple way will be welcomed by the sick units and other defaulters in corporate or non-corporate sectors.

It is expected that the CBR will allow such write-off/waiver as admissible expenses in the assessment of such banks and DFIs. The question is if write-off/waiver is the answer to resolve the looted money why it took years to issue such guidelines by the SBP and what was the justification to establish various institutions for recovery.

These loans were paid by the banks/DFI’s after execution of number of agreements and securities were obtained from the borrowers, if these documents are just piece of papers and cannot be enforced effectively for recovery of the loans, then the banks/DFI’s will continue to carry this risk even today and write-offs will continue to be a normal practice. And this risk will ultimately be continuously borne by the depositors. As a result of loan defaults and write-offs depositors are paid low return on their deposits. Further they bear the burden of withholding tax and Zakat. Besides they will now bear the cost of service charges too as the SBP has allowed the banks to subject PLS accounts to service charges The write-off policy of the SBP adversely affects not only the interests of depositors, it will raise the burden o tax payers too as the written off loans will reduce the tax collection from the banks/DFIs and this gap will be required to be filled by general tax payers.