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Can big firms be forced to go public?

Updated December 11, 2017

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THE number of companies listed on the Pakistan Stock Exchange (PSX) is abysmally low at 560, representing a stunning drop from 638 that traded on the exchange just six years ago.

The Securities and Exchange Commission of Pakistan (SECP) announced last Wednesday that it had registered 881 new firms in November, taking the number of total registered companies to 84,201. All that boils down to the fact that only one in 150 registered companies have dared to enter the stock market.

Muneer Kamal, chairman of the PSX board, told this writer that the benefits of listing are not totally lost on private firms. “At the height of the stock market boom in May this year, there was a beeline of new companies waiting for the completion of formalities to seek entry into the stock market,” he recalls. But as the equity market started to melt, companies put a brake on floating Initial Public Offerings (IPOs) for fear of under-subscription.

Many people with exposure to foreign markets argue that persuasion and incentives are the only means of creating public entities

With a lot of liquidity chasing only a few blue-chip shares, can the prosperous private companies be forced to seek listing and share their fortunes with the public? The previous SECP chairman had tried the trick.

At an investor awareness conference in Islamabad, he thundered that he had the power to force any profit-making company to go public. Although most people took that with a pinch of salt, some are still raising perfectly fair questions: “If all commercial banks are required to be compulsorily listed on the stock exchange, why not other corporations?” asks one.

A senior banker admitted that though the regulation is not applicable to foreign banks operating in the country, all other banks incorporated in Pakistan are obliged to seek listing. There could be delays such as the case of the Sindh Bank Ltd which, though operational, is still out of the ambit of the bourse, as it is in process of a merger with the already quoted Summit Bank Ltd.

An old-timer recalled that decades ago that under the ‘Control of Capital Issues’ regulations, all companies were required to be listed. Those regulations have been replaced with new laws that arguably are consistent with those applied in international markets.

A senior corporate lawyer in Lahore, who asked not to be named, told this writer over the phone: “Even on Wall Street companies are not forced by the government to be listed. The Securities and Exchange Commission (SEC) sets the standards for companies which must go public in the US.

“For example, the regulator requires that if a company has a certain amount of assets (say around $10 million) and there are more than 500 shareholders on record, the company needs to start disclosing specific financial information publicly and in a timely manner”. The same was widely noticed in listing of Facebook on Wall Street.

It is all very well that regulators as well as investors have set their eyes on hundreds of prosperous companies in cellular, pharmaceutical, fast-moving consumer goods, food, construction and almost every field that makes tonnes of money in profit but keeps all to itself, and are loathe to share by going public.

Yet, many people with exposure to foreign markets argue that persuasion and incentives are the only means to bring more firms under the fold of public entities. Coercion could backfire.

Mr Kamal said that companies could be attracted to the stock market by maintaining tax differential between listed and unlisted companies.

Market participants say that less than a decade ago there was a tax incentive as private companies had to pay 10 per cent higher tax than listed corporations. But the difference was phased out over the years and both listed and unlisted firms are currently taxed at a uniform rate of 30pc.

“For smaller firms, the regulations should be less stringent and involve low costs,” said Arif Habib, a former chairman of the stock exchange.

He explained that to keep up with the regulations, the companies have to incur considerable costs in maintaining a host of records and documents, do a lot of paper work and ensure their timely filing with the regulator. It was one of the reasons that drove smaller firms away from the stock market.

An industrialist who is keeping his distance from the capital market said that his reason was the regulatory requirement of compulsory payout of 40pc profit in dividends. “My balance sheet is saddled with debt and it is more important for me to service those debts and pay back the principal,” he argued.

Another investor gives the argument of listing a twist. “Of what use is it to the investors if most small and mid-sized companies as well as multi-nationals keep 75-90pc of the issued shares to themselves?”

He emphasised that all listed firms should be persuaded to maintain at least 30pc free float in the market. Smaller firms should also be made to allow outsiders — other than family members — into their board rooms.

Published in Dawn, The Business and Finance Weekly, December 11th, 2017