"Why is the number of listed companies shrinking"? It is a key issue now emerging in the economy with more and more firms opting for de-listing. And new business firms being registered with Security Exchange Commission of Pakistan (SECP) have not departed from the traditional trend set by their older peers.

They prefer the umbrella provided by private outfits with very few choosing to be even non-listed public companies. Over the decades, business culture has improved but has not weakened in any significant way the grip of family ownership and management of business outfits.

In fact, the corporate fiascoes in the United States has strengthened their belief that family oversight helps protect shareholders much better. A new generation entrepreneurs educated at business schools at home and abroad run expanded family businesses with renewed confidence.

A pertinent question being raised by financial analysts is how would this trend impact on the country's economic development and the peoples' capitalism based on broad based share-ownership. At the moment, the flotation of shares of state enterprises in the star attraction for small investors.

To quote from Financial Market Review 2003-2004 published by the State Bank of Pakistan, corporate earnings have jumped up by 26.5 per cent. The after tax profit of 265 companies listed at the Karachi Stock Exchange has risen from Rs84 billion to Rs106 billion.

The good scrips are tightly held by management and institutions with a small fraction of individual shareholders. The corporate ownership is not broad based. Despite the historic bullish trend in the market and listing of two state enterprizes, the number of listed firms at the Karachi Stock Exchange dropped to 663 by end- September 2004 from 711 in 2002.

According to KSE, there were 773 listed companies in 1998. The number dropped mainly on account of de- listing even by multinationals. Some the textile mills have bought back the minority shares to sell the rising value of their assets including land.

" It is not a good thing that the market is loosing whatever little depth it had because of de-listing of firms and the government should do something about it," says a concerned bank president known for his close links with the corporate business.

That leaves the market at the mercy of the speculators now focused on daily trading of not more two dozens shares. Floating of shares of state enterprises which contributed bulk of Rs56.6 billion subscribed by public offerings in fiscal 2004 is a positive development but a more vigorous response from the private sector is needed.

Apparently, responding to corporate fiascoes in the United States, the SECP resorted to over- regulation, say financial analysts, that is driving the firms out of the stock markets. They lament that "our laws are more stringent than the Western laws".

It means a lot of clerical and paper work and hassle that impacts adversely on business efficiency. On second thoughts, the SECP is taking steps to revise its rules which had become a source of management worries.

One such issue was printing and dispatch of the quarterly company reports to the shareholders, who in some cases, like the NIT are in thousands. It was a financial burden on the NIT unit holders.

The SECP has, however, been persuaded to allow companies to post their quarterly performance on their website. Similarly the SECP has directed stock exchanges to defer implementation and application of regulations relating to transfer prices, which according to market sources, led to delisting of two multinational pharma companies.

Now, the Security Exchange Commission of Pakistan intends to extend the code of corporate governance to government corporations and to unlisted public companies. Officials may justify this move on reports that public-shy companies prefer privacy to hide some improprieties and to keep away from the market accountability.

As business enter prizes were debt-driven in 1970s,the bank lending/ bridge financing was used to encourage private firms to go for listing. It was not a voluntary affair. Under the market reforms, companies have been left to make their choice.

A discriminatory tax system, now being done away with, encouraged private firms in the past to become listed companies. The chairman of the Karachi Stock Exchange, Arif Habib laments that government is reducing tax rate on private firms by two per cent per annum to bring it at par with the listed companies by fiscal beginning July 2006.

The tax incentive for listing firms at stock exchanges is being withdrawn. The situation in regards to money supply has also changed. Equity cost has gone up. Loans are cheap. And corporates have much of their own money to invest as in the case of modernization and balancing of textile industry.

If the number of private limited companies and their targeted authorized capital is any indication, more equity may go into private companies than the non-listed public firms registered by SECP in the month of September.

Of the total authorized capital amounting to Rs3523 million209 private companies had aggregate capital of Rs2901 million and 11 public companies shared a combined total Rs 614 million.

In the year ending October 2004, the number of new companies registered with SECP were 2,456 against 1,684 in the corresponding period of the previous year. And that brought the total number of registered companies to 44,618; these included 40,562 private firms and 2,801 public companies as against 633 listed companies (upto September 2004).

Listed companies have to be transparent, keep their shareholders informed about their performance on a quarterly basis, observe a code of corporate governance including latest accounting systems with investors looking both for capital gains and handsome dividend incomes.

They have to pay their professional managers handsomely as compared to smaller private companies. A more stringent regulatory framework means more hassle for the listed companies. Time and money spent on complying with regulatory burdens are not commensurate to the derived benefits.

A stock broker says that while paying lip service to de- regulation and liberalization, more stringent rules are being enforced which may be applicable to more sophisticated developed markets but are ill-timed for emerging markets.

No doubt, there were 17 new flotations in fiscal year as compared to four each in previous two years, the surge was not surprizing because of historical bullish trends. But the flotation of corporate bonds dropped from 21 in fiscal 2003 worth Rs10.86 billion to six in fiscal 2004 valued at Rs3.3 billion, a sharp fall nearly 70 per cent in new issues.

Now, the market is unlikely to witnesses as much buoyancy as it did in the last 2-3 years. Whereas stringent regulatory framework discourages all companies equally, small companies suffer also from lack of interest in them by major institutional players who dominate the market.

The smaller outfits are out of sight of most investors, both in Pakistan as in developed markets like the United States. Institutional investors including corporates, security houses and mutual funds are not interested in small market capitalization because it is difficult to trade big blocks of their shares. The institutional research and focus is on big companies and major business houses.

In a recent issue, the Business Week reported that many small and medium size companies are being pushed out of the American stock market because: new legislation such as Sarbanes Oxley is sharply raising the cost of being a public company; Investment banks are cutting back on research on smaller companies which limits their trading and depresses their value; stock markets are increasing dominated by institutional investors, who shun smaller companies because it is hard to trade big blocks of shares; a growing amount of capital is now available from private sources.

The trend in the developed markets are being emulated in Pakistan too. It raises questions about the immediate future of individual investors and shareholders' capitalism.