The corporate sector in Pakistan is getting cleaned up. Instead of the list of companies registered with the Securities and Exchange Commission of Pakistan remaining at high 43,000, the number is coming down fast and that is because of the invitation of the SECP through its notice issued on April 1 to the dude companies to de-register themselves.

So far 2,788 companies have availed themselves of this opportunity and the SECP has notified their intention to de-register. Even other wise 26,000 companies out of 40,000 companies are dormant units with no assets and liabilities.

Many of them have registered in the days when import licenses became a kind of gold mine and there was a stampede for them. Already about 5,000 companies have been allowed to extinguish themselves. The defunct companies are vanishing fast as they have to pay higher registration to the SECP, fulfil several of its other demands, face inquires from the CBR in respect of taxation which they find exacting in return for no gains. However the SECP has notified 1,542 companies for inviting any objection from the public.

While such cleaning up of the company sector is desirable, so that company list will contain largely active companies, The SECP and the stock exchanges are acting in the area of the active companies as well. The stock exchanges have placed a number of sick companies, which have not paid any dividend for the past five years in the sick list and placed them in the sick counter.

The SECP has allowed a number of companies to pay of their minority share holders and become private limited companies listed on the stock exchange usually have a five percent tax advantage over private limited companies as well as the ability to get larger bank loans. But for some years now companies are not coming up with new shares but are relying on Term Finance Certificates which are easy to issue for good companies. And the banks singly or in a consortia meet the demands of the good companies and get assured returns from them. The number of companies issuing TFC’s is on the rise and the banks and the good companies are happy over it.

Companies are going private as their owners hold most of the shares with a small minority in the hands of the general public. And if they become private they will have no questions to answer from the stock exchanges of the country and also deal with the SECP in a marginal manner and they can pocket all the profits of the company. So the anxiety of many of the medium good companies to go private in the 1960’s when the corporate sector was making large profits, particularly in the textile sector, which was enjoying heavy tariff protection went public. And the government came up with the NIT and the ICP to enable the middle class and lower income groups to get a share of those large profits.

But in recent years both have suffered because of the setbacks in the corporate sector, and heavy fall in profits declared. The companies also find it irksome to respond to the many queries of the SECP. And paying fines for their irregularities and now the SECP wants the listed companies to come up with not only annual and semi-annual reports but also quarterly reports in an effort to catch the thief among them. All that is encouraging more and more listed companies to go private and keep all the profits to themselves and have less time for the SECP. The Gillette Company of the U.S was among the first to take the lead in this and go private and has since than been declaring large profits. If the good companies are finding the TFC’s very handy and useful, the affluent shareholders are also finding them rewarding as they offer large assured profits regularly. Hence, the corporate sector except in the area of the major multinational companies is on the retreat.

The Karachi Stock Exchange has also been getting tough with those indulging in fraudulent practices. For example one of the worst practices is issuing duplicate shares and trading on them in violation of the laws. The Depositary scheme, which the KSE came up with, prevents this abuse substantially. And the three-day trading scheme for shares introduced recently was also helpful. Countries make headway not on the basis of the stock register of the SECP being filled with names of dud companies but on the basis of real companies doing real business and sharing the profits with all the share-holders and not the majority share-holders only.

But the profits with minority shareholders has seldom become a part of our tradition as the owners of most companies try to grab as much of the profits as they can after accommodating the varied demands of their family members from the company resources. This tendency has to go if the corporate sector has to flourish but the investor has found it more profitable to get large loans from banks, often by offering bribes and then defaulting rather than depend on the shareholders money and answer questions from the SECP and stock exchanges.

As a result the country is left with Rs 300 billion of non-preforming loans and the banks have been made very sick and a few of them like the National Finance Development Cooperation have vanished.

The SECP might not have come up the demand of the quarterly report after six month reports if there had not been many malpractice’s in the corporate sector. In fact quarterly reports have become the norm in the West after the financial debacle of many famous companies. So the solution of the problem from the national point of view is not to go hurriedly private by buying off their few minority shareholders or by relying on TFC’s but to have fair practices in the private sector so that larger and more resourceful companies come up and the economy develop faster.