ISLAMABAD, Nov 7: The Federal Cabinet has approved the law providing for takeover of listed companies but in such a manner that almost fructifies its very purpose, capital market experts remarked here on Thursday.

The original draft “Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Ordinance, 2002” had envisaged that: “No person shall, directly or indirectly, acquire voting shares.... would entitle such person to more than fifteen per cent voting shares in a listed company”. The actual Ordinance has raised that threshold to 25 per cent.

The objective of the law was to remove many inherent weaknesses in the securities market. It would go a long way towards institutionalization of the concept of accountability in managing listed companies in the interests of minority shareholders by making them more powerful.

Another significant benefit of the law was price discovery, these experts observed. At present, only a handful of shares are being traded in the stock market. This is because most other shares are quoted at ridiculously low market value.

But under the law once a person makes a public offer of shares for sale at the highest price to other shareholders, the existing owners would naturally trade their shares at their real value. The new law may, therefore, discourage them from manipulating the market value. It may also broaden the sphere of trading, presenting potential small investors with a wider area of choice between companies.

The threshold for offering shares provided in the ordinance, however, obviates the threat to existing management to a large extent.

“This is the victory of the textile lobby,” quipped financial experts, while commenting on the watered down version of original draft. They saw the hand of Commerce Minister Razak Dawood, himself a textile industrialist, in this emasculation of the original draft.

His opposition to the law is no secret. The idea of promulgating it was broached by leading businessmen of Karachi including FPCCI and Karachi Stock Exchange when early in 2000 General Musharraf held a meeting with them in Karachi. He had directed the Securities and Exchange Commission of Pakistan (SECP) to submit the draft of such a law within one month.

True to the deadline, the SEC submitted the draft ordinance on March 31, 2000, after consultations with all the stakeholders as well as relevant wings of the government.

The proposed legislation embodied five aims, e.g.: (1) Fair treatment to all shareholders; (2) equal and timely access to information to all; (3) it must prescribe a disciplined, orderly process for substantial acquisition; (4) it must contain a methodology of offer to all shareholders as in UK; and (5) mandatory sale.

The ordinance now promulgated embodies many of these principles but the fact that it will let a person acquire one quarter of shares and sit pat on it without any fear of challenge from any contender for control renders application of these problematic.

But when the draft ordinance came before the Cabinet early this year, the Commerce Minister opposed it, although his own Ministry had joined others to approve it, albeit with certain changes. Nevertheless, General Musharraf had accorded his approval, in principle, but advised that Mr Dawood be consulted again. A task force was then instituted to go over it again in order to address his objections.

Approached for his comments, the Chairman of SEC, Mr Khalid Mirza said he was satisfied with the promulgation of the ordinance but not without deep reservations.

One of his main objection to it was that the takeover provisions should have been made operable through the listing regulations as is the practice in UK, etc. Amenable to change, these regulations would permit the necessary flexibility in coping with changing situations. On the other hand, should it be considered necessary to effect some changes in the ordinance in the light of subsequent experience, it would be very difficult to do so, he remarked.