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The right to take dividend decision

December 23, 2012

When a team of market regulators and brokers called on President Asif Ali Zardari and the Federal Finance Minister Dr Abdul Hafeez Shaikh in Karachi on Wednesday, there was all-around grin from chin to chin. The capital market representatives had reasons to be happy.

The relentless bull run has carried the KSE-100 index to its all-time high at just astone’s throw from the incredible 17,000 points level. In the year now drawing to a close, the KSE has already provided an enviable return of 48 per cent to the investors.

That ranks the bourse among the best performing markets in Asia in 2012.

On the market participants side, someone asked that corporates earning profit ought to be directed to distribute 40 per cent the year’s earnings in dividend to shareholders. Although the Federal Finance Minister Abdul Hafeez Shaikh was said to have scribbled a note, most market watchers wonder if such a regulation could be put into force.

The Companies’ Ordinance 1984 empowers the board of directors to ‘recommend’ dividends. The shareholders at annual meetings may reduce-if they want to- but not increase the dividends ‘recommended’ by the board.

The government had attempted to coerce company boards to share more profits with shareholders in cash dividend, but the attempt eventually failed.

In the Finance Act, 1999-2000, the government decreed that companies making profits distribute 40 per cent of it (after tax) in dividend to the shareholders or face an additional tax penalty of 10 per cent on the sum of reserves that exceed 50 per cent of the company’s capital.

The trick worked for a time. In most board rooms of profit earning companies, it was thought wiser to reward the shareholders (when majority stake was vested in directors themselves) than to let the taxman take away the bagful of money earned.

But many companies grudged the regulation of compulsory payout which they thought was an infringement on the right of the board to decide on how the profit should be appropriated. A major group with several profitable listed companies in textiles, cement and energy sectors, threatened to buy-back small shareholders’ equity and seek de-listing.

The group’s contention was that the budgetary provision had become a bottleneck for the company’s expansion plans that required sums in billions of rupees.

While dozens of loss-making companies buy back small investors’ stake and get themselves de-listed, the high valued dividend -yielding companies of the group, proved unnerving for the government and the corporate monitors. Under the provisions of the law, they could not block the company’s exit from the bourses, but the fear was that if one ‘blue chip’ was allowed to go, many others would follow.

Aizaz Sheikh, CEO at Attock Cement and chairman Pakistan Cement Manufacturers’ Association in answer to queries on Wednesday vehemently opposed outside interference in companies’ internal matters. “How can outsiders dictate the manner in which companies ought to be run?” he asked and said that listed companies, disheartened by no benefit even in the matter of tax with private companies are already seeking exit from the stock exchanges. He believed that such an attempt to arm twist companies, would only hasten the process of de-listings.

Already the number of listed companies is all too small. One in 10 of the 65,000 registered companies have come up for listing at the stock exchanges. The gradual closing of gap between tax rates applicable to listed and unlisted companies and increasing demands placed on corporates by the ‘Code of Corporate Governance’ are other reasons that have kept sponsors away from the primary capital market.

Initial Public Offering (IPOs) has almost dried up. Compared to 10-year average of 11 IPOs, only three companies came forward to mobilise capital from the stock market in fresh equity offerings in 2012.

According to the Annual Report 2012 of the KSE, out of the total of 638 listed companies, 351 companies or 55 per cent made profits in 2011. Yet only 248 companies or 39 per cent distributed dividends to stakeholders; the best being oil and gas sector where all 11 companies earned profit and announced payouts and the worst possibly the textile, where out of the 101 companies that posted profit, just 34 declared dividends. In all, 103 profit earning companies or 16 per cent of total listed equities skipped dividends in 2011.

Zubair Moti wala, chairman Board of Investment (BoI) Sindh, said  the payout decision could vary from one industrial sector to another, all depending upon the cash flow: “It may be easier for companies in the energy sector to pay dividends compared to say textile, which is embroiled in troubles ranging from financial constraints to gas supply shortages”. Besides, textile mills with large conglomerates would also want to retain cash for balancing, modernisation and replacement (BMR) and expansions.

Buckling under the pressure from powerful corporates, the government stepped backed and removed the compulsory dividend payout clause from the Act. Yet, this omission of dividend is biggest setback to the government itself for it holds more than half the total stake in the stock market. The dividends received on majority holding in energy sector companies; PTCL: SNGPL and others is the major source of revenue for the state.

National Investment Trust is the country’s largest mutual fund. Due to its heavy stakes in corporates, NIT holds membership on the boards of over 100 listed companies. Tariq Iqbal Khan, the former chairman of NIT observed that dividend payout may be easier for many companies in low interest rate scenario. But he added: “In a corporate democracy, the board is empowered to take decisions regarding company matters since the onus is upon the directors to protect the company assets, right of shareholders, employees and creditors”.