They formed a part of the over 4,000 sick corporate units and the large bank defaulters. But after the State Bank of Pakistan and the lending banks got active, the Karachi Stock Exchange too moved and confined some of the sick companies listed on it to a sick corner. And lately the Securities and Exchange Commission (SECP) has been pretty vigilant in this regard and decided to bury the dead.
The SECP has now moved to liquidate 22 of such derelict companies and served notice on those which had not had annual general meetings for 3 to 10 years and presented their accounts to the share-holders. Under the SECP law it could move to liquidate companies which did not hold annual general meetings for two years and present their accounts. Instead it had given them a long rope.
In corporate world history there is nothing unusual in moving to liquidate chronically derelict companies. Thousands of companies are liquidated each year, some by famous chief executives in the US and Japan, and to a lesser extent in Europe. It is certainly better to liquidate an unmanageable company and share the available assets with the share-holders than run down the company to dust which bars the share-holders get anything out of the residual assets.
The small share holders can then buy shares of other companies with what they got out of the liquidated company and try to make up for the lost gains of the closed company and a part of the capital and can eventually be better for that.
That does not happen in Pakistan where the factories are allowed to rot after the majority share holders had fully exploited them earlier and brought the companies to a sorry end. And since the Securities and Exchange Commission did not exist in the present form or with its current activism and the stock exchanges were indifferent to the degradation of such companies or their ruthless exploitation the majority share holders had felt free to do just what they wanted with their companies, which included both the minority share-holders’ capital as well as money borrowed from banks.
But lately the SECP has become really active and the stock exchanges more conscious of their obligations under pressure from the SECP. So after delisting individuals companies the SECP is taking collective action against 22 companies at one go.
Also affected by the degradation of such companies is the NIT and the ICP, which lost heavily or its unit holders lost. And now private unit trusts are keeping a better watch on the performance of such companies and their analysts expose the flaws in their operations.
Almost all section of the scrips traded on the stock exchanges are represented in the list of 22 companies minus banks and financial companies. And it has such well known old names like the Valika Woollen Mills, and names which recently became prominent like the Tawakkals and Dadhabhoys, apart from Sindh Alkalies which was once doing very well. And there are several insurance companies as well.
The share-holders are not likely to get anything after the lenders had been paid their dues. So the operation which is being undertaken now is largely burying the dead which is a decent thing to do after such a long interval.
The majority share-holders are able to abuse their companies in this manner or run them to the ground instead of liquidating them in time as they control a majority of shares. In fact far more than a majority of shares, the minority share holders own few shares and exercise too little influence.
And their boards of directors are stuffed with their relatives and employees of top owners and at time ghost-employees who are not traceable. And not only the majority share holders but also the entire family and their friends benefit by such monopoly ownership of the companies and the pattern is repeated in several of their companies as running one company successfully enables them get large loans for other companies.
But now the SECP insists on not only the annual reports in time but also half yearly reports and quarterly reports so that the share holders and the investment companies and their analysts remained well informed of the operations of such companies.
The banks too have become far more vigilant than before and keep a sharp eye on their borrowers’ financial transactions. And that is all the more so as bank interest rates have come down sharply and banks are facing financial problems and some are facing problems of survival and seek merger.
The Karachi Stock Exchange is also a vastly reformed organisation where the brokers do not have the last word now. Mr Moin Fudda, as the managing directors of KSE,keeps a sharp eye on the operations of the exchange and tries to keep them above board. That does not mean the brokers do not have their ingenious ways and try to bend the system their own way.
As a result, more and more listed companies are showing profits and paying dividends. Out of 711 companies listed on the KSE, 422 companies made profits in 2002 and the number was the same in 2001. And 306 companies paid dividends last year compared to 314 a year ago.
In 1999-2000 the government decreed that companies making profits should pay divided upto 40 per cent. Otherwise on the excess profit they had to pay 10 per cent tax which was an anti-capital formation measure. But now no such law is needed as many companies are paying good dividends a few exceeding 100 per cent.
A major issue now is the preference of the ordinary share-holders to buy term finance certificates (TFCs) over new shares. And the number of companies coming up with share offerings to the public is also small. They prefer TFCs with their fixed interest, and some have even come up with Islamic TFCs.
That phenomenon has developed as the public were not inclined to buy new shares when companies were paying very little or no dividend for long. And sponsors of companies did not want to be rebuffed by the public by their shares being rejected by them and even banks declining to under-write them or demanding heavy charges for them.
That situation has changed greatly with the index of 100 shares in the KSE crossing 3300 and prices of shares on the upward for long.
But sponsors of new companies are showing a preference for setting up private limited companies and finance them through banks instead of going to the stock exchange for the required capital which is a costly process. And they do not find any great gain in coming up with listed companies and be answerable to the SECP and the Stock Exchange in too many ways. Instead they prefer doing their own business with their own capital and have plenty of financial elbow space for themselves. That means the number of shares available to the public may not increase a great deal as long as bank interest rates are low and bank loans are available in plenty for private companies owned by entrepreneurs with a good track record.