THE KARACHI Stock Exchange has de-listed 23 companies since January this year, which is more than 20 companies that were de-listed in all of the past three years combined.

Companies seek delisting from the stock exchange after buying back small shareholders’ stake— sometimes at as fabulous a price as was paid by Novartis Pakistan (formerly Ciba-Geigy) and Novartis Pharma (formerly Sandoz). Against the then stock market values of around Rs 40 for a 10-rupee share, principal shareholders in those companies picked up all shares held by the small shareholders, at Rs 68 a share.

Gillette Pakistan was another multinational to pull out of the stock market through the buy-back of minority shares, again at attractive price of Rs 46.20 for each share. And Philips is buying back its stock at Rs 75 a piece. Among local companies, sponsors of dozens of companies have repurchased stocks after compensating shareholders, though no buy-back offer has perhaps been as spectacular as that of Bari Rice Mills. Small shareholders who put their money in the stock market flotation of Bari Rice Mills Limited in 1979 had not received a single dividend in all of the 21 years and the stock price had seldom come up to 50 per cent of the par value. Yet the sponsors agreed to buy-back the small shareholders’ stake at an attractive price of Rs 16 per share.

Such parting of ways with shareholders is fair and must be encouraged where companies are unable to remunerate shareholders’ investment and see no prospect of doing so in the near future. But concurrently, companies are also getting delisted without having paid a paisa to the small shareholders. Such delisting must be looked down upon as a bailout of defaulters and hence unacceptable.

The exit route for the latter type of delinquent companies run the familiar course: placing them on the defaulters counter, suspension and delisting. In July last year, as many as 35 companies were suspended by the stock exchange, which created an uproar among the small shareholders, who lamented that all their investment in those companies may have gone done the drain. But the KSE has continued to justify such suspension and delisting as entirely in ‘public interest’.

The stock exchange says that companies suspended and delisted are picked up from among the 120 that are languishing on the ‘defaulters’ counter’ for violations under section 32 (1) of the listing regulations. They cite host of reasons for their delisting: “Many of them have not responded to KSE notices; some, such as the Bankers’ Equity, are under liquidation, while many others simply do not exist”, a top KSE official said. Although he did admit that small investors who had taken stake in those companies could go to lose money— unless they get something on liquidation— it was the new unsuspecting investors that the stock exchange had sought to protect: “If such companies remain listed, new investors not knowing their current status could dabble in those stocks and eventually find themselves trapped”, the KSE official said.

Interestingly, the Committee for Over-The-Counter (OTC) market, which finalised its report on the modus operandi of such second tier market for equities, the previous week, has concluded its report on delisted companies: “Besides, OTC, we recommend formation of another counter where delisted companies can be traded to provide exit route to its security holders”, says the report.

Such a suggestion makes, all but, little sense. If the delisted companies are the lame ducks not fit to be kept on the regular market— since new investors need to be protected, how does it make them good enough for new investors on the OTC market? Small investors in delisted companies contend that suspension and delisting delinquent companies was akin to bailing them out. “Instead of showing them the easy way out, why mustn’t the corporate regulators move to confiscate whatever assets are available and distribute the proceedings among all interests, including the shareholders”, says Iqbal Pirwani, an investor who claims to have put in Rs 0.2 million in the green-field Rs 6 billion company— Saadi Cement Limited, which was suspended in 1999 along with its sister concern—Pakland Cement.

The KSE can boast a record of having blocked sale of assets by many companies, forcing managements to consider the interests of small shareholders, first. Thus, companies such as Karim Cotton Mills, Karim Silk Mills and Bari Rice Mills that did not pay a single dividend to the shareholders in decades, were persuaded to buy-back small shareholders’ stake at considerably high prices— before allowing them to seek stock market de-listing.

Buy-back of small shareholders’ interest in publicly traded companies should be the only exit route open to company sponsors. For if they could get away without paying anything to shareholders, most managements would naturally find it easier and cheaper than repurchasing small shareholders’ equity. The ‘Takeover Law’ is currently gathering dust on the desk of some busy bureaucrat. It would, hopefully, be promulgated, some day. But the long wait ought to be lot less painful than allowing scores of company managements to grab bagful of shareholders’ money and run.