ARE public companies in danger of being extinct? Is it the dawn of the new era of flourishing private firms with stakes concentrated in fewer hands?
Several economists paused and pondered before offering, generally an incoherent view. Stock brokers naturally shook their heads and attributed the dry and drab Initial Public Offering (IPOs) to the meltdown in equity markets in 2009, which spilled over also into the Pakistani bourses. “Private companies are still spooked by the current wave of concerns over the eurozone debt crisis and its impact on stock prices, which is keeping them away from the market,” says veteran stock broker and former chairman Karachi Stock Exchange, Arif Habib.
Market participants are worried over the fewer new listings and have asked the government for incentives such as lower tax rate, to attract more companies to go public. The total number of registered companies with the apex regulator, the Securities and Exchange Commission of Pakistan, has crossed well over 60,000. Yet, the number of listed companies is pathetic—at just 590 on the KSE. Their total number has actually shrunk over the last decade. Back in 2002, as many as 713 companies were on the ready board of the KSE— the biggest of the country’s three bourses.
There have been some explainable reasons for the fall in number of companies on the exchange, which include mergers, winding up and de-listings. But the worry is that the vacuum created by the exit of old has not been filled by the entry of new firms. It has been some years, since the wave of new companies venturing into the public fold has come to a halt. The number of IPOs in a single year topped at 40 in 2002. These have now dried down to fewer than four a year. The local investors, however, may be comforted by the knowledge that the trend of private companies unwilling to share equity with the public is not specific to Pakistan, but mirrors a global phenomenon.
In an article titled “The endangered public company” that appeared in May 19th issue of the Economist London, the writer recalls: “the number of public companies has fallen dramatically over the past decade—by 38 per cent in America since 1997 and 48 per cent in Britain. The number of IPOs in America has declined from an average of 311 a year in 1980-2000 to 81 a year in 2000-11.”
The writer goes on to say: “But there are reasons to worry about the decline of an organisation that has spread prosperity for 150 years.” First, public companies have been central to innovation and job creation. Second, public companies let in day light. They publish reports and hold shareholders’ meetings. By contrast, private companies and family firms operate in a fog of secrecy. Third, public companies give ordinary people a chance to invest directly in capitalism’s most important wealth-creating machines. But today popular capitalism is in retreat. Fewer IPOs mean fewer chances for ordinary people to put their money into a future Google.”
And the views are at odds. Mr Khalid Mirza, former chairman of SECP, recently nominated as Member Competition, Appellate Tribunal, speaking from London on phone told Dawn that he was scarcely surprised by the plunge in number of public listed companies.
He argued that the concept of joint stock companies was doomed to fail. “How can one expect a group to look after the interest of so many disparate interests when they themselves have stake in the fortunes of such companies?”, he asked and observed that the basic governance in such joint stock companies is disconnect.
Mirza referred to Adam Smith, the ‘Father of Capitalism’, who also criticised joint-stock companies in his epic work, ‘The Wealth of Nations’ as far back as 200 years. Adam Smith wrote: “When ownership is separated from management, the latter will inevitably begin to neglect the interests of the former, creating dysfunction with the company.”
Mr Khalid Mirza said that in his opinion, the private firms in Pakistan should only go public when there are ‘commercial reasons’ for it, such as inability to raise required capital from other personal sources, like family, friends and banks. “In my time as the chairman SECP”, said Mirza, “I had advised all the 250 or so dying and dead textile companies listed on the stock exchanges to de-list.” Except a few, they are a drag on the stock market, he contends.
But for all that, stock exchanges prefer more listings and insist on successful private companies to share their fortunes with the public. A senior stock broker at KSE Haji Ghani Haji Usman lists reasons that act as disincentives for private companies to go public.
“The Code of Corporate Governance has put immense pressure on listed companies to comply with a swath of regulations, including timely filing of quarterly results, holding of shareholders’ meetings and payment of listing fees, besides countless others,” he laments, adding: “What incentive does a sole proprietor or a partnership firm have to share equity with the public?”, he asks.
Family businesses account for about half of listed companies in the Asia-Pacific region and two-thirds in India. Families exercise tight control of their empires and limit power of other shareholders.
Dr Rashid Amjad, Vice Chancellor, Pakistan Institute of Development Economist (PIDE) in Islamabad, said, the reasons for entrepreneurs to hold on to all of the company equity and control was to prevent outsiders from meddling into their family business; the fear of a hostile take-over by other interests and to keep the cloak of secrecy wrapped around the affairs of privately held businesses. “More and more businesses all over the world now wish to keep outsiders, outside”, he said.
Incidentally, it is the same in high-income economies as well. The Economist in the same article says: “Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation.” And the caveat is: “But not so tightly that entrepreneurs start to dread the prospects of a public listing.”
Many firms now go (or stay) private to avoid red tape. In yet another article in the same issue of The Economist, the writer points out: “Even though public companies are flush with cash (American firms command $2.33 trillion), the signs of health are misleading.”
Big and profitable corporates on KSE are also sitting on mountains of cash — the reserves —, sometimes going up to two-digit multiples over their paid-up capital. The corporate regulator promulgated “The companies (buy back of shares) Rules, 1999 allowing big fortune corporates, mainly the foreign-controlled pharmaceutical firms and banks to buy-back their own shares from the market in order to improve earning per share. The response was disappointing as most corporates ignored the offer and preferred to remain liquid.
On Thursday, the Standing Committee in Senate voted in favour of five per cent lower tax as an incentive for listed corporates and a compulsory payment of dividend to shareholders by companies holding more than 50 per cent of paid-up capital in reserves. The taxmen have concurred. It has to be seen if private registered companies are now attracted by the tax incentive to enter the capital market and the number of IPOs manage to swell.