defaulter counter

35 additions to KSE list of ‘defaulter’ companies

The Daily DAWN

KARACHI, Dec 30: The Karachi Stock Exchange has pushed another 35 companies on the ’defaulters counter’ which makes the total number of listed companies on the infamous counter at 189. That works out to almost a third of the 653 companies quoted on the KSE.

No one has gone from door to door of the ‘registered offices’ of those companies, but people in the knowledge of how unscrupulous corporate sponsors work, say that the majority of those companies have disappeared lock, stock and barrel.

It was many years ago that the KSE thought of ‘punishing’ companies that do not comply with the bourse’s Listing Regulation 32(1). The purpose was to bring to shame such companies. “Pasting of the names of companies on the defaulters’ board would make them yield to the pressure and comply with all those regulations,” says Haji Ghani Haji Usman, chairman of the ‘Defaulters’ Committee’ for the year 2006. Did the trick work?

“In many instances ‘yes’”, says Mr Ghani. He did not say so, but it appears that the majority of those companies couldn’t care less. They sat comfortably wherever they were placed, provided no one asked them to settle the liabilities and refund the small shareholders money.

Mr Ghani said that the KSE had no powers to go beyond what they were already doing. He thought that it was for the government to appoint ‘administrators’ to takeover those companies and go through the compulsory winding up process. That would include liquidation of all assets and payment of all obligations and liabilities. The suggestion makes sense but the small shareholder in either case ends up as the loser.

When a company is thrown out to the ‘defaulters counter’, the market price of the share takes a dip. Sponsors already having made their booty, suffer no loss but the small investors’ share certificate (if still not in the CDC) turns into worthless papers.

In case the company undergoes compulsory liquidation process and a sum of money is realised, creditors including banks would stand first to seek the settlement of their debts. Small investor, by virtue of his being ‘owner’ of the company would keep waiting in the last row with outstretched palm.

Under provisions of section 32(1) of the KSE Listing Regulations, the bourse has the authority to name companies as ‘defaulters’ of the bourse, if they contravene all or any of the following regulations: if a company is quoted below 50 per cent of face value for a continuous period of three years; it has failed to declare dividend/bonus for five years from the date of last declaration or failure to hold Annual General Meeting for a continuous period of three year; if the company is under liquidation; if it has not paid annual listing fee for a period of two years and if an eligible company fails to join the Central Depository System (CDS). As per the rules, the bourse first issues show-cause notices and gives the companies time to rectify the error or give a valid reason for the defaults.

While most companies ignore such notices, there are exceptions. Some of the companies who receive show-cause notices ask for an extension in time and sometimes forward tearful tales of how bad the business is and promise to rectify the error as soon as possible.

But sometimes interesting comments are given at the hearings, such as some companies out rightly refuse to pay listing fees, saying that their nil turnover does not justify such payments.

The bourse says the defaulting companies are separated from the rest "in public interest”, where investors are able to sift the laggards from the properly working companies. Irrespective of what has been said earlier, it has to be admitted that in quite a small number of cases, where the companies still wish to function gracefully, the reform has benefited small shareholders.

Companies that wished to avoid being thrown to the ‘defaulters counter’ on account on non-payment of dividends have managed to make payouts to small shareholders, while skipping the sponsors’ share in case profits were insufficient. Those payouts, though at most times as small as 5 per cent, investors have at least seen some remuneration after years of waiting.

Going further back into history, a decade or so ago, scores of ‘sick and sorry’ companies were quietly ‘de-listed’ and they disappeared without paying a paisa to the small shareholders. The companies wishing to exit the bourse with dignity are now required to pay small shareholders value for their investment. A buy-back price is brokered and paid to the small investors, before a company goes off the quotation board.

A market participant thought that sending companies on the ‘defaulters’ counter’ was punishing, not only for the scar that becomes visible but also as they find difficultly in striking credit deals with banks and other business partners. “It is better if the list of quoted companies gets to be lean and thin”, says an ex-chairman of the stock exchange.

He observed that it would be better if the defaulters were asked to leave, after paying reasonable buy-back price to the small investors.

A cursory glance at the stock exchange quotation would indicate that at least in 200 companies no trading takes place as no one wishes to trade in them or where almost all of the shares are held by sponsors in large frozen blocks. Of what use are they to the small investors, though for the benefit of the exchange, they do add to the total market capitalisation that the bourse is able to display.

On July 18, the KSE had thrown 21 companies on the defaulters’ counter’, making a total of 56 companies to be sent to that counter this year.

The following notification was released by the KSE this week: Whereas the following companies were issued show-cause notices on October 10, 2005 on account of the default(s) under Listing Regulation No.32(1) which include: (i) 32(1)(a) i.e. quoted below 50 per cent of face value for a continuous period of three years, (ii) 32(1)(b) i.e., failed to declare dividend/bonus for five years from the date of last declaration and (iii) 32(1)(ff) i.e. failed to join CDS after the securities have been declared eligible by the CDC.

Prudential Stocks Fund Limited; International Multi Leasing Corporation Limited; Universal Leasing Corporation Limited; Ittefaq General Insurance Company Limited; Accord Textiles Limited; Fatima Enterprises Limited; Globe Textile Mills (OE) Limited; Globe Textile Mills Limited; Ishtiaq Textile Mills Limited; J. A. Textile Mills Limited; N.P. Spinning Mills Limited; Noon Textile Mills Limited; Sind Fine Textile Mills Limited; Hafiz Textile Mills Limited; Jubilee Spinning & Weaving Mills Limited; Taj Textile Mills Limited; Latif Jute Mills Limited; Suhail Jute Mills Limited; Dadabhoy Cement Industries Limited; Mustehkam Cement Limited; Zeal Pak Cement Factory Limited; Khyber Tobacco Company Limited; Sarhad Cigarette Industries Limited; Japan Power Generation Limited; Transmission Engineering Industries Limited; Leiner Pak Gelatine Limited; Nimir Industrial Chemicals Limited; Dadabhoy Sack Limited; Punjab Oil Mills Limited; Kakakhel Pakistan Limited; Wazir Ali Industries Limited; Emco Industries Limited; Hashimi Can Company Limited; Haydari Construction Company Limited; and United Brands Limited.

The KSE further stated that after following the due process and consideration of the facts and circumstances and in public interest and in exercise of the powers vested in it under Listing Regulation No. 32, the Karachi Stock Exchange (Guarantee) Limited has decided to place the above companies on the Defaulters’ Counter from January 3, 2007.

Accordingly, the names of the above companies along with nature of default(s) under Listing Regulation No. 32 will be published separately in the Daily Quotations of the Exchange with effect from the date of the placement on the Defaulters’ Counter.