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It was not in response to the amendment in taxation law but mainly due to improved earnings

Jan 03 - 16, 2000

After a long time the number of listed companies paying dividend for the year, 1998-99, can be termed a record. Despite, the year widely termed as economically 'bad' year, 319 companies out of a total of 769 companies have paid cash dividend. Some of the analysts say, "The results of amended law" regarding taxation on reserves. Many analysts say, "There was improvement in earnings. Keeping in view lack of opportunities for investment, most of the companies preferred to pay cash dividend".

Some of the analysts belonging to second group say, "Even in the past a large number of companies were able to post considerably higher profit but preferred to retained". In the early nineties many companies retained the profit and/or issued bonus shares. Often the purpose was to avail the opportunity to enhance borrowing ability for expansion and BMR. many companies also built up huge investment in the shares of listed as well private limited associate companies. Such investment opportunities were not present during 2 to 3 years.

According to the data available from the Karachi Stock Exchange till end October 382 companies posted profit and 313 posted loss. Out of the profit making companies 266 declared dividend and 116 preferred to skip payment of dividend. The largest number of loss making companies belong to spinning — 80 out of 150.

At the same time it is necessary to find out if there was growth in earnings in 1998-99 which prompted dividend payout by such a large number of companies. An analysis of annual accounts of listed companies show an overall improvement in net profit as compared to the previous year which, in the presence of the Law, forced the companies to pay cash dividend.

At the same time some of the analysts say that though 1998-99 was said to be an year of economic slow down, sales of most of the companies increased. Two factors were responsible for higher profit, enhanced sales volume and lower interest rates. Higher production resulted in economies of scale. Stringent cost controls coupled with economies of scale helped in optimizing cost of production as well as cost of goods sold. Besides this improved liquidity, due to better cash flow, helped in minimizing borrowing and reduction in financial charges.

One may wonder if there was economic slow down how could sales improve? With the introduction of forex management policy by the GoP, there was reduction in import and consumers as well as industries were forced to use locally produced raw material and finished goods. This resulted in higher off-take. Similarly there was increase in prices of finished goods due to inflation, reduction in the unit cost of goods sold profit margins improved.

Some analysts suggest there is a need to analyse the annual accounts of each company. They also say that dividend payout was confined to amount to qualify to avoid tax on reserves. Even in the past they were retaining the earnings without any valid reason — mainly to lend to associate companies. The recent amendment in the law governing lending to associate companies has helped in curbing this practice and consequently resulting in larger amounts available for disbursement to the shareholders. However, some of the analysts say that still the lending to associate companies is much above the limit specified in the law. The regulators must ensure that such lending is as per the amended law.

Some of the analysts say, "Still the largest beneficiary are the sponsors". The share holding pattern of a large number of companies show that a large percentage of the shares of companies are held by the sponsors — directly or indirectly. To substantiate this point they say, "A large number of companies are still not 'live' on the Central Depository System (CDS)".

Similarly, even if the company is live, a significant percentage of total shares is still outside the CDS. For example the companies belonging to the textile sector, comprising of over 250 companies, is still outside the CDS. It is apprehended that most of the shares which have not been brought to CDS are held by the sponsors which have been pledged with the financial institutions — as collateral from the third party.

Yet another analysts pointed out, "This year many sponsors were caught on wrong foot and could not manipulate the profit. However, in the subsequent years they will try their best to bring down the profit level". Keeping such a situation in mind, it is necessary that GoP should, at the earliest, make cost audit compulsory alongwith the financial audit. Many sectors, particularly textile, have been resisting compulsory cost audit. The GoP should no longer bow down before this pressure.






Mutual Fund 39   22
Modaraba Companies 48   13
Leasing Companies 32   20
Inv.Co./Securities Companies/Bank 39   15
Insurance Companies 39   15
Textile Spinning 150   36
Textile Weaving 27   7
Textile Composite 53   14
Woollen 8   1
Synthetic & Rayon 26   9
Jute 8   3
Sugar & Allied Industries 38   8
Cement 20   1
Tobacco 6   1
Fuel & Energy 28   20
Engineering 16   5
Auto & Allied Eegineering 25   10
Cables & Electrical Goods 15   5
Transport & Communication 7   2
Chemical & Pharmaceutical 41   23
Paper & Board 15   8
Vanaspati & Allied Industries 19   1
Construction 4  
Leather & Tanneries 8   4
Food & Allied 22   12
Glass & Ceramics 11   2
Miscellaneous 29   9
TOTAL 773   266
PERCENTAGE OF TOTAL 100%   34.41 %