It was not in response to the amendment in taxation law but mainly
due to improved earnings
By SHABBIR H. KAZMI
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.
PERFORMANCE OF COMPANIES LISTED ON THE EXCHANGE
SECTORS |
NO. OF COMPANIES |
companies |
COMPANIES DECLARED
DIVIDEND |
| 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 % |
