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Recipients are an example of good corporate behaviour

Mar 12 -25, 2001

Chief Executive, General Pervez Musharraf, while addressing the Top 25 Companies Awards ceremony of Karachi Stock Exchange (KSE) said, "The capital gains tax exemption, expiring on June 30 this year, would be extended." He also said the Takeover Law was ready for approval by the cabinet and it would shortly be promulgated. The two announcements are expected to improve the level of confidence of investors in equities market.

As the GoP intend to rely on the stock exchanges in accelerating the development of economy and privatization, it is making efforts to improve overall effectiveness of the market as a mode of resource mobilization. The GoP has set an agenda for capital market reforms. According to the Musharraf this includes: strengthening the capital markets, equity as a vital source of financing, protecting of interest of minority shareholders, improving corporate governance, enhancing level of disclosure and curbing insiders trading. He said to achieve these objectives Securities and Exchange Commission of Pakistan (SECP) would be further strengthened.

In his welcome address Muhammad Yasin Lakhani, Chairman of Karachi Stock Exchange, said, "Investments in capital market with a fair return will divert the attention from parking of funds in dollars which gives an unfair advantage to investors who stake their investment in local industrial enterprises. The market thrives only when interest of minority shareholders is protected." Therefore, he demanded further extension for five years on exemption for capital gains and bonus shares.

Both local and foreign portfolio investors are inspired by friendly policies. The GoP's decision to tax reserves if at least 40 per cent of the current year's profit is not distributed has improved the dividend payout in last few years. While a total of Rs 25.25 billion was distributed by listed companies as dividend for the year 1999, so far 340 companies have paid Rs 28.31 billion till as of March 12, 2000. This expected to increase considerably as the results of large number of companies of textile sector are still to come.

Selling by foreign investors up to one billion dollars has been absorbed by the local investors. This was mainly because Karachi Stock Exchange has not only become extremely efficient but fully transparent. This is evident from the fact that Central Depository Company caters to around 97 per cent of all settlements and an elaborate automated trading system. The market has rebounded from its low of 765 in July 1998 to 1,400 now an increase of about 80 per cent.

According to Lakhani, at present less than one per cent of Pakistanis owns shares of listed companies. This number has to be increased rapidly to enhance the profile of the market. More and more people should participate in and benefit from economic development. Efficiency in production, higher revenue for the GoP and faster retirement of debt are the potential benefits of privatization. Yasin made two suggestions, Privatization through the stock exchanges and in tranches which corresponds with the market appetite. He also suggested preferential treatment for non-resident Pakistanis as China and India have benefited tremendously by such a policy.

Karachi Stock Exchange has established a Clearing House Protection Fund and Investors Protection Fund to safeguard the interest of investors, particularly small investors, in case of members' default. These funds are financed through levy on the transactions done by the members of the Exchange. These funds were established on the demand of international lending agencies, particularly, the Asian Development Bank which has extended a loan of US$ 250 million to the GoP. Lately the CBR has revoked the tax exemption status of both these funds. Lakhani made a request to the CE to restore the income tax exemption of these funds.


In Pakistan most of the investors in equities look forward for dividend over capital gains. Any increase or decrease is linked with the performance of listed companies and many a times the impact of extraordinary transaction resulting in exceptional profit or loss is ignored. Inspite of this many prudent companies tend to follow, some kind of consistency in payout. They often retain a larger part of exceptional profit, for any one year, to use it for dividend payment when profit is low.

At the same time it was witnessed that some companies were not paying dividend, despite earning high profit. The motive was to ensure free of cost funds. Such funds were usually siphoned to non-listed associate companies. The amendment in rules pertaining to lending to associate companies has curbed this practice, to some extend. However, the fact which has forced the companies to pay dividend, at higher rates, is announcement in budget for 1999-2000. This law demand that all listed companies were to pay 40 per cent of profit after tax, of current year, to shareholders or pay a tax penalty. The result is higher dividend payout and for the year 2000 a large number of companies recorded payout ratios of 40 per cent or more on profit after tax.

According to a report by KASB, the total cash divided paid by the listed companies at Karachi Stock Exchange shows considerable improvement. Higher payouts have been beneficial for the bottom line of modarabas, brokerage houses, investment companies, banks and other financial institutions, which prefer dividend on their investment portfolios. Even though there has been a marked increase in dividend payout in general, prices of shares have not increased to the extent one would have expected. Investors have been astute enough to realize that most of these increased dividend payout ratio do not signal increased revenue potential and in fact are payments which have been accruing to them for the last many years.

Although, some equities analysts are critical of mandatory dividend payment, many others say that the law yield more benefits than otherwise. They say that since a large number of local corporates do not make proper disclosure and good corporate level is also poor the probability of making capital gains has less attraction. Investors mostly look forward to get cash dividend at the end of each financial year. Besides, if the GoP wishes to broaden shareholders' base, discourage investment in National Savings Schemes by institutions and dollarization, alternative investment opportunities have to be made available. Investment in equities, offering higher return, could be such an alternate option. Reinvestment of dividend income in other avenues is the prerogative on investors as they can minimize their risk profile.

As regards companies reinvesting their retained earnings, if their plans are properly disclosed, should not face any problems. Such companies can issue bonus shares and leave the decision at investor's discretion whether he/she would prefer to retain bonus shares or sell it to make monetary gains. Since the basic objective of any policy is to protect public interest the law should not be changed. While companies with no future plan for investing retained earnings do not deserve to retain funds, good companies should not face any problem. Companies that are able to convince their shareholders of prudent and sensible reinvestment of their profits will be able to add to their paid-up capital through rights and bonus shares.

Karachi Stock Exchange follows the policy of recognizing the good players. The recipients of the Top 25 Companies awards are a shining example of good corporate governance. Six companies namely; Pakistan State Oil Company, Lever Brothers, Millat Tractors, Shell Pakistan, Engro Chemical and BOC Pakistan have been winning this award for more than ten years. The others should emulate them.


Over the last 18 months there has been a marked reversal of the deteriorating trends witnessed for the last many years. Some of the key indicators of this are the consistent reduction in defence expenditure as a percentage of GDP, improvement in the current account balance and reduction in short-term external debt as a percentage of total external debt. Pakistan's agreement with the IMF for Stand-by Facility seems to have resulted in a fairly fiscal and monetary policy regime necessary for medium-term stability. The country is expected to qualify for long-term Poverty Reduction and Growth Facility (PRGF) of the IMF. The prospects for another rescheduling of external debt are bright. All these are expected to improve Pakistan's rating. Despite the present weakness on the macroeconomic front, Merrill Lynch has a forecast for 20 to 25 per cent rise in KSE-100 index over a 12-month time horizon.

As an aftermath of the May Crisis the stock exchanges and the SECP has taken various measures to improve market efficiency and transparency. Many equities analysts believe these are steps in right direction and would improve investors' confidence. On top of this, the GoP's plan to deregulate and further liberalize some of the key sectors telecommunication, power generation, oil and gas, and banking are expected to provide new impetus.

Top Companies of 1999


Pakistan State Oil Company


Al-Ghazi Tractors


Grays of Cambridge


Fauji Fertilizer Company


Lever Brothers Pakistan


Kohinoor Weaving Mills


Rafhan Maize Products


Millat Tractors


Cherat Papersacks


Shell Pakistan


Khadim Ali Shah Bukhari & Co.


Nestle Milkpak


National Refinery


Rafhan Best Foods


Lakson Tobacco Company


Dawood Hercules


Thal Jute Mills


Murree Brewery


Engro Chemical Pakistan


Treet Corporation


Mitchell's Fruit Farms


Kohinoor Raiwand Mills


Sitara Energy


BOC Pakistan


Nishat (Chunian)

Selection criteria

1- The pre-requisite for the purpose of selection of Top Companies were:

a) A minimum distribution of 40 per cent (including at least 15 per cent cash dividend by the companies,

b) A minimum number of 500 shareholders; and

c) The company has joined the CDS after it's securities have been declared as eligible securities at the Central Depository Company of Pakistan.

2- The companies which qualified the prerequisite were then selected on the basis of highest marks obtained as per the following criteria:

a) Distribution          40 per cent

b)  ROE (before tax) 30 per cent

c)   Turnover (Net)    30 per cent