The GoP must push this
through with the same urgency and efficiency that the Privatization
Commission has approached the privatization programme
By Aqib Elahi Mehboob
April 29 - May 05, 2002
To say that the investment community was dismayed by
the further delay in the Take-over Law would be an understatement. The
Law, that has long been a demand of investment professionals, has
reportedly been delayed, after being passed by the Federal Cabinet in
mid-2001, on the insistence of the Ministry of Commerce. The Ministry
claims that it had not been consulted in the drafting of the Law. In a
high-level two-day meeting it was decided to accept the proposal of the
Minister of Commerce, where he argued that certain industrialists should
be consulted in the legal and technical aspects of the new law.
Volumes have been written, and many more volumes will
be written on the importance of efficient capital markets in the
economic development of a country. In our opinion, for the future
development of capital markets in Pakistan, the equity market will play
an integral role. The future growth of the equity markets in turn will
dependent on giving primacy to the interests of two key stakeholders,
the small investor and the foreign investor. Having been to numerous
seminars/conferences centering around themes such as the federal
budgets, capital market reforms, etc., we have found that the thing that
most turns off the small investor from investing in the equity market is
because they believe that the management of the listed companies will
cheat them. Similarly, from marketing trips to East Asia and Europe, the
factor that we found weighs most heavily on the minds of fund managers
is the quality of management, especially when dealing with emerging
markets. The key concept: improving corporate governance should take top
priority for the government/regulatory agencies if their professed aim
of strengthening the capital markets is to be realized as it is the
small and foreign investors who will add badly needed depth to the
equity market.
What better way of enforcing good corporate on the
listed companies than making them accountable to the market participants
through the pricing mechanism? The first rule of good corporate
governance is that the interests of the shareholders must hold supreme.
Obviously that translates in most cases into a) the management
maximizing possible returns, b) paying out those returns in the form of
dividends if those funds can not be more profitability re-deployed into
the business. The opinion of present shareholders and potential
investors will then reflect in the price of the stock. Poor management
would result in the cheaper potential entry for entrepreneurs who
believe they could do better or who think they could make a spread from
splitting up and selling separately assets of a business which is no
longer a viable concern.
The question then is, who would have the most to lose
from the introduction of such a law? Answer: the management of literally
30-40% (we are probably quoting a low number) of some 741 companies
listed at the Karachi Stock Exchange. It is difficult to fault the
Ministry of Commerce for belatedly raising objections because this is
the very constituency with whom the Ministry must work with, and hence a
constituency that it would rather keep a cordial working relationship
with. But on the other hand, we feel that the other ministries and
regulatory bodies should be more forceful in pushing this through
because it is a strategic movement towards their stated objectives.
Quite obviously those opposed to such legislation will endeavour to
delay it until after the elections, where they will feel that they will
be able to exercise more influence. We, therefore, feel it imperative
that the present government pushes this through with the same urgency
and efficiency that the Privatization Commission has approached the
privatization programme. The question posed before the government today
is, who in their opinion are more important to Pakistan's economic
development? Is it the sponsors of loss-making companies who due to
inept management or lack of capital are unable to turn these companies
around, or the investors seeking a parking spot for their funds?
We further feel that the decision not to incorporate
provisions that require a mandatory offer to all shareholders after
control of a certain percentage of shares in a company, is probably
wise. This feature of Take-over Laws in countries like the UK and India
does add an incentive for long suffering minority shareholders, but
would raise the potential cost of a take-over, which may not be
desirable at present. The other proviso not likely to be included is
that of mandatory sale once an investor acquires control of most of the
shares in a company, i.e. over 90%, then the holders of residual shares
are required to sell these to the investor. This too we believe can be
shelved until the basic law is implemented and streamlined.
THE WRITER IS HEAD OF
RESEARCH AT KASB
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