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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.