Over half of listed firms on KSE are non-compliant

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More than half of the listed companies at Karachi Stock Exchange (KSE) attract little or no investment at the country’s largest bourse. Analysts fear that if a recovery is not mounted, it will lose its long-held title of most liquid equity market in Asia. According to KSE’s daily quotations, more than 50 percent, at least 320, of the total 638 listed companies at the KSE attracted little or no attention for risk-averse investors.
Quotations reveal that of the 320 firms, some 151 were on the default counter, 113 were facing suspension of trading in their shares, 38 were declared as a ‘non-complaint segment’ and 18 had been de-listed from the stocks market. This factor along with others, the brokers and investors agreed, carried enough weight to negate the widely-held perception that the ill-defined and, therefore, unpopular levies like Capital Gains Tax (CGT) were keeping investors aloof from the once vibrant and actively-traded equity market.
“The investors are reluctant to invest in those firms which are on the default counter or facing any other punitive measure,” opined Rafi Securities Chief Executive Officer Naeem Rafi. Market observers are concerned that prevailing low volumes at the country’s largest capital market, where the average daily share trading once used to stand at Rs40 billion, would take the highly volatile bourse to the brink of a market crash reminiscent to those that struck in 2005 and 2008.
“Rs40 billion a day was fairly average four years ago. This period also saw an all-time high volume of Rs 216 billion a day on March 9, 2005,” said Mohammed Sohail, Chief Executive Officer at Topline Securities. KSE data show that majority of the companies under fire for their default on the listing rules were from the heavily-incentivised textile sector.
The KSE had put some 72 of the total 126 listed textile companies, having a paid-up capital of over Rs 10.55 billion, on the default counter for violating the regulatory rules. Rafi, a senior broker and former member of KSE’s Defaulter Committee said a major negative impact of the non-compliance or default was that it inflicts a sort of reputational damage upon the concerned firm.
“The potential investors get alerted that there is something wrong with the company,” he stated. Investors, however, hold the related regulatory laws responsible for the existence of such a huge number of listed firms on default counter. “The investors get their capital stuck up in the defaulter companies that at their end feel comfortable by not declaring dividends for the shareholders for years,” a small investor at KSE told Pakistan Today.
He claimed that there was no concept of a default counter in the global stock markets where “direct delisting” was order of the day in case of a listed company’s default. “Delisting in local equity markets takes at least 3 years that keep the investors’ capital stuck up.” On the other hand, the investor claimed the companies were cheating the ordinary shareholders by different tactics.
“What the companies do to avoid delisting is to fulfill one or two of the set criteria while leaving others unattended,” he added. Critical of the listing policy of the Securities and Exchange Commission of Pakistan (SECP), the investor claimed that the regulator was enlisting the firms without authenticating their balance sheets mostly “manipulated” by the chartered accountant companies to make the applicant company attractive for the Commission.
“Only those firms having shown an annual profit after tax of 30 percent should get listing at the exchanges,” the investor suggested. Going a step further, another senior stock broker claimed that the listed companies deemed it a “status symbol” to remain on the default counter. “The list of defaulting firms became bigger so much so that they started to be status symbol to remain on the default counter,” the broker said.