Meet the minimum requirement: Increase free-float, SECP warns companies

Regulator directs delisted companies to buy back minority shares


Shahbaz Rana July 07, 2015
Regulator directs delisted companies to buy back minority shares. CREATIVE COMMONS

ISLAMABAD:


The country’ equity market regulator has decided to move against 151 companies that have either defaulted, been delisted, or are in the process of delisting without fulfilling requirements, directing all of them to buy back their minority shares or get ready to face the consequence. 


The Securities and Exchange Commission of Pakistan (SECP) also announced an amnesty scheme for those 271 companies that are listed at the Karachi Stock Exchange (KSE) but not fulfilling the criterion of maintaining a minimum of 25% free-float of shares.

For those companies that have at least 5 million minimum trading shares but not fulfilling the condition of 25% free float, the regulator has asked them to increase their free float to the minimum benchmark within a year. For other companies, it has announced a three-year period to fulfill the three basic conditions of 25% free float, 5 million shares and Rs200 million paid up capital.

The SECP’s move is expected to increase activity at the stock markets besides forcing the companies to comply with good governance standards. Government policies incentivise listings at the stock market and offer a five-year tax break. After enjoying these benefits, the companies tend to exit from the stock markets without buying back shares from minority shareholders.

In the past few years, the companies were exiting rather easily from the stock market without buying back their shares in violation of the law and regulations, said Zafar Hijazi, the SECP chairman.

He said out of 151 companies, 71 have already been delisted and the remaining 81 are on the defaulters’ segment and trading in their shares is suspended. Such companies are either under liquidation and winding-up, have not commenced operations within the required time, not held annual general meetings, failed to join the Central Depository System after their securities having been declared eligible for electronic form or failed to pay fees, penalties or dues of the KSE.

Hijazi admitted that the SECP was also responsible for the lax management, claiming that one of the reasons behind the inefficiency was SECP not being constituted to its full strength. He said the SECP has the authority to windup these companies for non-compliance. Hijazi said the SECP will appoint administrators in cases where the companies are doing businesses. If these have been closed down, liquidators will be appointed to sell their assets and distribute money among minority shareholders, he added.

Under a proposed law, the regulator has sought the power to bar the director of such companies from becoming directors in any company in the future.

The SECP is providing defaulter companies the time to rectify defaults so that they may revert to trading again, said Akif Saeed, commissioner of the Securities Market Division. Saeed said majority of the 151 companies willfully defaulted.

Amnesty scheme

The SECP also approved a special incentive package for those companies that are not fulfilling the regulatory requirements but are still trading at the stock market.

Saeed said, presently, 559 companies are listed at the KSE out of which 81 are placed at the defaulter counter.  The free-float data of 476 companies has been analysed which revealed that only 203 listed securities have sufficient free float, ie at least 25% free float and 5 million shares, said the Commissioner.

Out of the remaining 271 companies, 71 have less than 25% free float but have 5 million shares in the market.  These 71 securities constitute 40% of the total market capitalisation and capture 25% of the total trading activity at the KSE. The rest constitute 15% of total market capitalisation but capture less than 2% of trading activity at the KSE.

The chairman insisted that these companies cannot be immediately forced to increase the free float of as a glut of supplies may plunge share price.

However, companies having at least 5 million free float shares will be allowed to enhance free float up to 25% within a period of three years.

The companies that remain unable to meet these conditions will be shifted to secondary trading board, warning investors about the company’s inability to meet the requirements.

Published in The Express Tribune, July 8th,  2015.

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COMMENTS (1)

Almost Hopeful | 5 years ago | Reply Since increasing the free float will mostly benefit the retail investor thus it's implementation is higly unlikely.
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