WHEN the chairman Securities and Exchange Commission of Pakistan (SECP) thundered at an ‘investors awareness conference’ in Islamabad last week that he had the powers to force any profit-making company to go public, many people rightly took it with a pinch of salt.

The chief regulator, Zafar Hijazi’s anguish is understandable. Sponsors of most highly prosperous corporates have continued to avoid listing like the plague. As more and more companies continue to voluntarily de-list or are suspended, the number of those listed on the bourse gets thinner.

In the last five years, the number of listed companies has declined from 638 in 2011 to 559 at the moment. This is almost negligible when hundreds of companies continue to be registered with the SECP every month, taking the number of registered companies close to 80,000. By contrast, only six companies came up for listing in the outgoing year, even lower than the nine Initial Public Offerings (IPOs) that were seen the year ago.

While everyone agrees that serious attempts ought to be made to increase the depth of the market through fresh listings, persuasion and incentives are reckoned to be the only means to bring more firms under the fold of the public entities. Coercion could backfire. “There would be legal complexities in forced listing and many subsidiaries of giant foreign firms may simply walk out of the country,” cautioned a company secretary of a multinational firm.

“Until the early 1990s, companies entered the capital market in droves because the listed firms were taxed at 10pc lower rate (35pc) than the private ones

A senior corporate lawyer in Lahore, who asked not to be named, told this writer on phone: “Even on the Wall Street, companies are not forced by the government to be listed”. And he added: ‘The Securities and Exchange Commission (SEC) sets the standards for companies which must go public in the US. For example, the regulator requires that if a company has a certain amount of assets (around $10m) and there are more than 500 shareholders on record, the company needs to start disclosing specific financial information publicly and in a timely manner”. It happened in the recently listed all too familiar ‘face book’.

This man of law reckoned that in the US, the SEC requirement was not to force companies to share profit with the public but to protect huge number of unsuspecting shareholders in such companies from frauds and manipulations.

So what is the fair approach to make corporates seek listing happily on their own? “Relax some of the stringent corporate governance rules; reduce the unfathomable paper work and provide incentives”, a stock broker said. The government has almost always turned down the KSE’s budget proposals, which seeks tax incentives for listed companies over private enterprises. “Until the early nineties, companies entered the capital market in droves for the listed firms were taxed at 10pc lower rate (35pc) than the private firms which had to bear a bigger burden of 45pc in taxation” said a corporate executive. That incentive has gradually eroded and currently both public and private enterprises are taxed at the uniform rate of 33pc.

But aside from regulations, most corporate watchers also reckon that private companies and family firms are comfortable in operating under the cloak of secrecy. Many big and smaller companies want to avoid spotlight and hide their important sales and profit figures from their competitors. They therefore distance themselves from the stock market. The textbook theory of ‘mobilising funds from the equity market’ also stands in the shade as in the declining interest rate scenario, most commercial banks are willing to offer credit to reputable clients at abysmal low rates.

So, it is all very well that the regulator has set his eyes on hundreds of companies in cellular, pharmaceutical, textile, food and almost every field, that make tons of money in profit but are loathe to share their fortunes with the public. But many knowledgeable people in the market believe that the regulators must first set the house in order. Pulling more companies into the listed arena without proper and firm control over the already listed, would be putting the horse before the cart. According to Karachi Stock Exchange (KSE) Annual Report 2014, out of 562 listed companies, 246 paid dividends to their shareholders while as many as 114 did not despite earning profit. More than 150 companies stand ‘suspended’ and would eventually seek de-listing, robbing their shareholders of their due.

Scores of listed companies hitherto considered laggards in the textile and cement sectors have attracted most of the investors’ money in the booming stock market. Yet there is scarcely any free-float as sponsors exercise tight control over their company’s affairs. The family members sit on the boards of directors and retain disproportionately large shareholdings, sometimes as much as 90 per cent, leaving a tiny free-float for the public. The same is true for most multinational companies listed on the stock exchange, that rake in profit, but an overwhelming two-thirds of the shares are vested in the foreign parent and much of the remaining are taken up by the directors or institutions in big frozen blocks, leaving almost no shares to trade at the market.

Let the regulator first streamline the corporates already on the stock market. Profitable companies ought to be made to pay dividends; suspended companies must compensate their shareholders and firms across the board should be made to float at least 25pc of the paid-up shares for the public.

Published in Dawn, Business & Finance weekly, January 4th, 2016