31 families control KSE-100

ISLAMABAD: There are 31 families in Pakistan dominating Pakistan’s stock market, indicating the number of influential and wealthy families had gone up from 22 to 31 since the country’s independence.

It was the crux of the highly important research paper by former Deputy Chairman Planning Commission and Vice-Chancellor PIDE Dr. Nadeem Ul Haq and Amin Hussain. The explosive research paper stated that Mahbubul Haq famously pointed to 22 families owning Pakistan. But, in 2018, when the data was collected, 31 families dominated the KSE.

The paper stated: "Pakistan’s stock market tends to make headlines, sometimes because of record highs that make it the ‘best performing market of the region’, and sometimes because of the crashes. However, the degree to which it contributes to capital formation in the country is not a topic of study, while the ensuing ownership and governance structure is hardly ever made a part of public discourse. One such study concluded that 'around 64 percent of the 44 selected sample companies are controlled by prominent business groups and families of Pakistan'. This paper extends the aforementioned research to cover the top 100 companies that constitute the benchmark KSE-100 index2 at the Pakistan Stock Exchange (PSX).

"It also analyses the structure of ownership and sponsor control of companies constituting the KSE-100, and their impact on the functioning and transparency of the stock market. Pakistan’s corporate governance and human resource management practices are frequently questioned in the media and academic circles. A common phenomenon is companies managed as family enterprises despite being listed on the stock exchange. The offspring of the owners tend to be absorbed into the management of these companies, which are referred to as ‘seth companies’, seth being the founder/owner of the company.

"The objective of this paper is twofold. The first is to shed light on corporate groups and their ownerships in the stock market. We review the ownership structures of the large conglomerates to examine the extent of diversification in the stock market. This also gives us an idea of the kind of power that large houses wield in the market, and the choices available to the small shareholder. Secondly, we look at corporate governance by looking at how company boards are structured and examine the influence of the owner and his family on the structure and professional management of the company. Prevailing accounting standards and listed entity regulations require disclosure of shareholding by directors, and significant shareholding of more than five percent held with legal persons (individuals or companies), in addition to those held with associated undertakings, banking and financial institutions, trusts, etc. Using data from disclosures in 2018, this study focuses on directorship and significant shareholding of five percent or more for all listed entities that constitute the KSE-100 index and uses it as an indicator of ‘control’ and concentration of ownership in the top 100 companies.

"Of course, this is after accounting for the government, multinationals and the army. The families have a fair degree of influence in the businesses because of haphazard privatization and relatively lax multinational regulations. The analysis has found fewer clusters as different clusters are linked through family associations i.e. if two members of the same family initially owned shares in companies that were previously in two different clusters, these clusters would now be linked since the same family has ownership in both.

"Apart from allowing us to aggregate family ownership in the KSE-100, changes in the structure of the network point to the influence of family ties on the overall structure of the network. If we consider family association unimportant, then the network looks as it did previously.

"On the other hand, if we consider families to be an important consideration, then this second network gives an insight into the ownership network at a family level. We now also add the field for the number of families in each cluster. Clusters that only have a single-family are usually family groups running their own business groups. In other clusters, we can see multiple families associated through shared ownership. The largest one here is Component 0, which now has 51 KSE-100 companies. It contains six families linked through shared investors and investment.

"The boards comprises similar people — corporate, business founders and family, retired and current members of the civil service, and the army. In other words, it parallels a membership of an elite club in Pakistan. What is surprising is that there is very little representation from civil society, i.e. professionals and academia of Pakistan. Women make up only about 10 percent of the board members in Pakistan. It is notable that a significant number of non-executive directors have served as government employees in the past, whether as bureaucrats, the military, or in regulatory bodies such as the SECP. The other notable concentration belongs to those identifiable as family members.

When we look at the network of directors, there is a high degree of connectivity, which should be of concern. Boards of directors for KSE-100 companies are all connected in small clusters, where a few members act as go-betweens through memberships on multiple boards, or as part of identifiable family groups.

"The network consists of 16 components, where a component refers to the subset of nodes that can be reached through continuous edges, i.e. without any breaks. Recall that components are distinct subgroups. It is apparent that a giant component connects 82 percent of the individuals in the network (this number reduces when families are included), with very few smaller components. This indicates that most companies in the KSE-100 are connected to each other through directorships. Only a very few (at most 15) do not share common directorships with other companies in the index.

"Looking deeply at the 20 directors with the highest between ness centrality to see what we can learn from their characteristics. The highlights are as follows: Not surprisingly, there are no influential women. Interestingly, the most visible names are not on the list, their children are. The list seems to have many accountants, former bankers, NIT employees, and career professionals who have worked at these companies or groups.

"There does not seem to be much professional diversity in the group. It seems that most influential directors come from large metropolitan centers. They are mostly from Karachi, with Lahore being second. Islamabad has possibly one or two directors. It seems that many directors are reappointed in other companies as many of them have been on as many as 17 or 18 boards. The smallness of the club is once again reinforced.

"KSE is heavily skewed with the top 10 companies constituting more than half of total market capitalisation. Annual reports show that directors or significant shareholders (73 percent of total) hold ownership of over Rs4.963 trillion out of a total market cap of Rs6.8 trillion. This means that minority shareholders, holding less than 5 percent each, hold about 25 percent of the shares in each KSE-100 firm. Large firms such as Phillip Morris, Pakistan Tobacco, and Pak Suzuki are listed as mostly accounted for, as one or two legal owners hold over 90 percent of shares in the company.

"The ownership of KSE-100 market cap is heavily skewed towards a few large investors. For example, the single largest shareholder is the Government of Pakistan, which accounts for over 12 percent of market capitalisation with its controlling/substantial shareholding in KSE-100 heavyweights such as OGDCL, PPL, K-Electric, Mari Petroleum, PTCL, PSO, SNGPL, among others. Together, the top 10 owners account for 37 percent of the market capitalization of KSE-100.nted for, as one or two legal owners, hold over 90 percent of shares in the company.

"Different categories of entities that have ownership in the KSE100 and share each owns. These categories include the national government, foreign holding companies, local holding companies, and employee funds, etc. Together, the ownership of KSE-100 can be traced to 374 entities, which includes a special category of all unidentified individual owners.

"Multinational companies, or MNCs, are the single largest category of shareholders in KSE-100 typically denoting a holding-subsidiary relationship with a foreign principal and a local subsidiary. For example, British American Tobacco accounts for 9 percent of market capitalization for KSE-100 through its controlling share in Pakistan Tobacco Company. Collectively, close to 41 percent of ownership in KSE-100 index firms is held with MNCs, whether foreign holding companies or other foreign entities, with a significant shareholding of over 5 percent each.

"The second largest category of owners is the National Government, where the Government of Pakistan, directly and indirectly, is an investor through public sector enterprises and corporations such as State Life, State Bank of Pakistan, Privatisation Commission, WAPDA, etc. We refer to ownership of shares of a KSE-100 company by another KSE-100 company as intra KSE-100 ownership, while local non-KSE-100 companies are Pakistani companies not listed in the KSE-100. Interestingly, intra KSE-100 ownership accounts for just 9 percent of accounted market cap, whereas local non-KSE-100 companies and local holding companies together account for 20 percent of KSE-100 market cap.

"Individual owners, such as board-members, account for a total of 6 percent market capitalisation, whether in their capacity as directors, director-owners, or non director significant shareholders. In contrast, provincial governments, public sector banks, and NIT together account for just 1 percent of market capitalisation. Foreign shareholders and government ownership account for the bulk of ownership in KSE-100 market capitalisation, an estimated 61 percent."