A research paper by the former Deputy Chairman Planning Commission and Vice-Chancellor PIDE, Dr. Nadeem Ul Haq, and Amin Hussain has revealed that the Pakistan Stock Exchange (PSX) is dominated by 31 families in Pakistan.
At the time of independence, there were 22 influential families in the country. However, when data was collected in 2018, it was found that 31 families dominated the Karachi Stock Exchange (KSE).
The paper read, “The degree to which [KSE] 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”.
Another study done around the topic revealed that around 64 percent of the 44 selected sample companies are controlled by prominent business groups and families of Pakistan. This paper explores the corporate groups and their ownerships in the stock market looking into the extent of diversification in the stock market. It also sheds light on the kind of power that large houses wield in the market, and the choices available to the small shareholder.
The paper also dives deeper into corporate governance by looking at how company boards are structured and examines the influence of an owner and their family on the structure and professional management of a company.
It further detailed that “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 are comprised of similar people — corporate, business founders and family, retired and current members of the civil service, and the army; similar to the members of an elite club in Pakistan.
Surprisingly, there is very little representation of civil society, such as the professionals and academia of the country. Also, women make up only about 10 percent of the board members.
A significant number of non-executive directors have served as government employees in the past, either as bureaucrats, in the military, or in regulatory bodies like the SECP. The other notable concentration is of those identifiable as family members.
According to the paper, there is a high degree of connectivity even in the network of directors, which should be a matter of concern. The boards of directors for the KSE-100 companies are all connected in small clusters in which a few members act as go-betweens through memberships on multiple boards, or as part of identifiable family groups.
There also does not seem to be a lot of professional diversity in the group. It seems that most influential directors come from large metropolitan centers — mostly from Karachi, followed by Lahore. Islamabad has either one or two directors. Many directors are reappointed at other companies as a lot of them have been on as many as 17 or 18 boards. Therefore, the smallness of the club is once again reinforced.
The KSE is heavily skewed, with the top 10 companies constituting more than half of the total market capitalization. Annual reports show that directors or significant shareholders (73 percent of the total) own over Rs. 4.963 trillion of a total market cap of Rs. 6.8 trillion. This means that minority shareholders with less than five percent each hold about 25 percent of the shares in each KSE-100 firm. Large firms like 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 the KSE-100 market cap is heavily skewed towards a few large investors. For example, the single largest shareholder is the Government of Pakistan that accounts for over 12 percent of market capitalization with its controlling/substantial shareholding in KSE-100 heavyweights like the OGDCL, PPL, K-Electric, Mari Petroleum, PTCL, PSO, and SNGPL among others.
Together, the top 10 owners account for 37 percent of the market capitalization of KSE-100, as one or two legal owners hold over 90 percent of shares in the company.
Multinational companies (MNCs) are the single largest category of shareholders in KSE-100. Collectively, close to 41 percent of ownership in KSE-100 index firms is held with MNCs.
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 like State Life, the State Bank of Pakistan, Privatization Commission, the WAPDA, etc.
Individual owners like board members account for a total of six percent market capitalization either as directors, director-owners, or non-director significant shareholders.
In contrast, provincial governments, public sector banks, and the NIT together account for just one percent of market capitalization.
Foreign shareholders and government ownership account for the bulk of ownership in KSE-100 market capitalization, which is an estimated 61 percent, the paper outlined.