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Modaraba companies on KSE.

At present there are 30 companies on Karachi Stock Exchange (KSE) in the Modaraba sector with Paid-up capital of Rs. 2892.19 million. The year 1991 saw the listing of 16 new Modaraba companies. It is apprehended that the rise is Modaraba companies in Pakistan has brought a lot of non-professional modaraba manager who are entrusted to handle billions of rupees worth of investors' funds which if not monitored properly can create a gigantic mess in the economy. The problems regarding modarabas are two-fold.

Firstly, the lack of adequate monitoring and supervision through regulatory agencies by way of appropriate guidelines, measures, rules and regulations for the protection of the investors and drawing a clear line of definition between fiduciary (custodial) responsibilities of the modaraba managers and the limits of discretionary powers available to them. Secondly, all Modarabas should define a clear-cut investment strategy with respect to the investors funds. At present the objectives described in the offering prospectuses of the Modarabas are so vague and non-committal as to the application of funds and criteria of selecting investments that an average investment advisor will fell at odds in recommending any modaraba to his/her clients.

The present market position of most of the modarabas in Pakistan is extremely vulnerable because most of their investments are single sector oriented i.e. textile or related sector. This means that most of the modaraba funds may locked into textile or related sector and would force businessmen to go into that field. However, if there was to be a slump in the sector (which appears to be very likely in the near future) then the value of modaraba investments will be reduced substantially. This will result in potential defaults and/or bankruptcies in the specific sector. The result will be a lot of investors will lose out in the process. This is also valid because any single sector investment strategy is risky as compared to a portfolio which has a built-in risk hedge (risk prevention) system through diversification.

Current most modarabas in Pakistan are heavily exposed to either the textile sector or to the commodity trading segment. This is very dangerous as there is little or no participation in the basic industries such as machine and tool, avionics, electronics, chemicals, insurance, distribution, telecommunications or transportation. These industries are more resilient in face of a general economic downturn or an over-heated economy. This is very little awareness of infrastructure investment strategy in the market as most of the modaraba managers are old-school trader or feudal or pseudo-industrial mentality people with little or no experience in the industrial sector or professional arbitrage in the infrastructure capital investments in utilities etc.

The added cost of fixed asset management fees charged by the managers is no solace either. Investors end up paying large fees to managers for ill-managing the funds, on long-term basis. The fees range from 1 percent of the funds under management to well over 10 per cent (most of the time they take a percentage of the gross-profits as well in addition to fixed remuneration), regardless of the fact that the modaraba has not made any real profits during the year.

It is important that investors should invest in modaraba situations where the management charges a fee based only on net real gains during the year rather than a flat fee on the volume of transactions or size of the assets. It is safe to assume that if there was to be a slump in the world textile and textile-related sector and the commodity finance sector, as being predicted by many analyst, most of the modarabas active today, will not be around come next election.

In its sixth year 1990 BRR Capital Modaraba expanded satisfactorily. Revenue showed a rise of 46.8 per cent up from Rs. 153.37 million in 1989 to Rs. 225.04 million in 1990. Profit increased from Rs. 22.05 million in 1989 to Rs. 29.42 million showing a rise of 33.4 per cent. The company declared profit distribution of 12.5 per cent in cash and 15 per cent as bonus. Operating Revenue of First Grindlays Modaraba showed a rise of 52.0 per cent in 1990 up from Rs. 166.83 million in 1989 to Rs. 253.62 million in 1990. Profit for the year registered a modest rise of 22.6.
 Paid-up Dividend Market
Name Capital or Bonus Rate
B.F. Modaraba 24.0 20B 50R 14.60
B.R.R. Capital 10.0 - 38.50
B.R.R. II Modaraba 115.74 - 25.00
First Constellation 120.00 - 17.00
First Crescent 50.00 - 27.50
First DG Modaraba 100.00 - 23.00
First GRindlays 150.00 25% 74.00
First Habib Bank Mod. 200.00 - 32.75
First Habib Mod. 30.00 20B 12.75
First Hajveri Mod. 150.00 - 12.75
First Interfund Mod. 37.62 - 15.75
First Mehran Mod. 50.00 - 29.00
First National Mod. 52.99 - 7.25
First Pak. Mod. 100.00 - 13.75
First Premier Mod. 25.00 - 14.00
First Professional 50.00 - 14.00
First Providence Mod. 50.00 - 12.50
First Prudential Mod. 117.00 17B 33R 17.00
First Sanaullah Mod. 100.00 21% 35.00
First Tawakkal Mod. 75.00 - 27.75
First Tristar Mod. 50.00 - 39.25
Industrial Capital Mod. 75.00 - 25.00
First UDL Mod. 100.00 - 32.00
LTV Capital Mod. 200.00 24B 70R 10.00
Modaraba Al Mali 72.00 - 47.00
Modaraba Al-Tajarah 60.00 20%B 23.00
Second Prudential Mod. 175.50 - 14.50
Third Prudential Mod. 200.00 - 12.50
Trust Modaraba 150.00 - 30.25
Unicap Modaraba 100.00 - 16.75
Source: Karachi Stock Exchange
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Title Annotation:Karachi Stock Exchange
Publication:Economic Review
Date:Dec 1, 1991
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