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Corporate Sector of Pakistan

Corporate Sector
Definition
Pakistan Inc. is a common term used by the Pakistani media to refer to the
corporate sector of the nation. The Securities and Exchange Commission of Pakistan
(SECP) is an organization whose purpose is to develop a modern and efficient corporate
sector and a capital market based on sound regulatory principles

Corporate Sector of Pakistan


Pakistan Inc. is a common term used by the Pakistani media to refer to the
corporate sector of the nation. The Securities and Exchange Commission of Pakistan
(SECP) is an organization whose purpose is to develop a modern and efficient corporate
sector and a capital market based on sound regulatory principles, in order to foster
economic growth and prosperity in Pakistan. The Commission also regulates various
external service providers that are linked to the corporate sector, like chartered
accountants, rating agencies, corporate secretaries and others.
Various Corporate Sector’s are
 Chemical Sector
 Telecom Sector
 Financial Sector
 Real Estate Sector
 Textile Sector
 Banking Sector
 Tourism Development Sector
 Health Sector

Companies incorporated under these sectors are

Financial
Companies Insurance Banking
43,618 Services 244 56 47
Incorporated Companies Companies
Companies
Local general
Private companies Modaraba
39,628 64 insurance 48
limited by share companies
companies
Local life
Public non-listed Investment
2,214 57 insurance 3
companies advisors
companies
Foreign general
Public listed
687 Modarabas 47 insurance 3
companies
companies
Foreign companies 643 Close-end mutual 37 Foreign life 2
funds insurance
companies
Welfare
Leasing
organisations and 357 30
companies
associations
Asset
Trade companies
83 management 4
limited by guarantee
companies
Open-end mutual
Unlimited companies 6 3
funds
Credit rating
2
companies

Corporate social responsibility or CSR as it is fondly called is a relatively newer


concept in Pakistani corporate sector. The international market is adopting newer and
innovative ways to show that they care for the humanity. Pakistani CSR scene leaves
much to be desired.

Types of Financial Resources Available


Types of Financial Resources available particularly to companies in this sector
are:
 Debt &
 Equity

1) Debt Financing
Business owners may have some trepidation about borrowing from a
financial institution, as it means relinquishing some cash profits. But it could be a
good option so long as you expect to have sufficient cash flow to pay back the
loans, plus interest. The major benefit for debt financing, unlike with equity
financing, you'll retain full ownership of your business. The interest on business
loans is also tax-deductible, and you’ll build your credit.
Small businesses frequently take bank loans. They are usually easy to
obtain – so long as you have good credit, enough equity to cover the payments
and you're not already carrying heavy debts. These loans are generally granted
either on a short-term basis of less than one year or long-term basis of more than
one year.
Commercial finance companies also lend money and are willing to fund
riskier ventures that don't have solid financials. But this type of funding usually
comes with high interest.

2) Equity Financing
Small business owners when weighing debt and equity financing options
often opt for equity financing because they have concerns about either qualifying
for a loan or having to channel too much of their profits into repaying the loan.
Investors and partners can provide equity financing, and they generally expect to
profit from their investments. No debt payments mean more cash on hand.
Moreover, if no profit materializes, you aren’t obligated to pay back equity
contributions.

Drawback of Equity Finance:


The major drawback of equity financing is that you are no longer the full
owner of a business once you have other financial contributors who expect a
share. As such, you will be relinquishing not just financial control, but will no
longer be the sole arbiter of the business’s creative and strategic direction.
There are also so-called angel investors: wealthy individuals or networks that are
willing to fund small businesses. Angels are the largest source of seed and start-up
capital for businesses, investing $25.6 billion in businesses in 2006, according to
the Center for Venture Research at the University of New Hampshire. Angel
investors tend to fund small businesses for longer periods of time and expect a
lower return on investment than do venture capital firms.
Venture capital firms, on the other hand, provide equity for businesses and expect
high returns on their investments within three to five years. They generally fund
companies with significant growth potential -- Microsoft and Google attracted VC
funding -- not small businesses.

Sources of Finance according to Nature:


In the present days there exist several sources of finance. Keeping in view the
type of requirement the finance sources are chosen. Find below various types of
finance source:
1) Long-term Sources of finance
Long-term sources of finances can be raised from the following sources:
 Share capital or Equity Share.
 Preference shares.
 Retained earnings.
 Debentures/Bonds of different types.
 Loans from financial institutions.
 Loan from State Financial Corporation.
 Loans from commercial banks.
 Venture capital funding.
 Asset securitization.
 International

2) Medium-term Sources of finance


Medium-term sources of finance can be raised from the following sources.
 Preference shares.
 Debentures/Bonds.
 Public deposits/fixed deposits for duration of three years.
 Commercial banks.
 Financial institutions.
 State financial corporations.
 Lease financing / Hire Purchase financing.
 External commercial borrowings.
 Euro-issues.
 Foreign Currency bonds.
3) Short term Sources of finance
 Trade credit.
 Commercial banks.
 Fixed deposits for a period of 1 year or less.
 Advances received from customers.
 Various short-term provisions.

Internal And external Sources of finance:

Internal Sources
Traditionally, the major sources of finance for a limited company were internal sources:
 Personal savings
 Retained profit
 Working capital
 Sale of assets

External Sources

OwnershipCapital
In this context, 'owners' refers to those people/institutions who are shareholders.
Sole traders and partnerships do not have shareholders - the individual or the partners
are the owners of the business but do not hold shares. Shares are units of investment in
a limited company, whether it is a public or private limited company. Shares are
generally broken down into two categories:

 Ordinary shares
 Preference shares

Non-Ownership Capital
Whilst the following sources of finance are important, they are not classed as
Ownership Capital - Debenture holders are not shareholders, nor are banks who lend
money or creditors. Only shareholders are owners of the company.

 Debentures
 Other loans
 Overdraft facilities
 Hire purchase
 Lines of credit from creditors
 Financial structures of four well known British companies
 Grants
 Venture capital
 Factoring and invoice discounting:
 Leasing

Personal Savings

Quite simply, personal savings are amounts of money that a business person, partner or
shareholder has at their disposal to do with as they wish. If that person uses their
savings to invest in their own or another business, then the source of finance comes
under the heading of personal savings.

Although we would generally discuss personal savings as a source of finance for small
businesses, there are many examples where business people have used substantial sums
of their own money to help to finance their businesses

Retained Profit

This is often a very difficult idea to understand but, in reality, it is very simple. When a
business makes a profit and it does not spend it, it keeps it - and accountants call profits
that are kept and not spent retained profits. That's all.

The retained profit is then available to use within the business to help with buying new
machinery, vehicles, computers and so on or developing the business in any other way.
Retained profits are also kept if the owners think that they may have difficulties in the
future so they save them for a rainy day!

Working Capital

This is the short-term capital or finance that a business keeps. Working capital is the
money used to pay for the everyday trading activities carried out by the business -
stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and
so on. Working capital is defined as:

Working capital = current assets - current liabilities

Where:
current assets are short term sources of finance such as stocks, debtors and cash - the
amount of cash and cash equivalents - the business has at any one time. Cash is cash in
hand and deposits payable on demand (e.g. current accounts). Cash equivalents are short
term and highly liquid investments which are easily and immediately convertible into
cash.
current liabilities are short term requirements for cash including trade creditors,
expense creditors, tax owing, dividends owing - the amount of money the business owes
to other people/groups/businesses at any one time that needs to be repaid within the next
month or so.

Sale of Assets

Business balance sheets usually have several fixed assets on them. A fixed asset is
anything that is not used up in the production of the good or service concerned - land,
buildings, fixtures and fittings, machinery, vehicles and so on. At times, one or more of
these fixed assets may be surplus to requirements and can be sold.

Alternatively, a business may desperately need to find some cash so it decides to stop
offering certain products or services and because of that can sell some of its fixed assets.
Hence, by selling fixed assets, business can use them as a source of finance. Selling its
fixed assets, therefore, has an effect on the potential capacity of the business - the
amount it can produce.

Other sources:
Other sources of finance include

Leasing

Leasing is like renting a piece of equipment or machinery. The business pays a regular
amount for a period of time, but the item belongs to the leasing company.

Most company cars are leased to businesses. The business pays a monthly fee for the car
and at the end of the period (normally about two years), the business swaps the car for a
newer model.

The advantages of leasing are:

• Cheaper in the short run than buying a piece of equipment outright.


• If technology is changing quickly or equipment wears out quickly it can be regularly updated or
replaced.
• Cash flow management easier because of regular payments.
The disadvantages of leasing are:

• More expensive in the long run, because the leasing company charges fees which make the total
cost greater than the original cost.

Hire Purchase

Business hires the equipment for a period of time making fixed regular payments. Once
payments have finished it then owns the piece of equipment. Hire purchase is different to
leasing in that the business owns the equipment when it has finished making payments.
With an equipment lease, the equipment is handed back to the leasing provider.

Debt Factoring

A business sells its outstanding customer accounts (those who have not paid their debts to
the business) to a debt factoring company.

The factoring company pays the business - say 80-90% of face value of the debts - and
then collects the full amount of the debts. Once it has done this it will pay the remaining
amount to the business less a charge.

It is a good way of raising cash quickly, without the hassle of chasing payments. BUT it
is not so good for profits since it reduces the total revenue received from those sales.

Government Finance

The government and the European Union provide help to businesses for the following
reasons:

Protect jobs in failing/declining industries.

Help create jobs in areas of high unemployment.

Help start up new businesses.

Help businesses relocate to areas of high unemployment.

Some of the main sources of funds are:

European Structural Fund

Assisted Areas
Regional Selective Assistance

Small Loans Guarantee Scheme

Trade Credit

A business does not always have to pay their bills as soon as they receive them. They are
given period of credit, normally around 30-60 days. By trying to extend this period they
can improve their short-term finance position.

Small businesses now have some protection under law that prevents larger firms
exploiting their credit terms.

Trade credit is an important source of finance for nearly all businesses – since it is
effectively a free source of finance.

Retained Profits

The cheapest form of finance is the business’ own profits. In the UK over 80% of
retained profits are reinvested back into the business. Since it is not being borrowed from
anyone, it does not cost money to use.

Own Capital

For sole traders and partnerships a common source of finance, especially for start up is
money from the individuals who are forming the business. They may also borrow money
from family and friends. Own capital is a costless form of finance, but carries the risk of
the money being lost.

Working Capital

Working capital is the amount of money available for the day to day running of the
business. It is the difference between current assets and current liabilities. See below for
more details of how working capital can be used.

Sources of Finance for Public Sector Organizations

Public sector organizations receive from both the normal sources that most businesses
receive money, but also from tax revenues. Most public sector organizations, such as
schools and hospitals obtain more straight from the government - who have previously
collected the money from tax payers.
Other organizations gain money from sales, e.g. stamps for the Post Office, and licenses
for the BBC.

Guidelines & Choice between Debt and Equity for Meeting


Financial Requirements;
 The management decision regarding choice between debt and equity modes of
finance is contingent on a number of factors which include risk and cost of
capital. Under a private enterprise system the prospects of individual gains are
inevitably associated with the possibilities of loss, and this hazard rests on those
who have supplied the capital. The hazard shows itself in the form of uncertainty
both of income to be received and recovery of principal invested. It is these
uncertainties that constitute risk.
 If a corporate entity fails to earn a profit and continues to spend more money than
it takes in, a time will come when it will be unable to meet its current obligations.
 When that happens the company becomes insolvent or bankrupt. In such
situations all debts must be settled in full before any equity claims can be paid.
 Because of the priority of debt claims before equity claims the creditor is ready to
supply long term capital in the form of debt at a lower cost in the form of interest.
The creditor, therefore, does not demand a proportionate share in profit. It may be
pointed out here that the position of a creditor is negotiated one as a result of a
bargain between the firm and the supplier of the funds. The decision of accepting
a particular level of risk, there fore is voluntary on both the sides.
 If we compare debt and equity securities from the point of view of allocation of
income, holders of debt securities have to be satisfied with low and fixed
incomes. These instruments also enjoy stable market values because of lower
risks. on the other hand there is lot of variation in the income of equity security
with the result that the price performance is more volatile resulting in the higher
degree of risk. In accepting this higher level of risk, equity holder on the average
expect a higher rate of return.
 The mix of debt and equity, that is, the capital structure differs from industry to
industry. Industries with stable sales performance and stable margins (selling
price-cost relationship) permit use of more debt. On the other hand, an industry
having less stable sales performance and volatile margins may have a lower debt
to equity ratio.
 Therefore, companies in stable sales industries will enjoy lower cost of capital
compared with companies in volatile sale performance industries. Also the capital
structure affects the stock market performance of the shares of company. A
company using more debt than the industry averages may have lower share price
because of higher risk. Use of more debt may result in higher earnings per share
but they may be offset by increased risk, resulting in an adverse price effect .
 The mode of financing used is also influenced by the motivation to keep control.
A firm may avoid issuing new equity for fear of dilution of control and, therefore,
the growth requirements may be financed through internal equity (retained
profits ) only. Debit may also be used when this source falls short of the
requirement. This could result in a firm moving away from the optimal debt to
equity ratio.

Conclusion:
Pakistan is a developing country and its economy is going to a depression. Most of the
organisations are not certain about the government also, but a lot of opportunities are
available for them.

The above data suggests that debt and equity have got certain advantages as well as
disadvantages, but debt has got more advantages in Pakistan, so debt is more suitable
option in that part of the world. It is easy to get credit and also tax benefit is also there.
But the bankruptcy cost is also there, so a mix of debt and equity is required to increase
the market share.

Reference:
[1] http://en.wikipedia.org/wiki/Pakistan_Inc
[2]http://www.dailytimes.com.pk/default.asp?page=2008\08\19\story_19-8-2008_pg11_7
[3]http://telecompk.net/2007/07/09/corporate-social-responsibility-in-pakistan-telecom-
sector/
[4] http://www.ise.com.pk/ise%20website/investor%20education/HTML/research
%20paper%20links/html/rpaper_2.html

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