KARACHI: Dozens of listed companies have said in the last few days they’re cancelling the extraordinary general meetings (EOGMs) that were announced before June 9, the day Finance Minister Ishaq Dar presented the 2023-24 budget.

An EOGM is a huddle of a company’s shareholders held between two annual general meetings to address a major issue requiring their urgent approval to meet regulatory requirements.

The stated objective of these EOGMs, which were announced before June 9 and are now being cancelled in droves, was to increase the authorised capital.

Speaking to Dawn on Thursday, Arif Habib Ltd Head of Research Tahir Abbas said the companies wanted to increase their authorised capital to shield themselves from a rumoured tax on retained earnings. “The budget didn’t propose that tax. So these companies don’t need any increase in their authorised capital,” he said.

The rumoured tax on companies’ retained profits led to a lot of activity on the stock market in the run-up to the budget. Speculations that companies would have to pay an adjustable tax of 5-7.5 per cent on their retained earnings fuelled a spree of board meetings that called for holding EOGMs in 21 days to approve an increase in authorised capital.

Different from paid-up capital that reflects the amount of money a company has actually received from its shareholders in exchange for shares, authorised capital shows the maximum number of shares that a firm is entitled to issue to shareholders under its article of association.

In order to protect the retained earnings on their balance sheets from the rumoured tax, many listed firms came up with the idea of declaring one-time, heavy pay-outs to shareholders out of their reserves in the form of either cash dividends or bonus shares.

But cash dividends are taxed at 15pc. So the obvious choice for companies was to go for pay-outs in the form of bonus shares, which are untaxed.

However, bonus shares can only be declared if authorised capital of a firm exceeds its paid-up capital. Otherwise, the company must seek approval from its shareholders mid-year — i.e. through an EOGM — to increase its authorised capital before announcing a bonus share.

Contrary to the stock market expectations, Finance Minister Ishaq Dar didn’t announce on June 9 any tax on corporate reserves for 2023-24. At the same time, Mr Dar proposed a 10pc tax on bonus shares instead.

Hence, most companies are left with little incentive to increase their authorised capital — a move originally intended to avoid the rumoured tax on reserves.

The reserves of listed companies stand at approximately Rs6.4 trillion, according to data compiled by analyst Nasheed Malik of Topline Securities.

Published in Dawn, June 16th, 2023