Outsiders take fall for insiders’ violations

On August 8, the Iraq Securities Commission (ISC) announced that a total of 18 companies would be suspended for failing to submit their 2009 financials. Of these, 6 had already been suspended for never having submitted 2008 financials. (See the table for a complete list of the companies.) As of August 25, only four of the eighteen—HSBC subsidiary Dar Es Salaam Bank (BDSI), Gulf Commercial Bank (BGUC), Al Kindi for Veterinary Medicines (IKLV), and Al Qum’a for Financial Investment (VQUF)—had resumed trading.

There was more bad news for minority shareholders on August 18, when three of the companies that failed to submit 2008 financials—Iraqi for Bottling and Canning (IIBC), Messan Food Industries (IMFI), and Amusement Town (SAMT)—were delisted for not renewing their registration with the Iraqi Depository Center and failing to submit shareholders lists. A fourth company, National for Food Industries (INFF), was also delisted. In addition to the two violations cited for the other three companies, the reasons for INFF’s delisting also included an “inadequate” board of directors report that “does not support the continuance of the company’s business,” “continued losses, even after an infusion of additional capital,” and “cumulative losses exceeding total shareholders’ equity.”

Most of the 11 companies that remain suspended are likely to resume trading in the not too distant future. Indeed, it is not unusual for Iraqi companies to submit their year-end financials late, even though they get five months to prepare them and are allowed an additional two-month grace period after that. Evidently they find the ISC to be something of a paper tiger. And no wonder, as suspension from trading doesn’t really penalize anyone but the minority shareholder.

Even the ultimate penalty of delisting may make little difference to a company’s managers when it is heading for bankruptcy to begin with. Consider the case of INFF, for example, which was suspended in September of 2009 in advance of a rights issue in November and never subsequently resumed trading. This worked out fine for management—they got to go on paying themselves salaries with whatever money was raised. Once again it’s the outside investors, particularly those unlucky enough to have subscribed for the rights, that end up taking the fall.

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