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Flotation of stock market support fund delayed on flimsy grounds

The benchmark index of Pakistan Stock Exchange (PSX) is on persistent decline for the last two years. The recent hike in policy rate by 100bps has further accelerated the decline rate. It seems that the ship (PSX) has been abandoned by the captain (regulator), its engine has stopped working (daily trading volume has reduced to historic low) and passengers (investors) have been left at the mercy of hide tides (pressure of the IMF). Before making further deliberations, one point must be made clear that the prime purpose of the stock exchange is ‘capital formation’ and not revenue generation. The most distressing fact is that the focus of incumbent government has reduced to a single point, mobilization of tax and hardly any effort is being made to boost economic activities in the country.

In May this year, a suggestion was made to float a ‘Stock Market Support Fund’ and the proposed amount was Rs20 billion. In the prevailing situation the work has to be done ‘on war footing’ because each passing day is aggravating the miseries and in no way ‘sweeping the issue under the carpet’ can offer a ‘natural’ remedy. However, the simplest option of allocation of Rs20 billion has been delayed on all sorts of flimsy grounds. The believers of ‘maintaining status quo’ say this fund cannot be floated without a sovereign guarantee. They also go to the extent of saying that ‘now Pakistan is under IMF Program and it needs formal approval of the lender of the last resort to issue sovereign guarantee. However, the believers of ‘out of the box thinking’ insist that IMF is not there to curb economic activities in Pakistan, it simply demands certain operating procedures that are based on rationale and the outcome of the decisions have to be gauged against the targets.

It will not be for the first time that such a fund is being created for the support of investors in equities market. A similar fund was floated in the past which enabled National Investment Trust (NIT) to earn about Rs14 billion. The total amount mobilized from EOBI, National Bank of Pakistan (NBP) and State Life Insurance Corporation (SLIC) was Rs20 billion. The Fund primarily bought shares of state owned enterprises (SoEs) which provided an opportunity to small investors to take an exit. This time the same strategy may also be followed because shares of most of the listed companies, particularly SoEs, are quoted far below their break-up value.

There was a suggestions that mutual funds should form a consortium and borrow Rs20 billion from commercial banks. However, some critics rejected the idea on the grounds that depositors’ money cannot be used for bailing out investors in stock market. It sounds a bit morbid because commercial banks themselves are the promoters of mutual funds. It was also said that as per Prudential Regulations commercials banks are not allowed to invest more than a stipulated percentage of shareholders’ equity in the shares of public limited companies. While some analysts believe that commercial banks have not busted this limit, others demand that a similar limit should also be imposed on commercial banks, confining them not to invest more than a specified percentage of shareholders equity in the Government of Pakistan (GoP) securities.

Some analysts are of the consensus that persistent hike in policy rate is the single largest reason for shift in paradigm to fixed income securities from equities. As small savers face reduction in disposable income as well as savings, they are not keen in investing in high risk equities. They demand, if the GoP is serious in lending support to equities market, policy rate must be reduced to boost liquidity and reverse the trend of investment to equities market, from fixed income securities. Some cynics even go to the extent of saying that the incumbent government is adamant at penalizing the brokerage fraternity, which is often alleged for running the gambling den. Many in Islamabad believe that less than a dozen brokerage houses enjoy the power to set the market trend, which is totally incorrect.

 

The disgruntled brokerage fraternity says that only the policies of incumbent government are responsible for the persistent fall of equities market. It is true that the hike in interest rate encourages investors to liquidate their investment in equities, but the real culprit is newly-imposed ‘know your customer’ criteria. According to a brokerage house, it had sent 1,100 applications for opening up of accounts but only three have been approved. One of the conditions, mandatory biometrics is proving last nail in coffin, as investors are required to visit the brokerage houses for the biometrics, because the app using mobile phones has been disabled. Interestingly billions of rupees are sent and received through mobile phones, but use of mobile app has been banned.

There is consensus among equity market analysts that the market capitalization has reduced to US$ 41 billion, from US$100 billion due to political uncertainty, bad policies and above all growing ‘confidence deficit’. They insist that the wiz kids sitting in Islamabad consider Pakistan Stock Exchange a ‘gambling den’ where all are hitting jackpots therefore their income must be taxed at the highest rate. They completely fail to understand the reasons behind declining number of listed companies and dismal number of new flotation. According to informed sources the definition of capital gain has become the biggest stumbling block in the conversion of private limited companies into public limited companies.

It is worth noting that while the number of flotation of new companies is dismal, the number of listed companies is on constant decline because of perpetual buy back of shares by the sponsors of listed companies. This establishes two points: 1) sponsors are not keen in mobilization of funds through public offering and 2) they also believe that there is no incentive for listing, income of public limited companies is taxed at high rate. On top of that the investors in public limited companies have to pay tax on dividend as well as capital gains.

As a first step, Stock Market Support Fund should be launched without wasting further time. There is also need to bring change in the mind set of those assigned the responsibility of managing the economy. They should not hide their incompetency behind IMF conditions and the Fund should also facilitate Pakistan in boosting GDP growth rate. If documentation is necessary for meeting FATF requirements, KYC process should also be made simpler, not a stumbling block.

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