NEED FOR ENHANCING FREE FLOAT OF EQUITIES MARKET

The move should also be complimented by delisting of companies with less than Rs 50 million paid-up capital

SHABBIR H. KAZMI
Sep 03 - 09, 2007

Pakistan's equities market suffers from acute shortage of quality scrips. This is because most the scrips are highly illiquid and trading is confined to about two dozen companies. Though, various efforts have been made in the past to increase the number of listed companies, absence of prudent policies have not helped in increasing the free float. Rather, the number of listed companies is on the decline due to mergers and acquisitions and voluntary delisting.

In the past there laws stipulating that if paid-up capital a company exceeds e bench mark, it has to be listed on the local stock exchanges and its shares have to be offered to the general public. This was the reason the largest number of companies were listed during nineties, commonly termed 'lost decade'. However, after the amendments in the law there is no legal compulsion on the entrepreneurs to list their companies on the stock exchanges.

Another reason for the declining number in new listing is the shrinking difference in the corporate tax applicable on private and public limited companies. There was a suggestion that the government should once again provide incentive by reducing corporate tax rate on public limited companies.

IPO

A closer look at the recent public offering tells very interesting story. Most of the offerings, in terms of number, were by the mutual funds. The three offerings worth mentioning are IPO of Habib Bank, secondary offering of OGDC and Standard Chartered Bank Pakistan IPO. It was also after a long time that certificates of a Modaraba were offered to public.

The face value of public offering was Rs 4,445.8 million and the premium charged was Rs 6,795.1 million and total subscription amounted to Rs 11,240.9 million. This does not include amount pertaining to IPO of Habib Bank. Secondary offering of OGDC and Habib Bank IPO yielded fabulous amount to the government.

PUBLIC OFFERINGS

Allied Rental Modaraba
BMA Principal Guaranteed Fund
Arif Habib
Hira Textile Mills
OGDC (2nd Issue)
PACE
JS Bank
JS ABAMCO
Flying Cement Company
Meezan Islamic Income Fund
Standard Chartered Bank
AKD Income Fund
KASB Stock Market Fund
Pervez Ahmed Securities
Pak Oman Advantage Fund
Sitara Peroxide
Faysal Savings Growth Fund
AKD Index Tracker Fund
Habib Bank
Alfalah GHP Income Multiplier Fund

TFCS

Lately, only three issues of term finance certificates (TFCs) were floated amounting to Rs 6,500 million. Out of this Rs 5,000 was raised through pre-IPO and public subscription amounted to Rs 1,500 million only.

Allied Bank TFCs amounted to Rs 2,500 million and carry interest rate of 12.46% (KIBOR+1.9%), second tranche of Bank Al-Habib of Rs 1,500 million at 12.61% (KIBOR+1.95%) and second tranche of Oric Leasing Pakistan of Rs 2,500 million at 10.33% (KIBOR+1.5%). The variation in interest rates denotes level of comfort of the investors.

It is worth noting that now many companies prefer not to list their TFCs on the stock exchanges and prefer to mobilize the desired amount through private placement. The other observation is that after substantial reduction in the interest rates corporate entities prefer to borrow from banks rather than going through the hassle of listing regulations.

This also suggests that there is ample liquidity in the market and many financial institutions and corporate entities are willing to lock their funds for longer duration, provided the rate of return is attractive.

It is necessary to point out that secondary market for TFCs has not blossomed as yet. TFCs remain preferred choice of pension/provident funds. These investors prefer to hold the investment till maturity. Therefore, trading activity has remained low. Another reason for low trading volume is lower interest of individual investors.

WAY FORWARD

Increasing the number of investors in the equities market can help in containing volatility. However, the number cannot be increased without enhancing free float. At present too many buyers are chasing too few shares. For example total 209.5 million shares exchanged hands on Friday. Out of these 175.5 million pertained to companies belonging to KSE-100 companies and 140.8 million shares were covered in KSE-30 index. Therefore, this could be said that bulk of the volume pertained to 30 companies. This is because the percentage of free float is high and shares of these companies are also liquid.

The SECP and the KSE must also decide fate of those companies, which have remained on 'Defaulters Counter' for years. The most appropriate action could be to ask the sponsors of these companies to opt for voluntary delisting.

Some of the analysts are also of the view that all the companies with less than Rs 50 million paid-up should be delisted immediately. They are also of the view that over the next couple of years all the companies must be asked to either meet the minimum paid up capital requirement of Rs 100 million or opt for voluntary delisting.

In order to compensate for any reduction in the revenue of stock exchanges, all the companies with more than Rs 500 million shareholders' equity (paid-up capital plus reserves) must be listed at the stock exchanges.