EQUITIES MARKET THE PROVIDER OF LONG TERM CAPITAL

MISPLACED PRIORITIES IMPAIRING PROCESS OF CAPITAL FORMATION

SHABBIR H. KAZMI
July 21 - 27, 2008

Capital markets play the most vital role in mobilizing the much required funds for creating productive facilities. In the absence of DFIs and investment banks in Pakistan bourses became the key providers of funds to the business entities. Over the last five years bourses have been playing a key role in resource mobilization. Not only that the quantum of listed capital was increased manifold but market capitalization also registered substantial increase.

During the first six months of 2008 the KSE-100 index has moved in two opposite directions. It created historic highs and also broke all the previous records of low daily trading volume. As the market started suffering from some systemic risks in settlement rules of the game were changed to halt the nosedive. Two key decisions were make lately to bring the circuit breakers at the previous level and to create a market support fund, amounting to Rs 50 billion.

In a hasty move the high-ups reverted back to the old circuit breaker mechanism but failed in mobilizing the much needed fund. The result was massive erosion in values leading to violent demonstrations at the stock exchanges. There was news that Rs 10 billion fund has been created but its participation was not evident from the market behavior, though the market managed to close on appositive note.

Looking at the recent behavior of the market one tends to agree that the delay in formation of fund was a deliberate attempt. All those asked to contribute money have significant exposure in the equities market. Therefore, they were keen in letting the market plunged to the lowest possible level for maximizing the gains. They were also not interested in departing with the amount on which they have the least control.

On Friday the KSE-100 index gained some momentum but 'vultures' wanted some more casualties. It may be said that as the prices became attractive 'disgruntled' investors preferred to take an exit. However, this is the weakest argument because after the commencement of purchases by the proposed fund investors did not have any reason to indulge in panic selling.

It was only during the regime of Shaukat Aziz, last prime minister that any concerted effort was made to attract the small investors to equities market. IPOs and secondary offers attracted record number of applications when shares of state owned companies were offered to general public under 'Privatization for Public' program. It is also on record that during 2002-07 Pakistan emerged as one of the best performing markets. The reason was Shaukat Aziz used to take personal interest in equities market. He used to project equities market as the indicator of economic progress in the country. The time has changed, neither the new economic managers have time to look at whatever is happening on the economic front nor are willing to take any decision, which can possibly improve the quality of life of people.

One has no hesitation is saying that the apex regulators of equities market have failed in increasing the number of listed companies, in fact the number has reduced due to voluntary delisting program. One of the prime reasons for not listing the companies at the stock exchanges is 'no incentive for going public'. In the past the corporate tax on private limited companies was higher compared to the listed companies, which was an incentive for going public. The other reason was maximum paid-up capital limited for private limited companies, making public flotation mandatory if capital exceeded the stipulated amount. However, over the years this difference has virtually vanished and maximum capital limited for private limited companies is not there.

According to some analysts more companies should be delisted because such companies neither have the shareholding of the general public nor the sponsors bother to manage their companies efficiently. A good number of companies have less than Rs 100 million paid up capital and there is hardly any free float. It may be said that if such companies are delisted, it would reduce the income of the stock exchanges. However, analysts term this impression totally incorrect. Removal of such delinquent companies would reduce the quantum of listed capital by less than five percent but would save the regulators from a lot of hassle.

During the regime of Shaukat Aziz a number of state owned companies were listed at the stock exchanges and all of them were to be listed in due course of time. However, at the conclusion of his term it was decided that the next elected government would oversee all the transaction. Most of the documentation was complete and the transaction could have been completed without any delay. However, not much progress has been made by the present government. Similarly, no progress has been made on the GDR issues.

In fact it will not be wrong to say that sponsors have not been able to benefit from the equities market. They still prefer to borrow even the medium term and long term funds from the commercial banks. In the recent past leasing companies emerged as efficient provider of medium term funds. However, entry of banks in the leasing business created uneven field, banks enjoy greater outreach and their cost of funds is also lower compared to the leasing companies. A lot has been talked and written but neither the central bank nor the SECP is moved. The result is number of leasing companies are on the decline, because most of them are either posting nominal profit or incurring loses.

Capital market was also attracting a lot of foreign exchange in the SCRAs but due to political uncertainty and depreciation of rupee foreign investors have pulled out most of their investment. The current behavior of equities market refreshes the horrendous memories of nineties, often termed 'lost decade'.

Persistent increase in interest rates is also casting dark shadows on the equities market. One fails to understand why the central bank is adamant on raising interest rates contrary to the demands of business community, analysts and the representatives of the public? It is still not too late, the central bank act a little prudently.