DRYING INITIAL PUBLIC OFFERINGS
SHABBIR H. KAZMI
May 28 - June 3, 2012
New listings at Karachi stock exchange (KSE) over the last five years have been conspicuous by absence. It is true that the stock markets around the world came under extreme pressure in the aftermath of 2008 financial crisis but many of these factors hardly had any relevance with Pakistan. It may not be wrong to say that Pakistan market has been suffering due to imprudent government policies, keeping the retail investors away from the equities market.
New productive facilities are created only when existing facilities become insufficient to meet the rising demand, but the local business community faces a unique phenomenon in Pakistan. Over the years, there has been persistent decline in capacity utilization, mainly due to prolonged outages of electricity and gas.
Energy is the basic requirement for industrial and commercial enterprises. In a country, that faces from 10 to 16 hours of electricity outages daily and non-supply of gas up to three and half days in a week, no entrepreneur will be keen in establishing new production facilities. If the local investors are shy, no foreign investor will be ready to invest his/her money.
It looks strange that the country needs to add up minimum 10,000MW generation capacity but no investor seems interested in establishing power plant. This dismal situation can be attributed to bad policies but the main reason is that government has been failing miserably in honoring its own commitments. Many of the IPPs face ultimate closure because of mounting receivables as state owned distribution companies have been failing in making timely payment of the electricity purchased. The poor cash flow of companies like SSGC, SNGPL, PSO, and refineries is pushing these entities towards delinquency.
It is only a recent phenomenon that average daily trading volume has improved, else, it has touched historic lows along with declining prices of shares of even quality scrips. Lack of interest of investors in equities market can be attributed to poor law and order situation, energy crisis, imposition of capital gains tax, and inability of the listed companies to pay dividend among the shareholders.
While securities and exchange commission of Pakistan (SECP) and management of stock exchanges can do little in overcoming energy crisis, they can certainly do a lot in restoring confidence of investors.
The existing listing rules are sufficient to make the sponsors and senior management to follow good management practices including disclosure, complete transparency, and above all abiding by the code of corporate governance. The sluggishness of the regulators is evident from placement of nearly two-third of the listed companies on the defaulters' counter. It has been pointed out repeatedly that the sponsors of these companies should be asked to buyback the shares at a price to be determined by the reputed chartered accountants.
To encourage fresh listing, the government should determine a maximum limit of shareholders' equity for the private limited companies and also reduce the corporate tax rate for listed companies to half of the rate applicable on private limited companies.
Last year a conference was held in Lahore to find ways to facilitate new listings. It aimed at to bring together the sponsors of the companies needing funds for their plans and help them meet with the financial advisors, the underwriters, the investment bankers, exchanges and the regulators but also to carefully review the business models of such companies so as to build a strong case for the IPO of these companies. The underlined objective for holding this conference was not only to develop a closer interaction with the companies ready to offer their shares to public but also to gain insight into the business model of these companies. This in turn would help the stock exchanges to confidently display these companies.
Over the years, the successive governments have followed a comprehensive program for the privatization of state owned enterprises as the policymakers realized the benefits of listing and subsequent offer of the shares of these companies to public.
Privatization for people program has not only allowed the government to divest its holding in state-owned enterprises but also share the benefits with public at large. The privatization commission also participated in the IPO Summit, and their plans seem quite ambitious. However, due to depressed market and economic conditions, the privatization process has been rather slow. It is hoped as the economic conditions improve, the government would initiate this process in earnest, and the benefits would be there for all to share.
In the past, both the exchanges and the SECP thought that framing supporting regulations and implementing these were all what they needed to do. But, this paradigm has shifted and now frontline regulators face tremendous challenges from other markets such as informal lending market, the private equity players, the investment banks, and the banking sector as all of these entities want to serve the corporate sector and provide funding for new projects. In order to revive the markets, not only new businesses have to be created, but investors' confidence has to be restored.
Tax concession is one of the incentives that can encourage new listings. In the last budget, FBR announced certain measures for encouraging equity investments in balancing, modernization, and replacement (BMR) related projects and offered corresponding tax concessions besides increasing the tax rebate to 15 per cent to the newly listing companies in the year of their listing. The existing corporate tax rate of 35 per cent is one of the highest in the world.
If the government gradually reduces the corporate tax rate then many private limited companies will surely consider this as one of the additional benefits that they would get from the listing of their shares. The government has to be convinced about the benefits of reducing corporate tax for encouraging new IPOs.