If the impediments were removed, the listed companies may come out of the red

Nov 16 - 22, 1996

The capital markets in which sentiments turned bearish in 1994 are still under the grip of adversity. Unless the situation improves in general the sentiments are going to continue and small shareholders will not come back to the market. The situation is not even conducive to attracting the institutional investors and foreign fund managers as their investments have plunged to almost one-third over the years. These views were expressed by Mohammad Yasin Lakhani, an ex-president of Karachi Stock Exchange while talking to PAGE exclusively.

Lakhani said looking at the performance of the listed companies it was evident that the increase in input costs, POL prices, utilities tariff rates, devaluation and imposition of regulatory duty and general sales tax coupled with drastic cut in tariff rates on the import of finished goods have eroded the profitability of the corporate sector. The government has also failed to reduce the corporate tax, as promised earlier. But the real problem is that successive governments have failed to bridge the credibility gap - contrarily it has been increasing with the passage of time, he added.

Lakhani was of the view that many fiascoes, UBL and PTC privatization, devaluation of Pak rupee and the poor performance of the corporate sector have proved to be the serious impediments in attracting foreign investment. The recent selling pressure was mainly due to the negative feelings prevailing among foreign portfolio managers. They have lost almost two-thirds the worth of their original investment in Pakistan. He referred to Pakistan Fund managed by Morgan Stanley which had invested US$ 180 million which has been reduced to less than 90 million dollars due to devaluation. However, those who have invested in GDR have remained immune to devaluation.

The other factor responsible for the downslide of share prices was the massive right issues in 1995. Many of the rights were not fully subscribed to for two reasons. Either the issue was at premium or the companies did not make good profit for the existing shareholders. Even the right issues which managed to be fully subscribed to, are now selling below par value. Right issues should not be allowed at premium at all because the companies build up reserves by not distributing cash dividend and therefore the shareholders were penalized doubly if they were asked to subscribe at premium. Even the multinationals like ICI Pakistan have always given right issues at par and why not the others he added.

Many of the key sectors like textiles, polyester staple fibre, fuel and energy (particularly the captive power plants) and cement suffered on account of many factors. Textiles suffered due to high prices of raw cotton, margins in polyester were reduced due to increase in input costs and reduction in PSF prices, while captive power plants suffered due to high receivables and cement on account of increasing costs of furnace oil and electricity.

Lakhani said that since trading at Karachi Stock Exchange was confined to a few sectors and scrips, when the blue chips started registering massive decline in prices and speculators started losing large sums they diverted their money to other businesses, particularly real estate. Heavy selling pressure resulted in serious liquidity crunch but more importantly while the lending rates in the unofficial market, were as high as 3% per month, badlah rate has gone down to 1.5% but no one was willing to take the chances - there was gtreater probability of losing money than making even marginal gains.

He held the regulators, the Corporate Law Authority, the State Bank of Pakistan and the stock exchanges responsible for the present dismal condition of stock exchanges. In his opinion the capital market had lost steam because the scrips were over-priced and the companies having no track record were allowed to offer their shares at premium. Since the prices were going up the regulators did not bother to monitor the situation. Similarly, identification of companies regarding violation of listing laws and non-payment of dividevd should have been made much earlier.

However, Lakhani was confident that after the market touched the bottom line and prices had become attractive. In his opinion the average PE ratio in Pakistan was lowest as compared to some other emerging markets in the region and if the various impediments were removed, the listed companies would conveniently come out of the red. To substantiate his point he said that in almost all the major sectors, i.e. textiles, synthetic fibre, sugar, automobile assembly and cement, the units are working below installed capacity. If these units were able to produce exportable surpluses and export them, not only the manufacturers would be able to make profit but the country would also earn the much needed foreign exchange.

Concluding, he said "the companies do not need special favours but demand policies conducive to generating business. The regulators must perform their duty of protecting the small shareholders' interest." He also demanded that the necessary laws should be legislated to make the Central Depository operational pointing out that although the last cabinet had approved the draft on September 18 the ordinance had not yet been issued.