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It will help in containing financial cost as well as expand business

By SHABBIR H. KAZMI
 Nov ,19 - 25, 2001

Sigma Leasing Corporation (SLC) is the second leasing company which has decided to issue Right Shares at discount. While the decision will help in containing financial cost, it is also the step to meet minimum capital requirement fixed by Securities and Exchange Commission of Pakistan (SECP). Since the Corporation enjoys virtually 100 per cent recovery track record and has been paying modest dividend, analysts expects that most of the shareholders will exercise the right. The current offer at Rs 7 per share is about 30 per cent lower than the break-up value at the end of June 2001, the year end for the Corporation.

Most of the leasing companies, who have less than Rs 200 million paid-up capital were trying very hard to convince the SECP to extend the deadline fixed, June 30, 2001. However, the SECP was point blank in informing leasing companies about no further extension in time. At the same time it was evident that no more mergers and acquisitions were possible. Therefore, the SECP asked each company to submit plan for enhancing paid-up capital. Most of the companies have either received approval from the SECP or would be getting shortly. Only few companies are left which do not have any plan at all.

Initially the SECP was reluctant in allowing the leasing companies to offer Right Shares at a discount. However, with the help and active participation of Leasing Association of Pakistan, the SECP consented to allow leasing companies to issue Right Shares at a discount. SLC has decided to issue Right Shares in two tranches by September 30, 2002, first being for Rs 50 million is already underway. The issue has been underwritten by Chairman and Vice Chairman. Warrants have been dispatched.

According to Muhammad Nasim Khan, Chief Executive of Sigma Leasing, "Initially we had asked the SECP to allow SLC to issue Right Shares at 50 per cent discount. However, the SECP approved the issue at 30 per cent discount. The SLC share is quoted at Rs 10.68 at local stock exchanges. Therefore, the existing shareholders will be getting the shares at a discount. The book value is much higher than the price at which existing shareholders will be getting the shares."

According to a sector analyst, "All those companies which decide to offer Right Shares at discount will benefit in two ways: 1) liquidity position will improve and 2) financial expenses will come down. Due to improved liquidity, companies can immediately pay off the expensive debts, write more leases and not to renew the COIs which mature. In a nutshell, leasing companies will be able to curtail financial charges. This will help them to cut mark-up rates as well as pay improved dividend to shareholders."

Referring to SLC's decision to raise capital in two tranches, another analyst, said, "The management has made a prudent decision. As the economic activity in the country is expected to increase, SLC will be able to meet fund requirement at a very nominal cost, improve its margins and retain larger amount at the end of next financial year. The SLC has to issue the second tranche before September 30, 2002. This gives SLC ample time to negotiate better credit lines.

Underwriting of the issue by Chairman and Vice Chairman may seem contradictory to the basic concept on broad-based shareholding or against the interest of minority shareholders. However, an analyst said, "It is selecting a lesser evil. However, it clearly shows commitment of the sponsors." He was also of the opinion that sponsors have the option to off load their holding, at a later stage. Though SLC is considered a relatively illiquid scrip, if quoted price remain high, above par value, it offers an opportunity to sponsors and other shareholders to make capital gains.

YEAR 2001 RESULTS

The year ending on June 30, 2001 was a difficult period for all the leasing companies, SLC being no exception. Net profit for this period was Rs 12 million as against Rs 20 million for the previous year. While SLC managed to underwrite over Rs 200 million fresh leases, bulk of the business was generated in second half, Jan-June period. This can be attributed to the changed policy of the GoP regarding initial depreciation. However, this issue has been resolved to some extent.

HIGHLIGHTS OF SECP APPROVAL

* Right shares at 30 per cent discount.
* To be issued in two equal tranches, Rs 50 million each, up to September 30, 2002.
* The sponsors to fully subscribe their right shares entitlement.
* First tranche to be underwritten by Chairman and Vice Chairman.
* Underwriters not allowed to charge any Underwriting commission and Takeup commission.
* That portion of the second tranche, which will be offered to shareholders other than sponsors, will also be underwritten by sponsoring directors at Rs 7.00 per share before its offer to the shareholders.