FINANCE

 
1- FREE FLOAT OF PAKISTAN'S EQUITIES MARKET
2- MUTUAL FUNDS TO BENEFIT FROM PRIVATIZATION OF NRL
 

FREE FLOAT OF PAKISTAN'S EQUITIES MARKET

.

Daily trading volume is purely an outcome of buying/selling of traders and portfolio managers

 

By SHABBIR H. KAZMI
June 13 - 19, 2005
.

 

 

After the crash of stock market in March, the volatile behaviour still continues and there is an urgent need to revisit the market. It has become necessary to understand the factors, which have the potential to directly impact the market movement. It has also become imperative to understand the strength of various stakeholders. The most spontaneous response is, there is nothing like free float and small investors are conspicuous by their absence in the country. The daily trading volume is purely an outcome of traders' activity and buying/selling of the portfolio managers.

Theoretically, the stakeholders of the equities market include investors, day traders, speculators, brokers and the regulators. It is often alleged that in Pakistan the market is completely in the grip of brokers. Does any one have a doubt? The brokers wear different caps and brokerage is the most insignificant part of their total earnings. Thanks to the government's policy of exempting capital gains from tax.

There are about 200 members of the Karachi Stock Exchange (KSE) but bulk of the daily trading volume originates from less than a dozen members only. These members are also the Badla providers. Some of them have majority stake in asset management companies (mutual funds). These members influence election of member directors at the KSE Board, which makes them part of the regulatory regime. But they always use small investors as their protective shield, be it the exemption on capital gains, imposition of the CVT or proposal to replace the existing Badla system with margin financing. Are there small investors in the country?

The number of small investors, as quoted by different quarters ranges from 250,000 to 1.5 million. As against this number of Investor Accounts maintained with the Central Depository Company (CDC) are still around 50,000. The recent surge in number of accounts is only due to public offering of shares of the state-owned enterprises. It is often said that a large number of investors do not have Investor Account but maintain sub-accounts with the brokerage houses. However, the critics are of the view that sub-accounts are nothing but the 'Baynami' accounts.

Some of the analysts are of the view that number of investors has no relevance. It is the free float which indicates the level of participation of the investors. Some of the analysts say, it is very difficult to calculate the free float in Pakistan. Others strongly believe that calculation of free float of the top 30 volume leaders is easy to calculate. Some of the brokerage houses have recently released the indicative figure of free float, which ranges from 15 to 25 percent. However, many critics are of the view that the free float of most of these companies is not even more than 5 percent and in some cases it is less than 2 percent. The difference in figures can only be attributed to the basis of calculation.

These analysts say that the sponsors, financial institutions, mutual funds, portfolio managers and high net worth retail investors hold bulk of the shares of the top 30 volume leaders. Most of these shares are held very tightly and hardly exchange hands on the daily basis. Theoretically, mutual funds and portfolio managers should not be participating in the day trading. However, one has all the reasons to believe that these entities actively indulge in day trading. This perception is fully supported when one compares the daily trading figures and the volume of Badla investment of certain scrips with the free float figures, as calculated by various brokerage houses.

Having reached the conclusion that brokers draw bulk of their income from capital gains, they have to indulge in day trading or 'ordinary trading' to show that millions of shares exchange hands daily. This perception is confirmed by the daily settlement figures. It is estimated that at an average less than 10 percent of the total daily trading volume comes for the settlement.

It is also often said that laws in the country prohibit short selling. However, the realty is contrary to the perception. It is even evident in online trading. While most of the companies offering online trading facility do not allow short selling, some do allow. It is also said that the recent settlement crisis of OGDC was also the result of short selling.

Another menace of Pakistan's market is insiders trading. Though, this activity is also prohibited by law, it is also a fact of life. A number of prominent brokers are on the Board of Directors of a number of listed companies and have access to the information that has direct bearing on the share price. It is often noted that on the dates closer to scheduled Board meetings a lot of activity is witnessed in certain scrips. The common news driving the market is either high expectation of dividend and bonus shares or forecast of lesser profit compared to the pervious year/quarter. The actual outcome is often contrary to the forecast.

Therefore, unless the brokers are confined to their basic mandate they would continue to drive the market in the direction they desire. It is also imperative that the government takes steps to enhance the free float. Limited free float is the key reason for keeping the market highly volatile.

NAME OF COMPANY

SHARES OUTSTANDING (MN)

FREE FLOAT %

FREE FLOAT SHARES (MN)

Hubco

1157

58.5%

676

PTCL

3774

15.3%

576

SNGP

499

50.3%

251

Fauji Fertilizer BQ

934

20.8%

194

OGDC

4301

4.5%

194

MCB

371

49.6%

184

Fauji Fertilizer

339

45.9%

156

Sui Southern Gas

671

23.1%

155

DG Khan

184

60.0%

111

National Bank

591

18.5%

109

Nishat Mills

145

55.0%

80

Engro Chemical

153

46.2%

71

PPL

686

10.0%

69

PSO

172

37.9%

65

Bank of Punjab

181

33.6%

61

Pako

131

44.7%

59

Source: Jahangir Siddiqui & Company