MARCH 2005 CRISIS LED A FALL IN NEW LISTINGS, IPOS

"What makes the situation even more alarming is that in many cases the technical listings of existing companies have substantially reduced the free float."

SYED M. ASLAM
Apr 23 - 29, 2007

To rephrase Mark Twain: "April is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, October, November, May, March, June, December, August and February."

As these lines are being written, the benchmark KSE-100 index looks poised to break the record 12,273 points level exactly one year ago, closing at the second highest level of 12,189.29 points on Wednesday (April 18). This depicts a healthy gain of over 21 per cent over 10,040 points on the last trading day of 2006, Friday (December 29), just 484 points above 9,556 points on the last trading day of 2005, Friday (December 30), that depicted a marginal increase of just 5 per cent compared to robust annual growth of 65 per cent in 2003 to 4,471 points, 39 per cent in 2004 to 6,218 points and 54 per cent to 9,556 points in 2005.

Though the KSE 100 Index managed the highest ever level of 12,273 points in April last year the market failed to sustain the upward movement taking the Index less than two months to dip to the lowest level of the year at 8,766 points on June 15, managing to inch up slowly before wiping out gains made in December 2006- the first bearish December since 2002.

December 2006 was marked by extremely low volumes, uncertainty, volatility, periods of range-bound movement and an overall lack of direction. Around 60 billion shares were traded at the KSE in 2006 - the lowest since 2003 - in 2005 it was 91.4 b shares; in 2004, 85.6 b shares and 76 b in 2003.

The average daily volume in 2006 declined drastically to 260.69 million shares, which once again was the lowest since 2003 with 308 m shares; 2004 343.7 m shares and 2005 365.6 m shares. The value of average daily turnover declined in 2006 to Rs 31.6 billion compared to Rs 33.5 b in 2005, Rs 17.4.

Things, however, started to pick up after Prime Minister Shaukat Aziz announced on January 8 to extend capital gains exemption for another year till June 2008. On January 12, the Sindh government announced to extend levying the stamp duty for two years till 2008. The duty was decreed in Budget 2006-07 but was never levied. The extension of the capital gains tax exemption and stamp duty precipitated the bull runs that continued for weeks.

The planned privatization of the giant oil marketing company PSO and the floatation of IPO of Habib Bank, additional GDR of blue chip Muslim Commercial Bank and first time IPOs of National Bank, United Bank and Kot Addu Power Plant later this year also helped up the sentiments to drum a consistent bull run in January.

In December 2006 the SECP announced to re-appoint Zafar A. Khan and the same three nominee-directors for the year 2007. With the elections of five member-directors in the first week of December 2006 the induction of SECP appointed Chairman and three Directors in addition to the Managing Director completed the formation of the 10-member KSE Board for 2007. The elections were historic in a way because they were the last such elections under the present set-up with the expected demutualization of the KSE targeted end this year- elections will still be held but they will be like those held in any other listed company.

The year 2006 was the year of many firsts at the KSE- the introduction of 30 Index and the beginning of the phased implementation of the Risk Management System on December 4, 2006. The year 2006 was an eventful year for the KSE and the year 2007 is expected to be an even more eventful year.

In 2007, the top two challenges for the KSE revolves round demutualization, which is already in its pre-implementation phase, and risk management system- simply because without them the market would not be able to attract the local and foreign investment. We have constantly been hearing the talks about how to facilitate the growth in the size of the KSE from around $ 50 billion at present to $ 100 billion over the next five years, including a growth to $ 70 billion this year.

Developing the derivative market also lists heavy on the agenda of the KSE. Enhancing the flow of foreign portfolio investment also lists high on the agenda. But here is the catch-22 -derivatives market could only be developed with demutualization.

Protecting the investors' interests is another challenge. The SECP is already closely monitoring companies that announce but do not pay dividends and also companies that do not issue financial reports. Such practices should not be tolerated anymore and thus issuance of "dividend warrant" to such companies is more likely to be enforced this year.

Besides the development of the Future derivative water and efficient CFS mechanism should be enforced. One of the other major challenges would be the separation of settlement and trading risks to be dealt separately and not together as has been the practice. Issue related to the absence of confidentiality and dissemination of information laws and their introduction should also list high on the priorities of KSE. The year 2007 would indeed be a challenging year for the management of KSE.

One of the other big challenges pertains to attracting more companies to get listed. The years 2003 and 2004 were an eventful time for the KSE. Between 17 months ended June 2004 total market capitalization increased by 55 per cent from December 595 billion on December 2002 to over Rs 1,471 billion on June 1 2004. Though total market capitalization has kept increasing since then to Rs 3,473 billion on the 17th of this month the number of new companies getting registered at the KSE has come to a trickle- 17 new companies were listed in 2004, 19 in 2005, a number which fell to 9 in 2006. The collective listed capital of new companies also depicted a decline from Rs 66.8 billion in 2004 to Rs 30 billion in 2005 and Rs 14.7 billion in 2006.

Thus far this year a total of 10 listings including three technical offerings- OGDC's secondary offering; JS Bank and Standard Chartered Bank which acquired the Union Bank that offered no initial public offerings. The remaining seven new listed companies- Allied Rental Modaraba, Hira Textile, Pace, Arif Habib Limited, JS Abamco, BMA Guarantee Fund and Flying Cement, an existing company, offered IPOs. The listed capital of these seven new listed companies totaled Rs 44.7 billion.

In its budget proposals for 2007-08 federal budget the KSE, among other things, has asked the government to maintain the differential between listed and non-listed companies. KSE has proposed to the government to reduce the tax rates for the public limited listed companies in the same ratio as that of private companies after June this year when corporate tax rates for non-listed companies would be brought at par with listed companies at 35 per cent. KSE said that the tax incentive would help attract companies to get listed at the premier bourse of the country by bringing down corporate tax rates for the listed companies to 25 per cent compared to 35 per cent for the non-listed private companies. The differential 10 per cent tax incentive would make all the difference to attract new listings, KSE feels.

Talking to PAGE Khawaja Asad Sami, an analyst at ZHV Securities, said that not only the number of new listings has constantly been declining since 2004 but many of the new listings are technical without IPOs. "What makes the situation even more alarming is that in many cases the technical listings of existing companies have substantially reduced the free float. For instance, the acquisition of majority shares of Lakson Tobacco by Philip Morris, acquisition of Union Bank by Standard Chartered Bank and Metropolitan Bank by Habib Bank AG Zurich resulted in reducing the existing float available. Philip Morris bought the shares from the investors. So far this year, of the 10 new listings at the KSE three were technical while in 2006 four out of nine new listings were technical with no initial public offerings."

Attributing the IPO boom of 2003 and 2004 to the 'privatization for people' policy of the government, Asad feels that the boom may have continued had the March 2005 stock market crisis not occurred, echoes of which still keep on making rounds. "The forensic investigation carried out by US company Diligence and the report that it issued in late November last year failed to exorcise the ghosts of that eventful month two years ago. And the June 2006 crisis made the situation even worse. It keeps on having a negative impact still on the workings of the capital markets- new listings included-particularly in a market where speculation reins supreme with no or little attention to market fundamentals."