'LACK OF INCENTIVES, HARSH RULES DISCOURAGING NEW LISTINGS & IPOS'

'It is time for the apex regulator SECP to give itself a self-set annual listing target - both quantitative and qualitative.'

SYED M. ASLAM
Apr 23 - 29, 2007

The importance of capital market for mobilizing resources to accelerate economic growth through efficient use of funds could hardly be over emphasized. Much, however, also depends on the performance of the companies on the stock exchanges and how investor and shareholder enact cordiality with each other. The bottom line is whether the listed companies offer attractive returns to the investors and the shareholders?

During the last many years a wide ranging reforms have been initiated in Pakistan to make Pakistani capital market more transparent; efficient by adopting internationally recognized good business practices. The Securities and Exchange Commission of Pakistan (SECP), the apex capital market regulator, with the active consultation and collaboration of the three national stock exchanges has implemented appropriate laws to effectively monitor and supervise the capital market. Risk management system was introduced last December and would be fully implemented by the end of this year.

Initial public offerings (IPOs) became a rage four years ago when the government decided to disinvest a portion of its holdings in National Bank of Pakistan and Sui Southern Gas Company. The divestment of 5 per cent stocks of Oil and Gas Development Company (OGDC), the biggest oil and gas exploration company in the country, in November 2003 attracted Rs 28 billion. It fueled a public interest. What whetted the appetite for more IPOs by the small investors was that realizing of the fact that they could double their money within a few months. The divestment of 15 per cent shares of Pakistan Petroleum Limited in mid 2004 received a record 755,000 applications worth Rs 21 billion for an IPO that was issued to generate Rs 5.65 billion.

The 'privatization for people' policy helped increase the number of investors by ten-fold from just around 70,000 in a short span of two years ended mid 2004 and for the first time small investors were benefited. This was the time when the word IPO became a household rage that many otherwise ordinary housewives spelled "instant profit".

Though the Pakistani capital markets have kept on performing strongly year-on-year except for lackluster performance last year and the benchmark KSE 100 Index looked poised to breach the 12,273 points level set last April, the rage seem to have died down - at least for the small investors who looked forward for more IPOs of divestment of government shares in large state-owned and managed companies. There have been talks of divestment of Pakistan Steel Mills through the stock exchanges but nothing appeared certain.

Initial public offerings cast positive impact on the market impact sentiments, which helped deepen and broaden the market. They let a large section of the population gain exposure to stock market, albeit indirectly, through institutional investors like mutual funds. The drying up of the IPOs and for that matter new listings that offer IPOs, particularly the public sector offerings, pose challenges for the apex as well as frontline regulator to come up with listing-friendly policies to tackle the situation. Page tried to understand the reasons for the IPOs and new listings coming to trickle and talked to Zafar Moti, the CEO of Zafar Moti Capital Securities and a former director of KSE.

Mr. Moti attributed the slowing down of initial public offerings and new listings at the premier bourse of the country to a number of factors. "It was bad last year but things seem to be as bad, if not worse, this year that has witnessed minor offerings thus far. "I strongly feel that lack of incentives, regressive taxation, harsh rules and regulations pertaining to listing and default as well as failure to market KSE effectively within and outside the country are some of major detriments that discourage new listings and IPO offerings," he said.

"In addition, the rules practiced by apex regulator SECP and the non-motivating attitude of the frontline regulator KSE have also discouraged new listings and offerings. This is evident from the fact that we failed to turn the enthusiasm and the attention of foreign investors and markets after the successful launch of the GDRs of the Oil and Gas Development Company (OGDC) at the London Stock Exchange (LSE) December last. In addition, though GDRs do benefit us in many ways including giving us the global exposure, the fact remains they are pro-foreign investment than local investment. The visit of a high-level delegation from the UK that visited Pakistan after the launching of the GDRs of OGDC was aimed at tapping the potential - the ultimate loser of which would be the Pakistani capital markets. If Pakistani companies start offering IPOs directly in the foreign markets the national stock exchanges could be deprived of immense potential source of market capitalization which in turn would deprive local investors of profit-making that would be enjoyed by foreign investors.

"Like LSE, which has managed to attract around 50 Chinese companies, some of them really big, we should also find ways to attract Chinese companies to get listed here. The memorandum of understanding signed during the visit of Prime Minister Shaukat Aziz to encourage inter-border-listings offers us a distinct opportunity for just such a beginning. The agreement that calls for cooperation between the KSE and the Shanghai Stock Exchange allows Pakistan to maintain a presence at Shanghai reciprocated by Chinese presence at Karachi and it gives us an opportunity to have Chinese companies get listed here. The important thing is that a beginning must be made as soon as possible."

Calling tax difference between listed and non-listed companies as one of the major factors influencing the listings, Zafar said it must be ensured that listed companies should be allowed to pay the corporate tax at a lower rate than the non-listed companies. And the regulations governing 'default' should also be changed for newly listed companies. "A distinction should be made because applying same regulations to old and new companies alike is just not fair because the latter has to absorb costs, energy and time that are part and parcel of listings."

Under the existing regulations a listed company could be put on the defaulters counter for any of six specific reasons namely: if it is quoted below 50 per cent of face value for a continuous period of 3 years; has failed to declare dividend/bonus for 5 years from the date of last declaration; failure to hold annual general meeting for a continuous period of 3 years, is under liquidation; has failed to pay annual listing fee for a period of 2 years and failed to join CDC after its securities having been declared eligible securities by the CDC.

Zafar is optimistic that enhancing the time period by at least one year to regulations governing face value and dividend/bonus would encourage new listings to a certain extent. "These are good rules indeed but newly listed companies should not be treated at par with old companies because they need a head start."

Mr. Moti feels that it is time for a 'debate' among all the stakeholders - apex and frontline regulators, brokers, members and investors - to find ways that would increase the market capitalization and attract new listings. And he also feels that print media has an important role to play. "Only print media could help us achieve these vital objectives because discussions on electronic media, numerous and frequent as they are, rarely serve any purpose because electronic media by nature is undocumented while print media by its very nature is documented - and thus it is much more efficient." And this seemingly wholehearted trust in print media comes from a man who appears on the electronic circuit frequently.

Mr. Moti also stressed the need for the decentralization of powers of the SECP to allow its regional headquarters to have decision making powers that they do not enjoy today. He also emphasized the need to involve the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) as well as all chambers of commerce and industry in the country give their proposals and suggestions to help increase the market capitalization and attract new listings at the three national stock exchanges. "It is imperative to involve the FPCCI and the chambers of commerce and industry because their feedback and suggestions would help the apex and frontline regulators to identify the factors discouraging new listings."

Zafar also feels that it is time for the apex regulator SECP to give itself a self-set annual listing target - both quantitative and qualitative. "This is a regular practice elsewhere in the world and the time has come that this target-oriented strategy should be introduced here. There is no precedent of target-based and target-oriented listing plan but that should not discourage us to overcome the prevalent lack of innovation, marketing, non-commitment on the part of both the regulators to address the problems arising mainly due to inefficiencies of laws, rules and regulations.

"There is nothing wrong with the trading tools - they are efficient. However, there should be a different set of rules to attract new listings, and thus the IPOs, and it is imperative that they should not be mixed up with trading tools."

Zafar feels that the government should not only act as a facilitator but also as a catalyst because it still owns a substantial portion of the holdings of the listed companies. The IPO boom of the 2002-2004 became possible only because the government decided to disinvest substantial holdings in a number of huge, and known, public entities, he said. And it could still act as a catalyst to give a boost to the capital markets by off loading more substantial holdings. "I suggest that the IPOs of a number of Steel Mills and Habib Bank should be launched at the earliest to initiate the price discovery.

"However, the privatization need not be the only pipeline for the issuance of IPOs. We need varied IPOs from a number of other sources, particularly the new industries that should be encouraged to get listed."

Encouraged by the successful launching of GDRs by Muslim Commercial Bank and Oil and Gas Development Company at the London Stock Exchange December last, a number of listed companies including United Bank, National Bank, Allied Bank and Kot Addu Power Company have also announced plans to issue GDRs. In addition, MCB would also be offering a secondary GDR. PAGE asked Zafar how this impacts the capital markets? Zafar suggested that the launching of the GDRs of MCB and OGDC has helped put Pakistan on the global capital market map. "The ensuing enthusiasm is evident from the high-level delegation of British entrepreneurs that visited Pakistan soon after the launching of OGDC's GDRs at the LSE and the interest shown by some four dozen Chinese companies to launch GDRs at the KSE. Though we failed to en-cash the enthusiasm and the interest the fact remains that these GDRs have given the needed exposure. It has also helped provide a platform for the apex and the frontline regulators as well all other stakeholders to develop a strategy to attract international IPOs here. "I suggest that a committee should be formed at all the regional offices of the SECP. We already have developed marketing tools for just such a purpose which was used when the boards of the three stock exchanges were managed completely by elected directors from amongst the members. I, however, feel that under the existing circumstances the management of KSE, and for that matter also Lahore Stock Exchange and Islamabad Stock Exchange, would not be able to live up to the challenge to tap the opportunities because the veto power rests with the Chairman; a SECP nominee elected by the Board of Directors that include five elected member-directors, 4 SECP-nominated directors (including the chairman) and an independent Managing Director.