SHARE ISSUE PRIVATISATION: A STRATEGY NEEDS JUDGMENT
TARIQ AHMED SAEEDI
May 3 - 16, 2010
Is it effective a strategy for the government to divest its shares in public sector enterprises through stock markets in the backdrop that international financial system is on a rollercoaster ride at present, and when foreign fund managers are retreating from venturing in to investments in new assets on volatility in global benchmark indices? While global financial situation is not healthy and thus swelling up figures is not less than a challenge for economic manager seeking foreign funds, yet share issue privatisation of public sector enterprises will prove an impressive strategy, comments a Karachi-based capital market analyst.
Ahsan Mehanti, chief executive Shehzad Chamdia Securities says given the global liquidity crunch assuming that a proposed privatisation will magnetise swamp of funds from outside is somehow unfounded. However, "attracting foreign direct investments is a next step to divesting shares of state-run enterprises to public," he remarks in an interview with Page.
First of all, privatisation process of state-run enterprises, which is at recess for last three years, should be expedited, believes Ahsan. Once divested, the shares will nudge their values up to invite funds, he says.
Within two and half years, the international spectrum has been overcrowded with failure stories of business groups once known for their impregnability, unleashing domino effects on the global financial system. In recent past, subprime mortgages raised questions over the invincibility of few of financial bellwethers like Lehman Brothers, and presently Goldman Sachs. A complex global financial structure is so intermingled as to put brake on racing rage in financial systems around the world whenever it loses fuel. Goldman Sachs is a recent example reflecting this fiendish correlation. The fraud charges against the leading investment bank pulled down most of the indices all over the world. More surprising than this is current Greece's downgrade. Standard & Poor's downgraded the Greece rating on its credit risk. Amazingly, the day the rating agency took the decision marked ubiquitous falls of leading stock markets not only in Europe but also in Asia. While FTSE-100 lost some percentage points on Greece default woes, BSE-30 index in India, Dow Jones Industrial Average in US, Hang Seng in China, Nikkei-225 index in Japan, and benchmark indices in South East Asia, Seoul, and you name it erased gains on the similar concern. Until last week, optimism returned on the health of Greece. Nevertheless, foreign fund mangers are still lurking in the corner to take any risky ventures without stop loss. In such a grim outlook, foreign investors are difficult to be tamed though Karachi stock exchange gains points on foreign buying. Importantly, however, foreign investments in Karachi stock market in April declined as compared to volume of funds pumped in the preceding month mainly because of the buyers' pullback.
Thanks to the incumbent economic team, Ahsan says, which is focussing on acceleration of privatisation process, saying, "We have already waited a lot". Share issue privatisation will be instrumental in goading foreign investors in addition to give breathing space to companies to generate inexpensive funds to cope up with liquidity crunch.
Share issue privatisation in which state-run companies go public to accumulate money from stock exchanges is a popular concept worldwide. Most of the public sector enterprises generate funds through offering their shares in public from bourses around the world.
Ahsan Mehanti, who has vast experience of asset management operations of several local asset managers, do not consider it a right approach to unsystematically float shares of public sector enterprises in public, categorically opposing the school of thought that favours privatisation of government firms simultaneously through capital market as well as direct selloff. A meticulous discernment is needed in this regard, he advises. "Some companies of strategic interest as well as loss-making enterprises should not be offered to public abruptly." If government sells shares of loss-making entities to public, then in any way it is entrapping the shareholders in its personal trouble, underscores Ahsan.
KESC, OGDCL, and PIA are for example entities of high strategic interests. What the shareholders got after investing in PIA. "My point is lose-making and state-run enterprises of strategic interest should first be offered for sale to foreign investors instead of public," he emphasises.
Share issue privatisation is recognised for its developing capital market around the world. Since 1991 when the government of Pakistan initialised the privatisation programme more than ten public sector enterprises such as OGDCL, KESC, PTCL, PSO, NBP, Habib Bank, PIA, etc. have their shares floated in local bourses, spurring individual share ownerships as well as building market capitalisation.
Market capitalisation in benchmark Karachi stock exchange had reached historically high of US$76 billion on April 18, 2008 then it had started to decline in the coming years. Even though, it still hovers at over $35 billion. It is a astounding a fact that such firms account for main proportion of trading volume and capitalisation.
In terms of market volume and capitalisation PSEs, which have been privatised, have 60 per cent contribution in equity market, states Ahsan Mehanti. Especially, National Investment Trust (NIT) has been instrumental in volume building, he says.
Chief executive Shehzad Chamdia Securities believes private governance of companies is relatively more effective and efficient. 'It is good for improving performance of the companies.' When people become shareholders of the state-run enterprises, it builds a citizens' surveillance system of monitoring performance of the companies, he says. Referring to making employees shareholders in the public sector enterprises, he says this will boost the morale of employees and close them near to their organisations. Local investors will have an opportunity to govern state run enterprises with minimal investment, he concludes.