WHILE the sponsors’ desire to mobilise capital from the stock market is at depressingly low ebb, there is an insatiable appetite of investors for new equity offerings.
The point was proved by the Initial Public Offering of International Steel Limited (ISL) which hit the stock
market on April 12. The floatation was over subscribed by 30 per cent on the first day of the three days at the ‘book building’ stage.
Analysts said the ISL was the first company to enter the equity market with an IPO after a gap of 12 months.
The State Bank of Pakistan reported on Wednesday that the private sector total borrowings from scheduled banks amounted to Rs177 billion. Corporates prefer to raise money at exorbitant interest rates from banks rather than tap the capital market for cheaper funds. The last five years saw an average of less than eight floatations a year.
The disenchantment of private companies to go public, considering that Pakistan equities have offered exciting return of 28 per cent last year, seems mind-boggling. But many market participants see “a method in this madness”.
One of the major reasons pointed out by the broker community for lackadaisical interest of sponsors to enter the stock market is the absence of the tax incentives for listed companies and the stringent requirements of corporate governance.
Up until June 2002, there was a difference of 10 per cent in rate of income tax paid by the listed and unlisted companies with the latter having to pay at 45 against 35 per cent for listed companies.
That difference was gradually eroded and now both are taxed at the same rate of 35 per cent.
The number of registered companies has increased by leaps and bounds in the last few years. “The Securities and Exchange Commission of Pakistan (SECP) proudly presents its accomplishment by declaring every month the new companies the regulator registered, (3,151 in 2010) which has now pushed the total corporate portfolio to 58,443”, said a stock broker.
“The transformation from ‘seth culture’ in running businesses to more open registered firms bodes well for the country”, says a third generation Oxford-educated child of one of the famous 22 families of the 1960’s. The story is nonetheless, half as glossy.
The penchant to keep control of corporates by individuals persists.
Public shareholders are still considered to be all but nuisance. Most registered companies comprise private companies, single member companies and public unlisted companies. The number of publicly listed companies on the stock exchange has scarcely managed to escalate.
At the moment, just about 638 companies are quoted on the Karachi Stock Exchange with listed capital of Rs924 billion. And even so, out of those listed entities more than 100 are lame ducks sitting on the ‘defaulters’ counter’.
In another 200 companies no trading takes place as almost all of the shares are held by sponsors in large frozen blocks. “Of what use are they to the small investors, though for the benefit of the exchange, they do add to the total market
capitalisation that the bourse is able to display?”, said an investor.
Incidentally, entities in one of the most affluent and high-growth sector: the cellular companies have opted to stay out of the public offer of equity. And that raises the question: Should wealthy companies earning enormous profits be forced to seek listing?
The shrinking IPO market, in spite of phenomenal growth in registered companies should be of concern to the government. Stock traders say that the government must take the lead in offerings of just a part from its almost wholly-owned giant companies.
The enormous gains that investors made from subscriptions in IPOs of state-owned companies, such as the Oil & Gas Development Company Limited (OGDC) and Pakistan Petroleum (PPL), brought them in droves to the capital markets, many years ago. Some estimates suggested that from less than 100,000, the number of investors in equities rose to 500,000. But that was until the stock market crash of 2008.
Both the needy and greedy small investors lost all that they had earned and more. The public sector offerings are not be seen even at a distant future and private sector listings are all, but slow.
The result is that too much cash is chasing too few shares at the market.
On any given day, volumes are almost always generated in as many shares as can be counted on the finger tips of one hand.
The government is at present stingily holding on to all its shares in public companies. None of those promises of
divestment of holdings in State Life Insurance and secon-dary offerings in the OGDC, the NBP and the UBL materialised.
The State Bank of Pakistan reported on Wednesday that government borrowings from scheduled banks had mounted to Rs317 billion during the first nine months of the ongoing fiscal year.
The current bull market presents the opportunity to the government to offer equities from its healthy state-controlled companies at heavy premium and lessen its burden of borrowings from banks.
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