Broadening shareholders’ base in Pakistan

For those who may not be very familiar with Pakistan’s capital market, the small number of listed companies and shareholders’ base may seem a little disappointing. Over the last one decade the number of listed companies has come down to around 650 from more than 750. Some of the critics are happy because they believe that the number has reduced due to the mergers and acquisitions as well as voluntary delisting. But the brutal reality is that bulk of daily trading volume is confined to less than two dozen companies. Many of the state owned enterprises are still not listed and the successive governments have failed in listing these corporations.

However, others are concerned as they consider the hike in benchmark index of Pakistan Stock Exchange unrealistic. They strongly believe that prices of shares are far above their intrinsic value. The limited free float may allow the large net worth investors and the day traders to make a quick buck, but smaller investors are becoming ‘endangered species’. The critics even go to the extent of saying that nearly 30% of the free float is owned by the foreign investors, which is not a good sign. They also fear after the acquisition of 40% shares of Pakistan Stock Exchange (PSX) by the Chinese investors, the percentage of holding by the overseas investors may increase further, leaving little for the local investors.

The benchmark index has come down substantially in the past and the fall is being attributed to political uncertainty by most of the experts. However, one of the conspiracy theories is that an environment of ‘panic selling’ is being created by those having vested interest. According to an analyst, “Lately, prices of shares of blue chip companies have gone up, which made these unattractive on the basis of dividend yield. Therefore, prices had to be brought down and political uncertainty was made the best excuse”. Another analyst who didn’t agree with this perception said, “Ideally asset management companies (AMCs) should be buying in the bearish market, but it happens the other way round. As the redemption pressure builds due to the declining NAV (net asset value), the AMCs also indulge in selling for facilitating unhindered redemption”.

The statement of an orthodox analyst may be of some interest for the general public as well as the apex regulators. He said, “Though, the rules demand strict classification of investment into ‘long terms investment’ and ‘for trading’ many AMCs don’t adhere to this rule. In fact some of the AMCs have become day traders”. He also pointed out, “Many of the AMCs are owned and operated by the big brokerage houses therefore one has the reasons to believe that these AMCs play a key role in setting the market direction”. He went to the extent of demanding forensic audit of AMCs because many of the bad investments are parked there by the brokerage house. He also expressed apprehensions that insiders’ trading is also common but regulators just keep their eyes closed.

National Investment Trust (NIT) was established as the first open end fund in Pakistan in 1962. One of its prime mandates was to take a substantial share in each IPO (initial public offering). At one time NIT held stake in more than 350 listed companies. Later it was observed that many of the companies had become delinquent and selling of their shares had become necessary. NIT still enjoys two distinctions: 1) it has one of the largest assets under its management and 2) it also has the largest base on unit holders. It has also being playing a key role in improving the level of governance in the companies, where it has nominee directors.

Many AMCs have floated Islamic funds but lately they suffered from surplus liquidity crisis. While conventional funds have accumulated huge investment in the government papers, Islamic funds just can’t invest in interest bearing instruments. Till recently the Government of Pakistan floated Sukuk, which provided an opportunity to the Islamic funds to deploy their liquidity in an efficient manner. However, it seems that the Government of Pakistan has utilized all those assets on the basis of which Sukuk could be issued, as no new Sukuk are being floated.

A senior portfolio manager, responding to a question, why only a few funds are being floated said, “Since the Government of Pakistan has emerged as the biggest borrowers commercial banks and their fully owned subsidiaries prefer to invest in risk government securities i.e. Treasury Bills and Pakistan Investment Bonds. The other attraction is that the Government is ready to offer higher return on papers of short tenors.

Till recently, investors were keen in owning shares of exploration and production companies, OMCs and gas distribution companies. However, with the fall in international oil prices, income of exploration and production companies has come down substantially. OMCs and gas distribution companies are the victim of circular debt. In the prevailing situation investors are puzzled and ask everyone, where I should invest my money. IPPs have also lost glitter, due to the mounting circular debt. Fertilizer manufacturers also face problems because of supply glut. The Government is offering subsidy on export of fertilizer, sugar and wheat to earn foreign exchange but not ready to bring down cost of doing business.

This article was originally published in Pakistan & Gulf Economist

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