KARACHI, April 18: A Multan-based weaving mills has started lobbying with large corporate holders of its term finance certificates (TFCs) to voluntarily accept a lower than promised minimum rate of return.
Sources in the debt market say this will undermine the reliance of the investors — particularly the small ones in the TFC and raise many question regarding the legality of this lobbying. They say if the issuer succeeds in its campaign then a bad precedent would be set for others as well. It could not be learnt immediately if this issue has come into the notice of the regulators — the Securities and Exchange Commission of Pakistan — and if so what action they have taken to stop this.
The weaving mills had issued Rs150 million five-year TFC in February 2002 at a floating rate with floor and cap fixed at 15.25 per cent and 17.50 per cent respectively. The issuer has asked one of the corporate holders of its TFC to voluntarily delete the floor and cap thus enabling it to pay a lower rate of return to the investors. The floating rate at which the said TFC was launched was SBP discount rate plus 2.5 per cent. Since the SBP discount rate now stands at 7.5 per cent the issuer will have to pay to the investors only 10 per cent return — if the floor is deleted. That means a big reduction of 5.25 per cent in the rate of return the issuer is otherwise bound to pay. That is why the issuer has started lobbying for voluntary deletion of the floor (and cap) of the TFC’s yield structure.
“We would request (you) to kindly reduce the markup rate in line with the present market conditions by deleting floor and cap and fixing the rate of markup at SBP discount rate plus 2.5 per cent from third coupon being (effective) February 5, 2003,” says a letter written by the Multan-based weaving mills to one of the corporate holders of its TFCs — based in Islamabad. “You are requested to approve the request so we may conduct our business smoothly and survive in the present competitive market environment. Your prompt and favourable action in this regard will be highly appreciated,” adds the letter.
The sources say the corporate holder — an Islamabad-based joint-venture industrial and agricultural investment company has agreed in principle to voluntarily reduce applicable floor rate of mark-up on its investment in the issue of the said TFC. But it has conveyed to the trustee of the TFC — a Karachi-based investment bank — that their willingness to voluntarily reduce the applicable floor rate is subject to the approval of the board of directors.
Going one step forward, this industrial and agricultural investment company has also suggested to the trustee bank that a meeting of institutional investors be convened to decide on the issue of voluntary reduction in markup on the TFC.
The sources say the way the issuer and one of the corporate holders of its TFCs are trying to address the issue is not in full confirmation of the rules. They say the issuer should have in the first place included a call option in the prospects for its TFC. They say the issuer should also have informed the regulators — both SECP as well as the Stock Exchange before making any such move. The sources say deletion of floor or cap of the yield structure of a publicly listed TFC falls in the category of price-sensitive material information that needs to be brought into the notice of the regulators.
No official of the weaving mills that launched the TFC was available for his comments.
