The annual report (2003) of the National Investment Trust Limited (NIT) describes the period covered as a banner year for the NIT.

As stated in the ‘Chairman’s Review’, “the Karachi stock exchange index of 100 shares (KSE-100) achieved a phenomenal growth of 92 per cent during the year, starting the year at 1,770 points and culminating at 3,402 points.” The major factors responsible for the sterling performance of the share market were the continuing reduction in the profit rates of national savings schemes (NSC) coupled with further cuts in the State Bank of Pakistan (SBP) discount rate.

NIT outperformed the KSE-100, registering an increase in its ‘net asset value’ of 102 per cent against the KSE’s 92 per cent. This is indeed a remarkable achievement by any measure. It shows no sign of slowing down. When sale of units resumed on 10 July 2003 the price per unit was Rs22.85. Within a month it had increased by almost 25 per cent, and is expected to climb further in line with the upward spiralling of the KSE-100 which market analysts expect to touch 5000 in the near future. All this is great news - but only for holders of 50 per cent of the total NIT units in issue.

The total NIT units in issue as on 30 June 2003 were 1,537 million. Of these, as many as 770 million, or 50 per cent, were owned by institutional unit holders who have been issued Letters of Comfort (LOC) by the ministry of finance. These letters originally issued in 1999 assured such institutional holders that if they agreed to retain their NIT units for a period of five years from the dates of such LOC, the ministry of finance would “facilitate” NIT to redeem them at the pre-determined price of Rs13.70 per unit. At the time the unit price was less than Rs 10.

Under such circumstances these unit holders had no option but to agree to the 5-years holding period, especially since earlier attempts to redeem the units had proved repeatedly unsuccessful. NIT just did not have the funds required to repurchase the large number of units that institutions were anxious to off-load in order to minimize their losses.

Furthermore, the LOC was reassuring since it not only guaranteed a re-purchase price of Rs13.70 per unit, but also accorded holders of LOC the option to redeem units at prevailing repurchase prices should they become equal to or greater than the guaranteed price, before the end of the 5-year period. The option for early redemption at prevailing prices was however arbitrarily withdrawn in 2001, and is no longer available under the revised LOC issued in August 2001 in supersession of those issued earlier. Therefore such units can neither be redeemed before August 2006 nor more frustratingly will they ever command a repurchase price higher than Rs13.70.

This is a great injustice to the holders of LOC which are mainly approved pension, provident and gratuity funds. The trustees of such funds are entrusted with the judicious and profitable investment of contribution made by, or on behalf of, millions of low and middle income employees mainly in the public sector.

These poor unfortunate people are being deprived of a share in NIT’s present and growing prosperity.

NIT has been the pampered offspring of the government from the day of its birth. All new issuers had to give NIT the option to acquire 20 per cent of the shares offered for sale at the issue price. NIT invariably exercised this option because the kerb prices in the days immediately preceding and following the offer date were customarily five to ten times the issue price. NIT could thus make a killing by realizing massive capital gains. In the event that it chose to retain the shares it earned handsome dividend yields.

Moreover the extent of its shareholding entitled it to a seat on the board of directors. It could thus influence the dividend policy of these companies. In the early days investment in NIT units by individual assessees was tax-deductible up to a certain proportion of the individual’s total income. This provided a great boost to sales of NIT units. So NIT was operating in a highly protected environment. It had privileged access to sizable chunks of new share offerings, and a steady stream of purchasers for its units given the additional attraction of tax relief on their investment in the NIT units.

In the mid nineties NIT suffered a major setback. Mismanagement as well as a slump in share prices sent the unit price into free fall. Everyone rushed to redeem their units. Even in the best of times NIT would have been unable to mobilize enough resources to meet such great redemption pressure. So it did what any bankrupt entity does. It refused to honour genuine claims for redemption. Since there is no secondary market for NIT units the holders could do nothing, not even dispose of their units at a loss. The pampered and spoilt brat just stuck its tongue out, and waved its ears, at indignant unit holders.

It is true that NIT will face immense redemption pressure if institutional holders of units issued LOC are released from their binding to hold units for five years, and to redeem their units at the pre-determined price of Rs13.70. On the other hand it is not fair to deny such holders a share in the growing prosperity of NIT. A compromise solution would appear to justify an increase of a few years in the mandatory holding period, with the restoration of the option to redeem their holdings at prevailing prices. The mandatory holding period could be structured such that redemption does not take place en bloc but in six to eight tranches at half-yearly intervals.

This issue has assumed greater urgency in view of the planned disinvestment by the government of its equity stake in NIT. Should the prospective buyer be handed the gift of a vast hidden reserve. The difference between the guaranteed redemption price of 770 million units and their prevailing repurchase price is a staggering 11,500 million rupees! Who owns this hidden reserve? It is the shareholders, not the unit holders. So why is the government according preference to the potential buyer of NIT’s majority shareholding over the holders of LOCs?

The NIT unit value is poised to advance further upwards. Forty-eight per cent of its entire portfolio is invested in companies in the energy and fertilizer sectors. These companies all have government-guaranteed returns— earnings before financial charges and taxation.

With the dramatic fall in borrowing rates over the past year the burden of financial charges on the guaranteed earnings of these companies has reduced considerably.

Corporate rates of taxation are also being brought down. All this means increased earnings available for the shareholders of these companies, and in turn the unit holders of NIT. Will the LOC holders be let off the hook?.