04 March 2005	Friday	22 Muharram 1426

KARACHI, March 3: Arrangements are being worked out for privatization of Pakistan's largest mutual fund - National Investment Trust (NIT) - preferably by June this year.

Tariq Iqbal Khan, chairman & managing director of NIT is in Islamabad for discussing the plan for privatization of the Fund that holds a phenomenal sum of Rs67 billion under management (total funds held by all private sector open and closed end funds put together amount to Rs115 billion).

"According to the proposed plan, NIT would be sliced into five parts, three of which would go under the hammer in public auction while the remaining two would be distributed among the institutions that hold the Letter of Comfort (LOC)," Tariq Iqbal Khan told Dawn on Thursday.

Three Financial Institutions that have benefited tremendously from windfall gains from LOC include: National Bank of Pakistan (NBP); Faysal Bank Limited (FABL) and the Bank of Punjab (BOP) - all three listed at the stock exchanges.

Nearly 24 per cent of the after-tax profit of the NBP in the last financial ended December 31, 2003 amounting to Rs4 billion accrued from capital gains from appreciation in price of NIT units (financial results of NBP for 2004 are still awaited).

Since the unit price is carried in the books of all three banks at the purchase price of Rs14, the banks have made a big boon of unrealized capital gains, which in case of NBP stand at Rs16 billion; for BOP Rs5.4 billion and for Faysal Bank Rs5.7 billion.

But what really is the Letter of Comfort (LOC)? The story goes as far back as July 2001, when NIT was in dire financial straits; the price of the unit had nose-dived to just about Rs7 and there was a run on the Fund for redemption.

In order to protect NIT from total collapse, the Government restrained those three major banks and a few other comparatively smaller holders of NIT units not to go for redemption. In exchange the Government issued them Letter of Comforts (LOCs) for five years with the guaranteed price of Rs13.70 on the date of redemption.

The holding position of institutions covered under LOC, which aggregated to 770 units is as follows: NBP 432 units, which works out to over 56 per cent of the total units covered under LOC; Bank of Punjab 149 units, accounting for 19 per cent of the total and Faysal Bank 157 units, which is about 20 per cent of the aggregate.

The Banks may have been disappointed in 2001 for having been restrained from going for redemption, but the event turned out to be an incredibly big blessing in disguise for the banks, the reason being that the NIT unit value has left the comfort price of Rs13.70 far behind.

The price of the unit has by now climbed steeply to as high as Rs49 -around 250 per cent higher than the Comfort price. The incremental windfall benefit, the difference of current unit price and the comfort price to LOC holders, has already amounted to Rs5.36 billion for BOP; Rs5.65 billion for Faysal Bank and Rs15.5 billion for NBP.

But the Letter of Comfort matures 17 months from now, in August 2006. And the government could be anxious to privatise the Fund as soon as possible. "The NIT plans to give the LOC holders a mutually acceptable exit by offering two of the five parts of the Fund after a nod from the government/ Privatization Commission", says the NIT chairman. He expressed the hope that the arrangement would be finalized and approved during the current month.