May 27, 2006	Saturday	Rabi-us-Sani 28, 1427

KARACHI, May 26: One of the disturbing news last week was the reduction in weightage of Pakistan’s equity markets in the MSCI emerging market index from 0.27 to 0.22 per cent.

Sponsors of listed companies have been given a deaf ear to the plea for increasing their free float, which forms the basis for calculation of weightage in the index. But more than them, the government is to blame.

Free float is shares available for general public in which to trade, which exclude strategic shares held by directors, employees, associated companies and the government. In developed markets, free float is believed to be around 86 per cent while it is 47 per cent in emerging markets. Compared to that in Pakistan, it is just about 25 per cent. Less than a dozen Pakistani companies can actually meet the minimum size requirement to be MSCI constituent. They include PSO, Hub Power, PTCL, SNGPL, Engro Chemical, Fauji Fertiliser, MCB, OGDC and perhaps Kapco.

It is understandable why sponsors of privately controlled listed companies jealously guard their majority shareholding — meaning most of the time 90 per cent of the aggregate (a proper example of that being textile companies). The concern of course is that it must all remain in the family. Where there have been family feuds, even the best of the veteran groups have lost control of the finest of their units.

But what compulsion is there for the government to be so stingy when it comes to divest equity to the public? In mega units, such as the OGDC, PPL, UBL, PTCL, Kapco and so on, the government could hardly muster the courage to offer to the general public a pittance: five per cent of the equity and another of that size in “green-shoe”.

The government is continuing choosing to sit on almost 90 per cent of the outstanding stock. For several reasons, including ‘dividends’ that it earns and which helps fill its yawning gap in fiscal deficit, it will be imprudent policy to give away an unreasonably larger chunk of the units. But the public is only asking for a little more.

The government need not be concerned for it owns nearly half the equity market. Why mustn’t it part with say a quarter of the total outstanding shares in such companies? Nothing can give a bigger boost to the market float than such a gesture. A blessing would also be that more people would hold shares and own more of the currently state-controlled units.

While the government wants to rush through the privatisation, divestment of more of the shares of fewer companies would do more good than sale of petty percentage of their total outstanding shares in large number of companies. Say a 15 per cent shares in Pakistan Steel divested through the stock exchange could have thickened the layer of free float at the exchange.

Over the last three years since March 2003, Pakistan’s weighting in MSCI has only increased marginally from 0.17 per cent, which scarcely matches the phenomenal rise in the KSE-100 index.

The significance of standing tall on the MSCI index or the Moody’s or Standards & Poor’s (S&P) has to do with attracting attention of foreign fund managers towards the Pakistani equity markets. It is all very well. But Pakistan’s experience with foreign portfolio investment — since it threw the door open to foreign investment in the beginning of the last decade —- has been all but pleasing. Offshore investment comes in as quickly as it flies out, leaving destruction in its wake. But it is in the local context that the increase in free float is important. The problem with the market is that growing number of investors chase a small float of few extensively traded stocks. That results in a frightening volatility.