KARACHI, June 4: The paper value of corporate Pakistan has shown an unfathomable increase of rupees one trillion to surpass Rs3.8 trillion on June 6 from Rs2.7 trillion at the close of business on Dec 31, 2006. It could be a moment to rejoice.
But there is a fly in the cocktail. Almost all of the increase has come from staggering rise in the market value of 650-odd stocks of companies already listed at the stock exchanges while new offerings have been negligible.
Doddering at the height of 13,000 points, the KSE-100 index represents rise of close to 3,000 points in less than half the year. Many market strategists admit that most of the shares in some of the sectors, such as banks and cement, are now highly ‘over-valued’. The pre-budget buying now in full swing, the party is likely to last for the time being. The market participants, nonetheless, hold a consensus view that for the bourse to keep up its bull run, there is a dire need for new listings.
The enormous gains that small investors had made from subscriptions in IPOs of state-owned companies, such as the OGDC and Pakistan Petroleum (PPL) a few years ago, had tended to bring them in droves to the Pakistan's capital markets.
Some estimates suggested that from less than 100,000, the number of investors in equities rose to 500,000. But that was until the stock market crash of March 2005. Both the needy and greedy small investors lost all that they had earned and more. The reverberation of those investors' scream still echoes in the corridors of Parliament. But that aside, the government has almost stingily held on to all its holdings in public companies. None of those promises of divestment of shares in many mega stocks have materialised. The private sector listings have also been all but too slow. The result is that too much cash is chasing too few shares. On any given day, volumes are almost always generated in as many shares as can be counted on the finger tips of one hand: NBP; DGKC; MCB; Lucky Cement; MCB and one or two others.
Only nine new companies have entered the equity market to raise capital this year, amounting to Rs5.3 billion, including premium of Rs3.9 billion. Five new companies had sought listing last year, compared with 14 IPOs worth Rs13.6 billion (including green shoe option) recorded in 2005.
One major reason for companies to shun listing, which the Stock Exchanges have been propagating, is the lack of incentives. “It is the removal of 10 per cent tax benefit to listed companies as compared to unlisted companies which was available until June 2002, that have put off companies from entering the capital market,” said an official at the KSE.
He said that companies had no reason to seek listing and take on themselves all the responsibilities of complying with audit as well as the 'code of corporate governance', when they had no incentives to do so. Matters, he said, were being pursued with the government. Budget proposals for each of the last several years have asked for differentiation in tax rates for listed and unlisted companies. It is the same this year too. But would the ministry budge from its stand is difficult to tell.
If the stock market players are to be believed, equal taxation for both listed and unlisted companies is one of the reasons that only 658 of the 50,000 registered companies have sought listing at the stock exchanges. And even so, out of those 658 listed entities more than 100 are lame ducks sitting on the 'defaulters' counter'.
Another 200 companies are such in which no trading takes place since almost all of the shares are held by sponsors in large frozen blocks. Of what use are they to the small investors, though for the benefit of the exchange, they do add to the total market capitalisation that the bourse is able to display.
Among companies currently coming up for raising capital from equity markets, around 10 companies can be counted that are in one of the following stages of listings: “Companies in process of formal listings”; “prospectus/offer for sale cleared by the Exchange' and those that have 'Applied for listing'.
To satiate the appetite for more stocks and rein in volatility in few actively traded scrips, it is imperative for the government to take the lead in offerings of just a part from its almost wholly-controlled corporate giants.
A private company cannot be expected to enter the market, even if some of the hassles of compliance with complicated code of corporate governance were to be relaxed. And equalising tax rates for listed and unlisted companies is not how everybody visualises as a means to increase the depth of the market.
“To ask for a lower tax rates for listed companies does not make sense,” says Mr Iqbal Ismail, chairman, ACE Securities.
He argues that those companies sought listing at the bourse and benefited by raising capital through IPOs and right shares. If there was no benefit of remaining listed, there would have been a bee-line for seeking de-listing, but that is not the case. Mr Ismail suggests and several market participants and analysts were found to concur with the view that all new companies who apply for listing should be given the incentive of tax holiday for say three to five years. There is little time left for the budget makers to make a last minute changes and at least for now, it looks like the idea would have to remain just that.
