ISLAMABAD, Aug 19: The Asian Development Bank (ADB) has asked Pakistan to formulate a policy of privatising state-owned enterprises through share markets.

The move is likely to reduce risk exposure in local markets, weigh investor demand and strike a balance between shares offered in global and domestic markets.

According to a report recently sent by the board of directors to the bank’s president, the ADB will assist the government in simulating the experience of countries like China, Malaysia and Vietnam.

The policy will soon be announced to ensure transparency.

It is also learnt that the bank has linked the release of $400 million loan for implementing the second generation capital market reforms to several conditions proposed by its board of directors.

After implementation of the new capital market-oriented privatisation policy, shares of state-owned enterprises are likely to be floated at higher prices, generating more budget revenue based on the assumption that investors might pay more if they had a credible expectation about additional packages for a specified number of shares.

The policy is also aimed at increasing market liquidity and reducing volatility through a significant increase in share supply, facilitating the overall capital market development, according to an ADB report containing recommendations for capital market reforms.

It will also introduce better market discipline even if companies are still partly state-owned besides improving the enterprise managers’ performance.

The policy also aims to limit corruption by increasing transparency of privatisation and reducing discretion of civil servants involved in the process.

It will also allow the Privatisation Commission to offer shares of state-owned enterprises by keeping record of bids of domestic institutional buyers in line with international practices. The commission will also allow the use of shelf-registrations procedures to make the process more efficient.

According to the ADB recommendations, the bank has proposed a better legal framework to replace the Securities Ordinance of 1969 needed to be replaced with a new substantive law to protect investors, facilitate capital formation and modernise securities markets.

“The Securities and Exchange Commission of Pakistan (SECP) has to be mandated with adequate legal powers … for regulation … of securities markets and intermediaries, private placements, public offers of listed and unlisted securities, corporate governance practices, and related matters, in line with international … practices,” the report states.

The new law is expected to introduce the concept of ‘best efforts’ and other international underwriting practices, substantially increasing the number of Initial Public Offerings (IPOs) at higher prices, making IPOs more attractive for more companies, the bank’s report said.