April 19, 2008	Saturday	Rabi-us-Sani 12, 1429

KARACHI, April 18: The government, which directly and indirectly holds 75 per cent shares in Pakistan Reinsurance, has cleverly skimmed the company, by allowing itself the luxury of bonus shares in the ratio of incredible 455.56 shares for every 100 shares held.

On April 4, when the eight-member board of the company, dominated by the nominees of ministry of commerce announced the shock bonus, the share in Pak Re was trading at Rs433 a stock. The number of paid-up shares stood at 45 million.

The ministry of commerce and State Life Insurance Company together held 36 million shares. A quick calculation would show that the government earned a staggering sum of Rs67 billion (36 x by 4.6 x Rs433) in just one day, from one company under its control.

It would be difficult to silence those who are given to regard unpatriotic, a criticism of the government for making money from an entity in which it holds the controlling stake. But the question is: Who else was a party to the booty?

The directors would push forward the small investors in the company whose interest they would have purported to serve. And sure enough a lucky shareholder who would have entered the market on April 4 with an investment of just about half a million rupees in Pak Re must have left for home, grinning from ear to ear, as he would have multiplied his wealth to Rs2.4 million.

But there are not likely to be too many of those lucky investors. The total number of individual shareholders (general public) on December 31, 2006 was only 646, holding 10 per cent shares in the company.

On that date (the latest would be forthcoming in due time), directors, chief executive and their family, who numbered 14 shareholders held 0.8 million shares equal to 1.84 per cent of the company’s paid-up capital; another 2.1 million shares (4.68 per cent) was with investors categorised under ‘others’ and the remaining equity was vested in institutional investors.

Much of the money that the directors decided to distribute to the government and other beneficiaries came from ‘investment income’, which rose by more than five times to Rs3.69 billion for the year ended December 31, 2007, from Rs771 million the year earlier.

It was mainly for that reason that the company’s after-tax profit scaled to Rs3.727 billion, from Rs672 million in 2006.

Shouldn’t the board have displayed the sagacity by fattening the reserves for a future eventuality, like the one which happened at the fag end of December (the assassination of Benazir Bhutto), the full impact of which would have to be borne next year?

But keeping that short-sightedness aside, there is the work cut out for the regulators to do, though no notice appears to have been taken until now.

And what merits investigation is the pattern of trading in shares of Pak Reinsurance, which shows that from March 19 to April 4 (the latter being the date of announcement of bonus), the market price of stock kept climbing, so that in ten straight sessions, the price shot up from Rs307 to Rs433. That, by all accounts is an unusual jump of 41 per cent in 10 days.

Granted that the bulls have taken charge of the market, but have they done so that persistently in any one stock, particularly just before the announcement of a hefty bonus issue? It does not require Sherlock Homes to conclude that some people had prior ‘insider’ information and they made a good use of it.