THE quest of the country’s stock exchanges in the search for a competitive strategic buyer of 40pc shares in demutualised bourses may be coming to an end.
While the regulators and members of the demutualisation committee are keeping it a well-guarded secret, Dawn has learnt that three parties have finally gone beyond the expression of interest for the acquisition of a controlling stake in the country’s capital markets. These are the Bursa Malaysia (previously known as the Kuala Lumpur Stock Exchange), the Tokyo Stock Exchange and the Qatar Exchange.
Earlier this month, the Securities and Exchange Commission of Pakistan (SECP) and members of KSE’s demutualisation committee, along with senior brokers, discussed the progress of the last leg of the completion of demutualisation. This was thought to have mainly discuss potential strategic investors.
“The entire process of demutualisation will be completed within the next three to four months,” Shehzad Chamdia, a key member of the committee, optimistically told this writer on Thursday.
Three parties have finally gone beyond the EoIs for the acquisition of a controlling stake in the country’s capital markets. These are the Bursa Malaysia, the Tokyo Stock Exchange and the Qatar Exchange
The financial advisor, Deutsche Bank, is still believed to be looking towards the West. Knowledgeable people at the market said initial interest was shown by the London Stock Exchange, Dubai Stock Exchange and the New York Stock Exchange. Yet, the NYSE had turned into an unlikely buyer as it was embroiled in its own continental derivative issues.
The involvement of a global strategic investor in the KSE will help raise the credibility of the Pakistani capital market, thereby facilitating the entrance of new participants.
“Seeking equity investment by a strategic international buyer will be a unique transaction, not seen in any other market,” says Chamdia. He hoped it would result in value-addition and help in index trading, new products and possibly cross-border listings. “The strategic investor will be expected to bring in investment, experience, technological assistance and new products,” he asserts.
The wholly owned broker stock exchanges in Pakistan were corporatised and demutualised from August 27, 2012. As a result, the entire equity of the KSE is vested with its members (brokers). But 40pc of the shares have passed on to the members’ own accounts, while the remaining 60pc are parked in their ‘restricted’ accounts with the Central Depository Company (CDC). From the restricted accounts, the strategic investor would be offered 40pc of the shares, while the remaining 20pc would be floated in an initial public offering (IPO).
The valuation of the stock exchange has been carried out according to different models and the figures have been placed securely with the SECP in a sealed envelope. Ostensibly, secrecy prevails over the value of the exchange worked out by the bourse.
“The need to keep the valuation under wraps is to prevent it from falling into the hands of a possible strategic investor,” says a senior broker. He explains that the knowledge would make it easier for the strategic buyer to make a lower bid, even when its due diligence represents a higher value of the exchange. “It would result in loss to other shareholders.”
The Stock Exchanges (Corporatisation, Demutualisation & Integration) Act 2012 vests power in the SECP to direct the stock exchanges to find a strategic buyer within 119 days. The SECP could relax the date, but by law, if the exchange is unable to find a buyer by the due date, the initiative would pass on to the regulator.
“We are loathe to issue directives to the exchange on the timeline to hunt for the strategic buyer,” says Zafar Abdullah, Commissioner, Securities Markets Division of the SECP. He reasons that during a commercial transaction with the strategic investor, such a pressure will dilute the negotiation power of the KSE.
The demutualisation of the exchange in 2012 was aimed at separating trading rights from ownership rights. It was visualised to result in removal of conflict of interest of brokers, who were both the owners of the stock exchange as well as holders of the trading rights. Yet, two years on, the impression that the ‘big brokers’ can (and do) still manipulate the market lingers on in some quarters.
However, Chamdia and several other brokers believe this cannot be the case. “The KSE is no more a small market, and is worth $68bn in market capitalisation,” they remind. They add that holdings in listed stocks are widely spread among financial institutions, mutual funds, foreign investors and other participants, which will make it difficult for one or a few brokers in collision to corner and manipulate a share.
Yet, some market experts also view the sale of the strategic stake to foreign investors with skepticism. “Since transparency and governance issues are still not above board, the sale of strategic shares to an outside investor is a double-edged sword,” says one. The induction of such an investor, he adds, will be useful for the market only if it results in value-addition and introduction of new derivative products.
“Since it is not a privatisation transaction, nothing will go into the government’s coffers, while the proceeds of the sale of 40pc of the bourse will be shared by the brokers, who will be the chief beneficiaries.”
Published in Dawn, Economic & Business, August 18th, 2014
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