AS a Chinese consortium forges ahead to buy a quarter of Bangladesh stock exchange’s 1.8 billion shares by outbidding India’s National Stock Exchange, investors and equity strategists here are feverishly drawing parallels with a similar sale of the Pakistan Stock Exchange (PSX) a year ago.

In Bangladesh’s case, the Chinese joint bidders — Shanghai and Shenzhen stock exchanges (the same as those who bid for the PSX, excluding the lead bidder) — offered 22 Bangladeshi taka per share (or $122m for the entire stake comprising 450m shares) to the Dhaka Stock Exchange together with additional technical support of nearly $37m.

Reports suggest that the Chinese have also offered to forgo profit on their investment in the first 10 years.

A Chinese consortium buys 40pc and 25pc stakes in Pakistan’s and Bangladesh’s stock exchanges for $85m and $122m. Local investors and stockbrokers think we have been short-changed

Back on Jan 21, 2017, Pakistan signed a sale-purchase agreement with a Chinese consortium amid much fanfare for selling a 40pc stake of the PSX.

The consortium comprised the Chinese Financial Futures Exchange Company Ltd (lead bidders), Shanghai Stock Exchange, Shenzhen Stock Exchange, and two local partners.

When the stake was put on the table in the winter of 2016, the consortium won by placing the highest bid of Rs28 per share, or Rs8.96bn ($85m) for the 320m shares on offer.

Moreover, against a single seat on the Dhaka Stock Exchange’s board, there are four Chinese directors in the PSX boardroom.

The timing of the PSX sale was perfect: besides being declared the best market in Asia and fifth best among global bourses in 2016 on the basis of mouth-watering returns of 44pc, the PSX was about to be graduated to the regional market six months later.

So, was the PSX short-changed by the Chinese buyers?

Shehzad Chamdia, who led the PSX divestment committee that negotiated the deal, denies that such was the case. “Considering the size, profitability and volume of trade at Dhaka, which is way above the PSX, we got a fair valuation,” he tells this writer.

He points to the number of investors in the Bangladesh market, which at more than 2.5m is 10 times the number of investors in the PSX.

According to calculations by brokerage Insight Securities, the taka stood strong at 83.5 to a dollar on Feb 20, the day when the Dhaka bourse deal was signed. Against this, the rupee was 104.80 to a dollar when the PSX deal was first struck, ie on Dec 22, 2016.

So, the implied value of the Dhaka Stock Exchange has been worked out at $488m while that of the PSX stands far below at $213m.

Other interesting figures include: the Dhaka bourse has fixed assets worth $110m against PSX’s $32m, revenues at $22.4m against $11.5m, and 2016 profit at $14.4m compared to PSX’s $1.3m.

Nasim Beg, vice-chairman of MCB-Arif Habib Savings and Investments Ltd, says the Chinese were aggressive bidders in Dhaka. “Their strategy is acquisition while the price for the deep-pocket Chinese is petty cash.”

Most market strategists concur with that view. They maintain that the Chinese paid a premium, if at all, to Dhaka for Bangladesh’s vibrant economy, the size and forward growth of the country’s exchanges and their confidence in law and order situation.

“Foreigners can be sighted strolling carefree in the markets and malls in Chittagong and Dhaka,” says a high-net-worth individual equity investor. “There is little doubt that the free movement of men and money claims the premium,” he says.

The premium is also embedded in the price of membership cards of the exchanges. In Pakistan, prior to the launch of Trading Rights Entitlement Certificates, the maximum cost of the card was Rs50m. By contrast, the membership card on the Dhaka Stock Exchange changes hands at an equivalent of Rs250m.

A member of PSX confides that in 2008, a big broker of the then Karachi Stock Exchange sought to buy a card of the Dhaka bourse. “But he took the next flight back home after seeing a Rs1.25bn price tag.”

At the ceremony to sign the sale-purchase agreement of the PSX stake sale, big promises were made by then finance minister Ishaq Dar. Representatives of both countries promised to reduce conflict of interest, strengthen governance and develop new products at the stock exchange going forward.

“The investors will bring improved governance, state-of-the-art technology, managerial experience, investor base and listing and product development opportunities,” said Zafarul Haq Hijazi, the chairman of the Securities and Exchange Commission if Pakistan at the time.

But true to the adage “the more things change, the more they remain the same”, there is scarcely any visible improvement on the regulatory or product development arena one year down the road.

Data leakage, insider trading, pump and dump — are all as rampant as before the Chinese directors took their seat on the board. Insiders whisper that the Chinese buyers are not really a happy lot.

The PSX share also ran into deep discount during the depression last year. It has since recovered much of the value, but still trades at around Rs26, which is Rs2 below the price at which Chinese bought the stake.

Published in Dawn, The Business and Finance Weekly, February 26th, 2018

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