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No interest in IPOs

December 24, 2018


EARLIER this month, the Securities and Exchange Commission of Pakistan (SECP) congratulated itself on having registered 1,060 new companies in November, raising the total number of registered companies to 93,157.

While this plays nicely into having brought businesses under the fold of the regulated sector, as many as 72 per cent of those companies were registered as private limited companies. Not a single ventured into the capital market that month. By that reckoning Pakistan’s capital market, with just 559 listed entities, is only a shadow of the number of registered firms.

As 2018 draws to a close, Topline Securities reported that during the year just three new companies came up for listing (other than Modarabas). The new entrants together raised Rs4.3 billion, which stood down by 49pc over the sum of Rs8.5m raised last year.

AGP Limited — a pharmaceutical company, due to its bigger size, collected 65pc of total capital mobilised from the market during the year. Two other companies that came up to collect funds from the equity market included Matco Foods Limited — a basmati rice exporter with an equity offer of Rs758 million and At-Tahur — a company in the dairy segment that made an Initial Public Offering (IPO) of Rs770m.

Persuasion and incentives are the only means of bringing more firms under the fold of the equity market. Coercion could backfire

The ‘daily quotation sheet’ of the Exchange shows that on May 25, 2017 at the height of the bull market, when the KSE-100 index hit the all-time high of 52,876 points, as many as 17 companies had lined up and were marked as “applied for listing”. But when the market turned bearish driving away investors, most prospective entrants put their plans on hold for fear of under-subscriptions.

Those vying to enter the capital market at the time included: Dalda Foods Limited, Inbox Business Technologies Limited and a host of funds in Prosperity Planning: Gold Fund; Energy Fund; Capital Protected Fund; Active Allocation Fund; Asset Allocation Fund; Strategic Allocation Fund; Treasury Fund and privately placed Sukuk.

The market is still reeling under selling pressure with the KSE-100 Index now consolidating around the 38,000 points level. But regardless of the market meltdown, eight new corporates have expressed their intention to enter the stock market in 2019. These include Interlope Limited, which could turn out to be one of the biggest with an offer size of Rs5bn.

As one of the biggest stock suppliers to leading market players like Nike, Adidas, Puma etc., the company is believed to be planning to raise funds from the equity market to finance its expansion plans.

“Companies would be happy to go public if they believe that the benefits of floating an IPO, outweighs the risks,” says a major broker. He added: “Expect the IPOs to expand and contract with the market’s boom and bust.”

An industrialist who was maintaining a safe distance from the capital market said that his reason was the regulatory requirement of compulsory pay out of 40pc profit in dividends. “My balance sheet is saddled with debts and it is more important for me to service those debts and pay back the principal,” he argued.

In the budget 2018-19, the government offered an incentive to companies to seek listing by giving greater power to the Boards to choose between retention and distribution of profit. The payout requirement of 40pc of after tax profit for corporations has been slashed to 20pc and the applicable tax rate on accounting profit in case of failure to distribute such dividend reduced to 5pc from 7.5pc.

Although it does not go well with small shareholders who depend upon cash dividends for their bread and butter, the market should be able to attract corporates that believe in creating long-term shareholders’ wealth.

The newly formed SECP Policy Board last Wednesday acknowledged that the stock market was suffering from over-regulation.

It is a good omen since one of the major complaint of listed and prospective entrants in the market was over-regulation that pushed listed companies to maintain tonnes of paperwork, at considerable time and cost, to comply with the ‘code of corporate governance’ and still remain in fear of punishment at the slightest error.

Regulators as well as investors eye with envy hundreds of prosperous companies in cellular, pharmaceutical, fast moving consumer goods and other sectors that make a fortune but keep it all for themselves, loathe to share by going public.

In a low interest rate environment corporates tend to turn to banks for finance at minimal interest rates. But as the Central Bank is tightening the monetary policy, private companies may again return to the capital market which at the moment has great appetite for fresh IPOs.

At an investor awareness conference in Islamabad, a previous chairman of the SECP had warned that he had the power to force any profit-making company to go public. Most people rightly took that with a pinch of salt, for persuasion and incentives are the only means of bringing more firms under the fold of the equity market. Coercion could backfire.

Published in Dawn, The Business and Finance Weekly, December 24th, 2018