Last Wednesday, the apex regulator of the share market, the Securities and Exchange Commission of Pakistan (SECP), proposed amendments to the Initial Public Offering (IPO) Regulations, 2017.
SECP Chairman Aamir Khan affirmed that the proposed amendments were meant to “make the IPO process more easy, simple and cost-effective”. The market is relieved that the IPO regulations have finally caught the eye of the regulator.
Early this year, when Interloop Ltd set out to raise Rs4.9 billion by offering a 12.5 per cent stake in the company, it was billed as the largest private-sector IPO in Pakistan. Starved over the years for a new issue of the kind, investors were jubilant. The size of the IPO by the largest hosiery producer in Pakistan was bigger than the total funds of Rs4.32bn that all the three IPOs offered in 2018 raised collectively.
Then finance minister Asad Umar could not contain his excitement. He took to Twitter and congratulated the nation. “This is the biggest equity issue ever by a Pakistani private-sector company and particularly pleasing that it’s an exporting company.”
The issue was oversubscribed with the company being able to raise Rs5.025bn. It made its place among the 50 largest companies listed on the Pakistan Stock Exchange (PSX) by market capitalisation.
‘It makes sense to raise money from the stock market as bank financing is expensive owing to high interest rates’
But the market was impressed less by Interloop Ltd itself and more by what it thought was the end of the drought in the primary equity market. There were great expectations about other issues that might follow. That, however, has not been the case. The Interloop offer in March this year has been one in isolation.
The quotation sheet of the PSX shows a list of about one dozen companies that are waiting to enter the market. The prospectus of one company has been approved by the regulator, but the offer continues to elude the market.
Investors have an insatiable appetite for new issues, but the companies have opted to stay out. One major reason is surely the meltdown in the secondary market that is in its third year, causing a loss of billions of rupees to investors. “With the price of blue-chips now quoting at a 40pc discount to their market values in 2017, prospective sponsors wonder if their offer will be greeted with a warm response from investors,” said an entrepreneur running a pharmaceutical business.
An asset manager of a mid-sized mutual fund contends: “Capital formation is the primary job of any equity market. No serious efforts seem to have been made on that account.”
SECP Policy Board Chairman Khalid Mirza told this writer that the market could not be developed without competition. “As long as there remains a single stock exchange in Pakistan, there will be no development in the capital market,” he said.
Mr Mirza argued that the frontline regulator should be putting its best foot forward to attract new listings. But there is scarce effort in the absence of competition.
He said markets could go up and down while the appetite for new issues could increase or decrease, but a complete dry-up should be a cause for concern. The SECP Policy Board chairman was unhappy with the role of investment banks which, he said, should be hunting out companies to bring them to the market. He believed that most investment banks were headed by ex-bankers and were, therefore, risk-averse.
The Economic Reforms Package announced early this year granted four of the six major demands forwarded by the PSX. The accepted demands included the abolition of the tax on undistributed profits levied at 5pc on corporations that did not distribute 20pc of their earnings in dividends from 2019-20.
The act of giving more power to the board to decide about profit retention and distribution was believed to encourage new companies to enter the stock market. But that was not to be. Market watchers say the companies weigh the benefits and returns of going public against potential hazards.
Besides having to endure the rowdy outside shareholders at annual general meetings, listed companies are seldom comfortable because they believe the regulators are constantly breathing down their necks, demanding the filing of endless statutory documents. The attention by the Financial Action Task Force (FATF) on money laundering and terror financing is another reason for private businesses to withdraw into their shells.
The retired head of a major multinational corporation in the food business observed that it made sense to raise money from the stock market in the rising interest rate environment: bank financing is available at a rate as high as 14pc.
But stability is essential to provide comfort to the companies that may be contemplating entry into the stock market. He said there were other issues that should lead entrepreneurs to mobilise funds from the stock market.
He complained that companies have to compromise on the quality of machinery and purchase mainly from China to avail the concessionary interest rate.
Thus, while the number of companies registered with the SECP has surpassed 100,000, the number of listed firms continues to linger below 600. Regulators as well as investors look with envy at hundreds of prosperous companies in telecommunication, pharmaceutical, fast-moving consumer goods and other sectors that make a fortune, but their sponsors keep it all to themselves and do not share even some of the rewards with the public.
Published in Dawn, The Business and Finance Weekly, October 28th, 2019