The issue, subscription and listing of the Pakistan Energy Sukuk-1 (PES-1) of Rs200 billion — billed as the largest Sharia-compliant financial instrument ever listed on the Pakistan Stock Exchange (PSX) — were completed in the autumn of 2019.

The debt instrument started to trade on the exchange on Oct 25. The sukuk, an asset-based Sharia-compliant government debt instrument, was offered by Power Holding Ltd (PHL), an entity owned by the Ministry of Energy and Power.

The required sum of Rs200bn was raised through subscription by eight banks, namely Meezan Bank, Faysal Bank, BankIslami Pakistan, Dubai Islamic Bank Pakistan, MCB Islamic Bank, Al Baraka Bank Pakistan, United Bank and National Bank of Pakistan. The purpose was to provide energy-sector companies with a breathing space as the entities are mired in the circular debt that amounted to Rs450bn in May 2019.

In mid-January, the Economic Coordination Committee (ECC) gave the go-ahead for the PES-2 of another Rs200bn before the start of the staff-level meeting with the International Monetary Fund (IMF). Recent reports indicate it may be launched in the first week of March. The government is expected to sign an agreement with the consortium of banks soon.

Asset management companies should be allowed to participate in primary issues of Islamic bonds to reduce the overreliance on banks

PES-1 was oversubscribed 1.5 times owing to a heavy participation from Islamic banks. It was supposed to be a lucrative investment option for them to park their surplus cash. For institutions and individuals that rake in cash, a major problem is the lack of avenues to deploy funds. It is understandable, therefore, that mutual funds nurse a grievance that they were made to stay away from the issue.

In a letter to the Securities and Exchange Commission of Pakistan (SECP) and the Ministry of Finance, the Mutual Funds Association of Pakistan (Mufap) said: “You would recall that the issue of PES-1 was made in March 2019 and the entire amount of Rs200bn was allocated to a consortium of commercial banks. Mutual funds were deprived of an opportunity to participate in that instrument”.

Mufap invited the attention of the SECP and the finance ministry to the fact that those instruments were to be listed on the PSX. One of the objectives of the chief regulator is to broaden and strengthen capital markets and increase the number of investors, it said. It was only fair that an opportunity be provided to retail investors to place their savings in the instrument through the allocation of a decent size of the issue to mutual funds as well, it added.

Mufap said that owing to the efforts of the SECP it was then agreed that in all subsequent sukuk, including PES, mutual funds would also be invited to participate in primary issues to broaden retail participation and reduce the reliance on banks.

The association expressed surprise that PHL invited only Islamic banks and Islamic windows of conventional banks to submit proposals as financing agents and lead arrangers for PES-2. “A number of banks formed a single consortium and submitted the proposal to fully underwrite and take up the total amount of Rs200bn,” it said. In doing so, Islamic mutual funds, which currently manage about Rs270bn on behalf of 200,000 investors, were completely ignored, it added.

Mufap demanded that 10pc of Rs200bn issue be allocated to mutual funds. “It will be extremely unfair to deprive retail participation through mutual funds in a government paper which is to be listed on the PSX,” it said.

According to an energy-sector analyst, Pakistan Energy Sukuk Rules 2019 provide that individuals would be allowed to hold the sukuk issued by PHL. Also, government debt securities, including Ijara sukuk, can be issued to individual investors.

Queries revealed that in a cabinet meeting held a couple of weeks ago, it was agreed that the allocation for PES-2 would be made on the basis of a competitive bidding. Yet the process was skipped and the consortium of banks filed a single bid to underwrite the issue of Rs200bn at a rate close to the one offered on PES-1.

The issue of PES-2, like its forerunner, was by PHL and ostensibly approved by the Ministry of Finance. It would now go to the ECC and the cabinet. Institutions and individuals that wish to participate in the process call for competitive bidding, which will enable a larger number of people to take part in the issue.

As for the utilisation of Rs200bn of PES-2, Topline Securities analyst Atif Zafar said the payment would be directed towards the power sector to ease liquidity constraints.

When the SECP was asked about the reason for keeping mutual funds out of the bidding process for PES-2, and whether offering a single bid by a consortium of banks at a mutually agreed yield was permissible, the chief regulator said in a written reply: “There is no such restriction on mutual funds from participation in sukuk issues. Further, mutual funds have professional risk and investment teams that invest only after conducting proper due diligence and considering investment objectives. It is their own decision to invest in a particular security.”

The apex regulator, however, avoided the query relating to PES-2 and passed the buck to PHL. “As regards the query specifically related to the issuance/allocation of sukuk by PHL, the issuer may please be contacted directly.”

The answer is prima facie unsatisfactory since the regulator of capital markets should be aware of every important detail of a security that is to be listed on the country’s stock exchange.

Published in Dawn, The Business and Finance Weekly, March 2nd, 2020

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