This is with reference to the article titled, “NIT: letters of (dis) comfort” published in the Economic & Business Review section of your esteemed paper on September 29th, 03. The learned writer has drawn some conclusions in this article which are not supported by facts.
The writer describes that only 50 per cent of the investors are benefited from the phenomenal growth of the NIT. The total outstanding units as on 30th June 03 were 1.537 billion and out of which 770 million are covered under LoC. As the government has not taken any position regarding redemption value of units under LoC hence it cannot be said that only 50 per cent unit holders are benefited.
The argument developed by the writer in respect of issuance of LoC is also not correct. The market was falling in 1996 and to support the market, the government was persuaded by the stock market leaders that if the government could guarantee the redemption of unit prices then the pressure on the market would subside. A guarantee was issued in 1996 with the condition that in case the price crosses the limit of Rs13.70 per unit, then the guarantee would expire.
This arrangement worked well initially, however, in the year 2000 the price crossed the figure of Rs13.70 per unit for a brief period, and consequently the guarantee expired. The redemption price was substantially low as compared to the figure of Rs13.70 and financial institutions holding NIT units had to make a provision for diminution in value. In these circumstances it was the requirement and desire of these institutions that an LoC be issued which provided that if these institutions, who would accept the arrangement and would sign an agreement to that effect, would continue to hold the units for a further period of 5 years, then the government would facilitate to get them the redemption at Rs13.70 per unit.
By this method these financial institutions and banks were not required to make the provision for diminution in value. Thus it is incorrect to say that they had no option. This was a mutual agreement of two parties and there was no compulsion for the investors to accept the conditions of LoC. It was rather in the interest of the investors and the stock market that the LOC were issued by the government and the concerned parties accepted this arrangement without any pressure as it was in their own interest.
The next factual mistake in the article is that the holders of the LoC were mainly approved pension, provident and gratuity funds. This is quite misleading as no such fund opted for an LoC and none is covered under LOC. The composition is as under:
No. of Units (in 000)
Banks & financial institutions 767,878
Industrial units 2,737
Charitable organizations 225
770,840
As regards NIT’s preferential rights in new issues of capital, again the view of the writer is misplaced. The NIT did not have an option to subscribe to new capital issues, rather it was a compulsion, and due to this reason alone the NIT has accumulated a large size of non-performing portfolio. Such an arrangement is unfair but the argument developed by the writer is wrong. The NIT remained a net investor in those days and it never sold these shares on short term basis. All the unit holders, including the units under LoC, are sharing the benefits of growth. In fact, the NIT has faced colossal redemptions in the last few years which are tabulated below:
Units Amount Average (in millions) (rupees in redemption millions) prices (rupee per unit)
2001-2002 250 2,662 10.65
2002-2003 318 5,049 15.88
July to Sept
2003 99 2,632 26.59
667 10,343 15.51
These figures show that all the investors who have opted for redemptions, have not only benefited from the growth, but also that no redemptions have been denied or delayed either.
Again the assumption of the writer regarding gift to the buyer of NITL is misplaced. The government is in the process of resolving the relevant issues including the issue of LoC before the disinvestment/privatization of the NIT.
The other side of the story pertains to the writer’s allegation of NIT being a bankrupt entity. NIT’s liquidity constraints are mainly due to the fact that a very large portion of the NIT portfolio (Rs11 billion at current market prices, i.e. 24 per cent of the total portfolio value) is frozen by the government. The NIT’s very large shareholdings in three public sector corporate entities is blocked for sale as these entities are on the privatization programme of the government, and the government needs the NIT’s shareholding in these companies to complete a 51 per cent controlling interest. Despite such huge constraints, the NIT has strived very hard to provide maximum returns to the unit holders, and our efforts have resulted in a 46 per cent increase in the dividend paid to unit holders in the previous year. The funds under management have also shown a strong growth of 102 per cent as against the KSE-100 benchmark, which showed a growth of 92 per cent - leading to the Mutual Funds Association of Pakistan (MUFAP) recognizing the NIT as the best performing mutual fund for the FY 2003.
Khurram Burney,
Marketing Executive NIT
Karachi