In regard to equities, only four companies entered the stock market with Initial Public Offerings (IPOs) of the aggregate value of just over two billion rupees: Arif Habib Securities; Fayzan Manufacturing Modaraba; Worldcall Multimedia and the disinvestment of 10 per cent government stake in the National Bank of Pakistan (NBP). At least two of the four stock issues were a debacle.
By contrast, as many as 17 new TFCs were floated in the market during the year; the total issuance size amounting to a whopping Rs 12 billion. The sudden boom in the private debt market could be gauged from the fact that in all of the last five years since the first TFC was launched, market had seen only 10 such issues worth around Rs 7 billion.
Making most of their money through the stock brokerage business, equity strategists at most brokerage houses, only reluctantly concede that TFCs have taken the market by storm. Some, do, however, say that in the declining interest rate scenario, many companies are opting to “lock in” funds at lower funding costs. Most TFCs offering the minimum 13 per cent floor rate, look attractive in the obtaining environment, they say.
Growing number of companies from various sectors: fertiliser, leasing, textiles, oil marketing; energy and communications, went on to raise medium-to-long term capital for their expansion projects through the TFCs.
Explaining the reasons for the robust growth of TFC market, the State Bank of Pakistan mentioned in its Annual Report 2001 that companies that previously relied heavily on Development Finance Institutions (DFIs) for term borrowings, were now looking at the bond market to meet their future financial needs. Those DFIs, in turn (previously) received considerable funding from International Financial Institutions (IFIs), as part of their past strategy of directed development. “Since this strategy has largely failed, the IFIs no longer support DFIs, particularly the leasing companies”, SBP says, adding, that for this reason, most of the TFCs were being launched by leasing companies. In its first quarter 2001-02 report, the SBP noted that the main factors for the bullish sentiments (in the TFCs) were the reforms in National Savings Schemes (rationalising rates and banning incremental institutional investment) and the launch of the Pakistan Investment Bonds (PIBs).
TFCs floated during calendar 2001 include: Pakistan Industrial Leasing; Packages; Orix Leasing; Shakerganj Mills; Nishat Mills; Atlas Leasing 1st tranch; Network Leasing; Al-Noor Sugar; Sui Southern 2nd tranche; Engro Asahi; ICI/PTA 2nd issue; Atlas Lease 2nd tranch; Gulistan Textile; Dawood Leasing; Interbank-2; Dewan Salman Fibre and Engro Chemicals, etc. TFCs in the process of listing at KSE include: Crescent Leasing; Security Leasing and Reliance Weaving. Pak-Arab Refinery (PARCO) has also launched TFC of the value of Rs 2.5 billion, which remains the largest issue in Pakistan’s debt market. But even PARCO’s issue would pale in comparison to what Pakistan International Airlines (PIA) has in store. Latest to jump on the TFC bandwagon, the cash-strapped airline has announced that it will raise a staggering Rs 15 billion through the issue of TFCs.
For the equity market, it was the old song and dance; much of the money chasing few scrips. Like last year, seventy per cent of the trading on any day during the year, took place in four liquid scrips: Hubco, PTCL, PSO and ICI and the first two accounted for nearly one half of all the traded volume.
The ebb and flow of speculation— far removed from ‘fundamentals’— continued to dictate the direction of the market. In that sense, it was a volatile year with the KSE-100 index starting out at 1518 points on January 1. Two days later on January 3, the index peaked to the year’s highest at 1550 points. On October 2, the index had crashed to the year’s lowest at 1076, which chairman KSE Yasin Lakhani says was a result of “war in the region and problems created by lack of liquidity in the market”.
The index recovered to 1277 by December 28, reflecting a 15 per cent drop over the year. In a similar manner, about Rs 96 billion evaporated from the market capitalisation during the year with the total market valued at Rs 297 billion, equivalent to just under $ 5 billion on December 28.
Foreign investors were net sellers in the market with an aggregate outflow recorded at Rs 7.8 billion or $ 124 million until October. At the same time last year, the foreigners had liquidated sharply lower equities valuing Rs 1.6 billion or $ 25 million. The foreign selling precipitated after February 19, following a Merrill Lynch Report that flashed negative sentiments about Pakistan’s economy, raising apprehensions of the country’s ability to remain on track regarding the SBA agreement with IMF. And the flight of the foreigner was made faster by the decision of Morgan Stanley Dean Witter, which came in the third week of March, announcing the liquidation of its Pakistan Fund.
On the domestic issues, the year saw the tug of war between the Securities and Exchange Commission of Pakistan (SECP) (which pushed ahead with its agenda of market reforms programme) and the KSE (which first opposed only to step back later). In January, the SECP’s order of making certain changes in the stock market’s articles of association antagonised the broker community. That settled, in late April, the two sides were again up in arms over the Regulator’s move to introduce the T+3 settlement system. The change, which seeks to curb speculation and avoid settlement risks, has been fully enforced since September 3 on all the scrips.
But the worst for the Pakistan stocks came at the same time as it did for all other bourses throughout the world, namely following the September 11 attacks on New York and Washington. In three sessions between Sept 12 and 14, the index had plunged 116 points with a whopping Rs 26 billion wiped out of the market capitalization. In a swift move to limit the downside, the market was closed down for a week. In order to bail out a major player in the badla market (Crescent Investment Bank), which was dragging all of the market down, the ministry of finance, the SBP and the SECP got together and asked five major commercial banks to pick up the Bank’s portfolio at discount. That helped to overcome the liquidity shortage and stabilize the market.
‘Circuit breakers’ that limited a day’s loss in any scrip to 5 per cent of its value, was one of the most effective risk management tool used after the September 11 market crash. There were a host of measures coming up from the SECP that have continued to help market assume a more transparent, efficient and investor friendly posture. These include: Increase in net capital balance requirement; imposition of capital adequacy ratio and exposure limits; introduction of futures contracts market; brokers and agents registration rules; prohibition of insider trading and restricting blank selling.
At the dawn of the new year, the stock market is nervously watching the developments on the borders with India; the index has been heading south and it is already down 7 per cent since December 13—the day of attacks on Indian parliament. How far down will it go? No one can be quite sure and given the thick fog of uncertainty, one analyst’s guess of what lies ahead is as good as that of the other.