HAS success spoilt the Privatization Commission (PC) in its efforts to dispose of the shares of the public sector units whose management control shares it had earlier transferred to foreign or local investors?
If it has, it can’t be blamed altogether, as the minister for privatization Dr Abdul Hafeez Shaikh claims that if during the first three years of President Musharraf’s administration, privatization had brought in Rs36 billion, in the following two years, the sale proceeds were Rs260 billion. He says a total of 27 privatization transactions had taken place so far.
Where the PC erred was in rather overpricing the UBL shares it offered to the public as Initial Public Offering (IPO) two years after selling 51 per cent of the shares along with management control to the Al Neyhan Group of the UAE and the Bestway Group at Rs47 .
And then it offered only 200 shares for each buyer. Buyers found they had little to gain by buying so few shares and then selling them, if they did not want to retain them.
Out of 51.8 million shares offered for sale through the IPO, the banks could sell only 22 million shares or about 42 per cent, although the buyers had been given sufficient time from June 2 to 8 to subscribe to the shares.
The government which owns these shares and is now stuck with them can argue it could not have offered the shares to the public at lesser prices than they were sold to the overseas investors.
But then one always pays a higher price for gaining management control of a company or bank.
The government can now sell the unsold shares - about 30 million of them - to another major investor; but it does not want to create a friction between the earlier investors and the new bulk buyer of the shares.
The other option is to make another IPO with 500 or more shares to each applicant so that the hundreds of thousands of new mini-speculators gain by that instead of too little through dealing in 200 shares.
The issue anyway, is before the privatization committee of the cabinet, and a decision may be taken following the prime minister’s return from his foreign trips.
The lead manager of the IPO was AKD Securities. It has been argued on behalf of the buyers of UBL shares that the investment company should have acted as proper under-writers and bought over the left-over shares — about 30 million of them. Apparently it was not ready for that.
Anyway in informal trading, the UBL share had gone for Rs60. The PC can claim that the market price was higher than the price of Rs50 investors were asked to pay in view of the attractive prices of bank shares in Pakistan now because of their high profits and declining tax rates on their income.
With an increase in money supply to the extent of Rs422 billion in the last financial year and rise in bank deposits of Rs500 billion, and the low deposits rates they give consumers, this is truly a boom period for banks. And so their share prices command good prices.
Despite such favourable factors for bank shares, the UBL shares suffered as they came in a period in which oil and gas company shares were being preferred because of the soaring price of oil.
In addition, the changes in the rules of the Central Depository Company under the directive of SECP and the creation of investor accounts in place of group accounts also puzzled the investors.
At such a time, the PC came up with an offer of 51.8 million shares, which is 10 per cent of the shares of the bank. It had also a ‘green shoe’ option of five per cent more of UBL shares.
Evidently, the bank is over-capitalized. As the bank under public sector went on losing money, the government kept pouring in more and more money and getting shares issued in its place. As a result, the total number of shares of UBL should now be 518 million, which is too large a number and will dilute the profit per share.
This is not the first time the commission’s IPO has run into problems. But this is the first time in its long 14- year history, the commission is stuck with the majority of the shares it offered to the public let apart the ‘green shoe’ option not being availed of.
And now the State Bank of Pakistan says that some persons had been using their consumer loans from banks, clean overdrafts, for buying shares offered through the IPO which is not permissible under the banking company rules. That means less money for buying the IPO shares when Badla too, is vanishing following its wild over-use.
When the PC offered the PTCL shares for sale in 1994 to the public, it initially multiplied the number of its shares five times. Then the shares were sold not for Rs10 as it’s face value is but for Rs30.
It was then argued by the PTCL chiefs that the very large assets of the company and its vast profitability warranted such multiplication of shares. It was also claimed that the profitability of PTCL would be 50 per cent, which was a gross exaggeration
Actually, the assets were not as valuable as claimed and the profitability was only 25 per cent, which later became taxable as the company forfeited its tax exemption. The assets or equipment was not as precious as claimed. A large part of that was old and not properly maintained.
Undeterred by such factors, 10 per cent of the PTCL shares were sold abroad for Rs55 and the company and its promoters rejoiced over that. Then the share prices crashed and remained in the Rs20 bracket for long. Many foreigners who had bought the PTCL shares sold them quickly and got out of the mess. It was only recently that the share price began climbing and its profitability improved a good deal. The over-pricing of the PTCL shares then was an act of disservice to the privatization efforts and foreign investors.
In the same manner and at the same time the Sui Northern Gas shares were multiplied and offered to the public at Rs40 a share. The public bought those shares hoping to reap large gains, but the share price crashed and stayed very low for long. The Muslim Commercial Bank which had underwritten the share ran into serious financial difficulties.
When it came to offering the shares of PIA to the public on the basis of book profits, it was right to make the first IPO at Rs10. But when the price of the shares was raised to Rs20 and the share holders did not get the promised cash dividend, they were very disappointed. They did not find great comfort in receiving bonus shares time and again and instead they wanted cash divided which did not come both for long.
It is easy to generate a hype in favour of any share as long as the public does not know the facts. But when it comes to selling the shares of the public sector units to the people, the PC should price its IPOs reasonably. Let the average buyer of shares make a little money while the big fish make very large gains through manipulation and subterfuges.
The PC has other difficulties like the one it faces in respect of the privatization of KESC with its manifold problems. Now the Saudi Arab bidder for KESC has opted out of the bid for political or other reasons. And the second highest bidder, Hasan Associates have been given six weeks to match the winning bid and take over the company. How the whole deal is finalized now remains to be seen.
Meanwhile, the MQM has offered its support to the KESC employees union. What that means in practical terms is not obvious now.
Peace and economic progress in Karachi demands that the KESC runs smoothly without the union overloading or crippling that, and there are few load-shedding and break downs in supply. The new buyers should be able to ensure that, with the help of the government. The people of the city have suffered enough through the varied failures of the mega utility.