Lack of funds keeps IPOs in short supply
KARACHI: The Securities and Exchange Commission of Pakistan (SECP) announced on Friday that a total of 277 companies were registered in the month of August, which raised the total corporate portfolio to 59,761 companies.
The number of registered companies, in November last year stood at 57,183, which goes to show that as many as 2,578 new companies were registered in the last nine months.
The flow of companies for listing at the stock market has, however, almost completely dried up.
Five companies had made Initial Public Offerings (IPOs) in the aggregate sum of Rs3.5 billion at the Karachi Stock Exchange in 2010. And to date this year, only two new companies have ventured into the equity market, Engro Food and Pak Gen.
All of that takes the total number of stock market quoted companies to a measly 637.
“What good is it if only one in 95 registered companies have offered equity to the public and fewer than 50 are actively traded,” complained an investor.
He reminded that even lesser number of listed companies share their fortunes with the general public, by paying regular dividends.
The disenchantment of private companies to go public, considering that Pakistan equities offered exciting return of 23 per cent during the calendar year 2010 (21 per cent in dollar terms), is not altogether surprising, said an analyst.
An expert who knows the working of the equity market like the back of his hand said that the overwhelming reason for private companies to stay out of public offerings was the lack of liquidity in the market. The perennial problem of low volumes, which on average currently range between 40 to 50 million shares a day, compared to 200 million shares a couple of years ago, was the major reason for investors lack of interest in equity market.
“Investors prefer to place money in T-Bills that offers 13 per cent risk-free return,” says an analyst.
He observed that individual investors in T-Bills were further encouraged by tax benefits offered vide the budget 2011-12.
Conversely, the imposition of capital gains tax (CGT), not for its monetary burden, but the complexities of collection, had further dampened investor sentiments in equity. Another analyst argued that though companies could mobilise resources through the stock exchange, the cost of equity was, in the end higher, since listed companies were expected to remunerate shareholders with dividends.
Other issues that put off private companies from floating Initial Public Offerings (IPOs) included the need to comply with stringent Code of Corporate Governance; the annoyance of dealing with small shareholders’ rowdysm at Annual General Meetings and the peace of mind that sponsors felt in keeping entire equity within the family fold. Most private companies are also loathe to share sensitive company information with the public. The few new listings in various stages at the KSE are mainly the Term Finance Certificates (TFCs).
An analyst explained that it was mandatory for TFCs to seek listing and the whole process was mostly paper work.
Incidentally, entities in one of the most affluent sector: cellular companies have also opted to stay out of the public offer of equity. The largest offering of Wateen during 2010 was the first telecom listing after a gap of four years.
The company offered an amount of Rs1.1bn (Rs2bn with green shoe option) for subscription, which was oversubscribed by almost 1.8 times.
The company, however, could not make a mark on the market as its 10-rupee share currently trades at discount of 85 per cent.