Hoarding of equities
THE ‘free-float’ — defined as the shares of a company listed at the stock market and available to investors for trading — is much too small comparatively at the Karachi Stock Exchange.
Overwhelming percentage of the shares of companies on certain sectors such as the textiles and sugar is tightly held by the sponsors.
Market participants say there could be many reasons for non-availability of shares for trading. Besides, sponsors with a large controlling stake — including financial institutions, high net-worth individuals and foreign investors — may also have penchant to hold on to certain stocks in big frozen blocks that does not come up for trading.
The KSE share ‘free float’ is estimated to be approximately 25 per cent of all shares issued and paid-up, which means that while the market capitalisation of the bourse has now reached a record $40 billion, the free-float capitalisation is worth only around $10 billion.
Old hands among the stock broker fraternity have always held a firm belief that at times when the market is flooded with liquidity, too much cash is found chasing too few shares. And the matters are made worst as fewer than 40 of the 575 stocks quoted on the KSE, come up for brisk trading.
“It will be futile to push sponsors to cut down their holdings and release more shares of their companies in the market”, says veteran stock broker Haji Ghani Haji Usman. He explains that if sponsors were forced to trim their holdings, they could chop the blocks and spread it among number of family members, who do not sit on the board.
Faisal Shaji, head of research at Standard Capital Securities, was of the similar view. He said an attempt was made many years ago, but a couple of multinational companies preferred to de-list instead of releasing more shares in the market; other local groups with several listed companies also threatened to quit. That forced regulators to step back.
At the moment, companies with paid-up capital of Rs200 to Rs500 million are required to maintain 50 per cent ‘free-float’ while those with paid-up capital of Rs500 million are obligated to float shares worth Rs250 million or 25 per cent of the capital.
The KSE Listing Regulations stipulated companies to leave 25 per cent of the capital in ‘free-float’ at the time of listing, but most companies did not want to part with a quarter of the equity and asked for relaxation.
“Some companies such as OGDC and Hub Power have a large free-float and investor base, but sponsors of even local highly profitable companies and banks have no penchant to loosen their grip over their huge controlling stake”, says a market expert.
He observed that in such cases, the bourse had the only option of persuading those companies to float more shares so as to allow price discovery in their stock. Such an act, those companies and banks are told, would be beneficial for themselves when they wish to seek credit as the market price of their stock would be considered more reliable.
Recently, the Securities and Exchange Commission of Pakistan (SECP) — the apex regulator—- set up a ‘Technical Committee’, which besides pondering on other pressing issues, also considered the question of ‘free-float’.
The KSE deputy managing director Haroon Askari told Dawn that the report on the recommendations of the Committee has been forwarded by the SECP to the bourses for approval by their board of directors. It envisages slabs of ‘free-float’ according to the Initial Public Offerings of new companies wishing to seek listings.
He stated that there were about seven categories, with the lowest amount on offer required to maintain higher ‘free-float’ of around 25 per cent shares on offer. The steps lead to the last category of highest amount of issue of Rs10 billion and above which would be required to have one per cent of stock in ‘free-float’. The idea is to attract large companies to enter the market.
Mr Askari explained that the amount of capital for ‘free-float’ would be calculated not on the par value but the offer price (whether at discount or premium).
The KSE DMD hoped that the SECP Committee recommendations would be implemented within a month. He also said that for the last two years, the KSE had included higher ‘free-float’ among the criteria set for nomination of the Top-25 companies in order to encourage companies to release more shares for trading.
“The KSE is striving to persuade companies to adhere to the ‘Code of Corporate Governance’, which is among the top priorities of the bourse”, says Mr Askari.
The KSE had left investors licking their wounds in 2011 with a sharp drop in equities values and a negative return of 5.6 per cent on volume of business that shrank to a 10-year low. All that has been compensated this year with the KSE-100 index up by incredible 3,630 points from 11,347 points at the end of 2011 to just a step away from 15,000 points level this week, representing a gain of 32 per cent.
Yet the benefits are not widespread. According to the Universal Identification Number (UIN) that keeps track of investors, there are just 0.3 million investors who ‘dabble’ in stocks in the country. The investor accounts are no more than 55,000 with another 0.25 million as sub-accounts. All of which suggests that where there is the need to bring bigger companies and bigger floats into the market, there is a greater need to expand the investor base.