The March 26 decision to withdraw incentives for new listings on the Pakistan Stock Exchange (PSX) makes no sense.

Just compare the number of listed companies on the Bombay Stock Exchange — 5,439 with market capitalisation of $2.8 trillion — with the miniscule 540 on the PSX and market capitalisation of $52 billion. It can be concluded that public money managers in Islamabad do not understand the importance of mobilising funds from the equity market by companies.

The tax credit granted to encourage companies for enlistment was abolished through Tax Laws (Second Amendment) Ordinance 2021. The concession had been granted through Finance Act 2010, which provided that “Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan on or before June 30, 2022, a tax credit equal to 20 per cent of the tax payable shall be allowed for the tax year in which the said company is enlisted and for the following three tax years: provided that the tax credit for the last two years shall be 10pc of the tax payable”.

The withdrawn tax incentive for new listings was a small enticement with no significant revenue impact

The PSX made appropriate reaction, demanding that the decision be reviewed. The exchange implored that the tax incentive for new listings was a very small enticement with no significant revenue impact. “Presently, only 10 listed companies are availing this benefit, which in our estimate based on their latest audited financial statements, comes to a total tax credit of approximately Rs175 million per annum. Out of these 10 companies, four companies are in their fourth or last year of availing this benefit and four companies have recently been listed in the current financial year,” the exchange said: “This tax incentive greatly encourages new companies to come forth and get listed. This has a significant impact on increasing the documentation and tax base of Pakistan and hence on tax revenue.”

All that fell on deaf ears.

In 2020-21, five companies have come up for listing while the sixth one is in the pipeline. The company in the process of offering shares this month — Service Global Footwear — would be the second in the current calendar year to date, after the Feb 22 listing of Panther Tyres.

Service Global Footwear is a wholly-owned subsidiary of Service Industries, one of the two shoemakers listed on the stock exchange. It is set to hit the market this month by issuing shares through book building and Initial Public Offering (IPO). The company has on offer 40.9m shares for subscription to raise Rs1.55bn. In the book-building phase to be held on March 7 and 8, the entire issue would be offered at the floor price of Rs38 per share with a maximum price band of up to 40pc i.e. Rs53.20 per share.

The successful bidders will be provisionally allotted only 75pc of the issue size while the remaining 25pc or 10.2m shares will be offered to retail investors at the strike price through an IPO on April 12 and 13. The eligible investor will be an individual and institutional investor whose bid amount is not less than the minimum bid size of Rs1m. Arif Habib Ltd has been appointed as book runner for the issue.

Service Global Footwear will utilise the proceeds of the public offering for greenfield tyre project — Service Long March Ltd (SLM) — for approximately 18.91pc of the company’s shares. Although the entire proceeds would go to SLM, the group opted to list SGFL instead of SLM. Being a greenfield project, the subsidiary is yet to commence operations.

Regarding the origins of Service Global Footwear, the prospectus discloses that on May 16, 2019, the board of directors of Service Industries decided to demerge and transfer to its manufacturing unit, SIL Muridke Unit, along with its manufacturing facility and all relevant assets, operations and liabilities, to a wholly owned subsidiary SGFL. The offering document noted: “There are certain benefits of taxes and duties exemptions, which are available to an export-oriented unit, which include duty- and tax-free import of plant and machinery, spare parts, raw materials, packaging material and accessories.

Moreover, the export-oriented units are entitled to speedy refunds of sales tax under FASTER module of the FBR. It was to avail the above benefits that the export-oriented footwear unit of Muridke was demerged from SIL into a separate company, SGFL. At the end of the first nine months of calendar year 2020, exports formed 95pc of the aggregate sales of 2m pairs of shoes that fetched revenue of Rs5.3bn for the company.

The holding company, Service Industries Ltd (SIL), has ventured into the manufacturing of “all-steel radial” tyres of truck and buses. For that purpose, SIL entered into a joint venture agreement with Chaoyang Long March Tyre Company and Myco Corporation on Nov 18, 2019, and set up a JV in Pakistan namely the Service Long March Tyres Ltd on Jan 7, 2020. The project with the installed production capacity of 600,000 tyres per annum is estimated to cost Rs16.4bn, which would be funded in a debt-to-equity ratio of 50:50.

Regarding competition, the offering document observes SLM will be the sole manufacturer of all-steel radial tyres and buses in the country. The company stated that due to the imposition of anti-dumping and countervailing duties by the European Union and the United States on imports from China, the supply lines to those regions from China were severely impacted. “Consequently, LM has opted to enter into a JV agreement with SIL and Myco Corporation for the establishment of manufacturing lines to meet the demand of those export markets.”

Published in Dawn, The Business and Finance Weekly, April 5th, 2021