The five-year summary of new listings on the Pakistan Stock Exchange (PSX) against entities that sought an exit cuts a fairly poor picture.

There were 21 new companies that entered the market to mobilise funds, including through preference shares of already listed companies. As many as 40 companies called quits.

With just 532 listed companies on the PSX and no serious efforts ever made to increase their number, it is scarcely surprising that on any trading day all the liquidity is seen to be chasing a few shares — even worthless penny stocks.

In his initial comments on the recently released federal budget, PSX CEO Farrukh Khan pointed to the lapse. “We thank the finance minister and the Federal Board of Revenue (FBR) for accepting many of the PSX proposals,” he stated and requested the government to reconsider the tax credit for initial public offers (IPOs). He stressed that it had no significant revenue impact and was very important for documentation of the economy and capital formation.

Clause 5 of the PSX budget proposals stated that tax rates for companies listed on the stock exchange ought to be rationalised. “It is generally observed that when companies opt for a listing on a stock exchange, their profits grow substantially due to effective corporate governance, better disclosures and ability to raise capital from the market.

Going public helps companies grow their profits substantially due to effective corporate governance and better disclosures

An increased number of listed companies and higher profitability lead to higher tax revenue for the government, including incremental revenues from capital gains tax (CGT). Hence, it is important to encourage companies to get listed on the PSX,” the exchange said. However, tax credit on listings under Section 65C has been withdrawn through Second Amendment Act, 2021.

According to the exchange, the particular tax incentive was a very small carrot with no significant revenue impact. The exchange contended that only 10 listed companies at the moment were availing this tax credit which, based on their latest audited financial statements, was estimated to have a tax revenue impact of Rs175 million per annum.

“Out of these 10 companies, four are in their fourth or last year of this benefit and four companies have recently listed in the current financial year. In fact, the tax revenue benefit in the medium term is very large as the documentation of the corporate sector increases and hence tax revenue of Pakistan. Further, the CGT collected on these 10 symbols for the eight-month period from July 2020 to February 2021 is Rs176m and, extrapolating based on this average collection of CGT, the tax collection for the 12-month period could be Rs264m compared with the total estimated tax credits of Rs175m availed by these 10 companies.”

The exchange’s proposed amendment to reinstate Section 65C of Income Tax Ordinance 2001, should be read as under: “Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan, a tax credit equal to 20pc of the tax payable shall be allowed for the tax year in which the said company is enlisted and for the following years for those companies that meet the prescribed requirements, including a minimum free float of 25pc throughout.”

On March 26, incentives for new listings on the PSX were 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 20pc 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 request in the budget proposals was slightly different. However, in the run-up to the budget, that simple yet major demand of the market was set aside.

2020-21 could prove to be a good year for the IPO market. Six companies have already come up for listings. Five companies raised Rs14.8bn in IPOs so far. Citi Pharma is the sixth one on the list. The book-building process of Citi Pharma’s IPO concluded the previous week with oversubscription of two times, according to Topline Securities, adviser and book runner of the issue. The company would offer 18.1m shares — 25pc of the total offer size in an IPO — on June 23-24 at the strike price of Rs32. But the rush of new offerings in the ongoing year should be considered an exception. After years of doling out losses, the PSX has already reaped returns of 41.56pc in the last one year while the benchmark KSE-100 index is hovering at a four-year high of 48,200-point level.

On Aug 20, 2020, the Cabinet Committee on Privatisation (CCOP) approved the offloading of a 7pc stake in Oil and Gas Development Company (OGDC) and 10pc shares in Pakistan Petroleum Limited (PPL) — the two profitable state-owned listed entities. The CCOP approved the divestment through public offerings and gave directives for initiating the process of appointing financial advisers. On May 22, 2021, the CCOP called a halt to the divestment of the government’s shares in Pakistan LNG Ltd, OGDC and PPL until key issues like the circular debt were resolved.

Besides, the Petroleum Division’s contended that as both PPL and OGDC were profitable companies, the ruling share prices of both companies were depressed and did not reflect their real worth. The decision to shelve the divestment of the two exploration and production (E&P) companies made sense. Although the stock market is booming, most shares in two heavyweight sectors — commercial banks and E&Ps — have underperformed the market.

Published in Dawn, The Business and Finance Weekly, June 21st, 2021