With the stock market flooded with liquidity, investor appetite for Initial Public Offerings seems to be insatiable.
The fierce bull run that has seen stock prices of ‘blue chips’ multiply to their re-rated values since November last year, makes it all the more necessary to persuade big profitable companies to float stocks.
The current status of 558 listed companies among more than 80,000 unlisted private firms is a poor showing. Just three new IPOs were witnessed in the outgoing year and investors wonder if things will be different this year.
The ‘daily quotation’ of the Pakistan Stock Market (PSX) shows just four companies that have applied so far for listing, two of which are spin-offs of already listed companies and will therefore not be going for an IPO.
“2017 could see more than eight new listings”, says a fund manager familiar with the affair. “Those companies are from various sectors such as steel, consumer goods, real estate, autos and packaging”, he elaborated.
People in the know at the bourse believe that the initiative of putting companies up for listings lies with the government. They pin hopes on the Privatisation Commission to keep its promise of divestment of 10pc stock in State Life Insurance Company of Pakistan.
In order to persuade private companies to enter the fold of the listed corporate sector, confidence building measures and incentives are the only means.
Why should private companies enter the stock market and give themselves up to stringent regulations without attractive incentives?
So when in winter last year, the chairman of the Securities and Exchange Commission of Pakistan (SECP) thundered at an ‘investors awareness conference’ in Islamabad that he had the powers to force any profit-making company to go public, many people rightly took it with a pinch of salt. Such an attempt would have pushed the regulator to legal wrangling.
‘Forced listings’ have therefore given way to ‘promote quality listings’. The recent statement by the apex regulator of encouraging companies with a good track record, credible sponsors, experienced management and operating in a strong industry, to tap the capital markets for generating resources required for growth is a healthier approach.
In order to strengthen its prospectus approval process, the PSX has now constituted a listing committee comprising independent market participants, professionals with business background and members of its management.
But why should private companies enter the stock market and give themselves up to stringent regulations without attractive incentives?
“Until the early nineties, companies entered the capital market in droves for listed firms were taxed at a 10pc lower rate (35pc) than private firms,” said a corporate executive. That incentive has gradually eroded. “Some tax rebate for two years post listing is not enough”, said an entrepreneur.
A stock broker counting the benefits of listings said it gives the company greater ‘visibility’, makes it easier to discover the entity’s fair market value and for those that have insufficient collateral, banks feel comfortable extending loans.
A distraught retail investor argued that just as the stock market is still considered ‘a rich man’s club’, deep pocket investors are the major beneficiaries of the IPOs.
Without going into the details of the shenanigans involved in the process of ‘book-building’, the practice itself is open to criticism.
Since institutions and High Net Worth Individuals (HNWIs) — defined as those with over Rs1m in investable funds — participate in the book building exercise and pick up three-quarters of the shares on offer, small investors are left to apply for crumbs.
“The argument that book building helps discover the ‘strike price’ holds no water” says one detractor, “there are many other means of determining the ‘strike price”, he argues.
The SECP can conveniently distance itself from the dispute of whether the book-building system is fair or foul for small investors by fishing out a copy of the ‘draft book-building regulations 2015,’ but the regulators need to do more. The onus lies on them to put the concerns of individual investors at rest by answering fair questions regarding the introduction of ‘book building’ and its process.
Many people continue to believe that listing a company is not of much moment unless the benefits are shared with the public.
Most sponsors of family controlled corporations still continue to keep firm hold on the equity with sometimes as much as 80pc paid-up stock held by directors and their families, and much of the remaining with institutional investors in frozen blocks.
The same is true for most multinational companies listed on the stock exchange that rake in profit. An overwhelming
two-thirds of their shares are vested in the foreign parent and much of the remaining is taken up by the directors or institutions, leaving minimal shares to trade at the market.
Firms across the board should be made to maintain free float of at least 30-35pc of their paid-up shares.