Who has gone public?

As the stock market is not the reliable indicator of the strength of the economy, oversubscribed initial public offerings (IPOs) also do not reflect the growth and depth of the equity market.

Surprisingly, the total number of investors participating in the IPOs and accounted for Rs30 billion fund raising are less than 2,000. All know and agree that the number of equity investors hasn’t increased, instead it declined in the last few years.

A total of eight IPOs during FY21 raised Rs20 billion at the equity market. The total transactions included seven new listings: The Organic Meat Company, TPL Trakker Limited, Agha Steel Industries Limited, Panther Tyres Limited, Service Global Footwear Limited, Citi Pharma Limited and Pakistan Aluminum Beverage Cans Limited, and one preference share issuance (Engro Polymer and Chemicals Limited).

The Rs6.3 billion Air Link Communications IPO and Octopus Digital’s offering came in the first quarter of FY22.

This equity amount raised through IPOs during this period is also the highest-ever amount raised in Pakistan. Since a few hundred high-net worth individuals (elites that own multiple financial institutions) move the market, the impression the IPOs were over-priced needs to be looked into. Indeed, there have been several developments on the economic and geo-political fronts, amid the post-Covid recovery. However, several oversubscribed scrips plunged below the IPO price a few days after the trading began or haven’t appreciated much, despite the fact that the benchmark index gained 34.6 per cent since July 1, 2020.

What is an IPO?

The initial public offering is the process by which a private company can go public by sale of its stocks to the general public. It could be a new, young company or an old company, which decides to be listed on an exchange and; hence, goes public.

The companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital. A company offering its shares to the public is not obliged to repay the capital to the public investors.

The company, which offers its shares, known as an ‘issuer’, does so with the help of investment banks. After IPO, the company’s shares are traded in an open market. Those shares can be further sold by investors through secondary market trading.

An analyst said the term ‘bubble’, in an economic context, generally refers to a situation where the price for something like an individual stock, a financial asset, or even an entire sector, market, or asset class exceeds its fundamental value by a large margin.

“Because speculative demand, rather than intrinsic worth, fuels the inflated prices, the bubble eventually but inevitably pops, and massive selloffs cause prices to decline, often quite dramatically. In most cases, in fact, a speculative bubble is followed by a spectacular crash in the securities in question.”

“In the rush to cash in on the boom, many investors ignored traditional investment metrics, such as the ratio of a company’s current share price, compared with its per-share earnings,” the analyst said.

In the public’s mind, the stock market is akin to a gambling casino, where people will bet on the direction of stocks, rather than a marketplace to connect savers with business ventures. This image is further supported by larger-than-life personas of some brokers. Most people associate the stock market with brokers rather than with the companies listed on the exchange.

Sani Mehmood Khan, CEO of Securities Management Suite, said that Pakistan’s equity market was not a savers’ market, but it was confined to a few hundred elites.

“I can’t say there was not that much liquidity in the market that the initial public offerings are receiving such response.” “As much as Rs30 billion were raised through IPOs in the last fiscal year, and interestingly the participant investors were not more than 1,800.”

“Except a couple, all the IPOs were over-priced. It seems the issuers get premiums approved by the regulator and then the high-net worth individuals and institutions jack up the prices,” he said.

Khan, also former deputy managing director of the Pakistan Stock Exchange (PSX), said not just the IPOs, around Rs70 billion were also raised through the issuance of rights shares, and it was the same story.

As of January 2021, the investors on the exchanges included 1,886 foreign institutional investors and 883 domestic institutional investors along with around 220,000 retail investors. Yet, only 1,800 investors participated in these IPOs that raised Rs30 billion.

It must be distinctly understood that by giving approval for listing, the Securities and Exchange Commission of Pakistan does not assume any liability for financial soundness of the company. The public should conduct their own independent investigation and analysis regarding the quality of the issue.

Ahsan Mehanti, Director at Arif Habib Corporation, said in the last couple of years, IPOs were getting lucrative returns, which primarily was due to availability of excess liquidity in the market.

“The issuers present quite a positive outlook in their feasibility reports and prospectuses, which attract investor-participation.”

“[The] government has allowed its funds to contribute up to 10 per cent in the IPOs, while, the mutual fund industry has grown significantly, and they take exposures in new listings.”

“The issues are also cheap, as the shares offered were in a low price range; we didn’t see any IPOs at over Rs100.” “It is true that the number of investors in the market is very low. New investors are not coming because of uncanny fluctuation and volatility. Because of the persistent economic and political uncertainties, the reading of the market is quite difficult, which deters new investors,” he said.

Khurram Schehzad said that there was sufficient liquidity in the market, as the institutional investors had grown large while there was low interest regime.

“I don’t’ think there could be price manipulation, because of the 40 per cent cap on shares prices above, which restricted price discovery. This 40 per cent capping on the strike price is against the doctrine of auction, and it needs to go.”

“Moreover, the tax incentive on inter-corporate dividends needs to be restored, which would invite big companies for the listing. There had been no new companies and when the tech companies came to the market, the investors’ evinced interest and prices were high,” he added.

Meaningful and transparent settlement of investors’ claims and discontinuation of investment-hostile products is important for restoring investors’ confidence and enhancing investors’ base. In case, if any government agency, authority and/or the National Accountability Bureau is interested in the economic development of Pakistan, they could just open-up any of the SECP’s investigation report, read out the names of confiscators and start punishing them.

If the government does it, the investors’ base would rise by leaps and bounds and the market will rock. Transparency and element of decency in the listing and delisting process is central to winning the issuers’ confidence and expanding the issuers’ base at the Pakistan Stock Exchange.