Wednesday, July 28, 2010

The Equities Market in Pakistan

The equities market plays a very important role in any economy to generate capital requirements. It is an essential part in mobilizing funds for medium and long-term debts that help firms emerge. The growth of Pakistani equity market however, has been stagnant and has not been fully utilized in its years of performance.

Historical evidence and analysis shows that the equities market in Pakistani gained importance and much appreciated growth in the 1960’s, but later the momentum was disrupted due to the political uncertainty and nationalized policy of the 1970’s. The economic growth however, changed its route to private equity investments in the 1980’s which helped the overall market sentiments regarding equity investments to improve.

It was only in 1990’s when the market regained its strength when the equities market was opened for foreign investment and inflows. The measures, stated by Hussain and Ali Qasim (1997), describe the measures taken for the revival of the stock market in Pakistan. The first states the opening of the market for foreign inflow of funds in the form of investments to the market. The second is the process of privatization of public entities. The third mentions the deregulation, and privatization of the economy which takes into account the privatization of commercial banking industry. And fourthly, liberalization of foreign exchange restrictions which also includes the freedom to Pakistani nationals of obtaining dollar accounts in banks.

However, due to political instability and violence, the authors state that developments were at a halt and the markets were not able to emerge properly. However, the market did perform in the midst of the turmoil and was able to generate new IPOs particularly through the listing of Pakistan Telecommunications Company (PTC) and Hubco Power.

The tide of political violence remained till the late 90’s when the power shifted to Nawaz Sharif. Some of the measures that the government took in 1997 are stated by the two authors were the exemption of CGT (Capital Gains Tax) till the year 2001, tax exemption for bonus shares issued, tax removal on dividend payout for all mutual funds activities, tax exemptions for foreign investments in government and corporate securities, and increase in sectoral investment limit by provident and pension funds from 10 percent to 20 percent with investment ceiling increased from 1 percent to 5 percent in one company.

The market in the period Musharraf era progressed like never before. The market reached up to new heights and the economic indications of the country set waves across the international investors, providing them reasons to invest in the equities market of Pakistan. Much of the stocks traded were at a discount that led foreign capital into the country.

Presently, the equities market is performing exceptionally well. Recently, the IPOs for Wateen were successfully launched, where the offerings for the share allotment oversubscribed, indicating small investors willingness to invest in new public companies. The market index as of July 3, 2010 was 9730.

The Importance of Primary Equity Market for Pakistani Markets

Pakistan experienced growth in the equities market during the past five years from 2003 – 2007. The importance of the growth can be judged by the fact that the economy progressed in the previous years leading to growth and economic development. The growth of the equity market leads to much liquidity required by public companies, whose aim is to increase profitability through investments. Thus, the importance of the primary equities cannot be ignored and should be marked as the backbone of the economy. The country needs to pace up expansion of the market in terms of its size and volume, for which the primary equity would pay an enormous role.

The market however, after the growth years entered into the cycle of recession, where stock market slowed down, starting from the year 2008 which eventually lead to a liquidity crisis and the KSE literally at a halt for three months. The year 2009 saw the least number of IPOs emerging for capital funding requirements. Only three public offerings (IPOs) were seen in the calendar year 2009 in the midst of depressing values and investor risk aversion strategies after one of the worst financial crisis that lead to many losses for the small investors, the primary target of IPOs.

With no offerings made in the first half of the year, power companies, in an attempt to fill out capital shortages for power generation, issued IPOs to tap the local market for investment. However, a low turnout was seen by Mr. Muhammad Sohail, CEO of a leading Top line Securities Company, where he mentions that only 20,000 investors showed interest from a base of 250,000, according to the CDC sub accounts information available. This shows that more than half of the small investors had suffered huge losses in the stock market crash.

It was seen in the KSE in contrast to the bearish 2009 market position, where only 3 IPOs were offered to public, 10 IPOs were launched in 2008, with many companies being financial sector firms raised a total of Rs 7.4 billion. In the past, 2004 and 2005 were the best years in terms of number of IPOs. A total of 17 IPOs were floated in 2005 to raise an amount of Rs 36 billion. The three IPOs offered in 2009 were worth Rs 1.1 billion in comparison to 10 IPOs worth Rs 17.7 billion issued in 2008, and Rs 36 Billion in 2005. Reviewing from the figures only, the extent of crisis in 2009 in the stocks can be visualized.

While comparing the volume of issuance of IPOs of this decade from the 1990s, we clearly see a decline in the issuance. The period of the 1990s was one of the golden times for issuance of IPOs, where many company were starting off its operations and decided to approach the money market for capital funding, causing the listed firms at KSE to increase from 487 in 1990 to 767 in 2000. We review that offerings in this decade fell by two third in comparison to the 1990 period. Thus, with the information present and analysis made, it is important to review macroeconomic policies and set up an environment for foreign and domestic investment to allow growth prospects for the Pakistani equity markets.

Moiz Damani is currently a student at Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, pursuing an MBA degree with specialization in Finance.

Friday, July 16, 2010

An Introduction to Primary Equity Markets

The equity market is a term used in synonymous to the much popular and layman term – The Stock Market. The equity market in any country plays a vital role in providing liquidity to companies that want to raise capital for investments in company infrastructure and development, or to invest in some portion of the economy that would yield the best returns to the company itself and its shareholders.

The equity market or the stock market is a bridge that narrows the gap between investors and issuers. It is a market through which provides access to companies to capital, and in turn, to the investors in the form of holdings in the ownership of the company; thus, providing hope of capital gain in the form of price appreciation of the shares of the company or through other modes such as dividends, bonus and rights issuance.

The equity market is divided into two sub forms: the primary equity market and the secondary equity market. The primary equity market is one where new companies offer the market new shares, termed as – IPO (Initial Public Offering). The purpose of this initiative of distributing new shares to the market is, as explained, to generate new capital for the firm/company from pool of investors. IPOs are used as a source to generate funds for long-term debt purpose as opposed to the short-term debt provided by banks/financial institutions. Similarly, other ways of primary form of equity issues are through Rights issue, and offer for sale.

The concept of IPO is usually to allow ownership of the company to mass public in general to utilize and accumulate pool of funds available from small investors. However, in the United States, the remaining shares that have not been consumed by the general public are offered to banks/investment firms willing to buy those remaining shares. These banks/firms are called underwriters. At times, single major companies are also the ones allotted all the IPOs on the preferred price by the company that releases it, thus giving no chance to the general public to invest.

Moiz Damani is currently a student at Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, pursuing an MBA degree with specialization in Finance.