GDRs in the offing!

By happy chance, it all started off when PML-N took hold of the driver’s seat to direct the unsound economy of Pakistan on the right path. And in less than a year, the government has been able to earn a myriad of applause by bringing the ailing economy of the country back in at least decent health.
The Government of Pakistan (GoP) is feathering nest for the issuance of GDR of OGDC after a gap of more than seven years.
Let’s go back to late 2006 when the GoP offloaded its 9.5 percent holding in OGDC through GDR issuance for the first time. The offering took place at a strike price of Rs115 per share, implying a discount of nearly 9.5 percent to the closing price of 127.20 (as on November 30, 2006).
However, on the valuation front, the strike price was reported to be substantially lower than analysts’ valuations. The valuations hovered in the range of Rs150-Rs160 per share.
The discounted transaction price came as a shock to market participants as the scrip punched its lower lock the following day, declining by Rs6.36 per share or 4.99 percent in a single day. This dragged the index down by nearly 2.18 percent (equivalent to 231 points).
Interestingly, since the government offloaded its holding and the GDRs were listed on London Stock Exchange, the market price of OGDC started slipping downwards, thus underperforming the benchmark KSE-100 by a wide margin (see graph).
Currently, GoP holds the majority ownership of OGDC, having a shareholding of 74.97 percent and is planning to offload further 10 percent of its holding through GDRs. This will bring GoP holding down to nearly 65 percent.
Qasim Shah, who oversees foreign sales desk at AKD Securities Ltd, opined that owing to illiquidity of GDRs in international markets, the GDRs will eventually be converted to shares on local bourse.
“Market reaction will depend much on the transaction price,” he asserted. In this context, a premium on the transaction price will bode well for index movement, whereas a discount will lead to dampening market sentiments.
“GoP offering OGDC’s GDR at discount seems highly likely and I doubt if the transaction will be made at a premium,” he said.
Market pundits believe that such conversion of GDRS into shares is likely to create a supply shock in the market. And considering that OGDC is the index heavyweight (weight of 16 percent in KSE-100 on the basis of total market capitalisation) the downward pressure in the scrip will shake down the index.
On the contrary, one of the analysts that BR Research spoke to believed that the downward pressure is not likely in the case of OGDC since a notable portion of the free-float is held with Templeton (a foreign fund).
Going back to 2006, Pakistan was a constituent country of MSCI Emerging Market Index, and now it is part of MSCI Frontier Market Index and since the returns of frontier markets have been more cheering than emerging markets since 2013; there appears to be a strong case of this GDR issuance receiving an overwhelming response from international markets. Let’s keep an eye on its progress!