The 2005 appeared to be a good year in terms of listing of securities and debt instruments at Karachi Stock Exchange (KSE), though the number was less than the preceding year. But the tone was set, slowly but surely, and the market would see entrants from the corporate sector, heralding boost in confidence both of business houses and the country's economy.
With superb performance posted by the stock market, where equity values surged by 52 percent (51 percent in dollar terms) in 2005 to-date, there could not be a better time for companies and government to raise funds through stock market. Excess liquidity in the market, coupled with strong macro-economic indicators, provided further impetus to the companies to offer their stocks in the stock market.
Muhammad Imran, research analyst at Jahangir Siddiqui Capital Markets Ltd, said that performance of the market was primarily judged by looking at the Index. One way to determine the growth of capital market is the fresh issues that brought in the market through IPOs.
The outgoing year 2005 saw 14 stock offerings in the local equity market. Total size of IPOs in 2005 was Rs 13.6 billion (including green-shoe option). This was on the lower side, both in terms of number and size, when compared to 19 equity offerings worth Rs 13.8 billion in 2004.
However, one must not forget that last year's figures included second biggest equity IPO (after OGDC's record Rs 6.8 billion in 2004) in the history of stock exchange, that is of PPL's Rs 5.6 billion issue.
The year 2003 saw 6 IPOs worth Rs 8 billion. Keeping this in mind, 2005 was a decent year for equity IPOs.
Kapco and UBL were the mega offerings in 2005 whose shares were offered through Privatisation Commission. As against cumulative offering size of Rs 13.6 billion in 2005, an amount of Rs 10.1 billion was raised. The deficit is attributable to under-subscription of UBL IPO, which was under-subscribed due to smaller lot, depressed market condition following March 2005 crisis and elimination of group account facility, while for Picic Energy Fund (IPO from December 28-29) amount excluding green-shoe option ie, Rs 250 million, is taken as it is fully underwritten.
In 2005, the subscription received against the offered amount of Rs 12.9 billion was Rs 36.5 billion--over-subscription of 2.8 times on an average. This excludes Picic Energy Fund as its outcome will arrive next year.
Again, in 2005, government issues dominated the IPO market with IPOs of state owned entities accounting for 67 percent of the total IPO size. During 2005, the government offered shares of Kapco and UBL. Out of total subscription of Rs 36.5 billion, government offerings attracted Rs 22.4 billion (61 percent) against their offer size of Rs 9.2 billion. The IPO of Kapco was oversubscribed by 4 times.
Corporate debt market is slowly and gradually developing in Pakistan. Companies are trying to raise debt through TFCs. The year was relatively better in this regard as 14 companies issued corporate bonds at KSE and LSE worth Rs 16.8 billion--highest since 1995.
After a sluggish trend was witnessed during 2004, TFCs primary market once again gained momentum during the year 2005, as 14 new TFCs were brought for IPO at local stock market as compared to only 6 IPOs during 2004. The TFCs issued in 2005 carried worth of Rs 16.8 billion, highest since 1995. The listed corporate bond market size is now Rs 45.5 billion. This size is still low when compared to stock market.
Corporate bond only makes 1.7 percent of the total market capitalisation of KSE.
The TFCs mode of borrowing is still in its infancy in Pakistan and total outstanding corporate debt is only 2.6 percent of commercial banks' outstanding advances. That is why there is hardly any activity of corporate bonds in the secondary market.
One peculiar thing about TFCs issued during 2005 was that 6 out of 14 TFCs were made by the commercial banks. The reason for TFCs offering by commercial banks was to strengthen their Tier II capital.
With 8 percent capital adequacy ratio requirement for banks, issue of TFCs helped the banks to meet this requirement in the sense that TFCs are treated as subordinated debt in their books. The share of TFCs in interest bearing liabilities of commercial is only 0.7 percent.
In all issues of TFCs during 2005, Kibor was used as a base rate according to the directives of State Bank of Pakistan dated January 21, 2004. The range of spreads over Kibor was 150 bps to 375 bps. Before 2005 most of the issuer used SBP discount rate or PIBs as the base rate.
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