Companies raised Rs 3.6 billion from selling shares through stock market and Rs 10.1 billion through selling debts during the current fiscal year, slowing down from the preceding financial year, but received overwhelming response from the general public.
The local equity market remained buoyant, with about 37 percent increase during July 2005 to June 2006 period, compared with the previous year when the stock market had gained nearly 35 percent. Slowness was observed during FY06 when it came to equity IPOs. Where the market performance is principally judged by looking at the Index, the equity IPOs are a broad indicator of growth in the capital market.
Unlike last fiscal year FY05, where the KSE saw record 17 equity IPOs, only 9 companies' shares were offered to the general public in FY06. The total amount offered through IPOs in FY06 stood at Rs 3.6 billion (excluding green-shoe option) as against Rs 12.1 billion during FY05.
This lower magnitude of IPOs in FY06 was due to non-appearance of government offerings, as there was only one IPO of Bank of Khyber, that too belonging to the provincial government. During FY05, government had offered shares of PPL, Kapco and UBL representing 75 percent of total IPOs size at that time.
On the other hand, private sector was also found to be reluctant to go for equity offerings. This lack of interest could be linked to easy availability of bank financing and somewhat to the strict rules to be faced after listing to meet the requirements of corporate governance.
A report of JS Capital said as against the offering size (without green-shoe option) of Rs 3.6 billion, 100 percent of the offered amount was raised by the 9 companies who offered shares in FY06. On cumulative basis, in FY06 the subscription received against the offered amount of Rs 4.3 billion was Rs 11.2 billion--over-subscription of 2.6 times, on average.
Major interest was observed in the banking companies' IPOs, where heavy over-subscription of close to 8 times was seen in both the Bank of Khyber and the Bank Islami. The IPO of Siddiqsons Tin Plate was oversubscribed by 2 times.
Public offering of corporate debts, known in Pakistan as term finance certificates (TFCs), slowed down during the outgoing fiscal year FY06. Against 14 TFC IPOs witnessed during FY05, only 8 TFCs worth Rs 10.1 billion were issued to general public for the fiscal year ended in June 2006.
Following is the review of new TFCs that were offered at local bourses.
After an improved trend witnessed during FY05, offering of TFCs was on the lower side in FY06. During the outgoing fiscal year, only 8 new TFCs, of Rs 10 billion, were brought for IPOs at the local stock market.
Last time (in FY05), 14 companies issued their bonds worth Rs 16 billion. The outstanding listed corporate bond market size is now close to Rs 35 billion.
It was observed that during FY06, 3 out of 8 TFCs were issued by commercial banks. The rate of return offered by these TFCs was based on 6-months Kibor (inline with the directives of SBP) and carried a spread ranging from 150 basis points to 285 basis points.
During FY06, Wapda also issued unlisted Sukuk bond worth Rs 8 billion. Thus the total issue size of corporate bonds (listed and unlisted) during FY06 arrived at Rs 18 billion. Similarly, total outstanding TFCs amount (listed & unlisted) was approximately Rs 65 billion. Three main unlisted TFCs were Wapda (10th issue), Wapda Sukuk and PIA.
Corporate debt market is still in the infancy stage in Pakistan, despite the fact that equity market has developed over the years.
Listed TFCs represented only 1.7 percent of the scheduled bank advances (total inclusive of unlisted is 3.1 percent of bank advances). On the other hand, as compared to equity market, the size of listed TFC market was only 1.2 percent of the total market capitalisation. Credit penetration in Pakistan is 27.4 percent of GDP, whereas the outstanding listed corporate debts are merely 0.5 percent of GDP.
From last couple of years, banking sector has been regularly issuing TFCs. In FY05, out of 14 TFCs, 7 belonged to commercial banks. As mentioned above, in FY06, 3 out of 8 were issued by commercial banks. These TFCs are taken as Tier-2 capital in the books of the banks and thus are considered for the purpose of 'capital adequacy ratio' (CAR). The banks which are facing problem in maintaining CAR due to growth in advances, are likely to go for the issuance of corporate bonds in future.
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