ISLAMABAD: The Securities and Exchange Commission of Pakistan’s (SECP) decision of adding mutual funds and Modarabas in the eligible institutions for the underwriting assignments shall expedite capital-formation process in the country. This was stated by Aftab Ahmad Chaudhry, who is leading the efforts for revival of the companies presently being traded on the defaulters’ counter of Pakistan Stock Exchange (PSX).
He stated that the underwriters are very critical players in the process of fund-raising in the capital market as they stand to guarantee to pick-up the unsubscribed shares if the same are not taken up by the general investors. The presence of underwriters makes it possible for the sponsors of the companies to assure themselves about the availability of growth-funding needed for the expansion of their businesses.
In Pakistan, underwriting activity is a regulated and licensed activity governed under the Public Offering (Regulated Securities Licensing) Regulations, 2017 of the Securities & Exchange Commission of Pakistan (SECP). Presently, these regulations only permit the scheduled banks and licensed securities brokers as the eligible entities to apply for the underwriting license/registration.
Aftab stated that the problem with the present underwriting eligible entities has been that it had unnecessarily restricted the entry of some very relevant institutional players like the mutual funds and the insurance companies, who are meant to focus on the longer-term potential of the stocks offered in the market. He said that due to slow decision-making and risk-averse attitude, the banking institutions have not been unable to support the capital formation process through aggressive underwriting assignments. On the other hand, the size of the balance sheet of the brokerage industry of Pakistan is not large enough, which again comes as a hurdle.
He said that due to this reason, the country has not seen any Initial or Further Offering of Shares to the tune of US$100 and beyond. He said that if we want to see more and more IPOs and FPOs in the future, then the market needs a large pool of underwriters so that more capital mobilization opportunities can be supported by these players.
He said that it may be the need of the time to expand the pool of entities eligible to act as underwriters. He suggested that the SECP should go a step further and make all institutions as underwriting eligible entities which are defined in the Financial Institutions (Recovery of Finances) Ordinance, 2001. He said that these entities include modarabas or modaraba management companies, leasing companies, investment banks, venture capital companies, financing companies, unit trusts or mutual funds of any kind and credit or investment institutions, corporations or companies. Besides this, he said that the insurance sector should also be covered in the scope of the eligible entities in the relevant regulations.
Copyright Business Recorder, 2022
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