The community of stock brokers of Karachi and the office of Securities and Exchange Commission of Pakistan (SECP) have given differing viewpoints on 'how to fix strike price through the book building process'. Brokers do not want SECP to fix a cap on the upper limit while SECP feels that in order to curb inflated, exaggerated and manipulated bids the upper limit needs to be fixed by SECP. In case of Saif Power, SECP fixed the upper limit as it received complaints in case of Hascol Petroleum. The highest bid was 182.5 percent of the floor price. We beg to differ with SECP. Price discovery has to be done by market forces. SECP's job is to regulate the market with a view to ensuring adherence to the rule of law. It is the market that ultimately determines the intrinsic or a fair value of a scrip seeking listing on the exchange.
If someone overpays by cornering a particular scrip, he is then willing to take the risk and could burn his fingers - so be it. SECP says it does not determine the floor and leaves it to offers to determine it but it does place a limit on a cap and the band in which offers can be made. This mechanism is aimed at broadening the investor base, according to SECP. Brokers want a pro-rata distribution of shares to broaden the base of investment. Both are wrong. Leave the market forces to make a price discovery for the scrip.
Pakistan Telecom or PTCL was the first scrip for which the book building process was introduced in this country. After an initial IPO at Rs 30 per share - the strike price mechanism earned the government under a billion dollars in 1999, with strike price at Rs 55 per share. The strike price mechanism is aimed at maximising the return for the seller and for benefit to the company in terms of value. Shares of Allied Bank Limited are now being offered by the government, and therefore, unlike a private company, the offer has no underwriters to the issue. We expect the offer to be oversubscribed.
The procedure of determining the strike price involves averaging of bids and then deriving the strike price. All those above the price are accommodated and if any shares are left to be distributed only then those who are closest to the strike price are allowed to change their offer to match the strike price in order to maximise the value of the company and pay a premium for the risk taken by the investor. So SECP needs to rethink and be consistent so that there is no finger pointing at them.
We would once again ask the government to appoint more commissioners at the SECP and have a tenured chairman. At present, there are only two commissioners. Regulatory bodies need to be strengthened. The poor handling of KASB Securities, by SECP, is a legitimate source of concern for all economic agents. Not only SECP but other regulatory bodies need to be strengthened and given complete autonomy. The government needs to be one of the stakeholders and not a monopoly in the system. It must not lose sight of the fact that a market is any arrangement in which buyers and sellers interact to determine the price.
The advertisement issued by Independent Power Producers (IPPs) about a possible sovereign default is quite worrisome. The government cannot fund Rs 40 billion demanded against the sovereign guarantee is hard to believe. If existing investors are finding it difficult to operate why then would new investors in Pakistan? The sovereign has the ability to print rupees. If it cannot do so - for whatever reasons - then that country is no more independent. Our growing dependence on loans and aid is a stark reality that indeed threatens our very existence as a sovereign country.
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