One of the major reasons of the current stock market crash is being attributed to the government's decision that National Investment Trust will be privatised. The privatisation Commission's decision to privatise, its planning and timing was ill planned.
There seems to be no doubt in any one's mind who has a slightest vision that once this institution is on sale, it should result in capital market crash and the reasons are obvious and summarised as follows:
The government created National Investment Trust for basically two important objectives in mind. The most important of these was to manage investment portfolios in equity markets for small and private individuals, who have little knowledge of the capital markets and have inadequate financial resources to look after their own portfolios.
The current portfolio of listed securities managed by this institution is approximately over 80 billion rupees. Out of this amount, the private investors excluding the three banks are holding 50%.
The government has not consulted these unit holders before making any decision to privatise their holdings by handing over this institution to private sector. Is there any moral or legal justification in this decision? Is it not betraying the faith of individuals that showed trust in the government?
Don't we thank that there is legitimate expectation of all those unit holders that invested their funds in this Trust to be consulted before a major decision is being taken for their future investments? It is being argued, that that government failed on this account by not consulting the unit holders regarding this privatisation. Had they been consulted, there would have been overwhelm majority rejecting government proposals of privatisation.
Currently, it is being estimated that with a fall in its Net Asset Value, Nit unit holders have lost almost 20 billion rupees during the last ten days. NIT's six monthly balance sheet for the period ending December 2005 indicates that there was an unrealised capital gain of RS 13.9 billion rupees.
It is being feared that this whole amount may have been washed away in this crisis. Unless the government comes out to rescue the market through corrective measures and by punishing those that are responsible for this crash, there is every possibility that NIT may not be able to come up with a normal dividend to its unit holders for the year ending June 30, 2006.
This may create further complications for the capital market especially the investor's sentiment that has been shaken. Besides this fall in value of NIT, the government has lost billions of rupees on the valuation of PSO, PPL, OGDC and National Bank of Pakistan.
The stock exchange crisis does not end up there. It has made even more difficult for the government to carry on its privatisation programme according to its original schedule. In that event, we are unable to understand the government officials statements that the up and down of the capital market is an international or regional phenomena.
There is common perception within the public and especially the investment community that this institution would be sold at through away price and that can only happen if its Net Asset Value is manipulated downward. We have seen that happening. The moment the announcement of its privatisation was made public, the prices of shares at the stock market started falling for no reason. It is being alleged that the Privatisation Commission has been grossly negligent in its planning, timing and not foreseeing its serious repercussions of privatising this important national institution.
In the event that this institution is privatised, there are obvious indicators that there would be severe redemption pressure from the unit holders as the current unit holders may not wish that their life time saving are placed in private hands to that brokerage community who are managing and operating several other mutual funds whose performance has not been comparable to National Investment Trust in any way. The privatisation of ICP Mutual Funds has proved this fear because the cash distribution had almost disappeared and unit holders are being offered stock bonus and right issues instead.
Secondly, the institution was to act as a support to the capital market whenever there is a need to do so. Assuming that privatisation of this institution takes place, what other options are available with the government and the small investors to ensure that manipulation will not take place or the manipulative acts may not increase from its present level. We see manipulative activities being repeated by these big fives as soon as they find an opportunity to do so. It is being feared that in the absence of this powerful institution, there will be no institution of such a magnitude to check the malpractices or manipulation in the capital markets and the field will be open for the manipulators to act in a manner that is against the public interest. In fact, the privatisation would further strengthen the monopolistic position of the existing mutual fund managers.
NIT has been very effective in the past to influence the capital market for the protection of small investors. NIT supported the market whenever there was a need to do so by purchasing at falling prices or to check a bearish trend in the capital markets. It checks the abnormal high prices by selling the stocks at rising prices.
This is an important role of this institution. This role alone, justifies that the government should have decided not to privatise this institution so that it does not go into the hands of those having a reputation of manipulating the market every now and then.
So far, there has been no debate, whether such an important national Institution should be privatised or not. No convincing arguments have been advanced so far to justify its privatisation. The common argument presented by the government is that it is none of the government business to run the investment institutions and these should be placed in private hands to show better progress and improve efficiency in the decision making process relating to investments. Apparently, it sounds a good reason, but why not apply the same reasoning on privatisation of National Bank of Pakistan.
Is there any good justification to keep this institution in the public sector? Why the government has been trying to set up a corporation in the public sector to handle the Saving Schemes that are floated by the government? There seems to be no moral justification for the government to manage the private savings if it is not willing to manage the National Investment Trust in public sector.
The privatisation Commission of Pakistan should give due regard to these concerns of the investors. Therefore it is being suggested that as this is a national institution whose aims and objectives are to encourage small investors, break monopolistic and dominant positions and to protect the small individuals interests, therefore it should not be privatised.