The trend of business, business partnership and capital acquisition is changing in Pakistan. Companies are now turning to the stock market instead of borrowing from banks to expand their business. In the financial year 2021, 32 companies have raised more than Rs 80 billion from the stock market.
What is the reason for this?
The main reason for the stock market to move towards investment instead of borrowing is the fluctuations in the basic interest rate in recent years.
The basic interest rate in Pakistan was more than 14% in 2011. It later declined and gradually declined to less than 5% in 2016. The situation remained the same till 2018, but then there was a sudden rise in interest rates. In 2019, the rate reached 14% again. This was the story of the basic interest rate at which various banks borrow from the SBP and take at least 4 to 5 percent interest on this loan.
That is, when the base interest rate was 14%, the interest burden on the company increased from 18% to 19%. It is also worth noting that banks lend at a floating rate while keeping their margins or profits stable, so when interest rates go up, the markup on old loans also goes up. Many companies have gone bankrupt due to the sharp rise in interest rates.
Within a few years, a company called Pearl Fabrics went bankrupt, and its owner, Sheikh Manzar Alam, told me a story in one of my vlogs about how a bank loan had sunk his business.
As interest payments become more expensive for companies, companies are now raising capital from the stock market instead of borrowing. Companies from the first public sale of shares and IPO in the stock market add others to their partnership and save themselves from the burden of debt.
In the financial year 2021, 32 companies have raised more than Rs 80 billion from the stock market. — File / Photo: Reuters
The fiscal year 2021 has proved to be the best year for the Pakistan stock market. Companies have raised record capital from the Pakistan stock market this year. The companies raised over Rs 80 billion in initial public offerings of shares, rights shares and bonds.
In the last 5 years, 19 companies have been listed on the Pakistan Stock Exchange (PSX) while 28 companies have been delisted since 2017. However, FY2021 was a very successful year in terms of listed companies in the stock market. This year, 8 companies were registered and these companies raised significant capital of Rs. 20.17 billion from the stock market.
In the year 2010 also 8 new companies were registered in the stock market but they could get only Rs6.62 billion. Later in 2017, 12 more companies were registered than before but these companies got only Rs 3.90 billion in the capital. Between 2007 and 2021, 76 new companies were listed on the Pakistan Stock Exchange, raising a total of over Rs 97.39 billion.
Tahir Abbas, Head of Research, Arif Habib Group, says: An offer was received to sell the shares at a price 40% higher than the target.
An examination of the first public sale of shares and the companies registered in the stock market reveals that the companies established in various sectors raised significant capital through registration.
The new listings include The Organic Mate Company (Food), TPL Tracker (Technology), Agha Steel (Steel), Engro Polymers & Chemicals, Panther Tire, Service Global Footwear, Citi Pharma and Pakistan Aluminum Beverage Cans.
The first public sale of AirLink Communications shares has been completed in the current financial year.
AirLink Communications Limited has been declared as the largest IPO in Pakistan on PSX, as a result of which Rs6.4 billion was raised while the sale of shares of an information technology company called Octopus is underway.
Between 2007 and 2021, 76 new companies were listed on the stock exchange in Pakistan, raising a total of over Rs 97.39 billion.
In addition to the initial public offering of shares, the companies also issued a large number of rights shares during the last financial year. Right shares are issued by companies that are already listed on the stock market and want to invest in expanding their business. Companies issue new shares and the first option to buy them is given to existing shareholders or partners. If the partners refuse to buy, then other investors are offered to buy the shares.
During the last financial year, 24 companies issued their right shares in the Pakistan Stock Exchange and raised a total capital of over Rs. 49.54 billion. Shell Pakistan has raised the highest capital of Rs. 11.55 billion by issuing right shares of 100% shares while Mitchell Farms has raised the highest capital of Rs. 75 crore by issuing the right shares in terms of percentage. Fuji Fertilizer Bin Qasim issued rights shares worth Rs 5 billion, The Searle Company issued rights shares worth Rs 4.69 billion and United Foods issued rights shares worth Rs 4.5 billion.
The answer is yes. In the second quarter of 2021, a total of 582 businesses globally offered their shares for public sale for the first time, raising کا 131 billion, according to the US equity and investment firm PWC. In the first quarter of the year, 727 IPOs were registered and the companies managed to sell shares worth over 2 202 billion for the first time.
In the first quarter of 2021, 51% of investments were made in the United States, 18% in Germany and 10% in China. Experts hope that in the near future, companies around the world will continue to turn to the stock market for capital.
Over the past two years, more than 200 companies in the Asian region have come to the stock market for registration, raising about 35-40 billion each quarter.
The London Stock Exchange's IPO rose 467% in the first half of this year, according to Fortune, a global news website. 49 companies were newly listed (of which 8 are technology-based companies) and a capital of 27 billion British pounds was raised.
New York Stock Exchange
Similarly, companies in our neighbouring country India are turning to the stock market. The market capitalization of Bombay Stock has crossed 3 trillion. In 2021, 60 new companies have announced the first public sale of shares, of which 28 have been completed. Former East Pakistan has now approved 15 IPOs in present-day Bangladesh.
If we compare Pakistan with other markets in the region, we find that the number of stock market investors in Pakistan is only 2.5 million while in China it is 170 million, in India 50 million and in Bangladesh 29 million.
Most company owners in Pakistan want to maintain control over their company so they offer very low-value shares for partnership, hence the free float of companies is also very low. In May 2017, the market capitalization was 100 100 billion, accounting for 35% of Gross Domestic Product (GDP). There is less left
Kamran Nasir, chief executive of JS Global, acknowledges that the stock market in Pakistan is lagging behind, but hopes for improvement, saying "investor confidence has increased and Will have to close the gap in different investment classes.
Investors in the stock market have to go through a very strict surveillance process while investing in real estate, gold or national savings is easy and convenient. If an account is opened on an ID card, no one will even ask where the money came from, this gap has to be closed, only after that more people will turn to regulated and structured markets.
According to experts, the main reason for companies turning to the stock market is the arrival of a new generation in the business. He says the second or third generation has now become part of the board in most companies limited to families.
The new generation is educated and familiar with domestic and foreign business regulations, which is why new owners want to expand on an equity basis rather than borrowing from a bank. He is also bringing new investments and new thinking to the company by adding people other than family members to the board of directors. This new thinking will take Pakistan to new heights of development.