KARACHI: The cash-strapped government has kick-started the process of raising Shariah-compliant debt worth Rs200 billion at the Pakistan Stock Exchange (PSX) to ease liquidity constraints and partially address circular debt in the energy sector.
This is for the first time in history that the government is using the PSX platform to raise debt. This will ensure maximum possible participation from financial institutions and rich individual investors to lend and help the government acquire the financing at minimum possible mark-up rate.
Power Holding Limited (PHL), a public sector entity fully owned by the Ministry of Energy, would auction the government of Pakistan’s guaranteed Shariah-compliant debt security named Pakistan Energy Sukuk-II (PES-II) to raise Rs200 billion through competitive bidding under the book building process at the PSX.
The participants would submit their bids like “six-month Kibor (Karachi interbank offered rate) and plus/minus basis points” to determine the rate of return at which the debt will be raised and “the issuer (PHL) will pay on a semi-annual basis to successful investors,” said PSX in a statement on Monday.
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Earlier, the government had invited bids (rate of return) twice directly from Islamic banks and Shariah-compliant financial institutions for Rs200 billion under PES-II since July 2019, but cancelled both, considering the process was not transparent and more investors should participate.
The government floated the first Pakistan Energy Sukuk (PES-I) worth a similar amount of Rs200 billion at the rate of return of Kibor plus 0.8% for a period of 10 years in March 2019. Some 7-8 Islamic banks and Shariah-compliant financial institutions had provided the financing.
“The government initiated work to auction PSE-II through Pakistan Stock Exchange (PSX) on April 27. The book-building was scheduled to be held on May5-6 which has been delayed. We will soon notify new dates,” a PSX official said.
“This is a Shariah-compliant debt security, meaning the government needs to raise the debt against creating underlying assets. The delay in creating the underlying assets caused the delay in the book-building process at PSX,” said a banker who is involved in the book-building process.
The underlying assets would be rental power plants to earn a profit under the Shariah-compliant PES-II. Islamic banks have excess liquidity worth around Rs300-400 billion, he said.
The circular debt swelled to a record high Rs1.8 trillion by last month. The debt has continued to soar despite government claims of controlling it and having raised power tariffs multiple times to recover more from those regularly paying electricity bills.
Pakistan Energy Sukuk-II (PES-II) is 100% SLR eligible, meaning banks may use it to meet SLR limits under the banking rules governed by the State Bank of Pakistan (SBP).
The PSX statement said that unlike the Sukuk issuance by PHL last year, investors who can participate in this issue include banks, financial institutions, companies or corporate bodies (as per Companies Act 2017), mutual funds, voluntary pension schemes, private funds being managed by NBFC’s, insurance companies, securities brokers, funds and trusts (as defined in the Employees Contributory funds), and individual investors having net assets of at least Rs2 million.
“The total issue size will be offered through private placement to eligible investors, followed by a technical listing of the Sukuk on PSX,” the stock market statement added.
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After the security is listed, investors throughout Pakistan and abroad can buy or sell units of the Sukuk on the PSX through their brokers. “The listing would enable participants to quit anytime and allow new investors to take benefit under PES-II,” PSX official said.
PSX MD Farrukh H Khan said in the statement, “This Sukuk issue on PSX through the state-of-the-art book building system is a watershed moment in the development of the debt market in Pakistan. The government, finance ministry and SECP are focused on developing the capital market and this is an important step in that direction.”
“Pakistan is finally following the globally accepted best practice of using a book building methodology to raise debt, which benefits both issuers and investors by bringing transparency and price discovery to the centre of the debt raising process. The book-building process through the stock exchange will benefit the issuer in that it will enable price and demand discovery. Furthermore, it will give access to a wide investor base which will enhance liquidity and secondary market trading.”
Published in The Express Tribune, May 5th, 2020.
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