Opinion: Stock-splits – an opportunity to broaden capital market

If allowed, hundreds of thousands of investors will benefit

KARACHI: Permit me to point out another injustice to the small shareholders. Permit me to identify another exploitative instrument.

All over the world it is admitted that the value of a share has to be neutral. Thus, the preferred treatment of a share is value-neutral. You own a share in a company that splits its stock, say 10/1, the effect is that for each share that you owned originally you now have 10. What effect does this have on a market? Nothing, everything is the same as it was before the split.

I have tried and cried for the big boys in the market to see the sense. Always, I have come across a brick wall. They will not accept the reality that nothing has changed. Everything remains the same.

What an opportunity has been wasted. A small investor is too scared of high prices.

You are asking him to buy shares at astronomical values because you argue that what is the difference? He can buy one share for X number of rupees. Why does he not? We do not prevent him from making this choice.

Now I ask you, please tell me why will you frustrate an initiative that will broaden the market?

If the ordinary shareholder is permitted to take advantage of the stock-splits, imagine what the effect would be? Hundreds of thousands of investors, local and foreign, would benefit.

I kid you not because it is not in my nature to be flippant about such grave issues. The investors will benefit. No one will lose and we will have a market of millions of small investors. All of these people, all of these participants would be very grateful for this relief.

But this is not to be because the environment here is different from what it is in developed capital markets. The big boys here don’t want it. It is for them another opportunity to bleed the small investor.

Reviving moribund market

Here is what will happen — mergers, acquisitions, dispositions, joint ventures and IPOs will take place. What an opportunity this is to revive a moribund capital market. It will put Pakistan on the map not of failed economies but of thriving markets for capital.

Here is an example, take the Saigol Group and its affiliates — would it not be beneficial for them to have a ready market to dispose of their shares and still remain owners? It’s like having your cake and eating it too.

But, in reality, the major gainers will be found in the IPO market. Here is a gold mine. If only the blind could see. If only the deaf could hear. If only the greedy would not kill the goose that lays the golden egg.

Here is another example of what can happen if greed does not overtake common sense.

Mughal Iron & Steel Industries Limited (MISIL) is up for listing on the bourse, offering 27.35 million shares (25% of the post-paid-up capital). Book building took place on Feb 16 with the portion of 20.5 million shares (75% of the issue). All the indicators are positive.

There is a parable in the financial jargon. It is of the camel who pokes his head into the tent. Soon, the camel is in and the Bedouin is out roaming in the desert seeking shelter.

The history of corporate finance reveals that takeovers, mergers and the Securities and Exchange Commission of Pakistan’s (SECP) actions to oust corrupt corporations are based on this objective.

For me the history has a background at Pittsburgh. Professor Bonner spent a full-day explaining stock-splits. Recollect that at Pitt, one-hour was equal to two elsewhere because we had to complete the MBA in one year. So, I’m sorry that I have been guilty of not explaining stock-splits properly.

It will pay to remember the stock-splits are different from bonus shares. A bonus is a free additional share. A stock split is the same share split into two. The treatment, therefore, has also got to be different.

The writer is the chairman of Ace Securities

Published in The Express Tribune, March  2^nd, 2015.

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