HAMID WALEED
LAHORE: The federal government can issue infrastructure bonds and municipal bonds for development projects to boost economic activity and mitigate the impact of Covid-19 spread.
With the recent drop of 4.25 percent in the interest rates, the cost of borrowing will be lower and the investors would try to lock their funds in fixed income guaranteed instruments with the hope of further drop in the interest rates. The fixed income guaranteed instruments will remain incentivised and attract subscription accordingly and it will be a win-win situation for all the stakeholders.
This was pointed out by a leading financial market expert Asif Baig Mirza while talking to Business Recorder on the issuance the energy Sukuk-II through Pakistan Stock Exchange (PSX).
He said it is a good way of raising money if book-building regulations are followed. The entitled bidders will provide their quotes, - or + of the KIBOR. The orders will compete and the book runner will keep on updating the strike price, on a real time basis.
He said the bidders can cancel or modify their bids, within given time and the strike price will be announced, i.e., the best bidders and the best price from the issuer’s point of view. Strike price is only one, which means that the lowest rate at which the total Sukuk amount of Rs200 billions, is received, against one push of a button, he said and added that it is called Dutch Auction Method.
For example, in the book, if the lowest bid is 7 percent and the other bids are slightly higher. At 8 percent, the bids cover the targeted amount of Rs 200 billion, then the strike price will be 8 percent for all. It means that in this list, the lower bidders, moving down, till 7 percent, will be accepted on the strike price of 8 percent. He hoped that it would ensure efficiency and fair pricing. Mostly, he added, the banks will be enthusiastic to subscribe to it. The Islamic banking institutions have more liquidity and will be keen to avail this opportunity, as their pool has subscribed for Rs 200 billions, for the same purpose in the past.
Although Baig said, the Sukuk would be tradable at PSX, but this platform is very inactive for bond trading. Therefore, secondary market trading and pricing would still be a challenge. Though, it is quite okay for investors, having the appetite till its maturity. If it works well, then Government can issue, Infrastructure bonds and so on. It is quite common in the developed world, he said. It is pertinent to mention that the money for the project is raised with a mechanism, as to how it will be spent and how the loan will be serviced and returned. Generally, the beneficiaries of the project take the burden and the product is serviced with that angle. It does happen that people are not burdened, who are not beneficiaries. He said the time has come to bring it in discipline, as we are having a big chunk of savers, parked in National Saving Schemes (NSS), having no productivity. It is the deficit, accumulated since decades. If bond issuance is disciplined and people are protected, a lot of NSS funds can move that way and ensure greater productivity, he hoped and added that the only prerequisite is to be selective in designing a product for the confidence-building purposes and if the idea is smartly saleable by convincing the people that they would also be winners. The way forward is to conduct the study and find under-writers. It may be noted that the Board could not meet to approve the Rs 200 billion Sukuk-II because of the compulsion of online meetings through ZOOM application, therefore, the new date will be announced soon. In between, Baig said, the issuer will benefit in the pricing cost if there is a further drop in the interest rate.
