The grim reality of
oversubscription By Saad Tanvir
T
he first IT sector company to get listed on the Pakistan Stock Exchange’s (PSX) freshly constructed GEM board, Supernet, concluded its book-building on Wednesday with a whopping Bid Size of Rs659 million and a major oversubscription of 1.4 times its offer size of Rs475 million. This has lately become a trend whereby recently listed corporations have all managed to acquire more than what they asked for. This, in particular, creates a disequilibrium in the market and takes away its true essence. Taking a deep dive into the IPOs concluded since the start of 2021, Pakistan has had a list of 9 IPOs - 3 on the recently introduced GEM Board and 5 on the conventional stock listing - out of which, all have been oversubscribed. While this may be perceived as exceptional by some, this does indicate a fundamental flaw. The objective of the book-builder is essentially to calibrate a suitable price for the share to be offered. If not, let the market forces decide. However, due to a term called price ceiling, there exist certain limits as to how much the price can climb as a response to the excessive demand. This has been witnessed in the last couple of years in the Pakistan stock market and is dangerous to the market’s ability
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to devise the accurate strike price for the stocks on offer. Companies recently listed include: Supernet; Pak Agro Packaging; Universal Network Systems; Airlink Communications; Octopus digital; Service Global Footwear; Pak Aluminum and Beverages; Citi Pharma; and Panther Tyres.Investors participate in IPOs to benefit from the capital gains in the stock(s) acquired. However, such returns are compromised when the shares are restricted from trading at the market price during the auction period. It is pertinent to mention that oversubscription has no direct relationship with the auction price or the IPO listing price, rather it indicates that the bids received for the stock were in surplus of the amount of shares available. In essence, demand > supply and hence market disequilibrium. While, in ECON101 we’re taught that the market has an invisible hand and that it’s self-correcting in such situations, that’s not the case over here. We’re taught that the price reflects the disequilibrium and that in case of access demand, it increases to cover up the surplus until the market reaches equilibrium again. However, if that was the case, we wouldn’t be looking at every IPO being oversubscribed, rather the difference between the bids received and the offers (available shares)
would be reflected in the listing price until the bids and offer would reach an equilibrium. This is primarily because the PSX sets a price ceiling for the stocks, which hampers market’s fluency and restricts it from running freely.
The GEM Board
T
he freshly formed Growth Enterprise Market (GEM) Board is to enable and facilitate small and medium enterprises (SMEs), greenfield projects, tech start-ups and other companies to streamline their listing process on the Pakistan Stock Exchange and raise capital. SMEs are a crucial element in the Pakistani economy where they constitute about 90% of all enterprises, contribute approximately 40% to the annual GDP, and employ about 80% of Pakistan’s non-agricultural labor force. Alongside this, such companies also provide people with diversified products, invest in Research & Development, create supply chains, increase market outreach and penetration, add to their infrastructure, and increase their production capacity. It is crucial for them to access sufficient funding to succeed. However, such funding is rather less accessible and costly at the same time. This is one of the reasons that Pakistan Stock Exchange has incorporated the GEM
