No sound reasons to privatise nit

As part of the Government's policy to privatise public sector businesses, the Privatisation Commission of Pakistan invited expressions of interest for the sale of the rights to manage the Trust Fund which exists solely with National Investment Trust Limited as the Management Company.
The National Investment Trust was established under a Trust Deed executed between National Investment Trust Limited as the Management Company and National Bank of Pakistan as the Trustee in 1962. The functions of the Trust were governed by the Trust Deed as amended vide Supplemental Trust Deed dated June 7th 1981 and National Investment (Unit) Trust Ordinance 1965.
Being Non-Banking Finance Company, it obtained the requisite licence from the Securities and Exchange Commission of Pakistan to undertake Asset Management Services. The licence granted exemptions to the Trust from the application provisions of NBFC Rules.
NIT Limited was incorporated under the Companies Act 1913 as a limited company currently with 12 shareholders who subscribed its total paid up capital. The shareholding is held by some of the leading financial institutions, Government of Pakistan and a few leading businessmen. National Bank of Pakistan alone holds 8.33% capital of NIT Limited.
According to unaudited accounts for the period nine months ended March 31st, 2007, the Management Company is assigned management quality rating "AM2-" by Pakistan Credit Rating Agency Limited (PACRA) that represents high quality management. The same agency has assigned "4-star" rating to National Investment (Unit) Trust (Fund) that signifies good performance.
The open ended Investment (Unit) Trust Fund has invested in almost 500 listed companies of Pakistan. It has a track record of paying regular dividends since 1964. Its research team has the necessary expertise in the local investment climate with sales outlets spread not only across the country but also overseas. The investment team and its associated research team have an experience of over 45 years in the management of well diversified portfolio.
GROWTH: The assets growth of National Investment Trust during the last 10 years reflects that its net assets base increased from Rs 24912 millions from June 1997 to Rs 78248 million by the end of March 2007. This amounts to over 300% growth during this period. Similarly, the valuation per unit of NIT went up from Rs 12.02 from June 1997 to Rs 49.38 by the end of March 2007. This also amounts to over 400% increase during this period. These are remarkable achievements as far as small investors are concerned, who invested in these Units.
To simplify the performance, any one who invested in NIT unit in June 1997 with a small amount of 1000 rupees, his portfolio valuation had a market value of over 4000 rupees by the end of March 2007. This appreciation in the valuation is in addition to the regular dividends income accrued to the investor during the last 10 years. The current portfolio managed by NITL is approximately over 76 billion rupees by the end of March 2007.
OBJECTIVES OF THE TRUST: There were some paramount objectives that were to be achieved by creating this Trust. One was to manage investment portfolios in equity markets for small and private individuals, who have little knowledge of the capital markets and inadequate financial resources to select and manage their own portfolios and the other was that the interest of the Unit Holders must be held as a paramount importance. The institution was to act as a support to the capital market whenever there is a need to do so.
CONSULTATIONS: There are strong public concerns that have been expressed in the recent past in connection with the government's decision to privatise the management rights. There is very clear evidence available that suggests that the government has not been able to appreciate the public concern in this respect. No convincing evidence has been presented by the Privatisation Commission to support their contention of privatising the management rights.
Are there moral or legal justifications in this decision? Is it not betraying the faith of individuals that showed trust in the government? Don't we think that there are legitimate expectations of all those Unit Holders who invested their funds in this Trust to be consulted before a major decision is taken for their future investments status? It is being argued, that the government failed on this account by not consulting the Unit Holders regarding this privatisation. Had they been consulted, there would have been overwhelming majority rejecting government proposals of privatisation.
MANIPULATIONS: Assuming that privatisation of this institution takes place, what guarantees are available with the government and the small investors to ensure that manipulation will not take place in the capital markets or the manipulative acts may not increase from its present level. Market manipulation has become order of the day.
Every now and then, accusations have been levelled against the private sector Asset Management Companies indulging themselves into these activities. This could be witnessed through the two enquiries conducted recently for 2005 and 2006 market crashes. We see manipulative activities being repeated by these privately owned Mutual Funds as soon as they find an opportunity to do so. It is being feared that in the absence of this powerful institution, there will be no institution of such a magnitude to check the malpractices or manipulations in the capital markets and the field will be open for the manipulators to act in a manner that is against the public interest.
In fact, the privatisation would further strengthen the monopolistic position of the existing mutual fund managers, which is seen as contrary to public interest. The recently formed Competition Authority must be satisfied that it is not contrary to public interest to sell the managing rights of the Trust to the existing Asset Management Companies to avoid any elements that are contrary to public interest.
LEGALITY OF DECISION: The government has not consulted the Unit Holders if they are in favour of privatising the management rights or not. There seems to be no doubt that it is legally possible for the government to sell off the management rights without any consultation with the stakeholders and the stakeholders also include the Unit Holders.
Assuming that this perception is correct and consultation with the shareholders is not legally required, still it is arguable if in a civilised society, all those stakeholders including the Unit Holders should be ignored and no consultation takes place. Apparently there is no evidence that this consultation has taken place.
If in the United Kingdom, issuing of a new taxi driving licence desires that the local council must consult the existing taxi drivers association before a decision is taken to issue new licences to drive taxis on a certain route because this act may affect the existing taxi drivers rights and privileges, then why the Government in Pakistan should not consult the existing Unit holders if their rights are affected.
The very fact that the investment has been made in NIT Units itself demonstrates that the investors preferred NITL over the other privately managed funds; otherwise the option to invest in privately managed mutual funds was already available to these investors. So it seems that there is definite desire that it should be managed through the said Trust.
OTHER OPTIONS AVAILABLE: In case the government still wishes to sell the management rights then there may be other options available where the sell off also takes place but the Unit Holders rights and privileges are also protected. All these options must be studied before the Privatisation Commission embarks upon a sell off expedition that may not end up as happened with KESC's privatisation.
One of the options that may be studied in depth seems to be that it should be handed over to the existing shareholders. The National Investment Trust Limited is owned by 12 shareholders, who are large banking institutions and a few businessmen. Most of these shareholders have their own expertise in the field of investment and are managing different asset management companies. It is being argued, why the twelve current shareholders should not take an active role in the management of this Trust as being the legal owners of this Trust.
Where does the government fit in this chain of ownership? Even if we assume that the GOP still has a majority control over the Trust ownership, still it would be ethical to hand over this Trust to these owners to manage the Trust efficiently and professionally to protect public interest instead of selling its management rights to a group of people who already enjoy virtual monopoly in this area of managing mutual funds.
The government may either sell its shareholding to the remaining shareholders or keep its stake to ensure its role to protect public interest. It is being strongly argued that if the rights are sold to private sector, there is every possibility that the new management may use its enhanced market strength to the detriment of the public interest, providing them more opportunities to manipulate the market and deviate from the current policies and practices so much that it would justify that the owners should be sure that the Unit Holders are not loser in this change of ownership, being a paramount objective of the Trust management.
To achieve this objective, there seems to be no legal remedy available with the seller that can bind the buyer to ensure continuity of policies particularly the distribution of profits in cash rather than through issue of bonus shares. Distribution of cash dividends has been an important element of this Trust since its inception.
This investment Trust was meant for a class of investors who believed in receiving regular cash dividends rather than receiving bonus shares.
ROLE OF PRESENT OWNERS: Even if we acknowledge for the sake of argument that the present owners are reluctant to manage this Trust and have agreed to sell the management rights of this Trust in small pieces to individual privately owned Assets Management Companies, there seems to be no big capital gain anticipated to be accruing to the owners by selling the management rights that would make a substantial impact upon the balance sheet of the institutions and GOP that owns the Trust.
The sensible approach seems to be that the Trust should be handed over to its current owners. This arrangement may also resolve the outstanding problem of encashing the units bought by National Bank of Pakistan, Bank of Punjab and Faysal Bank Limited that forms a substantial part of the total assets being managed by the NITL. In case, this is not done and the management rights are sold in pieces to private sector, this may result in huge encashment of NIT Units, because the Unit Holders may not be able to have the same faith and trust in the new owners.
There are obvious indicators that there would be severe redemption pressure from the Unit Holders as the current Unit Holders may not wish that their life time savings are placed in private hands to that brokerage community who are managing and operating several other mutual funds whose performance has not been comparable to National Investment Trust in any way. The privatisation of ICP Mutual Funds has proved this fear because the cash distribution had almost disappeared and unit holders are being offered stock bonus and right issues instead.
THE DEBATE: So far, there has been no debate, whether such an important national institution should be privatised or not. No convincing arguments have been advanced so far to justify its privatisation. The common argument presented by the government is that it is none of the government business to run the investment institutions and these should be placed in private hands to show better progress and improve efficiency in the decision making process relating to investments.
Apparently, it sounds a good reason, but why not apply the same reasoning on complete privatisation of National Bank of Pakistan. Is there any good justification to keep this institution in the public sector? Why the government has been trying to set up a Corporation in the public sector to handle the Saving Schemes that are floated by the government? There seems to be no moral justification for the government to manage the private savings if it is not willing to manage the National Investment Trust in public sector.
There is an urgent need to privatise the Pakistan Postal Services which has become a most corrupt and inefficient institution in the country that never delivers the post to its destination rather most of the mail is dumped into the waste bins to avoid its delivery. Why the government does not privatise this segment to improve its efficiency and to reduce losses? Why sell those institutions that are running efficiently and keep those that are not performing?
NIT has been very effective in the past to influence the capital market for the protection of small investors. NIT supported the market whenever there was a need to do so. This role alone, justifies that the government should decide not to privatise this institution to protect other small investors that invest their funds in listed securities directly.
The privatisation Commission of Pakistan should give due regard to these concerns of the investors. Therefore, it is being suggested that as this is a national institution whose aims and objectives are to encourage small investors, break monopolistic and dominant positions and to protect the small individuals' interests, the managing rights should not be privatised.