When it comes to investment instruments, the capital market of Pakistan can be divided into two broad categories: equities & debt. While equities are well understood as shareholding of companies, understanding of debt is not clear enough for many individuals or investors.
Debt market includes bonds, Term Finance Certificates (TFCs), commercial paper, bills such as Treasury Bills (T-Bills), Pakistan Investment Bonds (PIBs), Sukuks such as Government Ijarah Sukuks (GIS) and other such securities.
Debt basically involves borrowing money from the investors for a certain tenure against a payout by the issuers of the debt instrument at a fixed or floating percentage over the term of the issue. At the end of the term or at maturity, the borrower or issuer returns the principal amount to the investor. Hence it is termed as debt and is a liability for the issuer/ borrower.
Essential features of debt securities:
Essentially debt is of two types: private debt and public debt. Private debt is when private or public companies issue bonds such as TFCs. Public debt is when a government organisation or department issues bonds such as sovereign bonds or municipal bonds. The debt securities issued by the Government of Pakistan include bonds such as: Pakistan Investment Bonds (PIBs), Market Treasury Bills (T-Bills), National Savings Certificates, and Government Ijarah Sukuks (GIS).
Another defining factor of bonds is publicly placed debt and privately placed debt securities. Publicly placed debt is a debt security issued via selling the same to a large number of investors. In essence, publicly placed debt is more like an IPO of the debt market. Privately placed debt is a debt security issued via selling the same privately to a few (group of) individuals or institutions.
For publicly placed debt, the company issuing the debt security should have a paid-up capital of Rs 200 million or above whereas the total issue size of the security should be Rs 200 million or above as well.
On the other hand, for privately placed debt, the company issuing the debt security should have a paid-up capital of Rs 25 million or above whereas the total issue size of the debt security should also be Rs 25 million or above.
To explain bonds further, bonds can also be classified into two more categories: fixed rate and floating rate. Fixed rate bonds are the ones with fixed coupons. These bonds have an interest rate that remains fixed either for the entire term or part of the term of the bond. Floating rate bonds have an interest rate that rises up or down in accordance with some benchmark.
Bonds’ main characteristics include face value or par value. Face value is the amount of money a bondholder will receive once a bond matures at the end of its tenure. Moreover, a newly issued bond sells at its face value. It is pertinent to mention that when a bond trades at a higher price than the face value, it is said to be trading at a premium.
Conversely, if a bond sells at a price lower than the face value, it is said to be selling at a discount. The logic behind premium/discount is that when the prevailing interest rate is greater than the coupon rate of the issued bond, the bond will trade at discount. On the contrary, the bond will trade at premium if the coupon rate is greater than the prevailing interest rate because of higher demand.
The coupon rate of a bond is its interest rate. It is expressed as a percentage of the par value. A 10% coupon rate of a bond having par value Rs 100,000/- means that the payout against the bond is Rs 10,000/- annually. (This is an example of a fixed rate bond).
Maturity of a bond is when the term of the bond expires. At maturity, the principal amount of the bond becomes due and is repaid to the investor. Final interest payment is made at the time of maturity of the bond.
Government Debt Securities:
Government Debt Securities or GDS are bonds issued by the government of a country to finance its operational expenditure, infrastructure development and other needs. There are three types of Government Debt Securities currently issued by Government of Pakistan. These are:
• Market Treasury Bills (MTBs) or T-Bills
• Pakistan Investment Bonds (PIBs) (Fixed and Floating rate)
• Government Ijarah Sukuks (Shariah-compliant bonds) (Fixed and variable rate)
Market Treasury Bills (MTBs): Market Treasury Bills are issued for tenors of 3, 6 and 12 months. They are issued at a discount to their face value. These are issued in multiples of Rs 5000. Primary Market Auctions for MTBs are regularly held fortnightly with the schedule of the auctions published by the State Bank of Pakistan (SBP) at the beginning of every quarter. The schedule of auctions is published by the SBP, and available at this link:
The process of investing in Market Treasury Bills is a convenient one through opening an Investor Portfolio Securities (IPS) account by investors interested to invest in these instruments. The IPS account is offered by all Primary Dealers (PDs) of Government Securities/ scheduled banks designated by SBP for each financial year. It is also offered by Central Depository Company of Pakistan and National Clearing Company of Pakistan Limited as they are Special Purpose Primary dealers (SPPD).
The list of Primary Dealers offering IPS account is available on the following link whereby different years of circulars are listed. Once a particular year is clicked, a list of circulars for that year appears. Thereby, one can click on the list of PDs for that chosen year to see the Primary Dealers allocated for that particular year by SBP.
The procedure for investment follows through the Investor Portfolio Securities (IPS) account. PDs/SPPDs or Scheduled Banks hold MTBs in IPS accounts on behalf of their customers. The securities held in the IPS account are legally under the ownership of the investors in accordance with instructions of SBP.
An IPS account can be opened by any investor, individual as well as institutional, who has a Rupee denominated account in a scheduled bank offering this (IPS) facility or through SPPD. After opening an IPS account, investors can instruct their bank to purchase the MTBs either from the Primary Market through non-competitive bidding process in regular auctions conducted by SBP or from the Secondary Market. The Treasury Bills are of minimum denomination of Rs 5000.
In the Primary Market, there is non-competitive bidding. This allows investors to take part in the auction through Primary Dealers (PD). The non-competitive bids are sent to SBP separately from the normal bids before commencement of primary auction time with the name of investors without quoting the price. These bids are accepted at weighted average yield for each tenor; this is decided in the primary market auction. In case of over-subscription, non-competitive bids are accepted in order of lowest to highest amount or on pro-rata basis. The quantum size of non-competitive bids for an investor is linked with auction target i.e. 0.25% of the pre-announced auction target or Rs 25 million, whichever is higher, subject to a maximum of Rs 500 million.
In the Secondary Market, investors can also buy the MTBs by instructing their bank to purchase the MTBs. Investors can also sell their MTBs in the Secondary Market through their bank. If the MTB is held till maturity, the face value amount is credited into the account of the investor. In the Secondary Market, investors can purchase a T-bill from the bills available with the bank. These may be available at prices the banks may deem fit. Likewise, if the investor wants to sell the bill before maturity, then in that case as well, the (buy-back) price of the bill may be determined by the banks themselves which may be at a discount to the actual price.
The T-Bills have several benefits including guaranteed repayment on maturity by the Government of Pakistan. These securities are investable for short tenors and provide higher returns to the investor as compared to most bank deposits. Moreover, they can also be accepted as collateral by most banks.
Pakistan Investment Bond (PIBs): These are issued in tenors of 2, 3, 5, 7, 10, 15, 20 and 30 years whereby the coupon payments are fixed/floating and paid out quarterly/semi-annually. Primary Market auctions are regularly held for PIBs on quarterly basis with the schedule of auction being published at the beginning of each quarter by the State Bank of Pakistan (SBP). Individuals can also participate in SBP auctions including the PIB auction. They can participate with a minimum of Rs 100,000 or multiples thereof.
Through the Investor Portfolio Securities (IPS) account offered by any bank offering these services, investors can invest in PIBs. The IPS account is offered by all Primary Dealers (PDs) of scheduled banks designated by SBP for each financial year and by Special Purpose Primary Dealers (SPPD).
The procedure for investment follows through the Investor Portfolio Securities (IPS) account. PDs/SPPD/Scheduled Banks hold PIBs in IPS accounts on behalf of their customers. The securities held in the IPS account are legally under the ownership of the investors in accordance with instructions of SBP.
An IPS account can be opened by any investor who has a Rupee denominated account in a scheduled bank offering this (IPS) facility. After opening an IPS account, investors can instruct their bank to purchase the PIBs either from the Primary Market through non-competitive bidding process in regular auctions conducted by SBP or from the Secondary Market.
In the Primary Market, through non-competitive bidding, investors can take part in the auction of the PIBs through Primary Dealers. The non-competitive bids are sent to SBP separately from the normal bids before commencement of primary auction time with the name of investors without quoting the price. These bids are accepted at weighted average yield for each tenor; this is decided in the primary market auction. In case of over-subscription, non-competitive bids are accepted in order of lowest to highest amount or on pro-rata basis. The quantum size of non-competitive bids for one investor is linked with auction target of 0.25% of the pre-announced auction target or Rs 25 million, whichever is higher, subject to a maximum of Rs 500 million.
In the Secondary Market, investors can also purchase PIBs by instructing their bank for the same. PIBs can also be sold in the Secondary Market through the bank. If the PIB is held till maturity, the face value amount is credited into the account of the investor.
There are several benefits to PIBs such as guaranteed repayment of face value at maturity and semi-annual/ quarterly coupon payments by the Government of Pakistan. PIBs are also accepted as collaterals by most banks.
GoP Ijarah Sukuk (GIS):
The GoP (Government of Pakistan) Ijarah Sukuk is a government security which is issued in accordance with the Public Debt Act 1944.This is a Shariah-compliant security for those investors seeking to invest according to Islamic principles of finance. GIS is a lease-based arrangement compliant with Shariah principles.
The GIS issued through the capital market platform has been made possible subsequent to the Federal Cabinet approving the amendments to the existing Government of Pakistan Market Treasury Bills 1998 and Government of Pakistan Ijara Sukuk Rules 2008. These amendments enable the Government to conduct GIS auction through PSX and the capital market ecosystem comprising of National Clearing & Settlement Company Limited (NCCPL) and Central Depository Company (CDC) of Pakistan, collectively known as Capital Market Infrastructure Institutions (CMIIs).
In a major development for the capital markets of Pakistan including its stakeholders, market participants, issuers and investors, since December 2023, the Primary Market auction of Government Ijarah Sukuks has started to take place on the stock market platform. Previously, this came under the domain of the State Bank of Pakistan only. The state-of -the-art auction system of Pakistan Stock Exchange (PSX) enables greater transparency, competitiveness of price discovery and includes larger number of investors.
The 1 year listed Ijarah Sukuk issued through the PSX platform is offered at a discount from its face value in the auction. It means that investors bid at an investment value lower than the face value of the Sukuk. The Sukuk is redeemed at face value on maturity. The difference between the investment value and face value is actually the Ijarah rental. PSX notifies the auction calendar, Term sheets, Sukuk Structure, auction results and other relevant details at its website in ‘Government Debt Securities-Primary Market Auction’ section available at this link:
The GoP Ijarah Sukuk offered through the PSX platform is issued in tenors ranging from 1 year to 5 years with denomination of Rs 5,000 and its multiple thereof. The one-year GIS profit/ rental frequency is fixed and paid at maturity whereby the fixed rental rate is determined at the time of the auction. The Fixed Rental Rate (FRR) GIS is of 3 & 5 years tenor. It pays rental/ profit on semi-annual basis at a fixed rate determined at the time of auction. The Variable Rental Rate (VRR) GIS is of 3 & 5 years tenor as well. It pays the latest 6 months weighted average MTBs rate plus/ minus spread on semi-annual basis. The spread is revised after every six months and is linked with benchmark rate of 6-month weightage average yield of T-Bills.
Local, Non-Resident Pakistanis (NRPs) and foreign investors can participate in the Primary Market auction and Secondary Market investment of the Government Ijarah Sukuks. Local investors can do so through their brokerage accounts. NRPs can also participate through their Roshan Digital Accounts (RDA)/ through CDC while foreign investors can participate through their Special Convertible Rupee Accounts (SCRA) via the brokerage accounts. The mechanism is same as the one followed for equities.
There are two types of bidding formats in which an investor can participate: (i) Competitive bids and (ii) Non-Competitive bids. A Competitive bid is one wherein an investor specifies the price or bid rental or spread at which s/he wishes to purchase the GIS. Non-competitive bidding is for smaller investors purchasing the GIS. Non-competitive bidders do not specify the price/rental/spread of the security. The price or terms are set by a competitive bidding process by the large institutional buyers.
The minimum amount to bid in the auction is Rs. 5,000 per investor or any denomination as specified in GIS-Term sheet. There is no maximum amount for participating in competitive bidding. For non-competitive bidding, the upper limit per investor is 0.25% of target auction amount or Rs. 500 million whichever is lower.
From January 2024 onwards, the Primary Market auction of the following types of GIS takes place through the capital market ecosystem, specifically the CMIIs:
• Short term fixed rate discounted GIS: 1-Year GIS
• Variable Rental Rate (VRR) GIS: 3 years GIS-VRR & 5 years GIS-VRR
• Fixed Rental Rate (FRR) GIS: 3 years GIS-FRR & 5 years GIS-FRR
The inaugural primary market auction of the one-year GIS held on December 8, 2023, was a resounding success, surpassing the target amount of Rs 30 billion with bids accepted totaling Rs 36.068 billion. The overwhelming response, with total bids reaching Rs 481.307 billion from 172 investors with 132 being the successful number of bidders, resulted in a diversified investor base for the Government of Pakistan. Notably, the Sukuk was oversubscribed by 16 times, with a subscription amount of Rs 36.068 billion, a price of Rs 83.7055 and a cut-off rental rate of 19.5199%.
Subsequently, in January 2024, the GoP expanded the range of GIS offerings through PSX, introducing three and five-year tenures alongside the initial one-year Sukuk. This initiative has proven successful, with the value of total successful bids in Sukuks issued since January 2024 exceeding Rs 386.733 billion, signaling sustained positive momentum in Sukuk issuances by the GoP.
For instance, the January 2024 auction of the one-year GIS, with a target of Rs 40 billion, garnered bids accepted amounting to Rs 6.418 billion and total bids of Rs 350.220 billion. The Sukuk was oversubscribed by 8.76 times, with a cut-off rental rate of 19.4995% and a price of Rs 83.7198. A total of 445 bids were received, with 271 successful bids.
In the Secondary Market, for GIS listed on Exchange platform, investors can invest in Sukuks through any brokerage firm eligible to trade in listed debt securities including GIS. To transact or invest in the Secondary Market, investors need to maintain a trading account along with CDC Sub Account with the eligible brokerage firm. To purchase the GIS of their choice and at the preferred rate, investors need to deposit a cheque in favour of the brokerage firm. Thereafter, an investor can instruct the brokerage firm representative dealing with GIS to place an order at a certain rate for purchase of the GIS or buy it at the available rate in the market. The security thus purchased will be held in the CDC Sub Account of the investor. Likewise, an investor can also sell his/ her GIS in the market at the available market rates subject to the availability of counter orders.
Concludingly, it must be emphasised that Government Debt Securities including MTBs, PIBs, and GIS form a comprehensive suite of bonds and securities that cater to different segments of investors and their investment preferences. Moreover, these securities come with the added benefit of being guaranteed by the Government of Pakistan for their redemption and profit payments.
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