KARACHI, Dec 6: The National Investment Trust (NIT) -— Pakistan’s largest mutual fund that holds Rs75 billion under management — would be split into six parts, three would be distributed to three banks — Faysal Bank, Bank of Punjab and National Bank of Pakistan — that hold the letter of comfort (LoC) and the remaining would be put on public auction.

An executive officer at the NIT recalled that in March this year, the proposal was to split the fund into five parts, with two going to the LoC holding institutions and three under the hammer. Did the three institutions with LoC then ask for a bigger slice of the cake?

NIT was earlier planned to be privatized by June, but that date, like most of the transactions under the Privatization Commission, was shifted ahead. Abdul Ahad Effendi, consultant to the Privatization Commission told Dawn on Tuesday that it would be the endeavour to complete the transaction by the end of February or early March. He observed that all issues, including the LoC, had been resolved. There was no systemic risk and the privatisation would be an absolutely clean affair. He said he would be able to give more details about how LoCs would be redeemed after seeking permission from Minister for Privatization and Investment Dr Abdul Hafeez Sheikh.

Indications are that the NIT sell-off would be completed in time by virtue of the resolution of debatable outstanding issues: suitability of timing; decision on number of parts in which the fund would be split and finally the resolution of issue of redemption of LoCs.

Like most upcoming transactions, the date of the privatization of NIT would be difficult to shift ahead, since the redemption date of Faysal Bank’s LoC is drawing dangerously near.

And handling of the LoC is perhaps the most interesting aspect of the NIT’s privatization. But what really is the letter of comfort? The story goes as far back as July 2001 when the NIT was in dire financial straits; the price of the unit had nosedived to just about Rs7 and there was a run on the fund for redemption. In order to protect the NIT from total collapse, the government restrained those three major banks and a few other comparatively smaller holders of NIT units not to go for redemption. In exchange, the government issued them LoCs for five years with the guaranteed price of Rs13.70 on the date of redemption.

The institutions had varying units covered under the LoC, but Faysal Bank’s 157 units stand first in line for maturity which is due in coming June. The remaining two, NBP’s 432 units and Bank of Punjab’s 149, matures in August. The banks have benefited tremendously in the sense that the NIT unit value has left a comfort price of Rs13.70 far behind.

The net asset value (NAV) of the NIT unit had touched its all-time high of Rs52.80 on Monday, which was even higher than Rs51 that the NAV had climbed when the KSE-100 index had breached the 10,000-point level in March this year. The incremental windfall benefit, the difference of current unit price and the comfort price to LoC holders, now run into billions of rupees. The banks are making tremendous additions to their after-tax profits accrued from capital gains from appreciation in NIT units. Since the unit price is carried in the books of all three banks at the purchase price of Rs14, the banks have made a big boon of unrealized capital gains.

But what in case the Privatization Commission is unable to privatize the NIT latest before June, it would have to redeem first the Faysal Bank’s LoC, which would require a mammoth sum of Rs8.3 billion to be paid to the bank. Next would come NBP and BoP in August. Since the NIT can not afford to part with that kind of cash, both the auction of the three split parts and the offer of three NAV based funds to LoC holders look certain.

The Privatization Commission has asked the interested entities to submit their expressions of interest (EoIs) by December 22, 2005. “The management of the funds will offer a one-window entry into Pakistan’s equity markets as each will be invested in approximately 430 of the 662 listed companies at the Karachi Stock Exchange,” stated the Privatization Commission in its invitation for EoIs, adding that after the split, each of the funds would continue to constitute a significant portion of the mutual fund sector in Pakistan. The commission also notified that it would commence dispatch of request for statement of qualification (RSOQs) to the prospective bidders by November 28, 2005. However, the last date for the submission of statements of qualification was January 23, 2006.