Oct 22 - 28, 20

Capital market plays a pivotal role in the improvement of the economy. It facilitate in capital formation. It generates a huge amount of savings. The generated savings are used to develop various sectors of the economy such as agriculture, trade, industry, etc. It provides desirable interest rate return to investors.

An effective capital market provides a wider range of enchanting opportunities for foreign investors also.

Capital markets in Pakistan consist mainly of Stock (equity) and Debt markets.

A total of 591 companies were listed at the Karachi Stock Exchange (KSE) as of May 4, 2012 with a total listed capital of Rs1, 059.087 billion.

The aggregate market capitalization as on May 4, 2012 stood at Rs. 3,730.489 billion which remained below 18.1 percent of the provisional estimates of GDP, fiscal year 2012.

The Lahore Stock Exchange is the second stock exchange established in Pakistan in 1971. The institution is established to facilitate the investors of Punjab and Northern areas.

The Islamabad Stock Exchange is incorporated as a guarantee limited company. The purpose for establishment of the stock exchange in Islamabad is to provide the requirement of underdeveloped developed areas of the northern part of Pakistan.

In Pakistan, within a span of few years the overall capital markets, equity markets have grown substantially.

During the preceding few years the importance of debt markets and in particular, the bond markets has been recognized as an auxiliary source of finance.

The major segments of financial assets in Pakistan are deposits and government bonds, on the other hand corporate bonds remain a very little portion. In Pakistan, government bonds have the upper hand in the market.

SECP maintain an effective capital markets. It protects the rights of investors, boosts capital formation and develops an efficient regulatory model in line with the principles of the International Organisation of Securities Commissions (IOSCO).

Despite worst law and order condition, strain relations with the US and economic decline, Pakistan's stock market has been able to rank as the second best performing market in Asia after Indonesia in 2011 , according to a Topline Securities research note. Corporate earnings and reduction in interest rates aided equities in 2011 amongst the Asian Emerging and Frontier markets.

In 2012 to date Pakistan market is best performing market in Asia so far with KSE Index gaining by 38 percent in local currency terms and 31 percent in USD terms.

Some of the international markets showed negative growth varying from 18.1 percent (China) to 3 percent (UK). On the other hand principal stocks which witnessed positive growth include, Philippines (19.03 percent), Pakistan (10.13 percent), Indonesia Jakarta composite (5.99 percent) and Tokyo Nikkei 225 (2.72 percent).

In the financial year 2011-12 the performance of the Karachi stock market saw the main KSE-100 index gain 10 per cent, climbing from 12,496 points at the start of July 2011 to 13,800 points at the end of June 2012.

In the first half of the year (July-Dec) the index had lost over 9.2 per cent. However, a striking rally in the second half (January-June) yielded gain of 20 percent. Just for the second half gains, the market would have ended the year in the red.

Owing to world increase in prices and greater than normal consumption, Pakistan's oil and gas sector has shown high profits. In the year 2011 the total profit before tax was Rs. 196,116.97 million, whereas profit after tax was Rs. 134,496.29 million. In the year 2010 the profit after tax was Rs. 104,249.82 million.

As on March 31, 2012 the total market capitalization of this sector was Rs. 1,186,015 million as against total paid up capital of Rs. 74,537.225 million.

In the chemical sector 32 companies are listed, with total paid up capital of Rs. 95,480.23 million and the market capitalization was Rs. 393,536.80 million. The profit after tax of this sector was Rs. 49,515.7 million.

Six fertilizer manufacturing companies are included in this sector which has earned better profits during the year. These include Engro Chemicals, Fatima Fertilizer Company, Fauji Fertilizers Company and Fauji Fertilizers Bin Qasim etc.

Construction and materials sector comprises of 36 companies, with total listed capital of Rs. 77,003.96 million and the market capitalization of Rs.113, 500.56.

Higher cement prices and increase in local demand the sector also showed growth. In 2011 the total loss after tax has come down to Rs.404.275 million as against total loss of Rs. 6,107.25 million in year 2010.

Automobile and Parts sector comprises of 16 companies with the total paid up capital of Rs. 6,940.80 million and the total market capitalization was Rs. 43,857.87 million. The sector registered total profit of Rs. 4,519.86 million in year 2011. Automobile sales also picked up in spite of increase in prices of locally manufactured cars.

The biggest turnaround was witnessed in the financial services sector which amassed dramatic gain of 110 per cent in the second half compared with a loss of 21 per cent in first half, to end the year with net gain of 65 per cent.

Banks gained 12 per cent for the full fiscal year 2012, the contribution coming from the second half gain of 32 per cent that erased the negative return of 15 per cent of the first half.

It may be mentioned here that in consultation with relevant stakeholders, the SECP drafted a comprehensive three-year Capital Market Development Plan (2012-14).

Also, for developing the commodities market, the SECP may find out the potential of permitting new commodity exchanges to function in the country, as presently the possible offered by this market section is not being applied to the utmost.

Pakistan has drafted rules to develop the Islamic capital market as the State Bank seeks to increase assets that comply with religious tenets to 15 percent of the total in five years.

The "Issuance of Sukuk Regulations 2012 permits companies to sell Shariah-compliant notes so long as they have no overdue loans.

Each company must appoint a Shariah scholar to determine that the Sukuk meets Islamic principles and assign a fatwa, or legal ruling. Proceeds should also be used in accordance with Shariah law.

Pakistan is amending rules as it seeks to boost Shariah deposits to finance a budget deficit that is 7.4 percent of gross domestic product, the highest since 2009.

The demutualization bill was approved on March 27, 2012, in a joint session of the Parliament. It was promulgated with the signing of the bill by the President of Pakistan on May 7, 2012.

The Government enacted Stock Exchanges (Corporatization, Demutualization and Integration) Act, 2012 to further strengthen the country's stock markets.

As a result of completion of process of demutualization of stock exchanges, the Karachi Stock Exchange (KSE) stands corporatized and demutualised as a public company limited by shares under the name of Karachi Stock Exchange Limited, with effect from August 27, 2012 after issuance of the Certificate of Re-registration by Securities & Exchange Commission of Pakistan, in terms of the provisions of Stock Exchanges (Corporatization, Demutualization and Integration) Act, 2012 (ACT).

The KSE will now operate as demutualized entity, thereby assuring a clear separation of ownership rights from trading rights. This changeover of the stock exchanges shows an important shift of the Pakistan Capital Market and marks the successful completion of corporatization process under the Act which was promulgated on May 7, 2012.

The demutualization law provides a framework for the corporatization, demutualization and integration of the stock exchanges and had been drafted by the SECP after unanimity with all the stakeholders.

Demutualizations help flourish market, attract new investors, ameliorate liquidity and enable stock exchange to draw international strategic partners.

Currently the Pakistan stock exchanges are operating as non-profit companies with a mutualized structure wherein the members have the ownership as well as trading rights.

Corporatization and demutualization of stock exchanges would entail converting the stock exchanges' structure from non-profit, mutually owned organizations to for-profit entities owned by shareholders.

Demutualization will also facilitate integration of brokers leading to financially strong entities.

Demutualization is well based global trend and nearly all stock exchanges worldwide operate in demutualized set up.

The application of this law will bring Pakistan capital market equal with other external legal powers like India, Malaysia, Singapore, USA, UK, Germany, Australia, Hong Kong, Turkey, etc.

Following success in the process of reforms with the demutualization of stock exchanges, Pakistan has approached Morgan Stanley Capital.

A delegation of the Karachi Stock Exchange (KSE), requested for the upgrade of Pakistan's capital market status from 'frontier' to 'emerging' to attract more portfolio investment into the country.

MSCI officials appreciated the comprehensive market and institutional capacity update presented to them, adding that these factors would be kept in mind when the next review was done.

An upgrade in Pakistan's status would result in the country joining the league of large economies like China, India, Brazil and South Korea.