performance in store
June 17 - 23, 2002
Despite passing through a sequence of disruptive
events within and outside the country posing serious threats to the
economy of Pakistan, the economic managers have so far succeeded in
storming the weather skilfully.
The most sensitive part of the economy i.e. stock
market also emerged victorious by showing its depth and grit in the
backdrop of mounting tension between India and Pakistan, deteriorating
law and order situation and the fall out of the political ups and
downs in the region.
In the nutshell, the stock market registered a
sharp rise of 46 per cent in equity index, increase in foreign
portfolio investment, slower corporate debt market and a number of
reforms were the salient features of the country's capital market
during the year.
Salim Chamdia, Chairman of Karachi Stock Exchange
while talking to PAGE said that as an immediate effect of the
escalating border tension between India and Pakistan taking the
situation at the brink of war, the market shed around 252 points,
however it was a temporary phase which is reflected in the early
recovery of 200 points in short span of time.
Chamdia feels that as soon as the situation returns
to normalcy, the stock business, which is at the constant growth will
further strengthen the capitalization of resources in the country.
Capital market plays a crucial role in mobilization
of domestic resources and channeling them efficiently to raise
economic production and productivity. The level of capital market
development is thus an important determinant of a country's level of
savings, efficiency of investment and ultimately its rate of economic
growth, Chamdia said.
The government has a major role to play in the
development of securities market. The policies on interest rate
structure, allocation of credit, controlling inflation level and form
of taxation are all critical variables in the development of the
In recent years, the government increasingly comes
to realize the importance of improving the efficiency of the
securities market and its relevance to private sector development and
economic growth. In the context of Pakistan, securities market has a
special significance, as equity instruments are the truest form of
riba-free investment besides achieving socio-economic objective of
imparting a sense of participation to the general public in the
prosperity and development of the country. The government has also
embarked on a massive privatization programme in the next couple of
years, success of that is totally dependent on the health of the
equity market, KSE Chairman recommended strongly.
The first half of the current financial year has
been a very difficult for the Securities Market which remained
depressed due to prevailing recession the world over, following the
terrorist attacks on the World Trade Center on September 11, 2001.
However, subsequently in view of a number of positive factors which,
inter-alia, included reduction of the lending rates by the State Bank
of Pakistan, removal of economic sanctions, cash grants, debt
rescheduling support, trade concessions and economic assistance
extended by a number of countries, revision of the country's credit
ratings favourably and record rise of Pakistan foreign exchange
reserves touching the level of 6 billion dollars, stable exchange
rate, the market has experienced a remarkable turnaround.
Similarly, the KSE has undertaken a number of
development measures, which have positive developments, the Pakistan
Stock Market, which has appreciated by 46 per cent since January this
year in terms of prices and by 140 per cent in terms of average daily
The above statistics fully reflects the impact of
government's positive policies and restoration of investors'
confidence as well as increased foreign investment, investment by
overseas Pakistani and investment made by local investors.
It may be recalled that the KSE had demanded for
exemption of tax on Bonus shares issued by a company, which was
previously exempt from tax up to June 2001. Distribution through bonus
shares is nothing but capitalization of retained earnings through book
entry transfer to paid-up capital. The demand gets approval of the
KSE Recommendations for consideration in the Federal
budget for 2002-2003.
The new income tax Ordinance, 2001 provides for
withholding tax on gross dividend income of every person, which
includes Trust also. The section should be amended from withholding
tax on mutual funds.
Distribution of 90 per cent earning after setting
off previous losses.
Presently mutual funds are exempt from the levy of
tax if it distributes 90 per cent of their earnings for the year; the
clause should be amended to provide for distribution after set off of
any previous business losses.
INCOME TAX ON SALARIED CLASS
Tax on salaried class should be rationalized. A
number of tax benefits given to this class have been gradually
withdrawn. It is recommended that maximum rate of tax on individuals
should be reduced from 35 per cent to 30 per cent and number of slabs
should also be increased. Relief should also be provided on
reimbursement of expenses, as they do not result in any net cash
Reduction in tax liability of salaried class is
necessary, as this will encourage them to save and invest. Given the
chronic inflation, the basic tax exemption should be enhanced to
Rs100,000 from present exemption level of Rs60,000.
The income received by any person from rated and
listed TFCs was exempt if issued on or after September 14, 1997. This
exemption was withdrawn in relation to income received by any person
other than a company w.e.f assessment year 2002-2003. The decision of
the government to withdraw the tax exemption status for the listed
TFCs would not only be detrimental to the small investors who do not
have any other business or trading income but would also adversely
affect the development of the debt market in the country and would
retard investments and savings growth. Restoration of the exemption
for both individual and institutional investors of all listed TFCs.
Foreign Fund Managers and institutions prefer
corporate Brokerage Houses, as they tend to be more professional in
their approach. In the legal perspective too, they are viewed as a
perpetual entity in contrast with individual membership, which
terminates on the death of the individual.
KSE has demanded of the government to allow one
time tax exemption on capital gains on transfer of membership rights
or share in a stock exchange from individual to a corporate entity
which will help in professionalism of the brokerage houses as well as
to enhance their exposure and services for the investors. This will be
a one-time feature and should continue without any time limit.
Till 1998-99, 10 per cent withholding tax deducted
on account of brokerage and commission, under Section 50 (4-A) of
Income Tax Ordinance 1979, was treated as advance tax for adjustment
in final liability. In the Federal Budget 1999-2000, however, there
was an amendment to treat such tax deduction as full and final
liability of the assessees.
In a number of cases, due to declining revenue and
rising expenses, the final tax liability of members turns out to be
less than the withholding tax. This deprives the assessees of their
legitimate right of claim for refund of excess tax on the basis their
actual income. In order to end this anomaly, suitable amendment is
The Karachi Stock Exchange, despite witnessing a
volatile situation during 3rd quarter of the financial year, the
KSE-100 index closing with net gain of 46.7 per cent at 1,868.12
points at the end of the current financial year.
It is observed that the previous quarter ended
December 31, 2001 had closed on a negative note at 1,273.06 points,
owing to the December 13, 2001 attack on the Indian Parliament and the
ensuing border tensions, which overshadowed the positive economic
development during the financial year 2002.
With Pakistan emerging as key United States ally,
market made exceptional gain of 347 points in January 2002, ranking it
as top performing emerging market for the month by Morgan Stanley
Composite Index (MSCT).
Unfortunately, the market momentum was broken in
mid-February by the KSE circular, prudently reminding members of the
stringent minimum capital adequacy rules introduced recently. As a
result, index dropped by 119 points in three trading days before
recovering on the back of strong performance reported by Hubco, MCB
and Askari Bank, "Thereafter, sentiment on oil marketing company
stocks dominated the market, taking the market to its peak of 1,930.46
on March 14, 2002 as the government announced a much awaited increase
in their margins", the market took that as a prelude to the
privatization of PSO. But the index was unable to remain above 1900
points and consolidated around the 1,850 levels.
The 3rd quarter witnessed an increase in foreign
portfolio investment in the stock exchange. During the first two
months of the quarter, market saw net inflow of $50 million, which
stood in sharp contrast with net outflow of $32 million in the
previous quarter. The increase in foreign investment was stated to be
in line with the rise in KSE-100 index. This appears to reflect
greater confidence of foreign fund managers in the Pakistan market's
prospects due to its positive economic outlook, hefty reserves and
stable exchange rate.
During Financial Year 2002, the KSE had implemented
several structural developments which include complete implementation
of the T+3 system, rationalization of risk management measures
(deposit requirements, capital adequacy and uptick/downtick
fluctuation bands) changes in the carryover market and more recently
the launching of the new trading system. On the regulation front, the
SECP issued the "Code of Corporate Governance" on March 28,
which was included by all stock exchanges in their respective listing
Debt capital market: The private corporate debt
market had seen brisk activity since the beginning of fiscal year with
13 issues (Term Finance Certificate) floated in the market during the
financial year 2002. But only one TFC was launched during the third
quarter of the year: that of Reliance Weaving Mills Limited. The size
of the TFC was Rs150 million, issued on February 6. But the future
outlook for TFCs is positive as a number of large issues in the
The constant upward growth at the capital market is
also reflected in the Term Finance Certificates (TFCs) issued by 13
companies during the financial year. Those companies issued TFCs
include Orix Leasing Pakistan Ltd, Sui Southern Gas, Engro Asahi
Polimer & Chemicals Ltd, Dewan Salman, Pakistan PTA Limited, Engro
Chemical Limited, Security Leasing Corp. Limited, Crescent Leasing.
Reliance Weaving Mills Limited, Usman Leasing Limited, in this issue
over subscription of 107.070 million has been retained by the company,
Shahmurad Sugar Mills Limited, the company has the option to retain up
to 30 million i.e. 40 per cent of the total public issues. Saudi Pak
Leasing Company Ltd and the most recent issue of Sui Southern Gas
The consultative Working Group on Capital Markets
has reviewed the existing risk management measures at the stock
exchanges, in particular various proposals being considered at the
co-ordination meeting of the bourses and the SECP to remove existing
deficiencies in Carry Over Trade (COT) financing. SECP comprises
eminent practitioners from the private sector and provides advice on
important policy matters. The Group members as well as to deliberate
upon some recent events impacting the capital market in the country
convened the third meeting to discuss progress on various working
papers under preparation.
The COT measures being considered include: COT
should be for a period of 10 days and the finance will have option to
release it after one day. However, the financier is obliged to
rollover for 10 days, if so desired by the financee, while the COT
should only be allowed in the shares of very liquid companies:
The margins for COT should be 25 per cent higher
than for normal market trades.
The COT shares shall be kept with the CDC or the
Clearing House of the exchange or in the case of institutions
providing financing, pledged in favour of those institutions and
blocked for further use during the contract period of the financing.
It was, however, felt that while these measures
will serve as useful interim steps to improve risk management of COT
financing, a more permanent solution needs to be developed that will
widen alternative avenues for financing against shares, including
A sub-committee has been constituted to come up
with an action plan for developing these alternatives — financing
sources. The sub-committee headed by Ali Ansari includes Samir Ahmed,
Naseem Beg, Muneef Ibrahim and Ejaz Rahim. The committee is expected
to submit its report within 30 days.
The study, being conducted by Dr. Nishat, Professor
at IBA, Karachi, is due to be finished by the end of June and will
provide guidelines on appropriate exposure levels that would have
protected the clearing houses in the past from excessive price
Based on information contained in the study, the
group members are expected to come up with formulae to determine
margin requirements on individual stocks which will correlate with the
price volatility and hence the risk emanating from the particular
In order to discipline brokers/ investors, it was
proposed that regulations be devised that make it obligatory for
brokers to get margins from clients. This will also be in line with
international practices. Relaxation may be given to some class of
In view of the recent market happenings the
governance of the stock exchanges come under debate.
The meeting felt that while the stock exchanges had
taken a number of important steps to introduce independent
professional management, there is a significant need to further
strengthen the same to reduce perceived interference of the members in
the day-to-day running of the exchanges. It was also felt that there
is a need to dissipate informal lobbying efforts of brokers applied
through the stock exchange. Being a front line regulator, it is
important for the management of stock exchanges to independent of any
The total proceeds from the privatization of state
owned units have been estimated at Rs61 billion or $1.8 billion so
far. The government aims at bringing major transactions to the market
during the current calendar year. The privatization programme starting
from 1990s has sold some 109 units. Presently, some giants in the
public sector organizations especially in the financial and energy
sector are being given the final touches for transfer of hands from
public to private sector. The focus of the privatization policy should
be the broadening of the ownership base by selling these units through
share market. The market has the required depth to absorb these
transactions. The most important factor which the economic managers
should focus in their policy is to enable the potential investors both
individuals and companies to save their earnings. Presently, the high
rate of taxation, exorbitant cost of essential items including
utilities and multiplier effects on general prices have eroded the
saving capabilities of the people in general.
magnitudes are reflected by the following details since July
Capitalisation (Rs in billions)
Turnover (Shares in million)
July 01, 2001
September 30, 2001
December 31, 2001
March 31, 2002