Updated Aug 20, 2005



On the last day of the week the KSE-100 index registered a gain of 212 points due to a meeting of brokers and regulators with the Prime Minister. The good news is introduction of continuous financing system (CFS) for replacing the existing Badla system. It appears that one term is coined after another regarding financing of carryover trade. Previously it was margin financing and now it has been given CFS name. The market responded positively resulting in a sudden bull run. However, many analysts are of the opinion that unless concrete measures are taken, small investors should abstain from taking new positions. As such margin financing or continuous financing system is of no consequence for them. All these tools are for the support of speculators and the day traders. Small investors should work on 'delivery-basis' only and dividend income should be their objective rather than capital gains. As long as they do not suffer from greed and fear the probability of making losses in the long run is very low.

The overall expectations are that once the liquidity issue is resolved the bulls will return. As such it has been said repeatedly that there is nothing wrong with the economic fundamentals, having the potential to drive corporate earnings. Pakistan is still among the top three best performing markets, despite the March crisis. Karachi Stock Exchange is the biggest and most liquid exchange and has been declared as the "Best Performing Stock Market of the World for the Year 2002". The KSE-100 index has shown erosion after the crisis but it is still moving in a bandwidth ranging from 7,000 to 7,500.

At this juncture it may be of some interest to peep through the history of the Karachi Stock Exchange. The number of listed companies in fifties was 15 and total listed capital was Rs 117 million. As against this, at present there are 662 listed companies having an aggregate capital of Rs 452.674 billion and market capitalization of above two trillion rupees. There has been a substantial growth in listed capital from 2000 mainly due to listing of some large-cap public sector enterprises, as the government decided to offer share of these companies under 'Privatization for People' policy. As a result of this not only the quantum of listed capital has increased but the number of investors has also grown manifold.

The KSE began with a 50 shares index. As the market grew a representative index was needed. On 1st November 1991 the KSE-100 index was introduced and remains to this date the most generally accepted measure of the Exchange. The KSE-100 is a capital weighted index and consists of 100 companies representing about 88 percent of market capitalization of the Exchange.

However, it has been felt that inclusion of some large-cap companies in the index and the weightage assigned to these companies does not reflect the true market movement. The downward movement in the prices of less than six companies can plunge the index even if prices of all the remaining companies go up substantially high. Keeping this in view the KSE is considering to introduce sensitive price index, which will be based on 'free float' rather than listed capital. ABAMCO has already introduced an index, which is based on 30 companies. However, there are suggestions that the KSE should have various indices, including those which are sector specific.



The KSE has, till today, remained an equities exchange as the number of listed corporate bonds and their total value is a small fraction of total listed share capital. At present 23 TFCs are listed at the KSE having an aggregate value of slightly more than Rs 16 billion value. However, the number does not reflect true picture because a large number of TFCs are not listed at the stock exchange. The situation has arisen mainly because of absence of secondary market for TFCs. Most of the investors hold these till maturity or trade is minimal. The reason being that these TFCs are termed fixed income securities and also carry very risk. Therefore, investors either buy these at the time of private placement or public subscription and prefer to retain these unless unavoidable.

The number of listed companies is expected to increase further due to new listings and listing of public sector and recently privatized entities. However, the policy regarding public offering of shares of state owned/privatized entities has to be reviewed. Public offering on United Bank remained grossly undersubscribed because the lot size was reduced to 200 shares and the decision that applications for larger lots would not be entertained. All the recent public offerings remained undersubscribed except NetSol due to prevailing bearish sentiments.

It is necessary to reiterate that for the development of equities market the interest of small investors should be protected. It is a fact that the number of investors in the capital market, as stated by the government, is highly exaggerated. Unless the investor base is broadened few players would continue to influence the market direction.

The regulators must also try to increase the 'free float'. There is still no consensus on the free float because the percentage (as quoted by different analysts) ranges from 5 to 20 percent. It is mainly due to lack of classification of investment being held by the mutual funds and institutional investors. It is the responsibility of the regulators to ensure proper classification and then to ensure that there is no change in the classification simply to facilitate trading for short-term gains.