KSE: A PERFORMANCE REVIEW 

From SHAMIM AHMED RIZVI, Islamabad
June
09 - 15, 2003

While commenting on the recent upsurge in the stock market breaking all previous record the Chairman Securities and Exchange Commission of Pakistan (SECP) Abdul Rehman Qureshi said that it was real and sustainable and not a bubble as feared in some circles. The market will sustain itself as it was largely due to the regulatory measures initiated by the Commission during the last few years making it transparent, strengthening its integrity and improving the investor confidence.

Talking to the media men in his office in Islamabad about the performance of the stock market Qureshi said, "Over the past few years, our stock market has experienced renewed investor interest." It has attained new heights as is be evident from the following:

FROM JANUARY TO DECEMBER 2002 the KSE-100 Index rose from a level of 1273 to 2701 i.e. an increase of 112%. Market capitalization during this period increased by almost Rs 300 billion, from Rs 296 billion to Rs 595 billion.

FROM JANUARY TO MAY 2003 the KSE-100 Index has risen from 2701 to 3126 i.e. an increase of 16%. Market capitalization has increased from Rs 595 billion to Rs 689 billion representing an increase of Rs 94 billion.

•Average daily turnover has risen from 167 million shares in 2002 to more than 220 million shares in 2003.

•The actual daily settlement rate has also increased from a mere 3% in the past years to now 10%, averaging at Rs 1.5 billion.

This enhanced investor confidence in the market has largely been due to various far reaching reforms carried out by the SECP. The SECP has ensured that significant risk management measures are now in place at the exchanges, the T+3 settlement system has been implemented and margin requirements strengthened. Governance has been improved by the introduction of independent professionals on the boards of exchanges. Investor grievances have been addressed by improved procedures for the resolution of complaints. Clearing and Settlement has been radically modernized by setting up the National Clearing and Settlement System under the National Clearing Company.

In addition the undisclosed market system has been introduced to minimize front running and market abuse. New products such as Stock-Futures have been introduced that have opened up new ways for the investors to hedge and speculate. A code of corporate governance has been implemented for listed companies that is enhancing the faith of the shareholders in the corporate sector.

The SECP acting chief said that for the first time, investors are being provided quarterly accounts as done in the developed markets. As a result of these far reaching reforms, the stock exchanges in Pakistan are, by in large, complainant with the 30 IOSCO principles of Securities Regulation that constitute the International Standards adopted by the Financial Stability Forum.

These board-based reform initiatives are the key reason for the sustained growth that the market has witnessed over the past one year and form a significant milestone in the development of Pakistan's capital market. The stock exchanges have therefore shown vision by wholeheartedly accepting and successfully implementing these reforms and today the Pakistani capital market is ranked as one of the best performing markets in the world.

The reform agenda continues as we move to setting up the Over the Counter Market, Phasing-out the Carry Over Market and building the capacity of the exchanges for effective market surveillance. "We remain committed to our mission of making our stock markets fair, efficient, liquid, and transparent so that they can act as an effective economic agent for the progress of the nation's economy," he added.

Besides regulating the capital market, SECP also encourages and facilitates investment. The capital gains arising out investment in listed securities is currently exempt till June 2004. To enable investors to make long-term investment decisions, the SECP has recommended extension in the tax exemption period in pursuance of its objectives.

The commission recently amended the Companies Ordinance to allow firms owned by a single person to be registered as company. So far, about eight firms have availed themselves of this provision. As documentation in businesses was also government's policy and as such companies constitute a considerable chunk of private sector, the commission has proposed that income tax at the rate of tax applicable to an individual be applied to "single member companies".

Continuing, Qureshi said that the commission was encouraging the brokerage firms to convert into corporate brokerages as part of its efforts to develop the trading in equities along international standards. The SECP has, therefore, proposed that the capital gain arising out of such conversion be exempted from tax.

Similarly, the SECP, Chairman stated, exemption from tax had also been sought for contribution by employer and employee to Pension Fund Sections. Qureshi, responding to questions, was confident that the current boom of stock market was sustainable as it was built on the sound reforms undertaken by the SECP and the macroeconomic stability achieved by the government.

The SECP has provided full facilities for establishment of new companies. These include one window operation facility in each of the Company Registration Office to incorporate a company within the maximum period of three days.

Consequently, during January-April period of 2003, as many as 536 new companies were incorporated. This denotes 82 percent increase over the corresponding period of 1999. In order to obviate any delay, henceforth the prospectus would be approved at the whole Commission's level within three days of the receipt of complete offering documents.

The SECP chairman has constituted a committee to review the Code of Corporate Governance as previously implemented through listing regulations. The intention, he told newsmen, was to remove the inconsistencies between the Code of Corporate Governance as previously implemented through listing regulations and the relevant corporate laws. The objective was to give full comfort to the companies and ensure that there is no over-regulation which may have negative impact on development of the corporate sector.

As part of the continuing reforms, the commission was about to set up Over the Counter Market and to phase out the Carry Over Market and build the capacity of the exchanges for effective market surveillance.

As regards further agenda of SECP, Qureshi said the commission would strive to enhance retail investor base, deepen the market by listing of mega issues such as Habib Bank Limited and OGDC, encourage the brokers to set up offices all over the country and develop mutual fund and pension fund industry.