KSE on the anvil of being public limited company: Managing Director

Nov 26 - Dec 02, 2007

In recent years, demutualization has become a buzzword within the circle of capital markets. Especially, this term has been widely used in reference to stock exchanges of Pakistan. The word "mutual" was pioneered in insurance industry. It was used to describe mutual ownership rights of policy holders toward the company. But, soon the conversion to shareholder ownership base that is demutualization got policyholders shares or money in exchange of their ownerships, which can not be traded contrary to shares which can. The term has since become more broadly used to describe the process by which any member-owned organization becomes shareholder-owned. Worldwide, stock exchanges have shifted towards a new phenomenon of demutualization, as the London Stock Exchange (LSE), New York Stock Exchange (NYSE), Toronto Stock Exchange (TSE) and most other exchanges across the globe have either recently converted, are currently in the process, or are considering demutualization. This phenomenon is said to give a boost to economy in general and financial benefits to public particularly. After demutualization, it is sure that oligopoly of members in stock exchange would die down. This will greatly impact the share price fluctuation precipitated by few profit seeking cartels. It is not a worrisome call for members either. As part of the demutualization process, members of the Karachi Stock Exchange will receive a windfall, in the form of shares, a cash payment, or combination of both.

To know the current and prospective market trends in the capital market and of course the aftermaths of transforming of KSE into public owned company, PAGE talked with Adnan Afridi, who is at the helm of affairs at Karachi Stock Exchange as a managing director. He said in near future KSE will be a public listed company.

He has degrees in economics and corporate law from Harvard University and Harvard Law School. He has over 15 years of experience in managing business in emerging markets. He started his career in 1991 with Monitor Company, USA as strategy consultant, designing business unit and corporate strategies for Fortune 50 companies in financial service sector. In 1997, he joined the Artal Group as vice president. While at Artal, he served as CEO of Ava Water Company and participated in general management of KFC, acquisition of Pepsico Food Company in UAE and Development of Dunkin Donuts franchise in Pakistan and Middle East.

In year 2000, he joined Star Consultant (Strategy Consulting and Private Equity Group with operations in Middle East and Pakistan) as Managing Director. Afridi joined Overseas Investors Chamber of Commerce & Industry in 2006 as Chief Executive Officer. The OICCI has 171 members that collectively contribute over 14 percent of GNP of Pakistan and over 30 percent of all taxes. He is on the Board of Directors of FPCCI, Human Development Fund, Central Depository Company, and National Clearing Company of Pakistan.

MD KSE said basically demutualization is to demarcate between stock trading and ownership rights. After a certain period of time, new entities will be allowed to come. Right now, Karachi Stock Exchange is owned by 200 members. They also have the licence to trade. As soon as the process of demutualization gets completed KSE will become a public listed company. That implies that the share holder would be the general public as well as current share holders. New entrants-brokers-will be allowed to come in; who would not own share in the bourse but get trading licence. He assured that this will increase membership base.

In a reply to scribe's question, "Why does the process seem lethargic and has not finished over a period of two year?" Afridi retorted there are several regulatory, legal, and commercial intricacies involved conformity to which is equally necessary. All outstanding issues between SECP and stock exchange have been resolved amicably however, he added. Now, "the ordinance in this regard is waiting for signature by the President."

Talking about the prospects of capital market, he said, Pakistan's capital market is the reflection of underlying fundamental strength of nation's economy. Our market reflects corporate profitability and growth. It is to the extent that this growth continues like past. And, he foresees bright prospect in the performance in years to come.

When asked about the reason behind unprecedented fluctuation in share prices, he replied, the recent volatility is clearly due to the external factors; which "I can not comment on." KSE has remained a buoyant market through out the period, he revealed.

Inflow of foreign direct investment depends on performance of corporate sector. Foreign portfolio investment has witnessed a very sharp and steady increase in last two years. He expects that growth trend would continue. KSE is poised to enter in a very different and new era. "We are in the process of being demutualized. Our products are expanding. We welcome all new participants to come and invest in KSE."

When asked, "Is removal of cap over CFS a better option to generate funds for purchasing of shares?" He replied, "Market needs liquidity." But there must be a framework of proper regulations and management techniques in place in the backdrop of demand of ceiling-breach. He also denied the general perception that removal of cap over CFS would thwart inflow of public money in the exchange. "The both are not linked at all," he added.

Having in mind that stock exchange is a place through which public money can be mobilized when scribe questioned, "How could adequate ways be devised to mobilize public saving (money) into the stock exchange?" MD KSE asserted promptly, "It is not the exchange business to mobilize money from public. Rather, it works to list companies on exchanges; companies which are looking to grow further and seek capital." It is those companies which investors choose to invest. Stock exchange provides a plat from where person requires capital and person seeks capital meet. Our aim is to list more and more companies so that general public has more and more choices of investment. The decision of investment completely lies with the investor. Stock exchanges job is to keep the market more efficient; to keep the transaction cost at minimum; and to utilize latest technology for risk regulation.


Senior Research Analyst
Atlas Capital Markets

Synopsis... Yet another record was broken last week as the price of OPEC Basket crude oil pushed past the US$90/bbl mark, 224% higher than the upper limit of the price band set by the Organization in March 2000 at US$28/bbl. Taking calendar year average prices into account, the OPEC basket averages 140% higher at US$66/bbl in CY07 (January 2007-Date) over US$28/bbl in 2000, depicting a CAGR of 13% since then. Taking a look at the more recent trend, this time last year, crude oil prices were amidst one of the largest and longest bearish spell in history. OPEC basket plunged by 27% from a then high of US$73/bbl to US$53/bbl while during the entire period July - November 16, 2006 they were down 19%. Come this year, the benchmark crude price soared by 36% to a record high of US$91/bbl, whereas over the period July 2007 to date it is up by 27%.

Reasons for the Price Upsurge... The major factors attributed to constant increase in oil prices include winter supply concerns, rising speculator investment and more recently, a falling dollar. The reasons for the lattermost to occur have been reports showing the biggest drop in US industrial production since January and poor foreign investment in US assets.

Recent Discovery by OGDCL... Oil & Gas Development Company Limited (OGDCL) has made a gas and condensate discovery from Moolan exploratory well 01 near Hyderabad. As per initial tests zone-1 would produce 4.44mmcfd of gas and 64bpd of condensate while zone-2 would produce 6.02mmcfd gas and 165bpd of condensate. According to these figures alone, this discovery is going to have a very minimal effect on the company's earnings going forward. Therefore, we don't consider it to have any effect on OGDCL's fair value.

Going Forward... On the back of a persistently high oil price trend, we will be revising upwards our fair values and earnings estimates of all E&P companies. We project the OPEC basket to average US$77/bbl during 1H/FY08 and a very conservative US$75/bbl for the full year FY08, higher by 24% over FY07 average of US$60/bbl. The ripple effect this will have is on gas well-head prices, which are expected to depict a significant increase by OGRA in January 2008 following a marginal decline made in July 2007. Even on current earnings and fair values, we maintain an overweight stance on the sector with a buy on all companies. While all of them trade at very close to the sector price earnings multiple of 9.5x, given the constant pressure at the stock exchange due to political uncertainty, the premium of fair values for OGDCL, PPL and POL have surged to a respective 31%, 27% and 21%.