PAKISTANI STOCK MARKET

(History and future outlook)

SHAMSUL GHANI (shams_ghani@hotmail.com)
Nov 26 - Dec 02, 2007

The capital market in Pakistan comprises :

1. The equity market represented by the Stock Exchanges and

2. An intermediary financial system dominated by non-bank financial institutions, namely Leasing Companies, Modarabas, Discount Houses, Security Companies, Brokerage Houses, Currency Exchanges, Asset Management Companies, Open / Close End Mutual Funds etc.

The securities traded on a stock exchange include shares issued by companies, unit trusts, government and private companies' debt instruments like bonds, TFCs (Term Finance Certificates) etc.

There are presently three stock exchanges operating in Pakistan at Karachi, Lahore and Islamabad. Lahore and Islamabad exchanges, being the later additions, have a smaller operational size as compared to Karachi exchange.

Karachi Stock Exchange being a genuine representative of country's economic growth shall be in focus for the purpose of this study. The hypothesis for the study is that the growth of Pakistani stock market is not consistent with the capital formation in Pakistan. Therefore, much remains to be done on the front of capital formation.

KARACHI STOCK EXCHANGE

Membership, Management and Legal Frame Work.

Membership of KSE is limited and fixed at 200 and prospective members have to purchase a seat from existing members. The price of the membership is freely negotiable between the buyers and the sellers which varies according to the inter action of the forces of demand and supply. The KSE does not interfere with these transactions. However, the membership is allowed subject to fulfillment of criteria and qualification laid down by the Board.

The KSE is run by a Board of Directors that consist of 10 members including Managing Director. Out of these, 5 Directors are elected from amongst 200 members of the Exchange and 4, non-member Directors are nominated from various trade and professional bodies. The Chairman is elected by Board from amongst the elected Directors. The operational and administrative activities of the Exchange are managed by the Managing Director who is the full time Chief Executive of the Exchange.

The Security Exchange Commission of Pakistan set-up a committee of local and international experts on de-mutualization of stock exchanges in the country. The committee recommended de-mutualization and integration of existing exchanges through especial legislation. Alternatively, a new stock exchange sponsored by banks, public financial institutions should become a national exchange whether or not the existing stcok exchanges merge into it. The commission is vigorously pursuing the process of de-mutualization.

The securities market and the corporate sector are regulated by the provisions of:

* The Companies Ordinance 1984;

* The Securities and Exchange Ordinance 1969 and Rules framed there under 1971;

* The Securities & Exchange Commission Act 1999

There are also Federal legislations relating to specific areas like:

* Monopolies and Restrictive Trade Practices ( Control and Prevention ) Ordinance, 1970;

* Investment Companies and Investment Advisors Rules 1971;

* Modaraba Companies and Modaraba ( Flotation and Control ) Ordinance, 1980;

* Companies ( Issue of Capital ) Rules 1996;

* Leasing Companies ( establishment and Regulation) Rules 1996;

* Asset Management Companies Rules 1996;

* Insurance Companies Ordinance 2000;

* Guidelines fro insider trading.

* Listed companies( Substantial Acquisition of voting shares and take-over) Ordinance 2000.

In addition to the above, the listed companies are also subject to the Rules and Regulations of the stock exchanges.

REGULATORY BODY

The regulating authority for the securities market and corporate sector in Pakistan is the Securities and Exchange Commission of Pakistan. The Commission was established on January 01 1999 by dissolving the Coporate Law Authority which was formed in 1981 under a Special Law. The Commission administers the compliance of the Corporate laws in the country and is run by team of Commissioners under a Chairman.

The system provides administrative, operational and financial autonomy to the Commission and at the same time provides an accountability mechanism through establishment of a Securities and Exchange Policy Board. All policy decisions are made by the Board on the recommendations of the Commission which is also empowered to take so motto action. The Board is directly answerable to the Parliament.

Members of the stock exchanges are also subject to the discipline of self-regulation under various Rules and Regulations of the stock exchanges. Self-Regulation is the essence of market regulation and for this purpose the legal frame work has been amended to facilitate the attainment of SRO status by the stock exchanges.

OVER ALL PERFORMANCE

The KSE is the biggest and most liquid exchange of Pakistan and has been declared the best performing stock market of the world for the year 2002 by the international magazine Business Week. The US news paper USA Today also declared KSE as one of the best performing bourses in the world.

KSE began with a 50 Share-Index. In 1991 the KSE 100-Share Index was introduced and remains to this day the most generally accepted and representative measure of the exchange . the KSE-100 is a capital weighted index and consist of 100 companies representing about 86% of the market capitalization of the exchange. In Sept 1995 the KSE All-Share Index was introduced. In 2006 the KSE-30 Sensitive Index was introduced. The companies on the Index are the top companies ranked on the basis of liquidity, market capitalization and minimum free float of 10%.

The table 1 below summarizes the KSE operations during the last 5 years.

INTERPRETATION:

* The number of total listed companies shows a declining trend which means that capital formation process has not picked up as strongly as market capitalization which has registered an increase of 367% as compared to the base year.

* The listing of new companies was high in the year 2004 and 2005 which has come down in the year 2006.

* The average daily turn over of shares by volume shows a declining trend, whereas, the average daily turn over by value is quite high. By comparing the figures of 2006-07 it is observed that the turn over by volume has declined by 30% whereas, the turn over by value has increased by 40%. This proves that presently it is a narrow bull market.

Table 1
In million except companies, index and bonds data

5 YEARS PROGRESS

 

Upto 31-12-2003

Upto 31-12-2004

Upto 30-12-2005

Upto 29-12-2006

Upto 13-04-2007

Total No. of Listed Companies

701

661

661

652

656

Total Listed Capital - Rs.

313,267.23

405,646.32

470,427.47

519,270.17

582,040.70

Total Market Capitalization - Rs.

951,446.50

1,723,454.36

2,746,558.97

2,771,113.94

3,495,109.28

KSE-100 Index

4471.60

6218.40

9556.61

10040.50

11977.74

KSE-30 Index

     

12521.54

14908.77

KSE All Share Index

2833.10

4104.86

6444.64

6770.06

8442.90

New Companies Listed during the year

6

17

19

9

7

Listed Capital of New Companies - Rs.

4,562.6

66,837.0

30,090.28

14,789.76

44,763.93

New Debt Instruments Listed during the year

6

5

8

3

2

Listed Capital of New Debt Instruments - Rs.

2,749.0

4,775.0

10,900.00

3,400.00

4,000.00

Average Daily Turnover - Shares in million

308.81

343.70

365.64

260.69

215.39

Average value of daily turnover - Rs.

15,686.23

17,408.95

33,583.29

31,610.71

22,110.93

Average Daily Turnover (Future) YTD

54.06

69.64

117.16

82.68

68.25

Average Value of Daily Turnover - YTD

3,906.69

4,914.25

15,461.42

13,587.63

10,017.25

Foreign Investment in Securities Market

Inflow - Rs

11,256.5

1,481.1 *

-

-

-

Outflow - Rs

10,705.3

3,047.9

-

-

-

Net Inflow/(Outflow) Rs

551.2

-1,566.7

-

-

-

YTD = Year to date
a. The KSE 100 Index was introduced in November, 1991 and was recomposed in November 1994.
b. The KSE All Share Index was Introduced in September, 1995.
c. Listed companies reflected in the relevant year have been stated after 5 companies delisted in year 2000, 12 companies in 2001 and 24 companies in 2002, 8 in 2003, 44 in 2004, 15 in 2005 and 1 in 2006 (total 109) and merger of 1 company in 2000, 7 companies in 2001, 16 companies in 2002, 8 in 2003, 12 in 2004, 4 in 2005 and 12 in 2006 (total 61) and addition of 1 companies by splitting/ bifurcation in year 2001. In year 2004 preference shares of Chenab Limited was listed and company offered ordinary shares in year 2005.

(Source: Karachi Stock Exchange)


(Table 2)
SECTORAL PERFORMANCE OF KARACHI STOCK EXCHANGE
(Percent)

SECTOR

GENERAL INDEX JULY-MARCH
(GROWTH%)
 

MARKET CAPITALIZATION JULY-MARCH  
(GROWTH%)

AMC
(RS. BILLION)

  2004-05 2005-06

2004-05

2005-06

2005

2006

Cotton and other Textiles

19.3

-0.8

34.3

10.4

119.2

113.6

Pharmaceuticals & Chemicals

-1.6

46.9

23.3

59.8

195.8

272.6

Engineering

46.1

42.2

70.4

40.0

11.5

13.0

Auto& Allied

28.7

55.6

22.2

68.2

47.3

67.6

Cables and Electrical Goods

-2.2

55.6

29.2

94.5

9.3

17.7

Sugar & Allied

41.2

44.3

33.4

46.1

14.8

18.7

Paper & Board

11.8

14.1

-7.8

30.7

15.1

21.7

Cement

2.5

129.2

16.0

145.6

75.5

168.0

Fuel & Energy

63.7

19.2

87.1

44.6

909.0

1287.9

Transport & Communication

54.9

17.3

60.0

11.7

309.7

318.7

Banks other Financial Institutions

0.5

56.5

59.8

160.3

298.9

770.3

Miscellaneous

9.6

13.1

10.5

34.0

108.5

148.7

Overall/ Total

22.8

41.7

55.8

59.9

2114.8

3218.5

KSE Share index

47.2

54.2

0

0

0

0

End March 2005 and 2006
Source: State Bank of Pakistan

INTERPRETATION:

* It will be observed that the two dominant sectors of economy are fuel / energy and banks and other financial institutions with market capitalization of Rs.1288 billion and Rs.770 billion respectively. The third dominant sector is transport and communication with a market capitalization of Rs. 319 billion. These three sectors when combined together account for about 75% of the total market capitalization. This reveals the sectoral imbalance to which the performance of KSE is exposed.

* The oil marketing companies like PSO and Shell benefit from the rising international oil prices. A major portion of oil companies profits come from inventory profits.

* Banks and financial institutions have been the major gainers of SBP rate reduction scheme. With the SBP's failure to control banks to maintain a corelation between the lending rates and profits paid on customers deposits, the normal spread of 3% has been stretched to the double digit.

* The combination of transport and communication in one sector is unrealistic as the performance of the transport sector in Pakistan has been quite dismal. The stigmatized PIA and the transportation by land routes are all in shambles. In the automobile industry sizeable growth has been registered-thanks to the lease/debt financing by the banks and financial institutions. This consumer based growth has given rise to the country's import bill resulting in huge trade deficit, as no new plants for indigenous production of automobiles have been set up. The existing capacities are only for assembling CKD units which are based on imported goods. On the other hand the communication sector has registered a tremendous growth during the last few years. Although sizeable job creation has taken place, the investment in this sector has resulted in little capital formation. The investment is more of marketing nature without any sound industrial growth or technology transfer. This is proved by the fact that during 2005 the manufacturing sector recorded a growth of 15.4% while this rate declined to 13% in 2006. therefore, any capital formation through this sector is doubtful.

THE SOARING INDEX

Going back to table-1, we observe the following trends of KSE-100 Index:

(Table 3)

 

2003

2004

2005

2006

2007, (Oct)

KSE-100 Index

4472

6218

9557

10040

14320

Increase as compared to last year.

-

1746

3339

483

4280

% Increase

-

39%

54%

5%

43%

(Source: Karachi Stock Exchange Website and Daily Dawn)

INTERPRETATION AND CONCLUSION:

* It will be observed that high increase in a particular year carries a high risk of crash. During 2005 the Index recorded an increase of 54% and we experienced a severe crash situation. The year 2006 was a stable year as far as the increase in index is concerned. During the current year we have already seen an increase of 43%. We are obviously in danger of experiencing another crash situation. The outgoing ruling set up has staved off this situation successfully despite the emergency bogey. Will the new elected set up to be formed in the coming months be able to handle the situation, remains to be seen.