Apr 07 - 13, 2008

As a part of demutualization of Pakistan's stock exchanges, the valuation of shares is underway in the country's three stock exchanges. Initially, the valuation of Islamabad Stock Exchange (ISE) by M/s Ferguson has been started. The ISE has chalked out an extensive plan for segregation of the commercial functions of the exchange from the regulatory functions. International stock exchanges like Dubai, Korea, London and Norway bourses have already shown keen interest in acquiring stakes in the country's de-mutualized stock exchanges, according to the chairman of Securities and Exchange Commission of Pakistan (SECP).

While Karachi Stock Exchange (KSE) has hired the services of Deutsche Bank, the Lahore Stock Exchange (LSE) has hired Rotch Bank for valuation of their respective assets and members' seats or trading rights. Initial Public Offerings (IPOs) of shares of stock exchanges is expected to be ready within the next four months. After IPOs, the strategic investors and local financial institutions would have 40 percent shares; general public 20 percent; and existing brokers would have 40 percent shares.

The demutualization ordinance has already been approved by the Cabinet and it is now waiting for the approval of the president. The SECP is currently interacting with best global stock exchanges, including Stockholm Stock Exchange (OMEX), to attract investors for acquiring shares in the country's stock exchanges after promulgation of the demutualization law. The law also empowers the SECP to approve scheme of integration of two or more stock exchanges without recourse to the High Court.

The SECP has been pursuing the process of demutualization of stock exchanges since 2002. In February 2004, it set up an experts committee to examine the feasibility of demutualization, integration and transformation of stock exchanges. The committee submitted its report in September 2004 and fully supported the demutualization of the stock exchanges. This year on January 22, the federal government approved the demutualization ordinance to bring about an improvement in the governance structure making the stock exchanges more competitive.

The ordinance restricts any initial shareholder, a member of general public or Trading Right Entitlement (TRE) certificate-holders to hold more than one percent of the shares of stock exchange and financial institutions to hold more than five percent of shareholding. Only corporate entities would be registered as broker on the stock exchange after demutualization. The existing TRE certificates can only be transferred once. All other TRE certificates shall be non-transferable. A stock exchange cannot issue new TRE certificates till June 30, 2010 unless two-thirds majority of TRE certificate holders decide otherwise.

According to the SECP Chairman, the membership of those who would remain non-functional till 2011 will be cancelled from the stock market. There are 165 non-functional membership cards in three stock markets of the country out of which 41 are from Karachi, 46 from Lahore and 76 brokers from Islamabad stock market.

"Index Future and Options" are two new products the SECP intends to introduce in local stock markets but due to lack of experts, it is unable to introduce these products. With the demutualization of stock markets, foreign experts would be available in the country and new products could be introduced.


Karachi Stock Exchange (KSE) and Dubai Financial Market (DFM) signed a memorandum of understanding (MoU) this month to develop and strengthen capital markets activities in the region. The agreement is aimed at strengthening cooperation between both institutions in all areas relating to exchange of expertise and information. It will also encourage listed companies in both stock markets to cross list their securities.

The State-run Borse Dubai, the holding company for Dubai's stock exchange business, has already shown interest in buying a 40 per cent stake in KSE. The local analysts consider Dubai's stake in the KSE a good omen for the both. Dubai's investment in the Karachi Stock Exchange would also bring in much investment inflow for the local equity management and stock brokering community. Injection of funds at this crucial moment essentially brings investments to perk up the local Pakistani business scene.

With rising oil prices, a continued flow of revenue is expected to the region surrounding Dubai. It is also expected that the KSE would also attract more Gulf investors to the Pakistani market. If the deal with the Dubai Stock Exchange is firmed up, the two markets stand to gain. For the KSE, this would represent not just an expanded ownership by a premier stock exchange, but also the recognition which goes with that change. For the Dubai stock market, the acquisition helps it establish formal ties with a stock market close to home at a time when the Middle East region as a whole is benefiting from the robust flow of oil money.


After demutualization, the status of the benchmark Karachi Stock Exchange (KSE) 100-share index will change from a corporate entity to that of a "public entity. Promulgation of the ordinance will be a significant milestone for the stock exchanges of Pakistan, in particular, for the KSE, which is the largest and premier stock exchange of the country with 652 companies listed, a market capitalization of Rs 4.637 trillion as of March 24, 2008.

The members of KSE would become shareholders in the stock market after the approval of the ordinance by the president. According to the KSE managing-director, a number of exchanges have expressed interest in a demutualized KSE and several firms are mulling a KSE holding. Baltic bourse owner OMX has also shown interest in buying a stake in the KSE.

Transformation of the KSE to a shareholder owned for-profit entity from a not-for-profit concern limited by guarantee would greatly benefit investors and the general public as they will be able to buy and sell shares of the exchange. The demutualized KSE will allow the exchange to partner with a strategic international investor who is recognized as a market leader in offering a fair, transparent and efficient securities market.

Demutualization of KSE will bring better technology, access to better training, funds and staff making the KSE more competitive in the financial services market by introducing innovative new products and services that already exist in the developed markets, where the strategic investor is based. It would ensure that the exchange would not work in the interest of members only, but for all market participants. It would enable the exchange to raise capital that would allow the exchange to expand and improve its operations and a public exchange would increase transparency and improve the image of the exchange.