July 14 - 20, 2008

Capital market plays a role of intermediary between those who have capital but without existing source of investments and those with having capital need. It is congenitally aimed at resource funding of project and also at channelizing stream of funds in appropriate direction.

While this role of capital market of generating revenue for and fulfilling cash requirements of commercial venture facilitates investment in the floating share, capitalization of trillion of rupees only in Karachi Stock Exchange normally ends up in sheer changing hands and least is utilized for strengthening or initiating industrial foundation of the very country it accumulates in.

Therefore critics in Pakistan shed doubts over the stock exchanges recognized as barometer of reviewing economic growth. Minimal probability of funds reinvestment in real economic progress is often cited as an evidence of impractical linkage of economic prosperity with robust performing equity market.

However, few proponents have reverse views about this relation. Referring recent expansion of cement sector of the country, they bear up their claim of bourse-industry hard core affinity. Despite presently fraught with whip downfall in shares value owing to several economic policy glitches, all three stock exchanges across the nation have in past recorded skyrocketing growth rate.

The profitability of scrip and midterm growth perspective of securities has registered robust performance in many sectors such as banking and finance, E&P, automobile, and cement sectors. Inter alia cement scrip has propelled transference of stock profits in business extension in real term. Typically the margin collected on difference of face and market values of cement sector stocks is said to have expanded capacity utilization of production plants, employment opportunity, and sectoral tax revenue.


KSE's 654 listed companies having shares turnover worth of Rs. 27 billion earn profits exempted of capital gain tax, levied on difference in share's book and market values. Not denying the margin profitability of odd lots due to CGT exemption, yet, punters trading for large sum sweep easily away the tax incentive.

Institutional investors are the biggest beneficiaries of this exemption, quite evident from the nosedived index following the announcement of CGT proposition after a long moratorium. Immediate after this announcement index points plunged down to annual low level, thereby, simmering paranoia about who-grasp-capital-market-structure.

Certainly, traders of odd lots can not be financially capable enough to determine the course of equity market. It is actually large buyers whose investment or disinvestment set trends in securities trading.

Funds worth trillion of rupees are invested or reinvested in rotation in shares transactions to have profits again and again. As business principle goes returns of investment determine investment decision. Hence institutional buyers or any other traders intended to exploit capital market's speciality of multiplying paper value find it more profitable to retain its shareholding in the market instead of divert funds to real economic use; whatsoever the gravity of situations stock traders prefer investing or reinvesting in stock trading.


The recent deprecation in shares value is attributed to outflow of foreign portfolio investment from stock exchanges. FPI has been producing relatively enormous volume of funds for years in Pakistan. Even if one assumes insufficient direct contribution of the funds in building real economy or industry, the proportion must exceed beyond aggregate amounts in local currency. The total FPI during 11 months of last fiscal registered an inflow of $45.4 million in stock exchanges as opposed to $1107 million in the corresponding period of 2006-07.

Reduction in exposures to developing countries by foreign investors was one of the main reasons behind this gigantic recession in FPI of exchanges. Government has applied few corrections to offset lose of capital flight. For example, readjustment in upper and lower locks to prevent exit has been adopted as a corrective measure to contain capital flight.

Since dollar-PKR disparity attracted speculators and caused detraction to equity investments the measure was justified to impede flow of opportunists' funds in currency trading, controlling turbulent speculation activity. The dollar raised its PKR denomination to Rs.73 to face cutback value slightly following SBP intervention.

Pakistan's depleting foreign exchange reserves direly need sustainable inflows of foreign investments, but foreign investors offloading positions that has already capital market experienced blunt slash are neither signalling to replenish reserves nor are they seen coming to support long term stock market growth.

It is reported that Global Depository Receipt is to be issued from cement sector. Oil and Gas Development Corporation Limited and United Bank Limited have successfully launched GDRs amounting to a total sum of US$1.5 billion at the London Stock Exchange. Would the GDR by Lucky Cement be attracting response of international investors in the wake of dejected interest in equity funding in the country's equity markets? By issuing GDRs local industries can surely become able to raise funds for solidifying their standings. FPI declining or taking-off may inadvertently loosen industrial footholds.

Insofar as FPI is concerned local industries may be weakened due to the decline, however, if local investments turn back from stock market the effect on economic growth may doubtfully be considerable given the lethargic response of listed companies towards national industrial upkeeps.