Aug 15 - 21, 2011

Pakistan has three stock exchanges located in Karachi, Lahore, and Islamabad. Over the years, Karachi stock exchange (KSE) has emerged the biggest and the liquid exchange of the country.

The KSE has been playing a major role in capital formation in Pakistan. The key indicators of its enormous size include 1) large number of listed companies, 2) value of listed capital and its market capitalization, 3) number and value of debt instruments, 4) large number of active members, 5) fully automated trading system, 6) deliveries being made through central depository company and 7) settlements made through national clearing company.

Over the years, various indices have been developed to present a more realistic picture of the overall activities of the exchange. Now there are four indices which are 1) KSE-100, 2) KSE all shares, 3) KSE-30 and 4) KMI-30.


Initially, there was a 50 shares index followed at the KSE. As the market grew, the need was felt to come up with a more representative index. On November 01, 1991, the benchmark KSE-100 was introduced. To date, it remains the benchmark of the activities of the exchange. The KSE-100 is a capital-weighted index and consists of 100 companies representing above 80 per cent of market capitalization of the exchange. This index is recomposed with regular intervals to present more realistic picture to the investors.


In 1995, the need was felt for an all share index to provide the basis of index trading in future. The KSE all share Index was constructed and introduced on September 18, 1995.


The KSE has also introduced KSE -30 Index, which is based on 'free float market capitalization methodology'. The primary objective of this index is to serve as a benchmark by which the stock price performance can be compared.


In 2008, the KSE introduced the first Islamic Index KMI-30 in collaboration with Al-Meezan Group. The companies are first scrutinized for their compliance with certain Islamic principles for their inclusion in the index. Similar to KSE-30, the KMI-30 index is also based on 'free float market capitalization methodology'. In KMI-30, index market-capitalization of each company is capped at 12 per cent of the total market capitalization.

The market capitalization of individual companies cannot be more than 12 per cent of the total market capitalization of KMI 30 Index companies. The excess market capitalization is divided among the rest of the companies according to pro-rata basis. This helps in reducing the volatility of the index by minimizing the influence of large-cap stocks.


A review of the KSE performance indicates that the largest growth in terms of listed capital and market capitalization was achieved during 2000 to 2007.

During this period, Pakistan emerged as one of the best performing markets of the world. The factors responsible for this growth were 1) outstanding performance of the listed companies and 2) massive increase in the listed capital, mainly because of listing of state owned enterprises and offer of their shares to the general public under 'privatization for people' program.


Year 2008 proved one of the worst years for the global stock markets, staring with sub-prime loan crisis in the US that engulfed the entire world. Most of the developed economies plunged deep into recession and bailout programs by the governments provided some respite.

However, the apex regulators in Pakistan failed in taking timely corrective steps, worst being imposition of 'floor' leaving no opportunity for the exit. Some of the members faced default and a few managed to leave Pakistan putting the investors in serious trouble.


Beginning 2011, the market has remained highly volatile but mostly remained within 11,000 to 12,500 levels. The factors adding to volatility have been precarious law and order situation in Karachi, hub of industrial and commercial activities. Lately salt and pepper was added due to the plunging of global stock markets.

The US faced default-like situation and some of the countries of Euro Zone had to be bailed out to avoid default. However, the situation remains far from satisfactory. It may not be wrong to say that local investors overreacted to the global situation. Despite many odds, the results being posted for the period ended June 30, 2011 are encouraging. If there are some major deviations, these are because of the bad decisions of the government.


Many of the experts are of the opinion that the bearish sentiments engulfing Pakistan stock market are all internal from extreme political volatility to precarious law and order situation and from energy crisis to the confidence crisis. Not adhering to good governance may be one of the contentious issues faced by the country but real issues are lack of political will to take timely decisions, habit of sweeping the issues under the carpet and lack of acumen to prioritize the issues and taking corrective steps.


Over the last three years, the number of new flotation of equities and debt instruments has remained close to zero. The reason is simple if spells of load shedding of electricity stretch up to 16 hours a day and gas supply remains suspended up to three and half days in a week, no entrepreneur will be keen in making fresh investment.

With the rising inflation and closure of industrial and commercial entities, more and more people are being pushed below the poverty line, further plunging the already low savings to GDP ratio.

On top of all, capital formation outlook remains bleak when there are little incentives for saving and investment as economic managers are not willing to withdraw capital gains tax that has plunged the daily trading volume to extreme low. Tax collection regime completely fails to understand that without widening the tax net mobilizing more tax is very difficult; racking up taxes from taxpayers just cannot help in enhancing tax collection.

If the government is serious in enhancing tax collection, it should encourage new investment that can ensure new job opportunities. More jobs mean more spending that could spur demand for every thing from eatable to consumables and from consumer durables to plant and machinery. Stock exchange can play its due role when there is demand for capital.