Ch 4b Pakistani Capital Market - Copy

7/28/2019 Ch 4b Pakistani Capital Market - Copy

1/24

Pakistani Capital Market


2/24

Secondary Market

Stock Exchange: An organised/formal market of trading

securities is called stock exchange.

Over-the-Counter Market (OTC): A decentralized market of

securities not listed on an exchange where market

participants trade over the telephone, facsimile or electronicnetwork instead of a physical trading floor.

There is no central exchange or meeting place for this market.

In the OTC market, trading occurs via a network of

middlemen, called dealers. Not well or anised


3/24

History

In 1934, prior to the independence of Pakistan,the city of Lahore established a stock exchange the Lahore Stock Exchange.

In 1936, this stock exchange merged with thePunjab Stock Exchange Limited. At that time, thecity of Lahore had three locations wheresecurities traded: the Punjab Share and Stock

Brokers Association Limited; the Lahore CentralExchange Limited and the All-India StockExchange Limited.


4/24

History

Following independence in 1947, none of thesestock exchanges survived; two closed while theAll-India Stock exchange migrated to Delhi (India).

After the creation of Pakistan, Karachi becamethe hub of business activities due to the fact thatit was the Capital.

city and because it had a big sea port. OnSeptember 18, 1947, within two months of

Pakistan being established, the KSE startedoperations, and therefore became the first stockexchange in Pakistan.


5/24

History

In 1954, after the KSE had operated for several years,the Dhaka Stock Exchange was set up in the capital cityof East Pakistan (now Bangladesh).

In the late 1950s, there were attempts to re-establish astock exchange in the city of Lahore; however, theseefforts lapsed (Mirza, 1993). It was not until 1969 thatthe current Lahore Stock Exchange (LSE) wasestablished; it became operational in May 1971.

In 1992, the Islamabad Stock Exchange (ISE) was set upin the new capital of Pakistan. At present, therefore,there are three stock exchanges operating in Pakistan.


6/24

Introduction

The KSE is the largest of the three markets with

85.0% of turnover recorded for Karachi; only

14.0% of turnover occurs on the LSE while about

1.0% relates to ISE equities (Iqbal, 2008).

Most of the companies listed on the KSE have

cross-listed on the LSE and the ISE; this in turn

has reduced the volume on both the LSE and ISEstock exchanges because most trading occurs on

the KSE.


7/24

Introduction

In Pakistan, 40.0% of equity shares are in the

hands of 35 promoters and directors, 35.0% of

shares are held by small investors and 25.0%

are owned by institutional investors (Lukman,

2010).


8/24

Settlement of Transaction on

Exchanges Transactions on all the three stock exchanges are managed

by the National Clearing Company of Pakistan Limited(NCCPL).

The NCCPL was established on July 3, 2001 for settlement

of security transactions arising from dealings on the stockexchanges. The NCCPL established the National Clearingand Settlement System (NCSS) to carry out the settlementof securities for all three markets.

The most common settlement period is T+2. Under thisarrangement the buying, selling, payment, receipt andtransfer of securities for each member is settled by theNCSS within two working days


9/24

Settlement of Transaction on

Exchanges As a result of the large volume of trading on the three stock

exchanges, the handling of physical share certificatesbecame burdensome. As a result, the Central DepositoryCompany of Pakistan (CDC) was set up in September, 1997.

Its main function is to register security transfers using anelectronic book-entry system. Investors, at their discretion,have access to the security certificate if they wish.Currently, about 97.0% of trading is settled through theCDC .

The goal of the CDC and the NCCPL is the establishment ofan efficient electronic capital market in Pakistan.


10/24

LSE

The LSE is the second largest stock exchange ofPakistan.

There are 152 members of the LSE of whom 81 arecorporate and remaining are individual persons.

The LSE has two branches one in the city ofFaisalabad and the other in Sialkot.

The LSE is the most dynamic stock exchange inPakistan; for example, it was the first to shift from a

trading pit system to an automated trading system in1994; it also pioneered internet-based trading for itsmembers in 2001.

The benchmark of the LSE is the LSE-25 index.


11/24

ISE

It is the smallest of the three exchanges.

It currently has 120 members including 94

corporate and 26 individual members.

It was felt that the establishment of the ISE would

facilitate growth in the less-developed Northern

part of Pakistan.

On 1st January 2004 the ISE established its ownbenchmark index, the ISE-10. Before this, KSE-100

index was used a benchmark for trading.


12/24

Karachi Stock Exchange (KSE)

The KSE is the oldest and the largest stock

exchange in Pakistan; it is also the second oldest

stock exchange in the whole of South Asia.

Membership became fixed at 200 in 1966 andthis limit still remains; a prospective member

therefore has to buy a seat on the KSE from one

of the existing members. Total members are 200; out of which, 183

corporate members and remaining are individual.


13/24

Operations of the KSE

The KSE is run by a Board of Directors whichcomprises10 members: five members of the KSE,four individuals who are not members of the KSE

and one Managing Director. The four non-members are elected by the SECP

and the five members are elected by their peers.

A Chairman is elected out of the non-members by

the Board with the Managing Director acting asthe Chief Executive of the exchange dealing withits operational and administrative functions.


14/24


At its outset, the KSE used an open-out-cry

system of trading, but this changed in May

1998 when a computerised trading system,

known as the Karachi Automated TradingSystem (KATS), has introduced.

All transactions take place via computers and

transactions costs are freely negotiablebetween members and clients.


15/24


The KSE has also introduced a cap on the

extent to which securities are allowed to vary

since 2008; only share price fluctuations of

five percent around the opening share price ofthe security are now allowed.


16/24


17/24

Market Indices

Various indexes have been introduced to

gauge the share price performance of the

main Pakistani stock exchanges.

The KSE-50 share index was used as the main

index of KSE until November 1, 1991 when the

KSE-100 was introduced to capture changes in

over 80.0% of total market capitalisation.

This index is currently used as the benchmark

for measuring the performance of share prices

by the KSE.


18/24

Market Indices

The KSE-100 index is comprised of 100 companies:34 companies are selected on the basis of having the

largest market capitalisation in each of the 34 Karachi

Stock Exchange sectors.

while the remaining 66 companies are included onthe basis of their market capitalisation irrespective of

the industry and are taken up by the largest market

capitalisation companies in descending order.

Open-End mutual fund is not included in

computation of the KSE-100 index as its market

capitalisation is not fixed.

While the KSE-100 is the main index.


19/24

Re-Composition of the KSE-100 Index

The inclusion or exclusion of a company from

the KSE-100 index is done bi-annually (1st April

and 1st October each year)

Couple of rules are used in re-composition:

Sector Rule

Time-based rule

Value-based rule

Capitalisation Rule

Time-based rule


20/24

Re-Composition of the KSE-100 Index

Sector Base: The addition/deletion of a company on basis of

top market capitalisation in the 34 sectors is based on couple

of rules:

Time-Based Rule: A company is eligible to be selected in

the KSE-100 index if it maintained its possessed its largest

market capitalisation for two consecutive decomposition

periods (i.e., one year).

Value-Based Rule: A company will be included in the index

if its market capitalisation is more than 10% of the existingcompany of the index with largest market capitalisation of

a sector for last one decomposition period (i.e., 6 months).


21/24


22/24

Market Indices

The increase in the index is refers as bullishtrend and decrease in index is known as

BEARISHtrend.

ISE Building


23/24

Market Indices

For example, on September 18, 1995 the KSE

introduced the KSE-All shares index, which

consists of all companies listed on the KSE at a

particular point in time.

For international investors, the exchange also

established the KSE-30 index as a benchmark

of major share performance; it is comprised ofthe top 30 companies calculated on the basis

of free float market capitalisation.


24/24

Market Indices

To cater to the needs of Islamic focused investors,

the KSE introduced the first Islamic index, KMI-30, in

2008 based on the free float market capitalisation.

Currently, a limit of 12.0% exists for each companyon the KMI-30 whereby the market capitalisation of

an individual company cannot exceed 12.0% of the

total KMI-30 index value.

This rule was introduced in order to control the

volatility of the index to avoid the influence of large

companies.

Ch 4b Pakistani Capital Market - Copy

Documents

Transcript of Ch 4b Pakistani Capital Market - Copy