Karachi Stock Exchange

Issues & Prospects

Presentation by:

Nadeem Naqvi
Managing Director
Karachi Stock Exchange
February 15, 2012

www.kse.com.pk

Karachi Stock Exchange (KSE): Profile I

KSE is owned by 200 members
There are 10 directors; 5 elected by members; 5 nominated
(including MD) by the Securities & Exchange Commission of
Pakistan
Active members are approximately 135 at present

Over 600 companies are listed on the Exchange

Market Cap. is currently at US$34bn (US$75bn in Mar 2008)

Value Creation : 2.94x

the listed companies

Market Value of paid up capital of

01

Karachi Stock Exchange (KSE): Profile II

Benchmark indices
1) KSE-100 Index
2) All Share Index
3) KSE-30 Index

4) KMI-30 Index
5) Oil & Gas Index
6) Banking Index

Strong Systemic Risk Management System

State-of-the-art technology platform

Seamless electronic integration of Trading (KSE), Clearing
(NCCPL) and Settlement/Custody (CDCPL)
New Product Pipeline: SLB, MTS, ETFs, Sector Indices,
Cross Border Index Listings, Options

02

Business Functions of the Stock Exchange

PRIMARY
MARKET

Mobilise savings into

productive investment for
economic development

SECONDARY
MARKET

Maximise liquidity at the

lowest cost per
transaction

RISK
MANAGEMENT

Pre-trade; trade execution;

post trade clearing and
settlement of transactions

03

Regulatory Functions of the Stock Exchange

Licensing of members / brokers

Listing regulations of companies

Corporate Governance of listed companies
Market monitoring & surveillance of trading activity to
ensure fair play, efficiency & auditability

Penalty for infractions of regulations

Formal Reporting to SECP

04

Asset Class Comparative Performance

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

KSE
-16%
112%
66%
39%
54%
5%
40%
-58%
60%
28%

Gold
8%
9%
9%
15%
12%
26%
22%
32%
33%
30%

DSC
15%
13%
9%
8%
8%
10%
10%
11%
12%
12%

PIBs
13%
10%
6%
7%
8%
10%
10%
13%
13%
13%

T-bills
11%
6%
2%
2%
7%
8%
7%
11%
13%
13%

Deposits*
6%
4%
2%
1%
3%
3%
4%
6%
6%
6%

Average

33%

20%

11%

10%

8%

4%

* Weighted average deposits rate as per SBP data

05

Capital raised from the Stock Market

Total amount of equity capital raised by listed companies
through issuance of rights shares during the last 10 years
(2002-2011) was Rs316bn
Demonstrates the important role that KSE has played in
allowing companies to raise long term capital for growth
Over PkR122bn was raised by the Government of Pakistan
between 2003-2007 from privatization through the
stock exchanges
Indicates how the Government of Pakistan has been the
direct beneficiary of a thriving capital market that
allows market driven valuations of state owned
companies

06

Examples of private sector fund raising

DG Khan
Cement
Co.

2006

1.7bn

2009

1.0bn

2010

1.2bn

2011

1.5bn

Rs5.4bn
in 6 years

Engro
Chemical

2006

1.2bn

2007

3.2bn

2008

3.2bn

2009

4.3bn

Rs11.4bn
in 4 years

NIB
Bank

2006

19.0bn

2007

12.0bn

2011

3.0bn

Rs34.0bn
in 6 years

07

KSE-100 Index History

KSE-100 Index

15,676

16,000

14,000

12,262
12,000
10,000
8,000
6,000

4,815

4,000
2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: KSE

08

Regional Performance - I (June 30, 2011 Dec 31, 2011)

5.0%

1.9%

0.0%
-1.6%

-1.7%

-5.0%

-3.1%

-10.0%

-9.2%
-11.0%

-15.0%

-15.2%
-17.7%

-20.0%

-18.0%

-18.7%

-20.4%

China

Vietnam

India

Hong Kong

Singapore

Sri Lanka

Pakistan

Malaysia

Indonesia

Thailand

Philippines

-25.0%

Source: KSE; Bloomberg

09

Regional Performance - II (Jan 2, 2012 Feb 14, 2012)

16.0%

15.5%

13.9%

13.5%

12.9%

11.0%

9.2%

8.1%

7.9%

6.0%

6.6%
3.4%

2.3%

1.0%
-4.0%
-9.0%
-14.0%

Malaysia

Indonesia

China

Thailand

Pakistan

Philippines

Singapore

Hong Kong

Vietnam

India

Sri Lanka

-17.5%

-19.0%

Source: KSE; Bloomberg

10

Market Cap to GDP Unrealized Potential

50%

46.4%

45%
40%

36.5%

35%

31.6%

30%

24.9%

25%
20%
15%
10%

33.7%

15.6%

16.1%

18.3% 18.2%

16.5%

9.9%

5%
FY02 FY03 FY04 FY05 FY06 FY07 FY08
FY09 FY10 FY11 FY12
Source: KSE; Economic Survey FY11

*As at Mid Feb 2012

11

Average Daily Turnover (Shares mn)

(Shr mn)

400
350

365
344

300
257

258

250

200

171

133

150

121

100

79

94*

* CY12: Jan todate

CY12

CY11

CY10

CY09

CY08

CY07

CY06

CY05

CY04

50

Source: KSE

12

30-Mar-09

16-Mar-09

02-Mar-09

16-Feb-09

02-Feb-09

19-Jan-09

Imposition of Floor
at 9145 (Aug 27, 08)

05-Jan-09

22-Dec-08

08-Dec-08

24-Nov-08

10-Nov-08

27-Oct-08

13-Oct-08

29-Sep-08

15-Sep-08

01-Sep-08

18-Aug-08

04-Aug-08

21-Jul-08

07-Jul-08

23-Jun-08

8,000

09-Jun-08

26-May-08

12-May-08

28-Apr-08

14-Apr-08

31-Mar-08

17-Mar-08

12,000

03-Mar-08

KSE-100 Crisis Period Performance

KSE-100 Index

16,000

Market All Time

High at 15,676
(Apr 18,08)

Market Bottom
at 4815
(Jan 26, 09)

4,000

Source: KSE

13

Key Causes of 2008 Market Crisis

High leveraging, a phenomenon in most global markets since
mid-2000s
Sell-off by foreign funds in tandem with global market sell-off in
the summer of 2008
Investor defaults leading to brokerage houses receivables build
up and pledging of clients shares to banks
SBPs sudden change in regulation regarding banks exposure
quantum to equities/broker loans
Margin calls by banks & associated forced sell-off of securities
collateral, accentuating downward pressure on market
Regulatory panic via artificial floor imposition & no arrangements
for short-term liquidity for Pakistan market in contrast to full
liquidity support by regulators in other markets

14

Capital Market Contribution to Taxation

KSE Collected Taxes worth PkR17bn between FY05 FY11
(PkRbn)

4.7

5.0
4.2

3.6

4.0
3.0

2.8

2.0

1.0

0.6

0.5

FY09

FY10

0.4

FY05

FY06

FY07

FY08

FY11
Source: KSE

15

Declining Volumes Impact Broker Performance

PkRbn

Brokerage Commission

Total Income

PkRbn

7.0

9.0

2.5
8.4

6.1

2.2

2.0

8.0

6.0

Net Profit

PkRbn

1.5

7.0

5.0

1.4

1.0
0.5

5.7

6.0
4.0

0.0

5.0
3.0

2.4

3.9

4.0

2.3
1.7

2.0

-0.5
-1.0
3.2

3.0

-2.0

2008

2009

2010

2011

-2.2

-2.5

2.0

1.0

-1.3

-1.5

2008

2009

2010

2011

2008

2009

2010

2011

Source: KSE; Based on a sample of 50 active brokerage houses

16

KSE: 5-Year Financial Performance

Operating Revenue

Operating Profit

Net Profit

PkRmn

PkRmn

1,400

1,000

800

1,200

800

1,000

600

PkRmn

800

1,397

771
668

701

400

600

400

868

700
600

458

303

243

198

400

(200)

(400)

2006 2007 2008 2009 2010 2011

508

314

300

200

603

500

200
320

772

200

100
(295)

(314)

2006 2007 2008 2009 2010 2011

68

50

2006 2007 2008 2009 2010 2011

Source: KSE

17

Lessons from past crises

INVESTOR PROTECTION

Brokers quality & capability

Strong financial penalty & regulatory coordination
Preemptive risk management regime
Power to the Investors
Investor Protection Fund

SYSTEMIC RISK MITIGATION

Market Liquidity
Robust margining regime
Trade settlement guarantee
Clearing House Protection Fund

18

Investor Protection a Key Point of Focus

While enhancement in post event investor compensation
has occurred, more work is required on the prevention side
Strengthening of brokers financial, professional and risk
management capability is one area of priority
Regular reporting of brokers payables & receivables is
another area to be focused upon to preempt problems
turning into crisis
Brokers sales personnel training emphasising financial
planning and longer term investment rather than just
trading
Technology driven separation and management of custody
accounts can significantly reduce risk of comingling

19

Empowering Investors to Protect Themselves

Strengthened regulatory regime, driven by technology
Universal Identification Number (UIN)
for each individual investor

KSE

Auto tagging of CDC Sub A/C with

UIN & KATS Code
CDC

CDC

Investor
UIN

NCC

KATS
KATS
Code
Code

No comingling of investors funds

with broker's funds (separate bank
accounts)
SMS & email alert service on any
share movement / transaction in UIN
from CDC & NCC

20

Managing Operational Risk: Key Measures

Information Security

No removable storage devices in KSE employee computers

All personal e-mail/media sites blocked
Information flow matrix strictly enforced
Security cameras at sensitive locations

Risk Management Gateway to Members

Client Level Margining Client shares by the broker can

not be utilized for his own business or trades of other
clients
New Margining Regime Concentration margins at all
leveraged & futures markets; liquidity margin in the ready
market over and above existing VAR margins

21

New Initiatives to Broaden Investor Base

Launch of vision 2014: 500,000 investor base by Dec 2014
versus approx. 250,000 at present
Comprehensive, time bound action plan to generate investor
awareness by joint forum of all capital market institutions, SECP
and the reactivated Institute of Capital Market
New regulations by SECP to encourage individual investor
participation
New product rollouts including sector indices, Options, ETFs,
market-maker regulations, cross-listing of Regional Index
derivatives
Initiation of personal financial planning / wealth management
training program for brokers and mutual funds sales personnel

22

New Initiatives to Increase Listed Companies

Launch of IPO Initiative by the three exchanges under
umbrella of South Asian Federation of Exchanges (SAFE)
Cooption of investment banks, DFIs, investment banking
divisions of large banks & top-tier brokers to market the
IPO concept to privately held businesses
Detailed review of listing regulations in order to reduce
paperwork/application process timeline for listing, under
guidance of SECP

Initiative for launching a dedicated SME Exchange

23

KYC & CDD Initiative

Changes in Exchanges regulations mandating brokers to
follow international KYC and Customer Due Diligence
(CDD) guidelines by Anti Money Laundering Task Force as
per international compliance standards
Rollout of Broker education programme regarding anti
money laundering laws & regulations, KYC and CDD

Mandatory creation of compliance function by all brokers

Assisting brokers in defining internal KYC guideline and
implementing KYC and CDD activities on an ongoing basis
Stronger system audit regime to monitor KYC Compliance

24

Structural Issues Hampering Market Growth

Corporate Tax Structure Anomaly
Partnership/Proprietorship Tax rate of 20-25% versus corporatized
business tax rate of 35%. This is a huge disincentive to listing on the
stock market
Lack of liquidity
Banking sector nearly absent from capital market financing; partially due
to stringent regulations and partially due to crowding out by Govt.
borrowing
Capital Gains Tax Conundrum
Poorly designed and inappropriately timed imposition of new CGT regime.
Perception of unfair treatment for equity investors (c.f. investment in
govt. securities; no tax on agricultural sector; non implementation of
RGST on trade services). Further, perceived fear of harassment by taxofficials of individuals has driven out retail investors from the market

25

Structural Issues Hampering Market Growth

Absence of Market Makers
Till date, absence of market makers has been a key cost of low or nil
liquidity in the derivatives market. This is changing
Lack of Incentives for Debt Market
SBP still to focus on developing a robust domestic secondary market for
Govt. debt at retail level. As that happens the stock market and brokers
can became a strong retail distribution network for the Govt. and help
reduce cost
Problem facing NRPs
Cumbersome SCRA regulations a major disincentive for Non-ResidentPakistanis (NRPs) to invest in the domestic equity market
Lack of international marketing
No systematic, institutionalized effort to expose Pakistans capital
market to global investors and the Pakistani Diaspora

26

Sustainability of an Exchange
Information Technology
Quality of Human Resources

THE
VALUE
PROPOSITION

Access to Customers

Products & Services

Rules & Regulations
Risk Mgmt. Regime
Licensing of Brokers
Capital Resources
Supportive Govt. Policy

27

THANK YOU

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