The capital markets in Pakistan have witnessed a substantial improvement since 1999-2000. With the spectacular performance of the KSE 100 index, which crossed 5600 points in April 2004, (doubling the January 2003 level) and market capitalisation increasing from Rs 555 billion ($9.5 billion) in January 2003 to Rs 1436.0 billion ($25.0 billion) in April 2004, (an increase of 159 percent).
The KSE 100 index touched an all time high at 5620.7 points on April 19, 2004. A record turnover of over a billion shares was also seen twice in the year, first on August 8, 2003 and then on April 15, 2004.
The fiscal year 2003-04 has been a record year for the stock market in Pakistan, with unprecedented growth in market activity.
Pakistan has experienced substantial economic changes since 2001-02, supported by strong sectoral growth. The stock exchange has shown foresight in whole-heartedly accepting and successfully implementing reforms as a result of which the Pakistani market was ranked as one of the best performing markets in the world. The KSE is implementing further measures to increase the retail investor base in the country.
The land-mark performance of the stock market during the current fiscal year can be attributed to a number of positive factors including; a continuation of pro-growth macro-economic policies; a stable macroeconomic environment; strong economic growth; stable exchange rate; a positive privatisation process through the capital markets; a visible improvement in the Pakistan-India relationship; appropriate reforms initiated by the Securities and Exchange Commission of Pakistan (SEC); the availability of adequate liquidity in the market; good operating and financial results from the majority of blue chip companies and the enhancement of investor confidence, etc.
This exceptional performance of the capital markets was also supported by the growth in rupee liquidity and the consequent availability of cheap credit to the private sector. In addition, the last four years have witnessed a recovery in the economy, which has helped improve corporate profitability and investor confidence.
These factors have continued to drive the equity market in the current fiscal year as well.
Over the past few years, the Securities & Exchange Commission of Pakistan (SEC) has taken measures to restore confidence of both foreign and domestic investors by endeavouring to ensure that the market functions in a smooth and transparent manner.
Its regulatory mechanisms are aimed at minimising the elements of systemic risk on the one hand and promoting institutional strengthening/capacity building of various segments of the capital markets on the other.
The SEC has actively pursued a capital market reform program geared towards the development of a modern and efficient corporate sector and capital market, based on sound regulatory principles that provide the impetus for high economic growth.
During the first ten months of the current fiscal year the KSE share index has increased by 59.6 percent (from 3402.5 points on June 30, 2003 to 5430.4 points on April 30, 2004). Similarly market capitalisation has increased by 92.4 percent or from Rs 746.4 billion on June 30, 2003 to Rs 1436.0 billion on April 30, 2004.
In terms of US dollars the market capitalisation of the Karachi Stock Exchange was about $25.0 billion on April 30, 2004 increasing from USD 6.78 billion in the end of June 2002 and USD 12.92 billion in the end of June 2003.
The unprecedented boom in the stock market in the current fiscal year has been brought primarily by some heavy weight blue chip companies in the power and communication sectors, although other trading groups also remained buoyant in the market.
The share of the top ten scrips in total market turnover increased significantly from 67.2 percent in October 2003 to 71.1 percent in December 2003, reflecting a strong co-movement of trading in these scrips (the total market turnover increased from 4934.3 million shares to 6088.0 million shares in the respective months).
Interest in the energy sector stocks was also an important factor in the movement of the KSE-100 index. The monthly trends of the leading stock market indicators are given in Table 7.1.
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Table-7.1: Leading Stock Market Indicators on KSE (KSE Index: November 1991=1000)
---------------------------------------------------------------------------------------------------
2002-03 2003-04
Months (July-April)
KSE Index Market Turnover of KSE Index Market Turnover
(end month) Capitalisation Shares (end month) Capitalisation of Share
(Rs billion) (billion) (Rs billion) (billion)
(end month) end month)
---------------------------------------------------------------------------------------------------
July 1787.6 412.5 1.6 3933.4 836.2 10.3
August 1974.6 450.8 3.1 4461.5 972.5 12.2
September 2018.8 458.3 2.7 4027.3 907.3 9.8
October 2278.5 535.4 4.3 3781.0 794.3 5.0
November 2285.9 513.6 3.9 4068.3 837.2 2.1
December 2701.4 588.4 6.8 4471.6 922.0 6.2
January 2545.1 554.8 9.1 4841.3 1254.8 7.0
February 2509.4 42.2 2.1 4840.4 1245.6 4.8
March 2715.7 589.7 2.7 5106.7 1346.1 7.8
April 2902.4 618.8 4.4 5430.4 1436.0 16.1
May 3099.0 675.3 4.5
June 3402.5 746.4 8.0
===================================================================================================
Source: Karachi Stock Exchange
As documented below, (Table 7.2), out of the 15 leading stock markets in the world, the KSE share index increased by 61 percent in terms of US dollar during July-April 2003-04, surpassed only by India.
=======================================================================
Table-7.2:Performance of Global Stock Markets during July-April 2003-04
-----------------------------------------------------------------------
Country Closing Index in Respective % Change
Currencies in USD
April 2004 June 2003
-----------------------------------------------------------------------
Pakistan 5,430 3,402 61
India 5,655 3,607 64
Indonesia 783 506 46
Thailand 648 462 48
South Korea 863 670 31
Hong Kong 11,943 9,577 25
Malaysia 838 692 21
Japan 11,762 9,083 41
Singapore 1,842 1,448 32
Sri Lanka 1,212 1,049 14
China 1,596 1,486 7
Philippines 1,555 1,223 22
Australia 3,408 2,999 22
US 1,107 975 14
UK 4,490 4,031 20
=======================================================================
Source: Global Securities Pakistan Limited.
The other 13 leading world stock markets recorded growth ranging from 7.0 percent (China) to 48 percent (Thailand) . It is pertinent to mention here that unlike the previous year, all the leading stock markets of the world posted positive growth in the current fiscal year, which may be an encouraging indication of the world economic recovery.
The SEC has introduced a number of significant reforms in the field of risk management. It has already constituted an expert committee comprising national and international market experts with the objective of formulating a comprehensive plan for the demutualization and integration of the stock exchanges.
The recommendations of the committee on the de-modularization of the stock exchanges will be implemented by the end of the year as part of an ongoing capital market reform process.
Carryover transactions (COT) will also be phased out by the end of the current fiscal year. For the development of cross border scrip listing the SEC consulted with SAARC corporate regulators and a memorandum of understanding has already been signed with Sri Lanka's corporate watchdog.
A number of other structural reforms are also underway in the KSE and other stock exchanges which include: the introduction of trading in odd-lots; the development of an IT infrastructure for a backup system and the upgrading/expansion of the existing IT systems; the strengthening of the market monitoring and surveillance wing; the commencement of internet trading; the introduction of an over the counter (OTC) market; index trading; margin trading rules; and cross-border listing.
A future reforms agenda will also include a code of corporate governance for unlisted public companies and statutory corporations, an enhancement of monitoring and surveillance to prevent market abuse, and a corporate social responsibility (CSR) sector.
The SEC has addressed numerous distortions in the capital markets and the corporate sector with a view to evolving a fair, transparent and efficient system that engenders investor confidence.
At the same time, the SEC has ensured stringent enforcement to curb market abuses, particularly, in the securities market. A number of new products are also being envisaged which include the introduction of index and option trading.
To cater to the expected increase in trading activities, especially through Internet trading, the up-gradation and provision of backup trading and clearing systems is also in process.
During the outgoing year, the KSE has further strengthened its international relations and continued to play an active role through the platform of the Federation of the Euro-Asian Stock Exchanges (FEAS) and the South Asian Federation of Exchanges (SAFE).
POLICY MEASURES AND PROGRESS: The Securities and Exchange Commission of Pakistan (SEC) has actively pursued a capital market reform program geared towards the development of a modern and efficient corporate sector and capital market, based on sound regulatory principles that provide an impetus for high economic growth.
Provided below are the various reform initiatives introduced during the year under review:
A) IMPROVEMENTS IN GOVERNANCE:
-- In order to prohibit unfair trade practices, ensure a level playing field, inculcate good governance in business conduct and promote transparency in the securities market, a clause 187 (i) was inserted in the Companies Ordinance, 1984 which places a prohibition on any person from being appointed as a director of a listed company if he is a member of a stock exchange, engaged in the business of brokerage or a spouse of such a member.
-- In order to safeguard public interest and improve governance and transparency in the business conduct of brokers, the Commission, issued a directive to brokers in February 2004. Pursuant to the said directive, brokers shall provide brokerage services to an investor only after ensuring that an account has been opened in the investor's name using a standardised account opening form. In addition, a broker shall not recommend to an investor the purchase or sale of any security that is unsuitable for the investor with due regard to his/her age, financial situation and investment objectives.
-- The Commission formulated a standardised account opening form in consultation with the stock exchanges and directed the exchanges to adopt/implement the standardised account opening form with effect from January 15, 2004. The standardised account opening form contains the standard terms and conditions which shall govern the broker-investor relationship at all the three stock exchanges. The form strikes a balance between the rights and obligations of both investors as well as brokers.
-- The Commission issued a directive in August 2003 directing the exchanges to insert appropriate clauses in their listing regulations in order to establish the necessary framework for transfer pricing whereby transactions between related parties are measured at an arm's length price and adequate records and disclosures are maintained in respect thereof.
-- In terms of the amendments in the Listing regulations of the stock exchanges, companies must now seek the approval of the Audit Committees and the Board of Directors for the transfer pricing policy. They are also required to prepare and maintain complete records in respect of transactions with related parties.
-- After considering the amendments as proposed by the stock exchanges, the Commission accorded approval to the regulations for the system audit of brokers of the exchange, 2004 under section 34(1) of the Securities and Exchange Ordinance, 1969.
B) RISK MANAGEMENT MEASURES:
-- In order to strengthen market integrity and to reduce the incidence of systemic risk, the Commission has introduced a number of significant reforms in the field of risk management as provided below:
-- Unlike other countries, COT/Badla financing is available only in Pakistan. While the system of Badla financing has added liquidity to the market, it has been one of the major causes of market crises experienced over the last few years. In order to avoid systemic risk associated with Badla financing, the SEC has finalised the Margin Trading Rules, 2004 to replace Badla financing in consultation with the stock exchanges as well the Central Depository Company (CDC). The Margin Trading Rules, 2004 have been sent to the Ministry of Finance for approval by the federal Government. As a measure to gradually phase-out COT facility, the SEC has restricted the COT facility to the shares of 30 eligible companies only with effect from December 15, 2003.
-- The National Clearing Company of Pakistan Limited (NCCPL), which is fully operationalized as of January 19, 2004 with 474 securities inducted in the system, will improve the efficiency of the settlement process, reduce systemic risk of the current clearance and settlement procedures and improve the investor confidence level in the integrity of the securities market. The integrated national clearing system would provide for the settlement of trades executed in respect of companies in the Central Depository System (CDS) on all three exchanges, under one system as opposed to the past practice of separate clearing houses of the exchange.
NEW PRODUCTS/DEVELOPMENTS:
-- The Commission had approved the regulations governing the over the counter market in December 2002 for establishing a quote-driven OTC Market for smaller capitalised companies and debt securities. The OTC market, which is expected to start operation by June 2004, would also serve as a second tier market for green field/illiquid scrips currently listed on the exchange.
-- Appropriate amendments have been made in the Securities and Exchange Ordinance, 1969 and a new section 32D has been inserted exclusively for the regulation of business of the national commodity exchange limited (NCEL). The emergence of trading in futures contracts in commodities would provide investors and stakeholders with basic hedging instruments as well as enabling economic players to lock in costs. The NCEL is expected to be operational by June 2004.
-- The Commission on February 17, 2004 constituted an expert committee comprising national and international market experts with the objective of formulating a comprehensive plan for demutualization and integration of the stock exchanges. The expert committee shall submit its report and recommendations to the Commission within 120 days of its first meeting or June 15, 2004, whichever is earlier. An interim report is to be submitted to the Commission within 60 days of its first meeting. The Commission has formulated a detailed terms of reference (TOR) for the expert committee to examine the feasibility of the integration of stock exchanges and to provide specific recommendations on demutualization of exchanges such as, an appropriate mode/structure for the demutualized exchanges and a plan of action for its implementation.
SECTORAL PERFORMANCE: During the first nine months of the outgoing fiscal year, the KSE share index and aggregate market capitalisation of 12 different sector's have increased by 50.1 percent and 80.3 percent respectively, as against their increase of 53.4 percent and 44.7 percent in the same period last year.
Total turnover of shares on the KSE was 65.2 billion in the first nine months of 2003-04 as compared to 36.2 billion in the same period last year.
Funds mobilised by the KSE during this period amounted to Rs 61.7 billion as compared to Rs 23.8 billion in the same period last year.
All the 12 major trading groups on the KSE (cotton and other textiles, pharmaceuticals & chemicals, engineering, auto & allied, cables and electric goods, sugar and allied, paper and board, cement, fuel and energy, transport and communication, banks and other financial institutions, and miscellaneous) witnessed record growth in their share indices, ranging from 15.7 percent (sugar & allied) to 65.2 percent (cement).
During the calendar year 2003, total profit before taxation of the 12 trading groups amounted to Rs 136.8 billion as compared to their before taxation profit of Rs 90.9 billion in 2002.
The performance of leading trading groups and companies for the first nine months of the outgoing fiscal year is discussed below (Table 7.3-7.5).
COTTON AND OTHER TEXTILES:
IN THIS GROUP, THERE ARE THREE SUB-GROUPS:
(a) textile spinning, (b) textile weaving & composite, and (c) other textiles. There were 229 companies listed with the KSE under this group in December 2003. The share index of cotton and other textiles recorded a growth of 37.4 percent during the first nine months of the current fiscal year as compared to a growth of 5.0 percent in the same period last year. Its market capitalisation increased by 28.8 percent or by Rs 19 billion during July-March 2003-04 as compared to a rise of 16.6 percent (Rs 6.8 billion) in the same period last year.
CHEMICALS & PHARMACEUTICALS: A total of 38 companies were listed with the KSE under this group at the end of December 2003. During the first nine months of the current fiscal year, its share index increased by a record 54.3 percent as compared to an increase of 27.0 percent in the comparable period of last year. Its market capitalisation stood at Rs 160.2 billion on 31st March 2004, showing an increase of 48.1 percent over June 2003 and 73.7 percent over March 2003.
AUTO AND ALLIED: A total of 25 companies were listed with the KSE under this group at the end of December 2003. Its share index increased by 50.1 percent, while its market capitalisation increased by 42.8 percent.
SUGAR AND ALLIED: Under this group, a total of 38 companies were listed with the KSE with a market capitalisation of Rs 8.6 billion. The sugar and allied group is a minor player in the stock market although it has a weight of 8.6 percent in the production index of major industries. During the first three quarters of the current fiscal year, the share index of sugar and allied posted a growth of 15.7 percent as compared to a rise of 24.9 percent in the comparable period last year.
CEMENT: At the end of 2003, there were 22 cement companies listed with the KSE. The cement industry was one of the best performing sectors in the stock market. During July-March 2003-04 its share index grew by 65.2 percent, which was the highest among the 12 trading groups. Its market capitalisation increased to Rs 57.2 billion on March 31, 2004 from Rs 33.5 billion in June 2003, recording a growth of Rs 23.7 billion or 70.7 percent.
FUEL & ENERGY: A total of 25 companies were listed with the KSE. It is the most dominant group in the stock market. While its share index grew by 24.5 percent during the first nine months of the current fiscal year, its market capitalisation increased by a huge Rs 314.4 billion to Rs 506.0 billion in March 2004 from Rs 191.5 billion in June 2003. Its market capitalisation constituted 37.6 percent of the aggregate market capitalisation in March 2004. A swelling fuel and energy sector is one of the major market players in the current year along with transport and communication, banking and finance and cement. The energy sector has been identified as an engine of growth along with 3 other sectors, (agriculture, small and medium enterprises and information technology) by the government and its unprecedented growth is expected to further promote investment activities in the country.
TRANSPORT & COMMUNICATION: At the end of 2003, there were 11 companies of this group listed with the KSE. Its share index and market capitalisation increased by 37.2 percent and 47.9 percent respectively during July-March 2003-04 as compared to their rises of 58.5 percent and 43.5 percent in the same period last year. Its market capitalisation at Rs 182.4 billion constituted 13.5 percent of the aggregate market capitalisation (AMC) in March 2004 making it a major player on the KSE. The combined market capitalisation of fuel and energy, and transport & communication was Rs 688.3 billion on March 31, 2004, which constituted 51.1 percent of the AMC as compared to their share of 44.8 percent on the corresponding date of last year.
BANKS & OTHER FINANCIAL INSTITUTIONS: In December 2003, a total of 184 companies were listed with the KSE. There are 4 sub groups in this group: banks & investment companies, modarabas, leasing companies, and insurance. During the current fiscal year, the share index and market capitalisation of this group has increased by 55.1 percent and 85.8 percent respectively. Its market capitalisation increased from Rs 99.7 billion in June 2003 to Rs 185.2 billion in March 2004.
MISCELLANEOUS:
THE MISCELLANEOUS GROUP INCLUDES FIVE SUB-GROUPS: jute, food & allied, glass & ceramics, vanaspati & allied, and others. In December 2002, a total of 98 companies were listed with the KSE, which came down to 92 companies at end December 2003. Its share index and market capitalisation posted growth of 33.5 percent and 37.6 percent respectively in the first nine months of the current fiscal year, as compared to their growth of 23.1 percent and 16.9 percent respectively, in the same period last year.
In December 2003, a total of 701 companies were listed on the Karachi Stock Exchange, including 229 companies in cotton and other textile, 184 in banks and financial institutions, 92 in miscellaneous group etc.
In the calendar year 2003, the number of dividend paying companies increased to 312, from 307 companies in 2002. As compared to 429 companies in 2002, 431 companies were profit making in 2003. During 2003, 170 companies were shown as loss making as compared to 195 in 2002. In 2002, the total before taxation profit of the 12 trading groups, listed with the KSE, amounted to Rs 90.9 billion, which increased to Rs 136.8 billion in 2003, showing a growth of 50.5 percent.
Transport and communication, which was the most profitable industry during 2003, earned a pre-taxation profit of Rs 41.4 billion compared to its pre-taxation profit of Rs 33.9 billion in 2002.
Banking and other financial institutions recorded the second highest pre-taxation profit of Rs 37.1 billion in 2003 as compared to Rs 20.1 billion in 2002.
Other sectors which earned higher pre-taxation during 2003 profits were; fuel and energy (Rs 20.5 billion); chemical & pharmaceuticals (Rs 10 billion); auto and allied (Rs 9.2 billion) and cotton and textiles (Rs 6.8 billion). The group-wise number of companies and their performance is given in Table 7.4.
===================================================================================================
Table-7.3: Sectoral Performance on Karachi Stock Exchange (Percent)
---------------------------------------------------------------------------------------------------
Sector General Index Market Capitalisation AMC
July-March (Growth%) July-March (Rs billion)
(Growth %)
---------------------------------------------------------------------------------------------------
2002-03 2003-04 2002-03 2003-04 2003* 2004*
---------------------------------------------------------------------------------------------------
1. Cotton and other Textiles 5.0 37.4 16.6 28.8 47.9 84.6
2. Chemicals & Pharmaceuticals 27.0 54.3 81.7 48.1 92.2 160.2
3. Engineering 34.2 56.5 47.6 45.4 3.0 6.2
4. Auto & Allied 82.3 51.1 108.0 42.8 21.2 43.6
5. Cables and Electrical Goods 20.9 50.4 31.8 28.5 3.1 5.7
6. Sugar & Allied 24.7 15.7 12.4 18.4 5.1 8.6
7. Paper & Board 32.1 16.2 26.3 29.6 8.3 15.5
8. Cement 1.9 65.2 15.6 70.7 18.2 57.2
9. Fuel & Energy 45.0 24.5 56.4 164.2 163.4 506.0
10. Transport & Communication 58.5 37.2 43.5 47.9 100.6 182.4
11. Banks other Financial Institutions 28.6 55.1 35.1 85.8 74.3 185.2
12. Miscellaneous 23.1 33.5 16.9 37.6 52.4 90.8
13. Overall/Total 33.0 40.5 44.7 80.3 589.7 1346.1
14. KSE Index 53.4 0 53.4 50.1 0 0
===================================================================================================
--End March 2003 and 2004.
Source: State Bank of Pakistan
===================================================================================================
Table-7.4: Companies Listed on KSE and their Before Tax Profits
---------------------------------------------------------------------------------------------------
S.No Name of Sector No of Before Taxation Dividend Profit Making Loss making
Companies Profit (Rs billion) Paying Companies Companies
Companies
2002 2003 2002 2003 2002 2003 2002 2003 2002 2003
---------------------------------------------------------------------------------------------------
1. Cotton & other
Textile 231 229 6.9 6.8 82 78 127 118 70 73
2. Chemical &
Pharmaceutical 37 38 9.2 10.0 24 23 27 27 09 09
3. Engineering 13 13 0.01 0.9 05 04 07 08 03 02
4. Auto & Allied 25 25 4.6 9.2 13 15 15 21 07 01
5. Cables & Electric 12 11 0.6 0.9 04 04 05 05 03 02
Goods
6. Sugar & Allied 38 38 -0.5 -0.2 14 10 17 15 20 22
7. Paper & Board 14 13 1.7 2.2 07 07 10 08 02 03
8. Cement 22 22 0.4 -0.6 09 08 12 12 08 08
9. Fuel & Energy 25 25 7.4 20.5 16 18 18 20 06 03
10. Transport & 09 11 33.9 41.4 03 04 06 07 01 02
Communication
11. Bank & Financial 187 184 20.1 37.1 93 111 134 144 37 22
Institutions
12. Miscellaneous 98 92 6.6 8.7 37 30 51 46 29 23
Total 711 701 90.9 136.8 307 312 429 431 195 170
===================================================================================================
Source: Karachi Stock Exchange
The KSE is primarily influenced by some big blue chip companies including; Hub Power, PTCL, Pakistan State Oil etc. During the first three quarters of the current fiscal year, the combined turnover of shares of ten big companies (OGDC, Hub Power, PTCL, Sui Northern Gas, FF Bin Qasim, D.G. Khan Cement, Dewan Salman, PIAC, Fauji Cement and Lucy Cement) was 12.44 billion, which constituted 19.1 percent of the total turnover of the KSE.
These ten companies earned a profit after taxation of Rs 55.1 billion in the current fiscal year up to March 2004. Out of Rs 55.1 billion after taxation profit, the share of PTCL and OGDC was Rs 43.8 billion representing 79.4 percent of the ten big companies. In the first nine months of 2003-04, PTCL's after taxation profit was (Rs 23.1 billion).
The price- earning ratio of the ten big companies ranged from 6.62 in the case of PTCL to 325.64 in respect of Dewan Salman. This indicates that the business environment in the current fiscal year has improved appreciably.
(Details in Table 7.5), a profile of the KSE is shown on Table 7.6).
=======================================================================================
Table-7.5: Price Earning Ratio July 2003 - March 2004
---------------------------------------------------------------------------------------
Company No of Profit EPS Rate P/E Ratio
Shares After Tax
(in billion) (Rs billion)
---------------------------------------------------------------------------------------
Oil & Gas Dev. Company 4.30 20.67 4.81 60.90 12.67
P.T.C.L. 3.77 23.08 6.12 40.50 6.62
D.G. Khan Cement 0.17 0.47 2.78 52.60 18.94
Dewan Salman 0.34 0.01 0.08 27.10 325.64
P.I.A.C. 0.67 1.87 2.81 24.95 8.87
Fauji Cement 0.37 -0.53 -1.43 14.35 -10.01
Sui Northern Gas 0.50 2.01 4.03 59.40 14.72
Lucky Cement 0.25 0.23 0.93 33.35 35.84
Fauji Fertiliser Bin Qasim 0.91 1.20 1.32 21.50 16.29
Hub Power 1.16 6.10 5.27 38.45 7.29
Total/Average 12.44 55.11 4.45 37.31 43.69
=======================================================================================
Source: Karachi Stock Exchange
=======================================================================================
Table-7.6: Profile of Karachi Stock Exchange
---------------------------------------------------------------------------------------
2003-04
2000-01 2001-02 2002-03 (July-
March)
---------------------------------------------------------------------------------------
Number of Listed Companies 745 712 702 689
New Companies Listed 4 4 2 9
Fund Mobilised (Rs Billion) 3.6 15.2 23.8 61.7
Listed Capital (Rs Billion) 235.7 291.2 300.9 363.0
Turnover of Share ( Billion Nos) 29.2 29.1 53.1 65.2
Average daily Turnover of Share (in million) 122.5 158.6 257.0 336.8
Aggregate Market Capitalisation (Rs Billion) 339.2 407.6 755.8 1364.8
=======================================================================================
Source: Karachi Stock Exchange.
The Lahore and Islamabad Stock Exchanges also showed a record performance during the outgoing year. The turnover of shares on the Lahore Stock Exchange (LSE) during July-March 2003-04 was 34.5 billion compared to 19.5 billion shares in the same period last year. Total paid up capital with the LSE increased from Rs 280.1 billion in June 2003 to Rs 347.6 billion in March 2004.
The LSE index, which was 2034.6 points in June 2003, increased to 2840.1 points in March 2004. The market capitalisation of the LSE has increased from Rs 751.2 billion in June 2003 to Rs 1345.6 billion in March 2004. Ten new companies were listed with the LSE during July-March 2003-04, as compared to only one in the same period last year.
The amount of funds mobilised at the LSE by way of subscription was Rs 55.4 million in the first nine months of the outgoing fiscal year. A profile of LSE is given in Table-7.7.
==============================================================================
Table-7.7: Profile of Lahore Stock Exchange
------------------------------------------------------------------------------
2000-01 2001-02 2002-03 2003-04
(July-March)
------------------------------------------------------------------------------
Number of Listed companies 614 581 561 551
New Companies Listed 3 3 2 10
Fund Mobilised (Rs Billion) 2.5 14.2 4.1 55.4
Listed Capital (Rs Billion) 226.2 246.3 280.1 347.6
Turnover of Share (Billion Nos) 7.8 18.3 28.2 34.5
Average daily shares (in mln) 32.2 74.3 115.5 182.1
LSE Index 273.5 297.5 2034.6* 2840.1*
Market Capitalisation (Rs bln) 325.7 393.3 751.2 1345.6
==============================================================================
-- The LSE Launched the new LSE-25 index in December 2002
Source: Lahore Stock Exchange
The turnover of shares on the Islamabad Stock Exchange (ISE) was 1.11 billion during July-March 2003-04 as compared to 1.30 billion during the same period last year. The ISE share index has increased from 8210.6 points in June 2003 to 10840.0 points in March 2004, recording a growth of 32.0 percent. Six new companies were listed and Rs 51.9 billion was mobilised on the ISE during the first nine months of the current fiscal year.
The ISE started functioning in August 1992 and within 13 years, it has developed into a vibrant, efficient and stable market.
Today, the ISE is one of the premier stock exchanges of the country known for the highest standard of transparency in its operations, excellent risk management, dynamic market technology and lowest overall costs of listing. A profile of the ISE is given in Table 7.8.
========================================================================================
Table-7.8: Profile of Islamabad Stock Exchange
----------------------------------------------------------------------------------------
2000-01 2001-02 2002-03 2003-04
(July-March)
----------------------------------------------------------------------------------------
Number of Listed Companies 281 267 260 251
New Companies Listed 5 3 1 6
Fund Mobilised (Rs billion) 0.8 3.7 11.5 51.9
Listed Capital (Rs billion) 183.3 199.0 233.0 287.4
Turnover of Share (In Billion Nos) 1.4 2.7 2.1 1.11
Average Daily Turnover of Share (in million) 6.0 11.0 8.4 6.8
ISE Index 4374.2 4684.0 8210.0 10840.6
Market Capitalisation (bln) 249.0 292.0 547.0 1082.9
========================================================================================
Source: Islamabad Stock Exchange
The total funds mobilised during July-March 2003-04 in the three stock exchanges (KSE, LSE & ISE) amounted to Rs169 billion, as compared to Rs 39.4 billion in the last fiscal year.
The total turnover of shares in the three stock exchanges during the first three-quarters of the current fiscal year was 100.8 billion, compared to 56.9 billion shares in the same period last year, recording an increase of 77.2 percent.
During the period under review (July-March 2003-04) TFCs by 8 companies, amounting to Rs 3.90 billion were listed on the stock exchanges (5 on the Karachi Stock Exchange and 3 on Lahore Stock Exchange).
Further more, during the period under review, 8 companies with a paid-up capital of Rs 49.44 billion, 9 companies with a capital of Rs 51.30 billion and 5 companies with a capital of Rs 47.47 billion were listed on the Karachi, Lahore and Islamabad Stock Exchanges respectively.
MUTUAL FUNDS: Millions of investors put their money in mutual funds around the world to get higher returns on their capital. Globally, mutual funds are considered an appropriate investment vehicle for small investors.
More than 50 million people in the US invest in mutual funds. Where over four trillion dollars is invested in the industry.
The Indian mutual funds sector has grown by more than 5 percent per annum over the last five years, and now stands at US $22 billion.
Compared to the developed markets the mutual funds industry in Pakistan is still in its nascent stage, albeit growing in size.
Until the beginning of the 1990s mutual funds were the exclusive domain of the public sector.
The NIT was floated in 1962 and the ICP was established in 1966. The NIT remained the only open-end fund for more than three decades.
Over the years, the ICP has floated only 26 closed end funds. During the 1991-96 period 12 funds were floated by the private sector but all of them were closed-end funds.
Mutual funds provide an attractive and cost effective alternative to direct purchases of stocks or bonds for investors, particularly small investors.
Mutual funds assets are typically invested in a diversified portfolio of securities.
The Government of Pakistan also provides safety nets to the investors by regulating the mutual fund business. At the end of December 2003, there were 37 closed-end mutual fund companies, with listed capital of Rs 6.8 billion.
Mutual funds in Pakistan are showing a higher growth rate compared to other stock markets. Between February and September 2003 the market capitalisation of the KSE rose by 89 percent but that of the mutual funds sector increased by 118 percent.
The closed-end mutual funds performed exceptionally well during 2003. Out of 37 companies 34 companies announced dividends during 2003, 36 companies were profit making whereas no company incurred any losses during the year.
In 2002 out of 37 companies 33 were profit making and 4 were loss making. Mutual funds pre-taxation profit during 2003 was Rs 5.6 billion as compared to Rs 0.5 billion only in 2002.
Another encouraging sign in the mutual funds sector is that the number of Sharia compliant funds is on the increase. The Meezan Islamic Fund was floated recently and Arif Habib Investment has also signed an MoU with the Bank of Khyber to float another Sharia compliant fund.
A Sharia compliant fund is a fund that does not invest in shares of companies drawing the bulk of their income from Riba-based operations and/or undertakes activities prohibited by Sharia.
DEVELOPMENT FINANCE INSTITUTIONS (DFIS) During 2002-03, the DFIs sanctioned total loans of Rs 12.37 billion against which they disbursed Rs 8.67 billion. In the first half of the current fiscal year, the DFIs disbursed an amount of Rs 7.11 billion.
The loans sanctioned and disbursed by the special banks during 2002-03 amounted to Rs 25.70 billion and Rs 25.17 billion, while, during the first six months of the current fiscal year, their disbursements amounted to Rs 16.7 billion. In 2002-03, the investment banks' total sanctions and disbursements were Rs 8.2 billion and Rs 7.6 billion.
In the first nine months of the current financial year, their sanctions and disbursements were recorded at Rs 5.1 billion and Rs 4.5 billion.
The Islamic banks sanctioned and disbursed Rs 6.2 billion and Rs 11.1 billion during 2002-03 while their disbursements were Rs 7.8 billion during the first half of 2003-04.
Total sanctions and disbursements of the housing finance companies (HFCs) amounted to Rs 1.2 billion and Rs 0.84 billion respectively in 2002-03.
During the first nine months of 2003-04, these were Rs 2.0 billion and Rs 1.8 billion respectively.
The leasing companies sanctioned an amount of Rs 14.4 billion out of which they disbursed Rs 14.2 billion while the modarabas sanctioned Rs 6.6 billion and disbursed Rs 6.1 billion, respectively in the first nine months of 2003-04.
NATIONAL SAVINGS SCHEMES (NSS) The Central Directorate of National Savings (CDNS) is an attached department of the Finance Division and performs deposit bank functions by selling government securities through a network of 366 savings centers, spread all over the country.
Till 1971, the activities of the National Savings Department were merely promotional in nature while, post offices and commercial banks' were operative agents for investment purposes. From 1972 onward the NSS is engaged in the operations of various savings schemes through its own branch network.
Presently, there are about 4.3 million investors with National Saving Schemes (NSS).
The ongoing saving schemes currently in operation are Defence Savings Certificates, Special Savings Certificates/Accounts, National Deposit Certificates, Savings Accounts, Regular Income Certificates, Mahana Amdani Accounts, and prize Bonds.
Two new saving schemes entitled "Pensioners' Benefit Account" and Bahbood Savings Certificates were also launched recently. Some Salient of popular schemes in 2003-04 are discussed below.
DEFENCE SAVINGS CERTIFICATES: Defence Savings Certificates were introduced by the Government of Pakistan in the year 1966 and are available in denominations ranging from Rs 500 to Rs 1,000,000/-.
These certificates are issued for 10 years but encashanble any time after one month. The certificates purchased on or after 01-01-2004 earn a profit @ 7.96 percent per annum, compounded on maturity.
The profits on the deposits exceeding Rs 150,000/- are subject to a withholding tax @ 10 percent. Zakat is collected only once at the time of actual encashment.
These certificates are available at National Savings Centres, Pakistan Post Offices and the State Bank of Pakistan. The outstanding stock of the scheme was Rs 313 billion on March 31, 2004.
BAHBOOD SAVING CERTIFICATES: This is a new scheme with 10 years maturity and was exclusively launched for widows.
The scheme was later extended to senior citizens (above 60 years) and offers a profit payment facility on a monthly basis. Presently on an investment of Rs 100,000/- the investor gets a monthly profit of Rs 840/-.
The profit is subject to a 10 percent withholding tax at source where the deposits exceed Rs 150,000/-.
However, the profit earned through this scheme is exempt from the compulsory deduction of Zakat. Premature encashment before completion of one, two, three, and four years entails service charges. These certificates are available at National Saving Centers only.
PENSIONERS' BENEFIT ACCOUNT: This new savings scheme was exclusively launched for retired government employees and offers a profit payment facility on a monthly basis. Presently on an investment of Rs 100,000/- the investor gets a monthly profit of Rs 840/.
The profit is subject to a 10 percent withholding tax at source on the deposits exceeding Rs 150,000/-.
However, the profit earned through this scheme is exempt from a compulsory deduction of Zakat. Premature encashment before completion of one, two, three, and four years entails service charges.
DURING THE FISCAL YEAR 2002-03, NET DEPOSITS WITPRIZE BONDS: This is a bearer security available in denominations of Rs 200, Rs 750, Rs 500, Rs 7,500, Rs 15,000 and 40,000.
No fixed return is paid but prize draws are held on a quarterly basis. Tax at the rate of 10 percent of the prize money is deducted at source.
The outstanding stock of the scheme was Rs 149 billion on March 31, 2004.h National Saving Schemes increased by Rs 143.2 billion compared to Rs 91.4 billion in 2001-02. Out of Rs 143.2 billion, Rs 84.9 billion, (59.3%) were mobilised by Special Saving Certificates (Registered), alone, while, Rs 22.0 billion, (15.4%) was mobilised by Defence Saving Certificates, Rs 10.2 billion, (7.1%) by Pensioner's Benefit Accounts, and Rs 26.8 billion, (18.7%) by Prize Bonds (Table 7.9).
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Table-7.9: Net Accruals by National Saving Schemes (Rs Billion)
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July-March
2000-01 2001-02 2002-03 2002-03 2003-04
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Defence Saving Certificates 16.6 22.0 22.0 14.7 3.8
(32.5) (24.1) (15.4) (19.9) (66.7)
Special Saving Certificates Registered 9.4 36.4 84.9 41.3 -10.2
(18.4) (39.8) (59.3) (55.8) (-178.9)
Special Saving Accounts 3.6 4.3 5.1 2.9 0.4
(7.0) (4.7) (3.6) (3.9) (7.0)
Regular Income Certificates 8.6 11.0 -14.9 -11.9 -35.1
- - (-10.4) (-16.1) (-615.8)
Pensioner's Benefit Accounts - - 10.2 4.7 11.2
- - (7.1) (6.4) (196.5)
Bahbood Savings Certificates 13.3
(233.3)
National Prize Bonds 10.4 11.6 26.8 18.0 19.1
(20.3) (12.7) (18.7) (24.3) (335.1)
Others 2.5 6.1 9.1 4.3 3.2
(4.9) (6.7) (6.4) (5.8) (56.1)
Grand Total 51.1 91.4 143.2 74.0 5.7
(100) (100) (100) (100) (100)
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NOTE: Figures within brackets represent share to total.
Source: Directorate of National Savings.
During the first nine months of the current fiscal year, total net accruals under the NSS amounted to Rs 5.7 billion only as against the net receipts of Rs 74.0 billion in the same period last year.
The schemes which showed negative net receipts are; Regular Income Certificates (Rs -35.1 billion), Special Saving Certificates (Rs -10.2 billion), and Saving Accounts (Rs -1.7 billion).
The schemes, which recorded positive growth, during the period under review, were; Bahbood Savings Certificates (Rs 13.3 billion), Pensioner's Benefit Accounts (Rs 11.2 billion) and Prize Bonds (Rs 19.1 billion) and Defence Savings Certificates (3.8 billion).
Massive withdrawals of funds from some of the prominent savings schemes during the current fiscal year were apparently due to availability of better investment opportunities elsewhere, including a booming stock market and real estate business.
The Government of Pakistan has reviewed the rate of return on National Savings Schemes in July 2003 and January 2004.
The return on Defence Savings Certificates has been fixed at 7.96 percent per annum (on maturity). The nominal deposit rates for saving schemes, which are presently in operation with the NSS ranged between 4.0 percent (Savings Account) to 10.41 percent, (Mahana Amdani) with a weighted average rate of 7.2 percent.
With an inflation rate of only 3.7 percent, the real deposit rates during July-March 2003-04, ranged between 1.3 percent (Prize Bonds) to 6.38 percent (Pensioners Benefit Accounts) with a weighted average real rate of 3.5 percent.
The real deposit rate on Pensioner's Benefit Accounts and Bahbood Savings Certificates, which were the most popular schemes during 2003-04, was as good as 6.38 percent.
In the current year, the real rates of return under the NSS were still attractive if compared to the weighted average deposit rate of scheduled banks (1.3 %).
Since the weighted average real deposit rates of banks remained negative by 2.4 percent, the NSS still offers the most attractive rate of return to depositors.
REFORMS OF THE NSS: The rates offered on the instruments of the NSS are increasingly becoming market based as these are reviewed bi-annually and are being aligned towards the yield on Pakistan Investment Bonds (PIBs) of relevant maturities.
The linkage is being carried out in one form or another since January 2001 and the rates have almost been slashed by half compared to those offered prior to May 1999.
However, the government has decided to launch the special schemes targeting the deserving segments of the society to protect them against the declining return on the NSS.
The Pensioner's Benefit Account has been launched exclusively for retired government/semi government employees, whereas, the Bahbood Savings Certificates have been launched for widows and senior citizens (above the age of 60 years).
Thus the NSS are becoming more of a social safety net in the absence of a proper social security system in the country.
The government is also considering launching a fixed income mutual fund, which would be available to ordinary citizens through the counters of the CDNS all over the country.
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