The capital market is the life-blood of capitalism which fosters development by providing the boost for entrepreneurship, innovation, job creation and economic growth. An efficient capital market does what no government can do by ensuring the best allocation of resources.
The Karachi Stock Exchange (KSE), founded in 1947, is Pakistan's largest and oldest stock exchange. KSE began with a '50 shares' index at its formation but with the growth of the markets, the requirements changed and a more representative index was created. The current KSE-100 Index was introduced in November 1999 with base value of 1,000 points. The index captures over 80% of the total market capitalisation of the companies listed on the exchange. Out of the 35 sectors, 34 companies are selected with one company from each sector (excluding Open-End Mutual Fund Sector) on the basis of the largest market capitalisation and the remaining 66 companies are selected on the basis of largest market capitalisation in the sector in descending order. This is a total return index in which dividend, bonus and rights are adjusted.
From its inception, the exchange has contributed in mobilising long-term funds through its market mechanism, though the market remains largely detached from the economy because companies and corporations in the commanding heights of the Pakistan economy are not listed on the exchange. Also, for the reason that Pakistan entrepreneurs are averse to listing their companies on the exchange for a number of reasons including ignorance, phobia for public accountability, myopia and egocentrism - a desire to run a one-man show without thinking global. The minority which are listed, even for those the average free float is a minor percentage of the overall market capitalisation. With weak corporate governance, little regulatory oversight and protection of the minority shareholders, the capital markets cannot evolve unless these deficiencies are addressed through reforms.
The role of the capital market in enhancing economic development cannot be over-emphasised. A school of thought has related the rate of economic growth of nations to the growth rate of their capital markets. Pakistan is in need of a big, strong and vibrant capital market to catalyse economic growth more speedily, but this may not be readily attained under the present monopolistic regime of the Karachi Stock Exchange. And this is with a sense of responsibility, this writer being a capital market operator and analyst with over 15 years of experience and an in-depth knowledge of the operations and peculiarities of the Pakistan capital market. The nation needs more independent stock exchanges to break the monopoly and compete with the KSE.
A monopoly is restrictive while healthy competition releases creative energy and engenders innovation, dynamism and synergy. It galvanises rapid economic expansion as is evident in the telecommunications industry. The postulation that a mono stock exchange is good enough for Pakistan because some stock exchanges in developed countries merged is mendacious and is not altruistic. Such mergers were mere survival strategies in the face of global competition and they generated tremendous synergies.
The American Stock Exchange merged with NASDAQ and evolved into an exchange with multi-trillion dollar market capitalisation, offering a deluge of products. The New York Stock Exchange merged with Archipelago, became demutualised and acquired Euronext in 2006 in a grand move to emerge the world's largest stock exchange. The London Stock Exchange merged with Borsa Italiana and adopted an integrated business model, offering customers a one-stop shop for a variety of products. But for competition, these mergers and the associated synergies would not have been. However, notwithstanding, the USA still boasts of about 18 other independent stock exchanges, Brazil 14, India 22, Germany 11, Japan 11 and London 6. Others are Belgium 6, Canada 5, Switzerland 3, etc.
Capital markets grow through deregulation and competition. Competition leads to corporate restructuring, strategic alliances and or demutualisation of stock exchanges for the major purpose of purchasing the latest technologies in order to stay ahead of the competition because technology is the soul of stock market operation. Typically, demutualisation is the offspring of competition. But in Pakistan, the regulatory authorities want to jump the gun. They want to run without first crawling. They are bandying the concept of demutualisation for the heck of it and because demutualisation is a capital market jargon and a buzzword.
Competition among stock exchanges is encouraged for the best to emerge. That should be the way to go and grow. Monopoly is anathema to growth and expansion. The Ministry of Finance, State Bank of Pakistan, the Senate and house committees on capital market and any willing and ready individual entrepreneurs and financial institutions with the wherewithal should take this paper as food for thought towards conceiving and promoting independence and competition in stock exchange/s. Pakistan deserves some more life-blood of capitalism for rapid economic growth.