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Landmark MOU signed to form new stock exchange

Article - February 23, 2016

Integration of the Karachi, Islamabad and Lahore stock exchanges follows the global trend of consolidation, a move clearly welcomed by foreign investors

With an energized economy generating new opportunities for Pakistan to take advantage of its human potential, a modern, closely regulated securities exchange plays a key role in raising and allocating the capital needed to get the productivity ball rolling. Commercial banks are often hard pressed to offer financing for long-term projects in a country where deposits and other instruments in their portfolios are mainly short-term or not readily liquid. Public sector institutions or multilateral lenders had to make up the shortfall, but even so, too many opportunities in both the public and private sector had to be turned down on account of inadequate access to capital.

All that changed, however, when the Pakistani Stock Exchanges were demutualized in 2012 and transformed into  limited companies. The Karachi Stock Exchange, KSE, on its own now has an equity base of $80 million. Currently, shares and debt issued by 577 different companies are traded on the KSE that Bloomberg has ranked in third place on its list of the 10 best performing world capital markets. “Emerging Asia will require over a trillion dollars in infrastructure finance if growth is to be maintained anywhere near past levels,” says  Nadeem Naqvi, Managing Director and CEO of the KSE.

Results confirm that market analysts who thought Pakistan was nearing the point of converting from a “frontier” to “emerging” economy have an argument worth making. “Pakistan offers very good returns with a minimum of 50% and even for the worst projects [investors] get huge benefits. No other country in the world can offer the returns which Pakistan offers to investors,” says Aqeel Karim Dhedi, Chairman of AKD Securities Ltd, one of the leading securities firms in Pakistan which provides a comprehensive range of investor focused services and accounts for more than 6% of the average daily value of the KSE.

“The underlying philosophy behind the integration is that a single, deep and centralized stock exchange will bring greater efficiency, enhance regulatory oversight and improve the structure of the presently fragmented securities industry”

Nadeem Naqvi, Managing Director and CEO, Karachi Stock Exchange

The benchmark KSE-100 is up 16% this year, after a rise of 200% over the past five years. The value of combined debt and equity capital raised on the Karachi exchange stood at $546 million by the end of 2014, up from 31 billion in 2013 and 22 billion over the previous period. Investments denominated in US dollars originating from outside the country have climbed at an annual rate of 26% since 2008. Earnings in the banking sector have risen 56%, compared with 2014.


All told, foreign interests invested over $2.3 billion in Pakistan’s premier capital market. As a backstop for bear markets in other countries, it should be noted that Pakistani equities had zero correlation with the S&P 500 in 2014, according to a Bloomberg study.

Small and Medium Enterprises, SMEs, have the hardest time putting up collateral for bank loans, but they are responsible for creating and maintaining 95% of the jobs in Pakistan. Beginning this year, smaller concerns are being offered special breaks for listing their issues on a customized section of the counter, where the amount of paid-up capital required from them is just PKR25 million ($240,000) as versus the PKR250 million ($2.4 million) required from their larger counterparts.

Similarly, during the first few years, norms in the corporate governance code that big companies are required to adhere to will be relaxed for newcomers. Mr. Naqvi is particularly eager to see this initiative succeed. “Our job is to bridge the link between public equity and the private equity that is just starting to emerge in our country. As I see it, the SME exchange would be the right outlet for private equity. This is one area I’m very excited about.”

U.S.-based investors who are unfamiliar with the South Asian marketplace now have the option of putting their money into a country specific ETF (Exchange Traded Fund) as a vehicle giving them exposure to Pakistan’s blue chip performers.

Available through the New York-based ETF specialists Global X, the dedicated ETF is listed as PAK, and tracks the performance of the MSCI 25/50 index.

Late this August, a giant step towards was taken when an MOU was signed in presence of Finance Minister Ishaq Dar, to merge all three Pakistani Stock Exchanges into one. At the signing ceremony, Mr. Dar said his government remained committed to a strong, vibrant and competitive capital market as a basic building block for a strong economy. “It is a win-win situation for all concerned and will go a long way towards consolidating a sustainable capital market,” he said of the merger, and urged the three exchange shareholders to complete the disbursement process to speed the unification along. At the same time, he called on the regulatory agency, the Security and Exchange Commission of Pakistan (SECP) to implement a strong enforcement and compliance regime with zero tolerance for any attempt at market manipulation, inside trading, misconduct or abuse.

KSE boss Mr. Naqvi said that investors in Lahore and Islamabad would benefit from the merger with “better, quicker and more efficient price discovery”, as brokers in those two cities will be able to place orders directly without having them routed through Karachi-based brokerages and an IT platform over which they have no control.

“The underlying philosophy behind the integration is that a single, deep and centralized stock exchange will bring greater efficiency, enhance regulatory oversight and improve the structure of the presently fragmented securities industry,” he added, and cited the more stringent criteria for risk management by the KSE as another aspect that will improve as a result of consolidation.

What comes next? Under the terms of its demutualization, the KSE is looking to sell off a 40% equity stake to strategic investors. Another 40% will be retained by brokers and the remaining 20% offered to the public as an Initial Public Offering (IPO). Among the share markets that have been approached with a view towards entering into a strategic partnership are exchanges in Istanbul, London, Tokyo, and Malaysia. “Our objective is to have a partner who can bring great expertise and technology,” says Mr. Naqvi. “It’s a big change but I believe that once we get over the transformation phase, we will be as good as any other international stock exchange.”