As
I write this article, we see that our domestic capital markets are experiencing
a revolutionary era. New standards and milestones are piling on, just as the
volume and value of trade at stock exchanges in the country continue to set new
records.
Over
the past 15 years, the capital markets of Pakistan have witnessed significant development
in terms of introduction of high-tech infrastructure, efficient trading
mechanisms, proficient processes and comprehensive regulations.
The
KSE-100 index has peaked in recent weeks, towering beyond the 21,000 points level.
By virtue of this performance, the KSE is today, the top performing market in
Asia and among the best performing bourses of the world. Moreover, 14 equity
funds from Pakistan made it to the list of the world's 100 top performing
equity funds in 2012.
These
achievements are harbingers of even greater potential for investments and
business growth in the country.
With
the regulatory support extended by the Securities and Exchange Commission of
Pakistan (SECP), the Central Depository Company (CDC) and the National Clearing
Company of Pakistan (NCCPL) have played catalyst roles in this drive for
domestic capital markets.
Domestic
and foreign investors have been facilitated through the establishment of a
number of systems for trading, custody and settlement i.e. the Automated
Trading Systems, the Central Depository System (CDS) and the National Clearing
and Settlement System (NCSS).
Besides,
a new Risk Management Structure (RMS) has also been introduced that includes a
new netting regime, a margining system based on value at risk (VAR) and capital
adequacy.
INFRASTRUCTURE DEVELOPMENT
Central Depository Company of Pakistan
Limited
In
early 1990’s, the domestic capital market witnessed phenomenal escalation in
trading volumes which resulted in excessive handling of physical securities. The
manual handling (physical shares handling and transfer) was becoming time
consuming and arduous.
To
manage these increasing volumes in a manner that was not only efficient but
also time effective, the Central Depository Company of Pakistan Limited was
established. The objective was to operate as the central securities depository
and to maintain an electronic book entry system.
Under
a well-defined legal framework, CDC operates and manages the Central Depository
System (CDS) for equity, debt and other financial instruments. The system
records, maintains and registers the transfer of securities. It facilitates
transfer of ownership of securities without any physical movement or
endorsement of certificates or execution of transfer instruments. It also
serves to link up the issuers of securities for the purpose of executing
corporate actions like disbursement of corporate benefits and carrying out
mergers and issuance of rights etc. Similarly, it enables the investors to
obtain financing against securities conveniently.
With
time the company has grown tremendously where it has carved its role in various
other services such as Trustee services for mutual funds, Share registrar
services and IT services.
National Clearing Company of Pakistan
Limited
As
part of efforts to further improve the settlement mechanism in terms of
security and efficiency, National Clearing & Settlement System (NCSS) was
established to replace the separate and individual clearing houses of Karachi
Stock Exchange, Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (ISE)
with a centralized entity.
NCCPL
became fully operational in 2003-04 and started catering to settlement of all
book-entry securities through NCSS which has brought tremendous efficiency in
the settlement mechanism and has reduced settlement risk significantly.
CDC
played a significant role in the establishment of NCSS and contributed in the
areas of need analysis, application development and database management. CDC
managed the operations of NCCPL for three years before handing it over to its
independent management and continues to liaise with it for all capital market
development initiatives.
Unique Identification Number
Unique
Identification Number (UIN) system was introduced by National Clearing Company
in 2006 to uniquely identify individual investors and institutions with an
alpha-numerical code.
This
reformation bars passing of any order for sale or purchase of securities
without a UIN. The number is assigned to each account holder by the National
Clearing and Settlement System (NCSS).
As
a result of this initiative, settlement of securities transactions executed on
the three stock exchanges in the country is now being performed directly from
the respective CDS accounts of investors without manual intervention, thus
ensuring complete transparency and straight-through-processing
in the market.
Straight-Through Processing
After
the implementation of UIN by NCCPL, Straight-Through-Processing (STP) was made possible
in the capital market in December 2010 by CDC in collaboration with NCCPL and three
stock exchanges to achieve automation in settlement of securities mechanism.
The
newly introduced mechanism has brought increased efficiency and transparency in
the securities transfer mechanism where the settlement cycles have reduced from
T+3 to T+2 and for negotiated deals to T+0.
Under
the mechanism, securities are now directly transferred to the target depository
custody account based on the UIN of the investors resulting in more
transparency and clear audit trail.
MARKET DEVELOPMENT
Bonds Automated
Trading System
Realizing
the importance of debt market for helping businesses and the economy to grow,
the KSE introduced Bonds Automated Trading System (BATS) to provide issuers
with the convenience of liquidity generation through alternative means of
raising debt capital.
Stock Index Futures Contract
To
deal with the lack of liquidity which has been the biggest challenge for Stock
Exchanges in the recent past and for the development of the derivatives segment,
Stock Index Futures Contract (SIFC) was launched in 2012. This unique offering provides
investors with an opportunity to take composite exposure in top-30 liquid
stocks, representing 70 percent of the total market capitalization. It lets
individual as well as institutional investor hedge against market volatility.
Issuance
of GDR’s, Increase in Market Valuation
The
last fifteen years have also witnessed the issuance of Global Depository
Receipts (GDR) as well as large-scale mergers and acquisitions.
The
Oil & Gas Development Company Limited (OGDCL) and MCB Bank have issued
successful GDR offerings amounting to $888 million. These GDR’s are listed at
the London Stock Exchange (FTSE) and have received strong interest from investors.
Similarly,
several key takeovers have also taken place in Pakistan’s corporate world in
the last fifteen years. These include acquisition of Union Bank by Standard
Chartered Bank, Citibank Consumer division by Habib Bank Limited, Royal Bank of
Scotland (RBS) by Faysal Bank Limited, PICIC Bank by Temasek Singapore,
Crescent Commercial Bank by SAMBA, Pak Tel by China Mobile and acquisition of
further stake in Lakson Tobacco by Phillip Morris.
Demutualization of the exchanges
To
improve governance structure at local exchanges, expand market outreach,
attract new investors and improve liquidity which is necessary for
technological development and human resource up gradation, the Stock Exchange
Demutualization Bill was unanimously passed by the joint sitting of the Parliament
on March 27, 2012. The same was enacted into law by the President of Pakistan
on May 7, 2012.
Demutualization
provides greater balance between the interests of various stakeholders by clear
segregation of trading rights and ownership rights. This separation of
commercial and regulatory functions has completely transformed the role and
identity of the stock exchanges.
As
the changes have been devised with the consensus of all stakeholders, they
promise greater efficiency, transparency and profitability for the exchanges.
A
demutualized stock exchange is in a better position to attract international
strategic partners and good quality issuers, increasing the visibility of these
exchanges on international capital market forums and facilitating consolidation
of brokers leading to financially strong entities.
New
regime of CGT Implementation
The SECP as part of its mandate to
develop Capital Market in Pakistan forwarded a proposal to the Federal Board of
Revenue (FBR) for revamping of CGT (Capital Gains Tax) Regime to facilitate
investors with the ease of calculation and documentation.
A new Capital Gain Tax (CGT) regime is
now implemented on all the three stock exchanges of the country and rules for
the computation of CGT on listed securities have been revised though the
promulgation of Finance (Amendment) Ordinance, 2012 effective from April 24,
2012. The National Clearing Company (NCCPL) is now responsible to compute,
determine, collect and deposit CGT to FBR.
Growth
in Mutual Funds Industry
The
mutual funds industry has grown remarkably and has become the most preferred
choice of investors as a ‘relatively secure investment option’. Today, these
mutual funds have billions of rupees in assets and are not only attracting
investors in great numbers but also escalating the settlement volumes, thus
benefiting the capital market.
The
Federal Government of Pakistan has also taken the initiative for development of
private pensions by allowing rebates for investments in approved pension
schemes under which investments made in-line with appropriate guidelines issued
by SECP are exempted from taxes. Under the voluntary pension scheme, employees
as well as employers can make tax-free contribution into the pension funds.
THE
WAY FORWARD
Cultivating
Investor Confidence
Investor
protection measures taken by market institutions in the past decade have not been
enough to stimulate investor confidence in the capital market. Such measures are
required to create a level playing field for even the smallest investors.
To
explore the real potential of retail investors and cultivate investor
confidence, large-scale and joint efforts are required from all stakeholders.
Awareness
sessions, information seminars, road shows and trainings need to be conducted
on a regular basis to ensure that existing and potential investors become aware
of the level of control they have on their investment portfolio.
Informational
material needs to be developed and distributed while direct interaction with
investors is needed. These efforts should be focused on improving the
confidence of potential investors, educating them about investment trends and
promoting culture of savings and investment.
Action
against those who were involved in any fraudulent activities will be the most
effective step towards rebuilding investor confidence.
Enhancing
Market Depth
Creating
new and large-volume listings on bourses by privatization of government-owned
organizations is the real way towards increasing this depth. Such listings
would also attract more individuals to domestic capital market, given the lure
of investing into new projects.
For
the same purpose, increasing the float by further issuance of government stocks
in already listed companies is also needed. A focus of the Pakistani Government
on privatization of state-owned assets in the past has provided some fervor to
the investors.
Product
Development
Introduction
of new products catering to the evolving needs of domestic investors is
necessary to foster development of capital market and improve investment
patterns to create a better investment environment. New product development is necessary
to respond to the new technology and changing market conditions and plays a
critical role in ensuring capital market's future growth potential. These
products must also be suitable to the local needs.
Conclusion
The
capital market’s current infrastructure and mechanisms provide strong grounds
for a speedy recovery of the economic growth and development of the country.
But
before you enter into the stock market, awareness should be your first line of
defense against any loss and fraud. There is no such thing as a foolproof way
of investing so ultimately it is the investor’s responsibility to keep a
stringent check on their securities on a daily basis.
Pakistan Rupee Exchange Rate