info about the capital market

1. Pakistani Capital Market

2. Secondary Market
• Stock Exchange: An organised/formal market of trading
securities is called stock exchange.
• Over-the-Counter Market (OTC): A decentralized market of
securities not listed on an exchange where market
participants trade over the telephone, facsimile or electronic
network instead of a physical trading floor.
• There is no central exchange or meeting place for this market.
• In the OTC market, trading occurs via a network of
middlemen, called dealers.
•

3. History
• In 1934, prior to the independence of Pakistan,
the city of Lahore established a stock exchange –
the Lahore Stock Exchange.
• In 1936, this stock exchange merged with the
Punjab Stock Exchange Limited. At that time, the
city of Lahore had three locations where
securities traded: the Punjab Share and Stock
Brokers Association Limited; the Lahore Central
Exchange Limited and the All-India Stock
Exchange Limited.

4. History
• Following independence in 1947, none of these
stock exchanges survived; two closed while the
All-India Stock exchange migrated to Delhi
(India).
• After the creation of Pakistan, Karachi became
the hub of business activities due to the fact that
it was the Capital.
• city and because it had a big sea port. On
September 18, 1947, within two months of
Pakistan being established, the KSE started
operations, and therefore became the first stock
exchange in Pakistan.

5. History
• In 1954, after the KSE had operated for several years,
the Dhaka Stock Exchange was set up in the capital city
of East Pakistan (now Bangladesh).
• In the late 1950s, there were attempts to re-establish a
stock exchange in the city of Lahore; however, these
efforts lapsed (Mirza, 1993). It was not until 1969 that
the current Lahore Stock Exchange (LSE) was
established; it became operational in May 1971.
• In 1992, the Islamabad Stock Exchange (ISE) was set up
in the new capital of Pakistan. At present, therefore,
there are three stock exchanges operating in Pakistan.

6. Introduction…
• The KSE is the largest of the three markets with
85.0% of turnover recorded for Karachi; only
14.0% of turnover occurs on the LSE while about
1.0% relates to ISE equities (Iqbal, 2008).
• Most of the companies listed on the KSE have
cross-listed on the LSE and the ISE; this in turn
has reduced the volume on both the LSE and ISE
stock exchanges because most trading occurs on
the KSE.

7. Introduction…
• In Pakistan, 40.0% of equity shares are in the
hands of 35 promoters and directors, 35.0% of
shares are held by small investors and 25.0%
are owned by institutional investors (Lukman,
2010).

8. Settlement of Transaction on
Exchanges
• Transactions on all the three stock exchanges are managed
by the National Clearing Company of Pakistan Limited
(NCCPL).
• The NCCPL was established on July 3, 2001 for settlement
of security transactions arising from dealings on the stock
exchanges. The NCCPL established the National Clearing
and Settlement System (NCSS) to carry out the settlement
of securities for all three markets.
• The most common settlement period is T+2. Under this
arrangement the buying, selling, payment, receipt and
transfer of securities for each member is settled by the
NCSS within two working days

9. Settlement of Transaction on
Exchanges
• As a result of the large volume of trading on the three stock
exchanges, the handling of physical share certificates
became burdensome. As a result, the Central Depository
Company of Pakistan (CDC) was set up in September, 1997.
• Its main function is to register security transfers using an
electronic book-entry system. Investors, at their discretion,
have access to the security certificate if they wish.
Currently, about 97.0% of trading is settled through the
CDC .
• The goal of the CDC and the NCCPL is the establishment of
an efficient electronic capital market in Pakistan.

10. LSE
• The LSE is the second largest stock exchange of
Pakistan.
• There are 152 members of the LSE of whom 81 are
corporate and remaining are individual persons.
• The LSE has two branches – one in the city of
Faisalabad and the other in Sialkot.
• The LSE is the most dynamic stock exchange in
Pakistan; for example, it was the first to shift from a
trading pit system to an automated trading system in
1994; it also pioneered internet-based trading for its
members in 2001.
• The benchmark of the LSE is the LSE-25 index.

11. ISE
• It is the smallest of the three exchanges.
• It currently has 120 members including 94
corporate and 26 individual members.
• It was felt that the establishment of the ISE
would facilitate growth in the less-developed
Northern part of Pakistan.
• On 1st January 2004 the ISE established its own
benchmark index, the ISE-10. Before this, KSE-
100 index was used a benchmark for trading.

12. Karachi Stock Exchange (KSE)
• The KSE is the oldest and the largest stock
exchange in Pakistan; it is also the second oldest
stock exchange in the whole of South Asia.
• Membership became fixed at 200 in 1966 and
this limit still remains; a prospective member
therefore has to buy a seat on the KSE from one
of the existing members.
• Total members are 200; out of which, 183
corporate members and remaining are individual.

13. Operations of the KSE
• The KSE is run by a Board of Directors which
comprises10 members: five members of the KSE,
four individuals who are not members of the KSE
and one Managing Director.
• The four non-members are elected by the SECP
and the five members are elected by their peers.
• A Chairman is elected out of the non-members
by the Board with the Managing Director acting
as the Chief Executive of the exchange dealing
with its operational and administrative functions.

14. Operations of the KSE
• At its outset, the KSE used an open-out-cry
system of trading, but this changed in May
1998 when a computerised trading system,
known as the Karachi Automated Trading
System (KATS), has introduced.
• All transactions take place via computers and
transactions costs are freely negotiable
between members and clients.

15. Operations of the KSE
• The KSE has also introduced a cap on the
extent to which securities are allowed to vary
since 2008; only share price fluctuations of
five percent around the opening share price of
the security are now allowed.

16. 35 Sectors on the KSE
1 Automobile Assembler 15 Leasing Companies 29 Textile Spinning
2 Automobile Parts & Accessories 16 Leather & Tanneries 30 Textile Weaving
3 Cables & Electric Goods 17 Miscellaneous 31 Tobacco
4 Cement 18 Modaraba 32 Transport
5 Chemical 19 Oil & Gas Exploration
Companies
33 Vanapati & Allied
6 Close-end Mutual Fund 20 Oil & Gas Marketing
Companies
34 Woolen
7 Commercial Banks 21 Paper & Board 35 Open-End Mutual Fund
8 Engineering 22 Pharmaceutical
9 Fertilizer 23 Power Generation &
Distribution
10 Foods & Personal Care Products 24 Refinery
11 Glass & Ceramics 25 Sugar & Allied
12 Insurance 26 Synthetics & Rayon
13 Inv. Banks / Inv. Cos. / Sec. Cos 27 Technology &
Communication
14 Jute 28 Textile Composite

17. Market Indices
• Various indexes have been introduced to
gauge the share price performance of the
main Pakistani stock exchanges.
• The KSE-50 share index was used as the main
index of KSE until November 1, 1991 when the
KSE-100 was introduced to capture changes in
over 80.0% of total market capitalisation.
• This index is currently used as the benchmark
for measuring the performance of share prices
by the KSE.

18. Market Indices
• The KSE-100 index is comprised of 100 companies:
34 companies are selected on the basis of having the
largest market capitalisation in each of the 34
Karachi Stock Exchange sectors.
• while the remaining 66 companies are included on
the basis of their market capitalisation irrespective of
the industry and are taken up by the largest market
capitalisation companies in descending order.
• Open-End mutual fund is not included in
computation of the KSE-100 index as its market
capitalisation is not fixed.
• While the KSE-100 is the main index.

19. Re-Composition of the KSE-100 Index
• The inclusion or exclusion of a company from
the KSE-100 index is done bi-annually (1st
April
and 1st
October each year)
• Couple of rules are used in re-composition:
– Sector Rule
• Time-based rule
• Value-based rule
– Capitalisation Rule
• Time-based rule

20. Re-Composition of the KSE-100 Index
• Sector Base: The addition/deletion of a company on basis of
top market capitalisation in the 34 sectors is based on couple
of rules:
– Time-Based Rule: A company is eligible to be selected in
the KSE-100 index if it maintained its possessed its largest
market capitalisation for two consecutive decomposition
periods (i.e., one year).
– Value-Based Rule: A company will be included in the index
if its market capitalisation is more than 10% of the existing
company of the index with largest market capitalisation of
a sector for last one decomposition period (i.e., 6 months).

21. Re-Composition of the KSE-100 Index
• Capitalisation Rule: Only one rule (time-based)
applied while adding/deleting of a company on the
basis of largest market capitalisation irrespective of
the sector.
– Time-based Rule: A company can be selected in the index
if its capitalisation exceeds the market capitalisation of the
last company in the index for successive two
decomposition periods (i.e., 1 year)

22. Market Indices
• The increase in the index is refers as ‘bullish’
trend and decrease in index is known as
‘BEARISH’ trend.
• ISE Building

23. Market Indices
• For example, on September 18, 1995 the KSE
introduced the KSE-All shares index, which
consists of all companies listed on the KSE at a
particular point in time.
• For international investors, the exchange also
established the KSE-30 index as a benchmark
of major share performance; it is comprised of
the top 30 companies calculated on the basis
of free float market capitalisation.

24. Market Indices
• To cater to the needs of Islamic focused investors,
the KSE introduced the first Islamic index, KMI-30, in
2008 based on the free float market capitalisation.
• Currently, a limit of 12.0% exists for each company
on the KMI-30 whereby the market capitalisation of
an individual company cannot exceed 12.0% of the
total KMI-30 index value.
• This rule was introduced in order to control the
volatility of the index to avoid the influence of large
companies.