Capital market of Pakistan

Capital Market of Pakistan
1 | P a g e
Capital Market
Definition of Capital Market
“Capital Market is the part of financial system which is concerned with raising capital funds by dealing in Shares,
Bonds, and other long-term investments. The market where Investment instruments like bonds, equities and mortgages
are traded is known as the capital market.”
Roles or Functions of Capital Market
Like the money market capital market is also very important. It plays a significant role in the national economy. A
developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and
development.
Capital markets in Pakistan play a crucial role in mobilizing domestic resources and channeling them efficiently to
productive uses, thus raising national productivity. The level of capital market development is an important determinant
of level of savings, efficiency of investment and ultimately rate of economic growth.
The major Pakistani capital market institutions include the three stock exchanges:
1. Karachi Stock Exchange (KSE 100)
2. Lahore Stock Exchange (LSE 30)
3. Islamabad Stock Exchange (ISE 10)
The central and geographically neutral clearing house ─National Clearing Company of Pakistan Limited (NCCPL)─
the Central Depository Company of Pakistan Limited (CDC) and the Pakistan Mercantile Exchange Limited (PMEX).

2 | P a g e
“The capital market in Pakistan is being regulated through the 1969 Securities and Exchange Ordinance. The
Senate passed the new Securities Law on April 16, 2015. After its approval by the National Assembly, it will
replace the 1969 law.”
Various functions and significance of capital market are discussed below:
 Link between Savers and Investors:
The capital market functions as a link between savers and investors. It plays an important role in mobilising the savings
and diverting them in productive investment. In this way, capital market plays a vital role in transferring the financial
resources from surplus and wasteful areas to deficit and productive areas, thus increasing the productivity and prosperity
of the country.
 Encouragement to Saving:
With the development of capital, market, the banking and non-banking institutions provide facilities, which encourage
people to save more. In the less- developed countries, in the absence of a capital market, there are very little savings
and those who save often invest their savings in unproductive and wasteful directions, i.e., in real estate (like land, gold,
and jewellery) and conspicuous consumption.
 Encouragement to Investment:
The capital market facilitates lending to the businessmen and the government and thus encourages investment. It
provides facilities through banks and nonbank financial institutions. Various financial assets, e.g., shares, securities,
bonds, etc., induce savers to lend to the government or invest in industry. With the development of financial institutions,
capital becomes more mobile, interest rate falls and investment increases.
 Promotes Economic Growth:
The capital market not only reflects the general condition of the economy, but also smoothens and accelerates the
process of economic growth. Various institutions of the capital market, like nonbank financial intermediaries, allocate
the resources rationally in accordance with the development needs of the country. The proper allocation of resources
results in the expansion of trade and industry in both public and private sectors, thus promoting balanced economic
growth in the country.

3 | P a g e
 Capital Formation:
Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the
economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to
various segments such as agriculture, industry, etc. This helps in increasing capital formation.
 Benefits to Investors:
The credit market helps the investors, i.e., those who have funds to invest in long-term financial assets, in many ways:
1. It brings together the buyers and sellers of securities and thus ensure the marketability of investments,
2. By advertising security prices, the Stock Exchange enables the investors to keep track of their investments and
channelize them into most profitable lines,
3. It safeguards the interests of the investors by compensating them from the Stock Exchange Compensating Fund
in the event of fraud and default.
Institutional players and their role in capital market of Pakistan
State Bank of Pakistan
State bank of Pakistan plays an important role in the process of economic development,
which is clear from the following points:
 State bank of Pakistan is the bank of all commercial banks working in Pakistan.
State bank can sell, purchase and hold debentures of any banking company or of any
other financing corporation
 State bank of Pakistan works as an advisor to federal and provincial government. It guides the government in
financial and economic matters. State bank helps the government in making investments
 The state bake of Pakistan also acts as the lender of the last resort for the commercial banks.
 State bank of Pakistan played a very significant role in the growth of the banking infrastructure. It gives special
importance towards the development of capital market in the country. It also provides assistance to the
government in development planning and poverty reduction programmes.
 Debt management is another important function of SBP.

4 | P a g e
Stock Exchanges of Pakistan
Stock exchanges are playing a crucial role in the
consolidation of a Pakistan's economy in general and in the
development of industrial sector in particular. It is one of
the most dynamic and organized component of capital
market.
1. The Karachi Stock Exchange (KSE) was established on 18th September, 1947.
2. Lahore Stock Exchange (Guarantee) Limited came into existence in October 1970, under the Securities and
Exchange Ordinance, 1969
3. The Islamabad Stock Exchange (ISE) was incorporated as a guarantee limited Company on 25th October, 1989
in Islamabad Capital territory of Pakistan
 In a developing country like Pakistan, the stock exchanges play a cardinal role in promoting the level of capital
formation through effective mobilization of savings and ensuring investment safety.
 The applications of technology in the payment and settlement systems have made the local capital market
comparable with the international capital markets. Now, the market features a developed regulatory mechanism
and a modern market infrastructure with growing market capitalization, market liquidity, and mobilization of
resources.
 Pakistan ranked third in calendar year 2014 amongst the top ten best performing markets in the world. Pakistan
was able to secure a place in the top ten for the third consecutive year now.
 KSE is attracting small savings especially of large number of investors in the capital market. It is functioning
as an organized market for individuals as well as for institutional investors.
 Providing a wider avenue for the investment to the people and organizations with investible surplus.
 Stock exchange has enabled the federal government to mobilize the funds for public utilities and public
undertakings, which take up the developmental activities like oil and gas, telecommunication, etc. KSE has
provided liquidity, marketability, price continuity, and constant evaluation of government securities.
 At both national and international level, performance of KSE represents the progress and conditions of
Pakistan's economy.

5 | P a g e
Securities and Exchange Commission of Pakistan
The Securities and Exchange Commission of Pakistan was formed on January 1, 1999 to
replace the Corporate Law Authority. The main functions of the Securities and Exchange
Commission of Pakistan according to the SECP Act are:
 Maintain facilities and improve performance of companies and securities markets.
 Maintain the confidence of investors in securities markets by ensuring adequate protection.
 Achieve uniformity in performance of functions and exercise of powers.
 Administer laws effectively with minimum procedural requirements.
 Receive, process and store, efficiently and quickly, the documents lodged with and information filed
with and ensure that documents and information filed with the commission are accessible to the public.
Types of Capital Market
There are two types of capital market:
1. Primary market
2. Secondary market
Primary Market
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies'
governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is
typically done through a syndicate of securities dealers. The process of selling new issues to investors is called
underwriting. In the case of a new stock issue this sale is an initial public offering (IPO). Dealers earn a commission
that is built into the price of the security offering; through it can be found in the prospectus. In simple word The Primary
Market is where financial instruments are sold from the issuer to investors
Features of Primary Market:
 It is related with new issues.
 It has no particular place.

6 | P a g e
 Manipulation of price is smaller so invest in primary market is safer.
 No need to time the market the investors get the share at the same price.
 It is secure because of primary research data is collected directly by the organization that deploys the research
 The company receives the money and issue new security certificates to the investors
Various methods of float Capital
Following are the methods of raising capital in the primary market.
 Public Issue
 Offer for Sale
 Private Placement
 Right Issue
 Electronic-Initial Public Offer.
Secondary Markets
The secondary market is that market in which the buying and selling of the previously issued securities is done. The
market that exists in a new security just after the new issue is often referred to as the aftermarket. Once a newly issued
stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market markers
provide bids and offers in the new stock. In short The Secondary Market is where financial instruments are sold from
investor to investor.
The main purpose of the secondary market is to create liquidity in securities.
 It Creates Liquidity
 It Comes after Primary Market
 It encourages new Investments
 Investor can get large interest by invest for a longer period of time.

7 | P a g e
Capital Market Instruments
Equity(Stock) Securities
“Finance is essential to any business. The larger the business grows, the wider the sources of finance should be available
to it. A public company raises capital through the sale of shares called equity financing and by borrowing named as
debt de-financing. Shares are the equity claims on the net income and assets of a company.”
There are three Stock Exchanges in Pakistan, which form an equity market. Three Stock Exchanges of the country are
based in Karachi (KSE 100), Lahore (LSE 30) and Islamabad (ISE 10). Out of these three Exchanges Karachi Stock
Exchange dominate the other exchanges in terms of number of listed companies, turnover rate and quantum of Capital
raised through floatation of new issues. Securities & Exchange Commission of Pakistan (SECP) is playing an active
role in safeguarding the interest of small investors.
Basic Capital market
instruments in Pakistan
Equity
Securities
Debt
Securities
Equity
shares
Preference
shares
BondsDebentures

8 | P a g e
Equity Shares
“Also known as common stock, these are the most common type of equity, and when people talk about equity they
usually mean common stock. Common stockholders are, in effect, part-owners of their company in proportion to the
number of shares held.”
They have the last (residual) claim on the assets of the company. In the event of a liquidation of the company, they
receive what is left after all other creditors have been paid. They are entitled to a pro-rata share in the profits of the
company in the form of dividend.

9 | P a g e
Preference Shares
Preference shares (or preferred stock) are something of a hybrid between ordinary shares and
bonds. Like bonds, most prefs pay a fixed rate of interest which must be paid by the company
before common stockholders receive any dividends. Moreover, prefs do not normally carry voting
rights. Shareholders do not have the right to force liquidation. As such, they form part of the
company’s equity. Preference shares typically represent a relatively small proportion of the total
equity market.
Preference shares may be
 Cumulative - unpaid dividends in any year must be paid in subsequent years. No dividends
can be paid to ordinary shareholders until holders of cumulative prefs have received all
outstandinginterest.
 Participating - in addition to receiving a fixed dividend, pref. holders are also entitled to
a shareof dividends paid to ordinary shareholders.
 Redeemable - the company may repay them either at a predetermined date or at their
discretion. Redemption may be at par or at a pre-determined premium.
 Convertible - they can be exchanged, at the holder’s option, into a given number of
ordinary shares on a specified date and at a predetermined conversion price.
Debt Securities
“A debt security is a financial instrument issued by a company (usually a publicly traded
corporation) and sold to an investor. The debt security represents a promise to pay back the face
amount and interest until the instrument matures.”
 The market for debt securities is substantially bigger than the equity market.
 Debt securities are owned and traded by individuals, institutional investors, and even
governments.
 Investors purchase debt securities because they seek a safer return than with riskier
equities.
 The lower a debt security’s risk, the lower the interest rate.

10 | P a g e
Debentures
“Debentures can be defined as that document, which is issued by company to lender for borrowing
some money. And such document consists of a contract through which company owes to repay
borrowed amount along with interest to lender at some specific time.”
Debenture is a long term loan to the company with a very strong credit rating. Each year debenture
holders receive a fixed rate of interest whether a company is making profit or not if the company
goes bankrupt, the debenture holders must be paid before any other claim is met.
Characteristics of Debentures
Following are the characteristics of debentures
 It is a document containing a acknowledgment of debt.
 It is issued to the money lender under the seal of the company.
 It helps a company to raise its capital or to make up deficiency in its capital account.
 It represents the debt of the company
 It gives a right to debenture holder to enjoy interest at fixed rate.
 It provides a guarantee that principal amount shall be paid on the specified date.
 It creates security for repayment of loan.
Period of Debentures
The period for which debentures are issued is as under
 They may be issued for fixed term of years.
 They may be made payable on demand.
 They may be issued perpetually.
 They may be made irredeemable.
 They may be made redeemable on the happening of a contingency.

11 | P a g e
Types of Debentures
There are several kinds of debentures, of which the most usual are.
 Debenture payable to Registered Holder
These are not negotiable instruments. They are transferable only in a manner specified in the
conditions endorsed thereon. The transferee takes them subject to all claims which the company
may have against all prior holder at the date of the transfer.
 Debenture payable to bearer
These are negotiable instruments, and consequently a transferee in good faith and for value takes
them free from any defect in the title of a prior holder. They are transferrable by delivery.
 Redeemable Debentures
The amount of these debentures are payable after a stated period. These are issued subject to the
condition that the company shall redeem them on specified date. These debentures are very
common now days.
 Perpetual Debentures
Debentures are not invalid simply because they are irredeemable or redeemable on the happening
of a contingency, however remote, e.g. the winding up of the company or on the expiration of a
period however long. A perpetual or irredeemable debenture is in fact an annuity in perpetuity to
the holder.
 Simple or naked debentures
It is one which only amounts to an acknowledgements of indebtedness or is coupled with an
undertaking to pay the principal and interest till payment. There is a security, and the debenture
holder is an ordinary, unsecured creditor.
 Mortgage debentures
It is one which not only recognizes the company’s indebtedness but also creates a charge on its
assets or property. It is necessary that a debenture creating a charge, whether floating or fixed, over
any immovable property should be registered according to the provisions of the section 17 of the
registration Act in addition to the provisions of the companies ordinance.

12 | P a g e
Bonds
“A debt investment in which an investor loans money to an entity (corporate or governmental) that
borrows the funds for a defined period of time at a fixed interest rate.”
 Bonds are used by companies, municipalities, states and foreign governments to finance a
variety of projects and activities.
 Bonds are referred to as fixed-income securities.
 Interest on bonds is usually paid every six months
The bond market in Pakistan covers debt and debt like securities issued by the government,
statutory corporations and corporate entities. As of June 30, 1995, the size of the Pakistani bond
market was approximately Rs. 811.3 billion, the equivalent to US$ 26.2 billion or about 43% of
the country's GDP.
In 1991, the government with the consultation of World Bank, started issuance of two types of
securities—one of short-term maturity and the other of long-term maturity on the basis of auction
through the intermediation of primary dealers, i.e. treasury Bills (short-term) and federal
investment bonds (long-term).
Types of bonds
 Corporate Bond
They are issued by corporations to raise funds, e.g. WAPDA Bearer Bonds. They are either
registered or bearer. In case of the registered forms the name of the purchaser is registered with
the corporation and the transfer of their ownership.
 Federal investment bonds
Federal Investment Bonds are issued by the Government of Pakistan. They are similar to Treasury
Bonds. They are issued for three different time periods: short-term, medium-term and long-term,
1. When the bonds can mature after 3 years they are called the sort-term debt of the
government
2. When they mature after 5 years, they are called the medium-term debt of the government
3. if they mature after 10 years, they are called the long-term debt of the government

13 | P a g e
Since they can be re-issued after the maturity of the bonds, e.g. when a bond matures after 3 years
immediately the investor gets another bond of the same denomination and for the same length of
the time period. Thus, it can be regarded as a permanent debt of the government.
The main feature of the Federal Investment Bonds they provide a suitable outlet for the investment
of funds like the pension, provident fund and welfare funds which cannot be invested in Defence
Saving Certificates (DSCs) and National Savings Schemes (NSCs) operated by the National
Saving Centres and Post Offices
 Registered bonds are issued in the name of the owner and have interest payments made
by cheque to bondholders of record.
 Bearer or coupon bonds are not registered; thus bondholders must send in coupons to
receive interest payments.
 Convertible bonds permit bondholders to convert the bonds into common shares at their
option.
 Redeemable (callable) bonds are subject to call and retirement at a stated dollar amount
prior to maturity at the option of the issuer.
 Retractable bonds are subject to redemption prior to maturity at the option of the holder.
 Secured bonds have specific assets of the issuer pledged as collateral for the bonds. A
bond can be secured by real estate or other assets.
 Unsecured bonds are issued against the general credit of the borrower; they are also called
debenture bonds.
 Bonds that mature at a single specified future date are called term bonds.
 Bonds that mature in installments are called serial bonds.

Capital market of Pakistan

Recommended

Recommended

More Related Content

Recently uploaded

Recently uploaded (20)

Featured

Featured (20)

Capital market of Pakistan