Chapter 5

Capital Markets

Background
The capital market in Pakistan consists of three stock exchanges located in three
major cities, i.e. Karachi, Lahore and Islamabad. The principal securities traded on
these exchanges are ordinary shares. However, other securities such as mutual
fund certificates, modaraba certificates, government and corporate bonds, are also
being traded. A number of listed companies have also offered TFC’s.

666 companies were listed at KSE (which is the main Stock Exchange) as at 30th
June 2004.

In order to facilitate corporate debt financing, the Government has taken a number
of measures. Amongst them, the foremost being the framing of rules for the
establishment of Credit Rating Agencies. The rules have facilitated the
establishment of Credit Rating Agencies and presently, there are following two
credit rating agencies in the country:

l Pakistan Credit Rating Agency (PACRA)

l JCR-VIS Credit Rating Company Limited

A company intending to issue any debt instrument to general public is required to

obtain a credit rating from one of the approved credit rating companies.

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The Government has also enacted Rules for the establishment and regulation of
Non-Banking Finance Companies, which include Asset Management Companies,
Discount Houses, Housing Finance Companies, Investment Advisers, Investment
Finance Companies, Leasing Companies and Venture Capital Companies. (For
details, refer to Chapter 4)

The stock exchanges are governed under the Securities and Exchange Ordinance,
1969. The Ordinance prohibits the dealing in listed securities outside the stock
exchange by any person and transaction in securities listed on the stock exchange
by a person, other than a member of the stock exchange.

The members are prohibited to:

l Extend or maintain credit, or arrange for extension or maintenance of credit to

or for any person for the purpose of purchasing or carrying any security; or
l Borrow on any security or lend or arrange for lending of any security carried for
on account of a customer; or
l Pledge or arrange for pledging of any security carried for the account of any
customer.

Performance of KSE
The KSE is the biggest and most liquid exchange in Pakistan and has been declared
as the ‘Best Performing Stock Market of the World for the year 2002’. The KSE 100
Index closed at 5,279.185 on 30th June 2004.

KSE has been well into the 3 rd year of being one of the Best Performing Markets of
the world as declared by the international magazine ‘Business Week’. According to
its website, the US newspaper, USA Today, termed KSE as one of the best
performing bourses in the world.

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© 2004 Taseer Hadi Khalid & Co, the Pakistan member firm of KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Major Developments
l The major developments of the capital market in Pakistan are: Karachi Stock
Exchange has introduced a state-of-the-art computerised trading system
known as KATS, abolishing the open-cry out system, to provide a fair,
transparent, efficient and cost effective market for the investors.
l Another major achievement was the transformation of physical settlement to
on-line, real time book entry settlement of securities i.e. CDS, managed by the
Central Depository Company of Pakistan Limited. This has eliminated the
chances of forgery and fraud and delays in transfer. A large number of
companies have moved to the scrip less system, while others are being
encouraged to switch over as well.
l SECP has decided to constitute an Expert Committee comprising of national
and international securities market experts with the object of formulating a
comprehensive plan for demutualization and integration of the three stock
exchanges in Pakistan.
l SECP has issued Margin Trading Rules to phase out the prevailing current
system of carry over transactions, in order to bring it in line with international
practices and to make it more transparent.

These rules deal with the following:

l Pre-requisite for carrying out margin trading and margin financing

l Margin Agreements
l Restrictions on margin trading and margin financing facilities
l Margin maintenance requirements
l Deposit of margin
l Withdrawal from margin account
l Valuation of collaterals
l Limit of collective outstanding balances
l Administrative, operational and reporting requirements
l Enhancement and reduction of margin maintenance requirements

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KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
l Internal procedures for granting margin financing and margin trading facilities
by Broker
l Non compliance of margin trading requirements

Over the past few years, SECP has taken measures to restore confidence of the
foreign and domestic investors by endeavouring to ensure that the market
functions in a smooth and transparent manner. The SECP has actively pursued a
capital market reform program geared towards the development of a modern and
efficient corporate sector and capital market, based on sound regulatory principles
that provide the impetus for high economic growth.

Stock Exchange Regulations

A company that seeks to offer its shares to the public and wishes to apply for a
listing on the Stock Exchange must comply with the listing requirements of the
Exchange, in addition to compliance with the provisions of the Companies
Ordinance, 1984.

The requirements of the Exchange relate to management and company

procedures, disclosures, provisions concerning the issue of prospectus for the
issue of shares to the public, distribution of financial statements and other matters
to keep the public and the exchange(s) adequately informed on all aspects of the
affairs of the company, which may affect the market value of its shares.

Listing Requirements & Procedures

Issue of capital is mainly governed by the Companies Ordinance 1984, Companies
(Issue of Capital) Rules, 1996, Listing Regulations, and Regulations Governing over
the counter (OTC) market and criteria for listing framed there under.

l The main requirements of listing on the ready market are: -

a) Minimum paid up capital of Rs.50 million.

b) Minimum public offer in case capital of company is up to two hundred

million rupees, at least

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© 2004 Taseer Hadi Khalid & Co, the Pakistan member firm of KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 fifty percent of such capital and in case capital of the company is beyond
two hundred million rupees,

at least one hundred million rupees or twenty five percent of the capital,
whichever is higher.

c) Public offer of equity has to be subscribed by at least 500 applicants.

d) The offering document has to be cleared by the KSE before it is submitted

to the SECP for approval.

l The main requirements of listing on OTC market

a) Minimum paid up capital of Rs.10 million.

b) Minimum public offer Rs.5 million or 25% of the capital, whichever is

higher.

c) Break-up value of the ordinary shares shall not be less than its face value
at the time of listing.

d) The offering document has to be cleared by the KSE, before it is

submitted to the SECP for approval.

l Time frame for Listing

The listing application completed in every respect along with offering document
does not require more than 7 to 10 days for clearance of the Exchange.

Investment in Pakistan 5
© 2004 Taseer Hadi Khalid & Co, the Pakistan member firm of KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.