Karachi Stock Exchange

Karachi Stock Exchange (KSE) is the biggest and most liquid exchange
in Pakistan with the average daily turnover of around 300-350 million
shares and market capitalization of US $ 33.2 billion. The international
magazine 'Business Week' announced the KSE as the best performing
world stock market in 2002. Since then the KSE continuously maintains
the reputation as one of the best performing markets in the world.

The Karachi Stock Exchange trades the KSE-100 Index. It is a highly-

diversified index of 100 largest capitalization companies' stocks from
all sectors of Pakistan economy. A constantly revised index is a good
indicator of the overall Exchange performance over a period of time. In
2005, 88% of the KSE total market capitalization was represented by
the KSE-100 Index.

The membership in the Karachi Stock Exchange is limited. Only 200

individual and corporate entities can register as members in the KSE.
In 2005, 162 members traded actively on the Exchange. In addition,
foreign corporate entities may also become the members of the KSE
with the condition that the nominee member of the company is a
citizen of Pakistan.

Islamabad Stock Exchange

The Islamabad Stock Exchange (ISE) was incorporated as a guarantee

limited Company on 25th October, 1989 in Islamabad Capital territory
of Pakistan with the main object of setting up of a trading and
settlement infrastructure, information system, skilled resources,
accessibility and a fair and orderly market place that ranks with the
best in the world. The purpose for establishment of the stock exchange
in Islamabad was to cater to the needs of less developed areas of the
northern part of Pakistan.

At present there are 103 Members out of which 29 are corporate

bodies including commercial and investment banks, DFIs and
brokerage houses. The other 74 Members are individual persons.

Since the inception of automated trading system which is called

ISECTS the trade volume is multiplying day by day and the average
daily turnover has now crossed the figure of 7.5 million shares. The
automated system which was indigenously developed replaced the
outcry system in 1997. Now all the listed securities are traded through
the ISECTS. The system of physical handling of shares and securities is
being phased out and majority of the scrips are settled through Central
Depository Company of Pakistan Limited.

At the moment there are 285 companies/securities listed on the

Exchange with an aggregate capital of Rs.155,352.618 million. The
market capitalization was Rs. 209,360.670 million (US $ 4,551.132
million) as on 10-09-98.

Lahore Stock Exchange

Lahore Stock Exchange (Guarantee) Limited came into existence in

October 1970, under the Securities and Exchange Ordinance, 1969, of
the Government of Pakistan in response to the needs of the Provincial
metropolis of the Punjab. Only 83 members had its memberships and it
was housed in a rented building in the crowded area of Bank Square in
exotic city of Lahore. The number of members has increased from 83
to 150 over a period of 25 years.

The past seven years have seen Lahore Stock Exchange come to its
own. Business has been steadily on the increase. A modern
Management Information System, (MIS) has been firmly in place.
Clearing House activities are fully computerized, computer ordering
has been implemented.

LSE has set up a credit rating company named "Pakistan Credit Rating
Agency (Pvt) Limited", (PACRA), in a joint venture with International
Finance Corporation (IFC), and IBCA Limited of London.

Indices at Karachi Stock Exchange

1. KSE-100 index

The most important index at Karachi stock exchange is the KSE-100

index. The primary objective of the KSE100 index is to have a
benchmark by which the stock price performance can be compared to
over a period of time. In particular, the KSE 100 is designed to provide
investors with a sense of how the Pakistan equity market is
performing. Thus, the KSE100 is similar to other indicators that track
various sector of the Pakistan economic activity such as the gross
national product, consumer price index, etc.

Composition:
 The KSE-100 contains a representative sample of common stock that
trade on the Karachi Stock Exchange. The KSE stocks that comprise
the index have a total market value of around Rs. 1,197 Billion
compared to total market value of Rs. 1,365 Billion for over 679 stocks
listed on the Karachi Stock Exchange. This means that the KSE100
Index represents 88 percent of the total market capitalization of the
Karachi Stock Exchange, as of 27th February, 2004.

The list of sectors whose shares are traded on the KSE-100 index is as
follows:

Table 1:

List of Sectors
19
1. Open-end Mutual Funds Oil & Gas Marketing Companies
.
20 Oil & Gas Exploration
2. Close-end Mutual Funds
. Companies
21
3. Modarabas Engineering
.
22
4. Leasing Companies Automobile Assembler
.
Investment Banks/Investment 23
5. Automobile Parts & Accessories
Cos./Securities Cos. .
24
6. Commercial Banks Cable & Electrical Goods
.
25
7. Insurance Transport
.
26
8. Textile Spinning Technology & Communication
.
27
9. Textile Weaving Fertilizer
.
10 28
Textile Composite Pharmaceuticals
. .
11 29
Woollen Chemical
. .
12 30
Synthetic & Rayon Paper & Board
. .
13 31
Jute Vanaspati & Allied Industries
. .
14 32
Sugar & Allied Industries Leather & Tanneries
. .
15 33
Cement Food & Personal Care Products
. .
16 34
Tobacco Glass & Ceramics
. .
17 35
Refinery Miscellaneous
. .
18
Power Generation & Distribution
.

Stock Selection Rules

The selection criteria for stock inclusion in the recomposed KSE100

Index are:

Rule # 1: Largest market capitalisation in each of the 34 Karachi

Stock Exchange sectors excluding open-end Mutual Fund Sector.

Rule # 2: The remaining index places (in this case 66) are taken up by
the largest market capitalisation companies in descending order.

A number of the 34 top sector companies may also qualify for inclusion
on the basis of their market capitalization. In other words, companies
may qualify solely under rule 1, solely under rule 2, or under both.

The fact that the sector rule is identified as Rule 1 does not imply that
it is more important, only that the nature of the selection process is
such that, it is the screening that is done first.

KSE All Share index

KSE all shares index is the least popular index of the Karachi Stock
Exchange and is designed to gauge the price movements of all the
companies listed on the exchange. All share index is rarely considered
by the investors to gauge the movement of the exchange. The scrips
have their proportionate representation on the basis of outstanding
capital and the price fluctuations are accommodated accordingly to
determine the fluctuations in the index

KSE-30 Index

KSE-30 index was launched at Pakistan's leading bourse on September

1, 2006. It is expected by the exchange's management to provide a
true picture of the country's capital market to the prospective investors
Composition:

KSE-30 index is based on 30 free-floated companies with biggest

market capitalization and best trading performance. It has been
designed to provide actual trading sentiment of the market to the
prospective investors.

The KSE-30 index is based on both free-floated companies and the

turnover of active scrips. Free-floated companies are those which have
floated a large proportion of their shares at the stock market and
whose shares are readily available for trading at the stock exchange.
Only the companies registered with the Central Depository Company
(CDC) will be eligible for inclusion in KSE-30 Index.

Leading banks have come at the top of the new index in the first
instance with the Muslim Commercial Bank at the peak with a
weightage of 11.06 per cent, followed by the National Bank of Pakistan
at the second position with 7.85 per cent weightage. Pakistan Oilfields
Limited with 7.65 per cent weightage comes third on the new index.
The other leading companies in KSE-30 index are: Pakistan Petroleum
Limited, Oil and Gas Development Company Limited, Fauji Fertilizer
Company Limited, Pakistan Telecommunication Company Limited,
Pakistan State Oil Company Limited, Hub Power Company Limited,
Engro Chemical (Pakistan) Limited, PICIC, DG Khan Cement Company
Limited, The Bank of Punjab, Fauji Fertilizer Bin Qasim Limited, Faysal
Bank Limited, Bank Al-Habib Limited, Lucky Cement Limited, Nishat
Mills Limited, Askari Commercial Bank Limited, Adamjee Insurance
Company Limited, Kot Addu Power Company Limited, Unilever Pakistan
Limited, Sui Northern Gas Pipeline Limited, Sui Southern Gas Company
Limited and Dawood Hercules Chemicals.

KSE-30 Index's base starts from 10,000 points and its composition will
be revised on half yearly basis. The first review will be held in March,
2007. This review will be based on the performance of the companies
during the first half of current fiscal year (July-December). The
companies which will end up in the defaulters' counter and/or their
trading is suspended for any reason, or they are declared non-tradable
in the preceding six months will not be included in the KSE-30 index
next time. Moreover, the eligible companies should have a formal
listing history of at least two months at the KSE and they must have an
operational track record of at least one financial year. They should also
not have defaulted on listing regulations.
Functioning of the stock market

The Current System ( write it in your own words)

Currently traded is carried on an automated system called Karachi

Automated Transaction System (KATS). Order placing, transaction
execution, clearing and settlement and price determination is all done
automatically. Floor brokers have taken new roles as traders who sit in
the member’s office on networked terminals.

Central depository company

Central depository company forms the backbone of the automated

transaction system at the karachi stock exchange. Instead of having
physical delevery of shares, the shares are now deposited with the
CDC which acts as a scripts bank. Investors are required to open
accounts either directly with the CDC or through the member. The
investors account has a balance of all the shares he has purchased or
have deposited with the CDC. Hence buying and selling of shares are
not paralleled by the physical flow of delievery. The accounts of the
investors are rather adjusted for each transaction they conduct and the
physical shares remain at the vault of CDC. CDC is not available for
each of the 700 scripts being traded on stock exchange

National Clearing & Settlement System:

National Clearing & Settlement System (NCSS) is responsible for the

clearing and settlement of the transactions that have been conducted
by each broker. The member wise daily netting , by utilization of the
market transaction data, is carried out by the NCSS and then the
summariez are communicated to the CDC to make relevant adjustment
in the accounts.

Investors account:

Investors are required to either open a CDC investor account or open a

member sub account in order to trade and invest in the Karachi Stock
Exchange. Investor accounts are broker-independent accounts that can
be accessed through any member or online trading software.
Member sub-accounts are opened through the reference of a member
and can be executed only through the respective member.
Transactions on the member sub-account are subjects to members’
commission on the sale and purchase of shares and other charges
such as withholding fee for physical shares.

Capital value tax:

Capital value tax is imposed on the face value of the transaction

(number of shares multiplied by face value). The current rate of CVT is
0.02 %. The CVT is deducted outright in the bill of the transaction.

Order placing:

There are three basic ways through which an investor can place
orders, namely:

• By placing a call to the assigned trader.

• Through an online trading software on the Internet.
• By using a personal terminal with KATS assigned to him by the
member

The investor can either act as a price taker or a price maker. If he is

placing a limit sell or buy order then he becomes a price maker.
However, if he is selling or buying on the existing bid or offer price he
becomes a price taker. Some trading softwares also provide stop loss
limits features but these are not a part of KATS.

Order execution:

Order is executed automatically once the bid and ask prices match on
the KATS system. Incase of more than one orders at the same prices,
priority is assigned on the basis of first come first served, that is the
order placed first is executed first.

Clearing and settlement:

Clearing and settlement is also done automatically through the

relevant clearing and settlement system depending on the type of
transaction, for example ready market transactions are settled on T+3
clearing system, discussed in detail below.
Circuit breakers

Within a day, share prices cannot increase or decrease by more than

five percent of the previous days’ closing price. That is, if a particular
share closed at Rs.100 on the previous day, it can touch a maximum
price of Rs.105 and a minimum of Rs.95.

• Upper circuit breaker

The upper circuit will come into play if the price of that share touches
Rs.105(increase by 5%). The buyers cannot a bid a price higher than
Rs.105 and the transaction will occur only if there is any seller willing
to sell his shares at Rs.105 or less. If there are no such sellers, then
trading would not occur and the share would have said to hit its upper
circuit breaker, also known as the upper lock.

• Lower circuit breaker

Similarly, a lower circuit breaker will come into play if the price of the
share declines to Rs.95 (price decrease by 5%). The sellers in such a
situation cannot offer a price below Rs.95 and a transaction will occur
only if there is nay buyer willing to buy shares at a price Rs.95 or
above. If for instance, there are no such buyers, then the share would
not be trodden and the share would have said to hit its lower circuit
breaker, also known as the lower lock.

Unique Identification Number (UIN)

In order to enhance transparency and to identify the trades done by

each investor, the UIN system has implemented effective from August
1, 2006. The UIN assigned to an investor would remain the same even
if the investor trades through multiple brokers at one or more stock
exchanges.

Types of Markets

Delivery: The ready Market

In the ready market, you need to have cash in your account to

purchase shares, because whatever purchases you make you have to
pay for them in cash. The settlement is the T+3 systems, which means
that it takes three days for the settlement of the transactions. For
example, the transactions carried out on Monday will be settled on
Thursday. This means that if you sell your shares today, you cannot
withdraw your money before three days have passed, although the
sub- account at the broker starts showing a shadow balance. This
shadow balance cannot be withdrawn but can be invested since
investments are required to be funded at the time of their T+3 clearing
date and by then the money is credited in the investors account.
During this period Money is transferred from the buyers sub account to
the sellers sub account and the scrips are transferred from the seller’s
account to the buyers account. The investors have their sub accounts
with the brokers or members. The members transfer the shares and
the money to each other through Central Depository Company, which
acts as an intermediary.

Square up market:

Transactions in the square up market are like auctions conducted by

the Karachi stock exchange. These transactions are essentially reverse
or correction transactions. When a wrong sale occur or exposures of
certain members or brokers are out, the corresponding shares of those
brokers/investors are confiscated by the Karachi Stock Exchange and
these shares are then auctioned in the square up market.

Odd lot:

Shares that are not in the form of normal lot are traded in the odd lot
market. Normal lot size varies from share to share. It is usually 500
shares for smaller shares, for shares having a market price of less than
Rs.100. similarly, 100 for medium size shares with prices ranging from
Rs.100-500 and 10 for big shares such as Unilever Pakistan which
trades at above Rs 2000.

IPO Market:

The shares of companies which make a minimum public offering of Rs.

150 million are traded on this segment from the date of publication of
offering documents. The period of contracts of each scrip is notified by
the Exchange. The outstanding contracts carried out under the
provisionally listed companies are settled on the settlement date and
members are not allowed to transfer their positions to the Ready
Clearing Board or any other Board. On formal listing, the trading in the
shares of the company are shifted to the Ready Board Counter under
T+3 Settlement System from the date of formal listing.

Future / forward transactions:

Future / forward transaction is an agreement to buy or sell a
commodity at some future date. A forward market requires a seller to
give or convey the ownership of the underlying assets. However, a
futures contract does not require the seller to convey or transfer the
ownership of the underlying asset.

The futures market of Karachi stock exchange is a blend of futures and

forward market The clearing and settlement is on T+30 basis. In our
market the weekly settlements of the transactions do not require
conveying or transferring the ownership of the underlying assets (that
are the shares), instead subsequent to the last Friday of the month the
transactions is converted into T+3 system, that is the seller of the
shares has to convey the delivery of the shares within three days after
the last Friday of the month in which he has entered into forward
contract. From the buyers point of view it is the money or cash that he
has to convey.

An investor doesn’t necessarily have to keep his investments for the

entire month. He can get out of his investments any time he wants.
But he has to clear his positions on the last Friday of the month. An
investor has three options to clear his positions.

1. He can make the payment for his purchase and take the
delivery.

2. He can sell offload his shares and book a profit or loss.

3. He can roll over to the next month futures. This can be done by
selling of the shares on the last Friday and repurchasing it on the
coming Monday. The transaction will be cleared and settled for
the subsequent month, requiring the investor to make payments
only for the loss he has booked or withdraw the profits he has
made and then enter into the next month futures by
repurchasing the shares on Monday.

Physical trading

Physical trading is the actual transfer of the share certificate and

forms only 3% of the total market volume. Physical trading occurs in
shares that are not in CDC. Clearing is done on a T+3 and the physical
delivery are handed over by the seller to the buyer. The buyer has to
get the shares transferred to his name at the company’s registrar
before he could receive the dividends. Usually the physical shares do
not get the current market value and are traded at a discount varying
from 5-10 % depending on the liquidity of the share.
CFS market

CfS market run parallel to the ready market and continue for one hour
after the market closes. CfS market is a market for continuous funding
system. Instead of price determination, the major role of the market is
t6o determine the market interest rate, and also to provide continuous,
real time financing for leveraged purchasing to the investors. The
trade screen of the CFS market displays bid and offer interest rates
instead of price. The interest rates are different for different scrips
depending on the liquidity risk of the share.

Clearing and Settlement System

The Trading is divided into four distinct segments, each of which has
its own clearing and settlement procedure. These are T+3,
Provisionally Listed Companies, Spot (T+1) Transactions and Future
Contracts.

• T + 3 Counter:

Transaction in this segment are settled through the Clearing House

that nets out the purchases and sales and the financial obligations
thereon of each member/firm for the notified clearing period and
issues instructions for deliveries of netted outstanding business.
Payment from and to members are routed through the Clearing House.

In order to handle the clearing of all the three stock exchanges of the
country under one roof, the National Clearing and Settlement System
(NCSS) has been introduced. NCSS is managed by Central Depository
Company of Pakistan Limited.

• Futures Trading in Provisionally Listed Companies:

The shares of companies which make a minimum public offering of Rs.

150 million are traded on this segment from the date of publication of
offering documents. The period of contracts of each scrip is notified by
the Exchange. The outstanding contracts carried out under the
provisionally listed companies are settled on the settlement date and
members are not allowed to transfer their positions to the Ready
Clearing Board or any other Board. On formal listing, the trading in the
shares of the company are shifted to the Ready Board Counter under
T+3 Settlement System from the date of formal listing.

• Spot / T+1 Transactions:

For about 5 days before the closure of shares transfer book notified by
the company, transactions are settled on T+1 basis.

For non-CDC securities the delivery and payment is settled through the
Clearing House of the Exchange, however, delivery is tendered directly
between the buying and selling members as per the instruction of the
Clearing House.

• Future Contracts:

Under the Regulations Governing Future Contracts, trading in Future

Contracts started in July 2001. Presently 13 companies are traded
under Future Contract and the Contract is fixed for a period of one
month.

Modes of Financing ( my part copy it as it is)

• Badla Transactions

Badla financing is a mechanism that allows share buyers and sellers to

buy and sell shares without paying for the shares bought or delivering
the shares sold, on transaction settlement dates. Badla is simply share-
financing through borrowed money, or in other words, a one-day repo
transaction in Pakistan. It is a transaction where the borrower, in order
to avoid funding for a purchase transaction carries forward his security
exposure from the current settlement cycle to the next. He does this
by selling it in this clearing and repurchasing in the subsequent
clearing at a predetermined differential price. The counter party can be
a badla financier (a lender), or a short seller, or both.

Badla transaction also works on T+3 basis but the investor in a badla
transaction does not need to have the funds available in his account.
since the funds are not available in the investors account funds have to
be arranged to pay off the sellers within the T+3 settlement time limit.
The financiers had to finance an investment for 10 days. However, the
financee can withdraw from the financing any time he wants. The
financing was arranged by two methods:

• Inhouse badla
• Out house badla

Inhouse badla

If the financing is provided by the broker himself the badla is termed

as inhouse badla. These badla transactions were not documented. In
house badla is banned at the Karachi Stock Exchange.

• Out house badla:

In the out house badla the financing for investments was arranged
through a market of financiers and brokers held at around 4:30 pm.
Previously, banks had banking hours till 1:30 and by 4:30 p.m. they
had established their cash balances for the day. These institutions
used to participate in the badla market as financiers and the brokers
used to participate as fund seekers. In this market the financiers
bought the shares theoretically on paper at their closing price of the
day. The next day before the Exchange opened for trade the financiers
sold the shares at the previous day closing price of the shares plus the
interest rate. This interest rate was calculated on the basis of the
market demand and supply conditions. This interest rate was also the
profit earned by the financiers who performed transactions in the badla
System.

The way the system worked was that the investors were required to
have certain amount of cash in their sub account which determined the
limit, that is the maximum investment that he/she can make. For
example, a cash balance of Rs 25000 with an exposure limit of five
times will give an investor an investment limit of Rs 125000. This
means that the investor can invest for 125000 even though he only
hasRs.25000 in his account. The profit and loss is adjusted in the
investor account on daily basis at the market close , when the badla
financing used to take place.

By using badla financing, the investors created leverage for their

investments. This leverage maximized their returns on the positive
index runs, but likewise, also led to maximization of losses when the
market rallied downwards. This created exposure problems discussed
below which led to further declines in the market.

Exposure Problems:

Let us reconsider the e.g of an investor having an equity of Rs 25000

and with an exposure limit of 5 times. He enters into an investment of
Rs.125000 and purchases 10000 shares of Rs 12.5 each. If the market
declined and the stock closed at Rs 11 at day end. The investor will sell
the shares to the financer for 11 per share, that is Rs 110000. This
means that the investor has locked in a loss of Rs 15000 which will be
deducted from the equity value of his account of Rs.25000. The new
cash value will be Rs.10000 and this will create a new investment limit
of Rs.50000 on an exposure limit of five times. Where as the investors
shares are repurchased by the brokers at Rs 11 per share which leads
to a total of Rs 110000. The exposure is out and the investors either
needs to sell the additional shares or has to deposit additional money
into his account. If the investor chooses to sell the shares, then this
might lead to further decline in the market, especially in the case of
panic selling.

Issues of Badla financing

Furthermore, apart from exposure problems, the Pakistan’s badla

market can be termed as an oligopolistic market that is highly
dominated by few players. These top players include a few brokers and
some financial institutions.

Moreover, badla financing sustains speculators who make wrong

investment decisions without having requisite financial resources
represented by the shares sold by them or the money to pay for the
shares bought by them. Besides being bad speculators, their serious
disqualification is that either they can’t (because they don’t have the
requisite financial standing), or won’t (because they don’t want to fall
in the tax net) borrow from banks. Instead, they look to badla
financiers to fulfil their commitments. Knowing these weaknesses,
badla financiers charge them lending rates that far exceed the cost of
bank borrowing Escalating cost of unsettled transactions forces these
investors to indulge in even higher levels of speculative trading to
drive share prices closer to levels at which they can settle their
unfulfilled commitments along with the cost incurred on borrowing
through the badla mechanism. This distorts the market even more.
Bigger the size of these speculators greater is the distortion they
introduce in the market and thus inflate stock market balloons. , in
many cases, badla financiers are powerful brokers who act on behalf of
these investors because badla financing earns for them huge financing
charges.

Moreover, it is through Badla that naïve investors were facilitated in

carrying out their economic destruction by speculating in the riskiest of
assets through borrowed money and it is not a coincidence that all
those who topped the list of perceived manipulators of stock market
had been the large badla financiers. Badla had not survived and
prospered in the market because it was the best financing system.
Instead it had been grown because of other factors, such as a powerful
badla lobby which had connections in higher echelons of power,
inability of exchanges to develop derivatives as alternative to Badla.

The current badla based margin trading has been widely misused in
allowing highly leverage trades. In an effort to generate more
commissions, the brokers allowed clients to leverage to the extent of
even 90 per cent and above. If a client had Rs100,000 or equivalent
worth of securities, he or she was allowed to build open positions in
excess of Rs2 million, particularly in stocks like PSO. Another practice
in vogue was that some of the brokerage houses demanded from
clients a margin in terms of rupees per share and not as a percentage
of value of open position. For instance, they would simply ask the client
to deposit say Rs10 per share in case of PSO (by having Rs100,000 in
your sub-account, you can easily keep 10,000 shares of open position
in PSO, which cost Rs2,800,000 at the current market value) or Rs 2-4
per share in case of PTC or Hubco (market price ranging between Rs
20-50 per share). These practices lured the novice investors and
habitual speculators to play for high stakes in the market.

The present system has in-built ability to cover up the existence of

short positions of clients by brokers. Since, the KSE monitors the
exposure limits of its members to the clearing system only, no matter
how the members handle the transactions inside their houses, it has
been left practically at their discretion. Therefore, most of the
brokerage houses had adopted the practice of doing badla financing
for their clients on a consolidated basis. In order to keep a check on
their exposure limits, the brokers even encouraged their clients to go
short in liquid stocks, which effectively reduced their exposure to the
clearing system without giving any details regarding the existence of
short selling to the KSE. At the same time, the brokers felt no problem
in allowing excessive leverage trades as the positions could have been
matched or squared internally without being reported to the clearing
system.

The repurchase agreements between brokers and financial institutions,

usually called outside badla, go unnoticed by the exchanges and other
regulators. This is a standard borrowing arrangement against listed
stocks by brokers from financial institutions, with adequate margin and
maturity; however, at any stage the regulators do not know the exact
quantum of brokers' borrowings from financial institutions. It is feared
that this practice artificially reduces the actual position of weak
holdings at the exchange, while at the same time helps the brokers in
carrying forward highly leveraged trading positions. The higher the
amounts outstanding in shares repurchase transactions with brokers,
the higher will be leveraged positions and weak holdings in the
exchange.

Most of these issues also apply to the Contineous funding system as

CFS is a modification of the Badla Financing System.

Continuous Funding System:

In order to alleviate the problems associated with COT/badla financing,

on 22 August 2005 COT was replaced with the continuous financing
system (CFS). CFS is an interim measure to enhance the level of
liquidity in the market and to facilitate alternative modes of leverage
financing such as margin financing and futures and options to develop.

One of the salient features of CFS is that it is available for the entire
trading period and runs parallel to the Ready Market. In addition, the
CFS Market is available one hour after the close of trading. Moreover,
CFS transactions take place through the Karachi Automated Trading
System (KATS). The CFS facility is available for a maximum period of
22 working days at the option of the financee. On maturity of the
contract, the same is being settled. The financee has the capacity to
roll over his positions by entering into a fresh CFS contract at the
prevailing finance rate. CFS facility is only available against purchases
in Ready Market on the day that the CFS facility is availed. All trades in
the CFS Market are conducted by Brokers for and on behalf of their
clients or for their own proprietary position who may either be
financees or financiers. Usage of duly registered Client Codes (under
UIN regime) are mandatory and shares acquired in CFS have to be
placed in the CDC Accounts of those clients. In addition to this, all
Brokers issue sale/purchase contract notes to their clients for all CFS
trades.

For the purpose of ensuring risk management, the CFS market is kept
separate from the Ready Market. Moreover, CFS is not available for
settlement of Future Deliverable Contracts. CFS Financier has to open and
maintain a separate blocked CFS Account in CDC in his name exclusively to
keep the CFS Financed Securities in order to ensure that the securities placed
are used only for delivery to NCCPL in settlement of CFS outstanding trades
and are not allowed or used for loaning against blank and short sale, used for
leveraging or for pledging with any other person or institution. Every Broker
has to maintain his leverage position in respect of CFS and other derivatives
not exceeding 15 times of his Net Capital Balance.

SECP has proposed modifications in CFS or ‘badla’ as it is commonly

known. These modifications, by means of amendments to CFS
regulations, would be interim measures before launch of CFS Mk-II, a
further modified version of ‘badla’, which seeks to reduce
intermediation by stock brokers and strengthen transparency and risk
controls.

The proposal is quite significant because it is likely to determine how

and how much trading activity would take place in different market
segments in coming years.

Salient proposed modifications regarding CFS are as follows:

(i) ban on undocumented financing done by brokers off the
trading system, also known as in-house ‘badla’
(ii) reduction in number of eligible securities to 14 from 32, thus
confining ‘badla’ to less risky securities
(iii) increase in financing cap at KSE to Rs 55 billion from present
Rs25 billion, perhaps to make room for in-house ‘badla’
(iv) placement of financed securities in blocked form so that they
cannot be used for further pledging or illegal selling by
financiers
(v) reduction in netting of purchase and sales by both financiers
and financees which would reduce their ability to take
exposure
(vi) restriction on availing financing without a net purchase in
regular segment, which would not allow financees to raise
cash by delivering securities
(vii) Imposition of segment wide, broker-wise, and client-wise
position limits to reduce settlement risk.

CFS MK-II
THE MOST STRIKING FEATURE OF CFS MK II IS THE ABSENCE OF ANY
LIMIT ON THE FINANCING (AGAINST THE RS24.5 BILLION LIMIT AND 18
PER CENT CAP AT PRESENT). THE CONCEPT OF AUTHORIZED
FINANCIER IS ALSO INTRODUCED. FOREMOST AMONG THEM BEING
THAT AN AF MUST BE WILLING TO COMMIT A MINIMUM OF RS2 BILLION
TOWARDS THE NEW CFS; MINIMUM EQUITY REQUIREMENT WAS RS500
MILLION AND IF A MUTUAL FUND, AF MUST HAVE AT LEAST RS2
BILLION UNDER MANAGEMENT. HOWEVER, THE INITIAL COMMITMENT
OF RS2 BILLION APPEARS TO BE TOO HIGH, AS IT COULD EXCLUDE
SEVERAL POTENTIAL FINANCIERS, WITH SMALLER MEANS. THUS,
INITIALLY THERE MIGHT ACTUALLY BE A LIQUIDITY CRUNCH IF ONLY A
FEW FINANCIAL INSTITUTIONS WERE WILLING TO CONTRIBUTE.
MOREOVER, IN CFS MK II FINANCING CAN BE DONE FOR 90 DAYS.

THE NEW SYSTEM SUGGESTS THAT THE RIGHT TO PROVIDE CFS

FINANCING COULD BE EXERCISED BY ANY FINANCIER WHO WAS
WILLING TO PAY RS1 MILLION AS FEES AND RS0.5 MILLION AS ANNUAL
SUBSCRIPTION. MAJORITY SUPPORTS CFS MK-II BECAUSE THIS WOULD
ENLARGE THE CANVAS OF FINANCIERS AND WOULD PRE-EMPT THE
SUDDEN WITHDRAWAL BY INDIVIDUAL MEMBERS AND MUTUAL FUNDS.
FURTHERMORE, THE BEST PART OF THE NEW PROPOSED SYSTEM WAS
THE GRADUAL REMOVAL OF THE RS24.5 TO RS25 BILLION CAP ON CFS
AND THE REMOVAL OF UPPER CAP ON LENDING RATE. THE REMOVAL
OF UPPER CAP WOULD MEAN THAT BORROWERS WOULD
AUTOMATICALLY BE DISCOURAGED FROM LEVERAGED BUYING IN CASE
OF ABNORMALLY HIGH RATES.

MARGIN TRADING

MARGIN IS A SECURED LOAN, WHERE THE COLLATERAL IS THE

EXISTING MARGINABLE SECURITIES IN YOUR ACCOUNT. HOW MUCH
YOU CAN BORROW IS DETERMINED BY HOW MUCH IS IN YOUR
ACCOUNT. CURRENTLY IN PAKISTAN, YOU OPEN ONE SUB-ACCOUNT
WITH A BROKER, WHERE ALL TRANSACTIONS ARE RECORDED
TOGETHER, WHETHER CASH BASED (DELIVERY) OR BADLA BASED
(MARGIN FINANCING). UNDER THE NEW SYSTEM, THE ACCOUNT
OPENING FORM OF A BROKERAGE HOUSE WOULD ASK WHETHER YOU
WOULD HAVE A CASH ACCOUNT OR A MARGIN ACCOUNT. IF YOU
CHOOSE THE CASH ACCOUNT, THEN YOU CAN BUY ONLY STOCKS
WHICH YOU INTEND TO PAY FOR AT THE TIME YOU PUT IN YOUR BUY
ORDER. ON THE OTHER HAND, IF YOU OPEN A MARGIN ACCOUNT, IT
MEANS THAT YOU ARE ASKING FOR THE BROKERAGE TO AGREE TO
LEND YOU MONEY FROM TIME TO TIME, SO THAT YOU MAY USE IT TO
INVEST MORE MONEY THAN YOU HAVE IN YOUR ACCOUNT.

IN MARGIN FINANCING, THE BROKERS HAVE TO KEEP A DAILY AS WELL

AS A WEEKLY CLIENT WISE POSITION, WHICH RESULTS IN A GREATER
TRANSPARENCY THAN BADLA, WHICH IS UNDOCUMENTED.

MOREOVER, MARGIN TRADING CAN ONLY BE EXECUTED AFTER YOU

HAVE SECURED FINANCING FOR SHARES TO BE PURCHASED IN THE
REGULAR (OR T+3) MARKET, THAT IS IN MARGIN TRADING FIANNACING
HAS TO BE ARRANGED PRIOR TO INVESTMENT. THIS FINANCING
WOULD HAVE TO BE ARRANGED IN A FRAGMENTED MARKET OF
BANKS, BROKERS, AND THEIR CLIENTS ON COUNTER PARTY RISK
BASIS. LENDERS WOULD HAVE TO CAREFULLY EVALUATE EXPECTED
RETURN FROM THE FINANCING, RISK PROFILE OF SECURITIES TO BE
PURCHASED, SECURITIES DEPOSITED AS INITIAL MARGIN, AND THE
BORROWERS. MOREOVER, DUE TO FRAGMENTED NATURE OF MARGIN
FINANCING AND COUNTER PARTY DEFAULT RISK, ITS SIZE IS BOUND
TO BE MUCH SMALLER THAN BADLA THUS DRIVING SPECULATORS TO
FUTURES.

SALIENT FEATURES

 ALL CLIENTS- INDIVIDUALS AND INSTITUTIONS HAVE TO

MAINTAIN SEPARATE MARGIN TRADING ACCOUNTS WITH THEIR
RESPECTIVE BROKERS.
 UNIFORM MAXIMUM MARGIN LIMIT ARE SET FOR ALL CLIENTS
AND THE BROKERS HAVE TO STRICTLY ADHERE TO THAT LIMIT.
EXCESS POSITIONS HAVE TO BE REDUCED AT THE END OF THE
DAY OR ADDITIONAL FUNDS OR SECURITIES WILL HAVE TO BE
PUT INTO THE ACCOUNT.
 ALL TRADES, WHETHER LONG OR SHORT, TAKING PLACE IN
THESE ACCOUNTS WILL BE REPORTED TO THE EXCHANGE.
 BROKERS WILL ARRANGE FUNDS (LONG POSITIONS) OR STOCKS
(SHORT POSITIONS) FOR CLIENTS MARGIN ACCOUNTS BY
BORROWING THE SAME FROM THE MARKET


CONDITIONS FOR EXTENDING MARGIN FINANCING TO BROKERS

1. BANKS/DFIS WILL EXTEND MARGIN FINANCING TO ONLY THOSE

BROKERS WHO ARE CONSTITUTED AS LIMITED COMPANIES.
BANKS/DFIS WILL EXTEND MARGIN FINANCING TO ONLY THOSE
BROKERS WHO ARE CREDIT RATED FROM A CREDIT RATING AGENCY
ON THE APPROVED PANEL OF STATE BANK OF PAKISTAN. STATE BANK
IS NOT PRESCRIBING ANY MINIMUM CREDIT RATING FOR THE
ELIGIBILITY PURPOSES. THE SOLE OBJECTIVE IS TO ENSURE THAT THE
LENDING BANK/DFI GETS THIS IMPORTANT INFORMATION BEFORE
TAKING EXPOSURE ON ANY BROKER.

2. A REGULARIZATION PERIOD OF ONE YEAR FROM THE DATE OF

ISSUANCE OF THESE REGULATIONS IS GRANTED TO THOSE BROKERS,
WHO ARE NOT CREDIT RATED. PROVIDED THAT SUCH BROKERS SHALL
WITHIN A PERIOD OF THREE MONTHS OF THE DATE OF ISSUANCE OF
THESE REGULATIONS ENTER INTO AGREEMENTS WITH ONE OF THE
CREDIT RATING AGENCIES (ON THE APPROVED PANEL OF STATE BANK
OF PAKISTAN), FOR RATING PURPOSES.

3. THE MARGIN FINANCING SHALL BE PROVIDED BY BANKS/DFIS ONLY

AGAINST APPROVED SHARES IN CENTRAL DEPOSITORY COMPANY OF
PAKISTAN.

4. THE BROKERS AVAILING THE MARGIN FINANCING FROM BANKS/DFIS

WOULD BE PROHIBITED FROM LENDING, THE FUNDS OBTAINED FROM
BANKS/ DFIS OR THEIR OWN FUNDS, DIRECTLY OR INDIRECTLY TO
EITHER THEIR OWN OR OF LENDING BANK’S CONNECTED ENTITIES,
DIRECTORS OR MAJOR SHAREHOLDERS AND RELATIVES OF DIRECTORS
OR MAJOR SHAREHOLDERS.

RISK MANAGEMENT AND INTERNAL CONTROLS:

1. BEFORE UNDERTAKING MARGIN FINANCING, THE BANKS/DFIS WILL

PREPARE COMPREHENSIVE POLICIES AND PROCEDURES FOR THE
PURPOSE. THE POLICIES IN THIS RESPECT WILL BE DULY APPROVED BY
THE BOARD OF DIRECTORS, IF NOT ALREADY COVERED
APPROPRIATELY IN THE CURRENT CREDIT POLICY.

2. THE BANKS/DFIS WILL OBTAIN LEGAL OPINIONS TO ENSURE THAT

THE MANNER IN WHICH THEY ARE ACCEPTING SHARES (ESPECIALLY
THOSE OF THE CLIENTS/CUSTOMERS OF THE BROKER) AS COLLATERAL
IS LEGALLY SOUND, THE DOCUMENTATION (INCLUDING THE
AUTHORITY/CONSENT OF THE CLIENTS/ CUSTOMERS OF THE BROKER
IN CASE THEIR SHARES ARE BEING PLEDGED) IS SUFFICIENT TO
CREATE AN EFFECTIVE PLEDGE OVER THE COLLATERAL AND THEY ARE
FULFILLING ALL THE LEGAL REQUIREMENTS APPROPRIATELY. IN ORDER
TO BRING UNIFORMITY, THE PAKISTAN BANKS ASSOCIATION WILL
PREPARE MASTER AGREEMENTS AND STANDARDIZED DOCUMENTS
FOR THE PURPOSES OF EXTENDING MARGIN FINANCING TO BROKERS.

3. BANKS/DFIS WILL PUT IN PLACE AN EFFECTIVE SYSTEM FOR

MONITORING MARGINS AND THEIR EXPOSURES ON THE SHARES OF
VARIOUS COMPANIES AND BROKERS, KEEPING IN VIEW THE QUANTUM
OF THEIR MARGIN FINANCING.

4. BANKS/DFIS WOULD REVIEW, ON AN ONGOING BASIS, THEIR

EXPOSURE IN MARGIN FINANCING WITH A VIEW TO ASSESS THE RISKS
DUE TO VOLATILITY IN ASSETS PRICES.

5. THE SURVEILLANCE AND OVERALL MONITORING OF A BANK’S/DFI’S

INVESTMENT IN SHARES, MARGIN FINANCING, FINANCING AGAINST
SHARES, ETC., WILL BE DONE BY A SEPARATE AND INDEPENDENT
COMMITTEE OF THE BANK/DFI. THE COMMITTEE WILL REVIEW THE
TOTAL EXPOSURE OF THE BANK TO CAPITAL MARKET BESIDES,
ENSURING COMPLIANCE WITH ALL THE SBP REGULATIONS, RELEVANT
RULES, LAWS AND POLICIES AND PROCEDURES ADOPTED BY THE
BANK/DFI.

MARGIN REQUIREMENTS

1. BANKS/DFIS WILL PROVIDE MARGIN FINANCING ONLY AGAINST THE

SECURITY OF APPROVED SHARES.

2. A MINIMUM MARGIN OF 30PC OF THE CURRENT VALUE OF THE

SHARES WILL BE RETAINED BY THE BANK/DFI AT ALL TIMES.
BANKS/DFIS MAY, HOWEVER, SET HIGHER MARGIN, IF THEY SO DESIRE.
BANKS/DFIS WILL MONITOR THE MARGIN ON AT LEAST DAILY BASIS
AND WILL TAKE APPROPRIATE STEPS FOR TOP-UP AND SELL-OUT ON
THE BASIS OF THEIR APPROVED POLICY IN THIS RESPECT AND
AGREEMENTS WITH THEIR CUSTOMERS (BROKERS). FOR THE PURPOSE
OF THIS REGULATION, VALUE SHALL BE BASED ON THE LAST CLOSING
PRICE OF THE SHARE ON THE PRECEDING MARKET DAY.

PER PARTY LIMIT

1. BANKS/DFIS MUST MAKE EFFORTS TO AVOID CONCENTRATION OF

MARGIN FINANCING TO A FEW BROKERS. IN THIS RESPECT, THEY MAY
PRESCRIBE INTERNAL LIMIT FOR MARGIN FINANCING TO A SINGLE
BROKER. IT IS EXPECTED THAT THE MARGIN FINANCING WOULD BE
SPREAD OUT BY A BANK/DFI AMONGST A REASONABLE NUMBER OF
BROKERS.
2. A BANK/DFI SHALL NOT EXTEND FINANCING TO ANY BROKER IN
EXCESS OF 20PC OF ITS OWN PAID UP CAPITAL AND RESERVES. THE
TOTAL MARGIN FINANCING PORTFOLIO, AT ANY GIVEN POINT IN TIME,
SHOULD NOT EXCEED THE PAID-UP CAPITAL AND RESERVES OF THE
BANK/DFI.

3. THE TOTAL FINANCING, INCLUDING MARGIN FINANCING, AVAILED BY

A BROKER FROM THE FINANCIAL INSTITUTIONS SHALL NOT EXCEED
TEN (10) TIMES OF ITS PAID UP CAPITAL AND RESERVES, SUBJECT TO
THE CONDITION THAT MARGIN FINANCING WILL NOT EXCEED FIVE (5)
TIMES OF ITS PAID UP CAPITAL AND RESERVES. BANKS/ DFIS SHALL
MAKE ARRANGEMENTS TO EFFECTIVELY MONITOR THIS LIMIT IN
COORDINATION WITH EACH OTHER. FOR THIS PURPOSE, THE
BANKS/DFIS SHALL OBTAIN, AT LEAST ON WEEKLY BASIS, DETAIL OF
TOTAL FINANCING FACILITIES AVAILED BY A BROKER FROM VARIOUS
FINANCIAL INSTITUTIONS.

4. THE TOTAL MARGIN FINANCING AGAINST THE SHARES OF ONE

COMPANY WILL BE DETERMINED BY THE BANK/DFI. HOWEVER, SUCH
TOTAL FINANCING SHOULD NOT EXCEED 10PC OF THE PAID-UP
CAPITAL AND RESERVES OF THE BANK/DFI EXTENDING MARGIN
FINANCING. BANKS ARE CAUTIONED THAT THEY SHOULD KEEP IN MIND
AND ENSURE COMPLIANCE AT ALL TIMES WITH THE REQUIREMENT OF
SUBSECTION (2) OF SECTION 23 OF THE BANKING COMPANIES
ORDINANCE, 1962 WHICH REQUIRES THAT THEY DO NOT HOLD
SHARES, WHETHER AS PLEDGE, MORTGAGEE OR ABSOLUTE OWNER,
IN EXCESS OF 30PC OF THE PAID-UP CAPITAL OF THE COMPANY. DFIS
ARE ALSO ADVISED TO ENSURE COMPLIANCE WITH THIS
REQUIREMENT.

5. BANKS/DFIS IN BREACH OF LIMITS MENTIONED ABOVE WILL ENSURE

COMPLIANCE WITH THESE LIMITS WITHIN THREE MONTHS OF DATE OF
ISSUANCE OF THESE REGULATIONS.

6. WHILE EXTENDING FINANCING TO BROKERS, BANKS/DFIS SHALL

ENSURE THAT THEY REMAIN COMPLIANT WITH THE OVERALL LIMITS
SET IN PRUDENTIAL REGULATIONS.

7. THE MARGIN FINANCING EXTENDED TO THE DIRECTORS OR MAJOR

SHAREHOLDERS OF A BROKER SHALL BE CONSIDERED A PART OF THE
MARGIN FINANCING ALLOWED TO THE BROKER FOR THE PURPOSES OF
THESE REGULATIONS.

8. The limits mentioned above are overall financing limits and total
financing facilities to brokers (e.g. working capital financing, financing
against receivables of brokers, financing to brokers for their
proprietary trading, or any other financing to brokers by whatever
name called) should not exceed the limits prescribed above. Further,
for the purposes of monitoring and better controls, banks will keep
separate records of the following facilities:

 Financing against the shares of clients of brokers.

 Financing against own shares of brokers.

 Financing against receivables of brokers.

 Working capital finance against any other security.

 Any other financing facility to brokers

Different types of markets

Primary markets

Secondary market

Money markets

The Pakistan money market basically consists of the Interbank Market

which is the Call market and the Open market which includes a host of
securities that can be traded

Call market ( find sum info on it)

In the Call market banks can lend or borrow funds upto their credit
limits without any collateral. The participants in the interbank market
are commercial banks and Development Financial Institutions (DFIs)

Open market

In the Open market there are repos in which a holder of securities sell
these securities to an investor with an agreement to repurchase them
at a fixed price on a fixed date. The 3-day Repo facility is one of the
main instrument of SBP. Changes in it shows the direction and stance
of monetary policy. Cash accommodation is usually provided for
overnight, however transaction period can be extended to 3-days or
more to cover occasionally long week ends.

there are Certificates of Investment (CoIs) which non-banking

financial institutions are allowed to issue for mobilizing deposits but
only for short maturities.

The participants in the open market are commercial banks,

Development Financial Institutions (DFIs), regional banks, corporate
bodies, securities houses, leasing companies, insurance companies,
investment companies and individuals.

Open market operations

After the abolishment of Credit to Deposit ratio in 1995, OMOs are

being used as a major tool for the conduct of Monetary Policy. Regular
OMOs are being conducted since January 1995. Effective from July,
2001 OMOs are conducted under a flexible schedule on as and when
required by market conditions prior to that OMOs were conducted
under a fixed schedule. The Government Market Treasury Bills created
for replenishment of Govt. accounts are used as instruments.

T-bills

Market Treasury Bills (MTBs) are short-term instruments of

Government borrowing having the following features:
• Zero Coupon bonds sold at a discount to their face values
• Issued in three tenors of 3-month, 6-month and 12-months
maturity
• Purchased by individuals, institutions and corporate bodies
including banks irrespective of their residential status.
• Can be traded freely in the country’s secondary market. The
settlement is normally through a book entry system through
Subsidiary General Ledger Accounts (SGLA) maintained by banks
with State Bank of Pakistan (SBP). Physical delivery could be
affected if required.
• Profit is taxable at 20%
As at end June 2003, outstanding amount in MTBs was Rs 516.268 bn
(USD 8.901bn) including MTBs created for replenishment of Govt. cash
balances with SBP.

The distribution of these T-bills is achieved through the auction

mechanism. SBP acts as an agent on behalf of the government for
raising short term and long term funds from the market. The T-bills are
sold by SBP to twelve approved Primary Dealers through multiple price
sealed bids auction.
 The Auction for MTBs is held under a fixed schedule on
fortnightly basis.
 The Auction for PIB is held on quarterly basis. Since September
2003, the sale of PIBs is done under Jumbo issuance mechanism
under which the previous issues are reopened in order to
enhance the liquidity in the secondary market.

• As a prerequisite for launching long term bonds, Primary Dealer

System was introduced in FY00 and seven banks were chosen by
SBP on the basis of their treasury expertise and infrastructure,
past performance as market makers and capital adequacy.
Based on the experience with the Primary Dealers the Primary
Dealers rules were revised in FY03 in which the minimum paid up
capital requirements were relaxed to allow brokerage houses to
act as primary dealers. The Primary Dealers (PDs) are given
explicit responsibility of developing an active secondary market
by supplying non-PDs and institutional investors with PIBs.
• In order to allow an effective price discovery mechanism each PD
is allowed to short sell 5% of the target amount before the
auction.
• Non competitive bidding upto 10% of the target amount in PIB
was introduced in FY03 in order to diversify the investor base
and encourage participation from retail investors.
• With the view to enhance secondary market liquidity in long term
bond market, Jumbo issuance mechanism for the sale of PIB was
introduced in September 2003. This step is expected to lessen
the segregation in Government bond market arising out of too
many issues of different sizes and coupon rates trading in the
market. Also the announcement of quarterly sale target, helps
market participants in forming expectations about long term
Government borrowing requirements.
• In January 2004, PIBs of 15-year and 20-year maturity were
introduced to provide long term yield curve for corporate sector,
housing finance and infrastructure projects.
Swap Desk
The Foreign Exchange Swap Desk was established in September 2001
to manage the liquidity in both the FX and Money Market.

Capital markets

Capital market can be further divided into the following categories:

• Bond markets
• Equity markets
• Derivatives

Bond markets

The bond market in Pakistan is comprised of debt and debt like

securities issued by a) the Government; b) statutory corporations; and
c) corporate entities. As of June 30th, 2003, the size of the Pakistan’s
bond market was approximately Rs. 1,892 billion equivalent to USD
33billion. The bond market is clearly dominated by the Government,
which accounted for Rs.1,852 billion (or 98%) of total bonds
outstanding as of June 30th, 2003 followed by corporate entities Rs. 25
billion (1.32%) and statutory bodies Rs.15billion (0.79%).
The following table shows the outstanding position of bond market
during the period June 30th, 2003 as compared to June 30th, 1996.
Debt Instruments FY2003 FY1996
Amt Rs. in Amt Rs. in USD in
mn USD in mn mn
mn
Government 1,852,391 31,938 901,402 15,541
Debt
Permanent Debt 427,908 223,788
Floating Debt 516,268 421,742
Un funded Debt 908,215 252,902
25,000 431.03 1,000 17.241
Corporate Debt
Statutory 15,000 258.62 13,400 231.03
Corporation
The secondary market trading volume in the Government bond market
as measured by average daily turnover is approximately Rs. 20 bn
which is 5% of the total outstanding debt.

Government debt: Pakistan Investment Bonds

After the suspension of auctions of the long term Federal Investment

Bonds (FIBs) in June 1998, there was no long term marketable
government security that could meet the investment needs of
institutional investors. Therefore, in order to develop the longer end of
the Government debt market for creating a benchmark yield curve and
to boost the corporate debt market, the Government decided to launch
Pakistan Investment Bonds in December 2000. These bonds have the
following features:
• Issued in five tenors of 3, 5, 10, 15 and 20-years maturity.
• Script less security managed through SGLA
• Purchased by individuals, institutions and corporate bodies
including banks irrespective of their residential status.
• Coupon and target amount announced by SBP in consultation
with Ministry of Finance
• Payment of Profit on semiannual basis. Profit is taxable @10%.
As at end June, 2003 outstanding amount under PIB was Rs. 228.665
bn. Equivalent to USD 3.94 bn.

As for T-bills, the distribution mechanism is auction and the primary

dealers deal in these government securities.

National saving certificates ( find sum info on this)

WASB bonds ( statutory bodies) ( find sum info on it)

Equity

Corporate bonds- term finance certificates

Pakistani debt capital market is at a nascent stage but it has the

potential of growing manifolds. The market has witnessed good
response to some of the recent TFC issues. Interest in the public
offering has been on the rise, and most of the public offers were over-
subscribed. However, there are many challenges that need to be
addressed before our bond markets can be said to be fully developed.
The small size of the markets has an adverse impact on liquidity and
this seriously hampers the active participation of issuers and investors.
There is a need therefore to add greater depth to the market by
encouraging a wide variety of corporations to participate as issuers
and facilitating the creation of investment products that meet the
needs of investors. Participation of investors - institutional, individual
and foreign – need to be enhanced. Where appropriate,
legislation and other restrictions that hamper activities of market
participants need to be reviewed. Adequate provisions for information
disclosure, accounting standards, rating organizations, and other
market infrastructure are pre-requisites, in addition to a fully
functioning government bond market that provides an effective
benchmark yield curve for pricing

on the corporate bond front, one of the biggest problems regarding their
marketability is that Term Finance Certificates (TFCs) are not included as approved
investments in the Statutory Liquidity Requirement (SLR) of commercial banks and
SLR of NBFIs. This is surprising because NIT units which are similar to these
certificates but have not been rated by an approved credit rating agency are
approved investments for maintenance of SLR.

NIT Units
These are open-end mutual funds that are issued by National Investment Trust.
NIT units’ unique attraction is that it provides investors with a one-window entry
to Pakistan’s equity markets, which at times can be illiquid and volatile.
Capitalization is not fixed and normally shares are issued, as people want them.
Mutual Funds
These are pooling together the savings of large number of investors for attractive
yield and appreciation in value. A mutual fund is a diversified portfolio of
investment, managed by fund manager, who has necessary expertise of
investment.
Investment is made in types of securities (equity or debt) according to the
investment policies laid down in the prospectus / offering document.
There are two types of mutual funds, which are:
− Open-end mutual funds
− Close-end mutual funds
Open-End Mutual Funds
Open-end mutual funds are those where subscription and redemption of
shares are allowed on continues basis. The price at which the shares of
open-end funds offered for subscription and redemption is determined by
the NAV after adjusting for any sales load or redemption fee. In Pakistan
there exists only four open ended mutual funds; National Investment (Unit)
Trust (NIT) in the public sector and Pakistan Stock Market Fund (PSM),
Pakistan Income Fund (PIF) and Unit Trust of Pakistan (UTP) in private
sector.
Close-End Mutual Funds
Close-end mutual funds are those where the shares are initially offered to
the public and are then traded in the secondary market. The trading usually
occurs at a slight discount to the NAV.
Page 15
24
Over a period of time, the mutual fund managers have developed a variety
of investment products to cater for the requirement of investors, having
different needs. These include:
− Growth funds
− Balanced funds
− Income funds
Growth Funds
The "growth funds" offer potential for appreciation in share value,
while the current income may be low. The fluctuation in share price
may also be high. Such funds invest in stocks and have tendency to
outperform other funds and other modes of savings over a period of
time.
Balanced Funds
The "growth and income funds" or "balanced funds", offer
prospects of both moderate appreciations in share value as well as
current income. The fluctuation in share price may be low. Such
funds invest in stocks, corporate debts and Government paper.
Income Funds
The "bond fund" or "income funds", offer good current income but
very little potential for growth. Such funds invest in government
paper, bonds issued by municipal or local bodies, corporate debts

and in stocks of utility companies, offering regular return

Mutual Fund Industry considered to be the backbone of fixed Income Market is at

its infancy in Pakistan. Pakistan was the pioneer in the field of Mutual Funds in
the South Asia Region, when it launched National Investment Trust (NIT), an
open-ended mutual fund in 1962, followed by the establishment in 1966 of
Investment Corporation of Pakistan (ICP), which launched a series of close-ended
mutual funds. Both NIT and ICP were established in the public sector. However, it
(Pakistan) subsequently failed to maintain the tempo of the initiative taken in the
field until early nineties mainly due to following reasons: (i) Frequent changes in
economic policies; (ii) High rates of alternative investment such as NSS; (iii)
Capital outflow; Limited investment options; (iv) Profusion of risk free investment
options in Government securities; (v) Lack of awareness among the general public