AN OVERVIEW OF STOCK MARKETS IN PAKISTAN

Theme of the Article

features of the Stock market in Pakistan focusing on post liberalization period. liberalization of market Market integration trading and settlement mechanism corporate governance

Unique features of Pakistan's stock market

Smaller in size but more active. provided very high returns to investors.

Pakistan's stock markets

KSE is Pakistans first and one of the oldest stock exchanges in emerging markets. established in 18 September 1947 Lahore Stock Exchange 1974 Islamabad Stock Exchange 1997

Turnover at Exchanges
85% of the turnover occurs at KSE, 14% at LSE and 1% at ISE

market capitalization
At the end of year 2007, 671companies were listed on the exchange market capitalization US$70.18 billion listed capital of US$12 billion. fiscal year 2006-2007 Pakistans GDP US$143 billion.

KSE 100 INDEX

market capitalization weighted index of 100 stocks The securities traded in the market include ordinary shares, preference shares, redeemable certificates and term-finance certificates.

Since 2001, the market has seen a rapid growth in capitalization and trading volume. IFC (1992) it was ranked third according to percentage increase in the local stock market index in 1991

ranking
More recently in 2002 Pakistan was reported to be the best performing market in the world according to the US news magazine Business Week ranked first and third in 2003 and 2006 respectively (Global Stock Markets Fact book).

LIBERALIZATION OF THE MARKET

market liberalization is expected to reduce the liberalizing country's cost of equity capital. Pakistans market was officially liberalized in February 1991. transfer of shares to foreigners were no longer required to have prior approval.

IMPACT OF LIBERALIZATION
real GDP growth declined and real investment growth become negative. volatility after liberalization has greatly increased.

Integration with the world market.

asset returns in segmented markets are determined by the local risk factors while for integrated markets global risk factors portfolio allocation benefits. The simplest measure of market integration is provided by the correlation coefficient between the country stock market indices.

February 1993 correlation of Pakistans equity market with the US market is -0.01. the correlation of Pakistans equity market with the Morgan Stanley Capital International (MSCI) and the overall world market index is reported to be 0.02 and 0.04 respectively.

Hussain and Saidi (2000) used cointegration analysis to investigate integration of Pakistan equity market with the developed markets of US, UK and Japan .

TRADING AND SETTLEMENT MECHANISM

intermediary functions between the buyers and sellers of security in the KSE are performed by brokerage firms. At the close of 2007, there were 200 members. the Central Depository Company of Pakistan (CDC) was established in September 1997.

The CDC registers and maintains the transfer of securities in the form of an electronic book-entry. It transfers the ownership of securities without any physical movement. 97 percent of settlements are routed through CDC. The regulated trading in the KSE is carried out through computerized Karachi Automated Trading System (KATS). The trading divided into four segments each of which has its own settlement procedure.

Capital gain is currently tax exempted. The dividend income is however subject to withholding tax at different rates depending on the investor type. A minimum dividend tax of 5% is charged if the recipient is an insurance company

For other institutional investors the rate is 10%. For individual investors, the dividend income is treated as a separate block of income to be taxed as usual income.

(OTC) MARKET
badla An investor or a broker buys shares with the intention to make a profit but without committing money directly. the investor can carry forward his position from one settlement date to another in a speculative trade with an agreed interest rate called the badla rate which is determined by supply and demand .

The badla rates are higher when prices are decreasing, the financiers refuse to clear the payments causing brokers to default. The financier has incentive to withdraw from the falling market causing further falls in prices.

Continuous Funding System

SECP has started replacing the badla trading with future trading.