Karachi Stock Exchange. Issues & Prospects. Presentation by: Nadeem Naqvi Managing Director. Karachi Stock Exchange. February 15,

Transcription

1 Karachi Stock Exchange Issues & Prospects Presentation by: Nadeem Naqvi Managing Director Karachi Stock Exchange February 15,

2 Karachi Stock Exchange (KSE): Profile I KSE is owned by 200 members There are 10 directors; 5 elected by members; 5 nominated (including MD) by the Securities & Exchange Commission of Pakistan Active members are approximately 135 at present Over 600 companies are listed on the Exchange Market Cap. is currently at US$34bn (US$75bn in Mar 2008) Value Creation : 2.94x the listed companies Market Value of paid up capital of 01

3 Karachi Stock Exchange (KSE): Profile II Benchmark indices 1) KSE-100 Index 4) KMI-30 Index 2) All Share Index 5) Oil & Gas Index 3) KSE-30 Index 6) Banking Index Strong Systemic Risk Management System State-of-the-art technology platform Seamless electronic integration of Trading (KSE), Clearing (NCCPL) and Settlement/Custody (CDCPL) New Product Pipeline: SLB, MTS, ETF s, Sector Indices, Cross Border Index Listings, Options 02

4 Business Functions of the Stock Exchange A PRIMARY MARKET Mobilise savings into productive investment for economic development B SECONDARY MARKET Maximise liquidity at the lowest cost per transaction C RISK MANAGEMENT Pre-trade; trade execution; post trade clearing and settlement of transactions 03

5 Regulatory Functions of the Stock Exchange Licensing of members / brokers Listing regulations of companies Corporate Governance of listed companies Market monitoring & surveillance of trading activity to ensure fair play, efficiency & auditability Penalty for infractions of regulations Formal Reporting to SECP 04

6 Asset Class Comparative Performance KSE Gold DSC PIBs T-bills Deposits* % 8% 15% 13% 11% 6% % 9% 13% 10% 6% 4% % 9% 9% 6% 2% 2% % 15% 8% 7% 2% 1% % 12% 8% 8% 7% 3% % 26% 10% 10% 8% 3% % 22% 10% 10% 7% 4% % 32% 11% 13% 11% 6% % 33% 12% 13% 13% 6% % 30% 12% 13% 13% 6% Average 33% 20% 11% 10% 8% 4% * Weighted average deposits rate as per SBP data 05

7 Capital raised from the Stock Market Total amount of equity capital raised by listed companies through issuance of rights shares during the last 10 years ( ) was Rs316bn Demonstrates the important role that KSE has played in allowing companies to raise long term capital for growth Over PkR122bn was raised by the Government of Pakistan between from privatization through the stock exchanges Indicates how the Government of Pakistan has been the direct beneficiary of a thriving capital market that allows market driven valuations of state owned companies 06

8 Examples of private sector fund raising DG Khan Cement Co bn bn bn bn Rs5.4bn in 6 years Engro Chemical bn bn bn bn Rs11.4bn in 4 years NIB Bank bn bn bn Rs34.0bn in 6 years 07

9 KSE-100 Index History KSE-100 Index 16,000 15,676 14,000 12,000 12,262 10,000 8,000 6,000 4,000 4, Source: KSE 08

10 Philippines Thailand Indonesia Malaysia Pakistan Sri Lanka Singapore Hong Kong India Vietnam China Regional Performance - I (June 30, 2011 Dec 31, 2011) 5.0% 1.9% 0.0% -5.0% -1.6% -1.7% -3.1% -10.0% -9.2% -11.0% -15.0% -15.2% -20.0% -17.7% -18.0% -18.7% -20.4% -25.0% Source: KSE; Bloomberg 09

11 India Vietnam Hong Kong Singapore Philippines Pakistan Thailand China Indonesia Malaysia Sri Lanka Regional Performance - II (Jan 2, 2012 Feb 14, 2012) 16.0% 15.5% 13.9% 13.5% 12.9% 11.0% 6.0% 9.2% 8.1% 7.9% 6.6% 3.4% 2.3% 1.0% -4.0% -9.0% -14.0% -19.0% -17.5% Source: KSE; Bloomberg 10

12 Market Cap to GDP Unrealized Potential 50% 46.4% 45% 40% 35% 36.5% 31.6% 33.7% 30% 25% 24.9% 20% 15% 10% 9.9% 15.6% 16.1% 18.3% 18.2% 16.5% 5% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Source: KSE; Economic Survey FY11 *As at Mid Feb

13 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 Average Daily Turnover (Shares mn) (Shr mn) * 50 * CY12: Jan todate Source: KSE 12

14 03-Mar Mar Mar Apr Apr May May Jun Jun Jul Jul Aug Aug Sep Sep Sep Oct Oct Nov Nov Dec Dec Jan Jan Feb Feb Mar Mar Mar-09 KSE-100 Crisis Period Performance KSE-100 Index 16,000 12,000 Market All Time High at 15,676 (Apr 18,08) 8,000 Imposition of Floor at 9145 (Aug 27, 08) Market Bottom at 4815 (Jan 26, 09) 4,000 Source: KSE 13

15 Key Causes of 2008 Market Crisis High leveraging, a phenomenon in most global markets since mid-2000 s Sell-off by foreign funds in tandem with global market sell-off in the summer of 2008 Investor defaults leading to brokerage houses receivables build up and pledging of clients shares to banks SBP s sudden change in regulation regarding banks exposure quantum to equities/broker loans Margin calls by banks & associated forced sell-off of securities collateral, accentuating downward pressure on market Regulatory panic via artificial floor imposition & no arrangements for short-term liquidity for Pakistan market in contrast to full liquidity support by regulators in other markets 14

16 Capital Market Contribution to Taxation KSE Collected Taxes worth PkR17bn between FY05 FY11 (PkRbn) FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: KSE 15

17 Declining Volumes Impact Broker Performance PkRbn Brokerage Commission PkRbn Total Income PkRbn Net Profit Source: KSE; Based on a sample of 50 active brokerage houses 16

18 KSE: 5-Year Financial Performance PkRmn 1,400 Operating Revenue 1,397 PkRmn 1,000 Operating Profit 868 PkRmn 800 Net Profit 772 1,200 1, (200) (400) (295) (314) Source: KSE 17

19 Lessons from past crises INVESTOR PROTECTION Brokers quality & capability Strong financial penalty & regulatory coordination Preemptive risk management regime Power to the Investors Investor Protection Fund SYSTEMIC RISK MITIGATION Market Liquidity Robust margining regime Trade settlement guarantee Clearing House Protection Fund 18

20 Investor Protection a Key Point of Focus While enhancement in post event investor compensation has occurred, more work is required on the prevention side Strengthening of brokers financial, professional and risk management capability is one area of priority Regular reporting of brokers payables & receivables is another area to be focused upon to preempt problems turning into crisis Brokers sales personnel training emphasising financial planning and longer term investment rather than just trading Technology driven separation and management of custody accounts can significantly reduce risk of comingling 19

21 Empowering Investors to Protect Themselves Strengthened regulatory regime, driven by technology KSE Universal Identification Number (UIN) for each individual investor CDC CDC Investor UIN KATS Code KATS Code Auto tagging of CDC Sub A/C with UIN & KATS Code No comingling of investors funds with broker's funds (separate bank accounts) NCC SMS & alert service on any share movement / transaction in UIN from CDC & NCC 20

22 Managing Operational Risk: Key Measures Information Security No removable storage devices in KSE employee computers All personal /media sites blocked Information flow matrix strictly enforced Security cameras at sensitive locations Risk Management Gateway to Members Client Level Margining Client shares by the broker can not be utilized for his own business or trades of other clients New Margining Regime Concentration margins at all leveraged & futures markets; liquidity margin in the ready market over and above existing VAR margins 21

23 New Initiatives to Broaden Investor Base Launch of vision 2014: 500,000 investor base by Dec 2014 versus approx. 250,000 at present Comprehensive, time bound action plan to generate investor awareness by joint forum of all capital market institutions, SECP and the reactivated Institute of Capital Market New regulations by SECP to encourage individual investor participation New product rollouts including sector indices, Options, ETFs, market-maker regulations, cross-listing of Regional Index derivatives Initiation of personal financial planning / wealth management training program for brokers and mutual funds sales personnel 22

24 New Initiatives to Increase Listed Companies Launch of IPO Initiative by the three exchanges under umbrella of South Asian Federation of Exchanges (SAFE) Cooption of investment banks, DFI s, investment banking divisions of large banks & top-tier brokers to market the IPO concept to privately held businesses Detailed review of listing regulations in order to reduce paperwork/application process timeline for listing, under guidance of SECP Initiative for launching a dedicated SME Exchange 23

25 KYC & CDD Initiative Changes in Exchanges regulations mandating brokers to follow international KYC and Customer Due Diligence (CDD) guidelines by Anti Money Laundering Task Force as per international compliance standards Rollout of Broker education programme regarding anti money laundering laws & regulations, KYC and CDD Mandatory creation of compliance function by all brokers Assisting brokers in defining internal KYC guideline and implementing KYC and CDD activities on an ongoing basis Stronger system audit regime to monitor KYC Compliance 24

26 Structural Issues Hampering Market Growth Corporate Tax Structure Anomaly Partnership/Proprietorship Tax rate of 20-25% versus corporatized business tax rate of 35%. This is a huge disincentive to listing on the stock market Lack of liquidity Banking sector nearly absent from capital market financing; partially due to stringent regulations and partially due to crowding out by Govt. borrowing Capital Gains Tax Conundrum Poorly designed and inappropriately timed imposition of new CGT regime. Perception of unfair treatment for equity investors (c.f. investment in govt. securities; no tax on agricultural sector; non implementation of RGST on trade services). Further, perceived fear of harassment by taxofficials of individuals has driven out retail investors from the market 25

27 Structural Issues Hampering Market Growth Absence of Market Makers Till date, absence of market makers has been a key cost of low or nil liquidity in the derivatives market. This is changing Lack of Incentives for Debt Market SBP still to focus on developing a robust domestic secondary market for Govt. debt at retail level. As that happens the stock market and brokers can became a strong retail distribution network for the Govt. and help reduce cost Problem facing NRP s Cumbersome SCRA regulations a major disincentive for Non-Resident- Pakistanis (NRP s) to invest in the domestic equity market Lack of international marketing No systematic, institutionalized effort to expose Pakistan s capital market to global investors and the Pakistani Diaspora 26

28 Sustainability of an Exchange Information Technology THE VALUE PROPOSITION Quality of Human Resources Access to Customers Products & Services Rules & Regulations Risk Mgmt. Regime Licensing of Brokers Capital Resources Supportive Govt. Policy 27

29 THANK YOU 28