Karachi: The Karachi Stock Exchange (KSE), Pakistan’s largest, may sell a 10% stake to an overseas partner before its initial share sale to help spur trading on a market that has risen 14-fold in six years.
“I have received interest from a number of regional, even European exchanges, including the Dubai International Financial Exchange,” Razi-ur-Rahman Khan, chairman of the Islamabad-based Securities & Exchange Commission of Pakistan, said in Karachi on 16 July. “A foreign stock exchange could take a 5% or 10% stake, become an active partner and play an active role in management.”
Pakistan’s KSE 100 index has surged to $70 billion (Rs2.83 trillion) in market value from $5 billion in 2001 as investors shrugged off street protests against President Pervez Musharraf and violence by militants along the border with Afghanistan. The NYSE Group Inc., operator of the world’s largest stock exchange, this year invested in neighbouring India’s biggest market.
Selling a stake “would be a step in the right direction because it will help bring in technology infrastructure, cross-border listings and product development,” said Abdul Aziz Anis, who oversees the equivalent of $58 million in stocks and bonds as chief executive of Alfalah GHP Investment Management Ltd in Karachi. “We’re still a plain vanilla exchange and we need derivatives and other products to be brought in.”
Companies from West Asia, including Emirates Telecom Corp. and Emaar Properties PJSC, accounted for 13% of Pakistan’s foreign investment in the 11 months ended 31 May.
The Karachi exchange, home to companies including Oil & Gas Development Co. and Pakistan Telecommunications Co. plans to demutualize, or convert to a public company from a body owned by its members, by December. Under a reform plan started in 1997, independent management, automated trading and risk management systems were introduced at the exchange.
Sale arranger Deutsche Bank AG will complete its valuation by August and an initial public offering of shares could take place early next year, said Khan, 57, who was appointed chairman in January 2006. Memberships are valued at about Pakistani Rs100 million (Rs6.8 crore), valuing the exchange at about $340 million.
Options, which are contracts granting their buyers the right to buy or sell a security at a set price, will be introduced by December, Khan said.
Overseas investors doubled their investment in Pakistani stocks to $1.8 billion in the 11 months ended 31 May, from $947 million a year earlier, according to central bank data.
The regulator also plans to install a surveillance system by October to curb insider trading. The Kolkata, Bangalore and Delhi stock exchanges in India, and the bourse and market regulator in the Philippines are using the technology, said Amer Hashmi, chief executive of System Innovations Pvt. Ltd in Karachi, which has procured and will implement the facility. “This will be a real-time system which will give us minute-by-minute updates of who is doing what and will flag us to various trading patterns,” Khan said. “Before recently, market surveillance was zero. Now, action will be taken against brokers and others found guilty of breaking the law.”
The regulator made it mandatory in June 2006 for brokers to use identification numbers to help track individual clients.
The commission needs to use trade logs, order logs and recorded phone lines at the offices of stock exchanges, brokers and fund managers to “facilitate the tracking of culprits in the event of abnormal trading activity or price movement,” said Mohammad Shoaib, who oversees Pakistani Rs11,000 million in stocks and bonds as chief executive officer of Al Meezan Investment Management Ltd in Karachi.
“Time and again, corporate results are leaked out and there is abnormal price movement prior to the announcement, but unfortunately nothing is done by the regulator to catch insider traders,” he said. “Existing regulation must be implemented.”
The Securities & Exchange Act of 1969 provides foras much as three years in prison for insider trading and fines amounting to as much asthree times the amount of gains accrued. The commission plans to hire 200 employees this year. It currently employs 560.