Pinning hope on the materialisation of politico-judicially embattled government’s recent tax-related reforms at the Karachi Stock Exchange (KSE), the KSE management foresees an imminent closure of the country’s largest stocks market if swift and effective remedial measures were not taken to address an annual operational loss of Rs300 million the Exchange was facing for last two years. Also, KSE Wednesday said declining volumes had “almost destroyed” the brokerage houses at the KSE whose net yearly profit had dipped to negative Rs1.3 billion in 2011 from Rs2.2 billion in 2008.
“We are operating on our reserves funds. If this continued the Stock Exchange would shut down,” KSE Managing Director Nadeem Naqvi told a briefing on “Karachi Stock Exchange: Issues and Prospects” here at KSE Wednesday.
Dwelling on past five years’ financial performance of KSE, the MD said the Exchange’s operating revenues had reduced to a nominal Rs303 million from Rs668 million in 2007. KSE’s net profit shrank to Rs50 million from 2008’s Rs772 million. The operational side was gloomier as, he said, the Exchange was facing an operational loss of Rs295 million and Rs314 million during last two years, 2010 and 2011.
Chairman Muneer Kamal, however, later explained that the MD did not mean a closure saying the front regulator had some reliable investment revenues too to be counted on. About the brokerage industry, Naqvi, citing a sample of 50 active brokerage houses, said due to declining volumes the annual brokerage commission had contracted to Rs1.7 billion in 2011 from Rs6.1 billion before 2008 crisis., while their total income came down to Rs3.2 billion from Rs8.4 billion.
He said the net yearly profit of the brokers had dipped from Rs2.2 billion to negative Rs1.3 billion. “The brokerage industry is almost destroyed,” said the MD. Talking of negative implications of 2008 crisis, Naqvi said the crash, which the chairman KSE clarified was in fact a “national economic crisis”, cost the exchequer over Rs4 billion collectable from stocks market on account of various taxes that Naqvi said had shrunk to “Nil”. On the positive side, the KSE has finalised work on the Electronic Traded Funds (ETF), a basket of stocks that trades like an index and enables the investors to hedge against investment risks. ETF is due on the capital market within a month time while the KSE has so far spent $5 million to upgrade its technology platform to international standards.
He said the Exchange has envisaged to broadening the investor base to 0.5 million by December 2014 from the existing 250,000 through employing a comprehensive time-bound action plan to generate investor awareness by joint efforts of the apex and front regulators. Comparing equity shares with other asset classes like gold, Defence Saving Certificates, PIBs, T-bills and other deposits, Naqvi said KSE along with gold was the asset class which had protected the investors against the double digit inflation Asset class comparative. The launch of IPO initiative by the three exchanges under the umbrella of South Asia Federal of Exchanges, co-option of investment banks, DFIs, detailed review of listing regulations and launching a dedicated SME exchange were some of the initiatives his side was working on to increase the number of listed companies.
He said the listed companies, through issuing right shares, had raised equity capital worth Rs316 billion during 2002-2011 from the stock market, which also contributed over Rs122 billion in the national kitty between 2003 and 2007 on account of privatisation through the stock exchanges. For example, he said, DG Khan Cement, Engro Chemical and NIB Bank were the private entities which had, respectively, raised Rs5.4 billion in last six years, Rs11 billion in four years and Rs34.0 billion in last six years. “The KSE collected taxes worth Rs17 billion between FY05 and FY11,” he added.
About investors’ protection, the managing director said the risk-averse investors were being empowered through strengthening the technology-driven regulatory regime where a trader would receive an instant email or SMS alert from Central Depositary Company (CDC) and NCCPL whenever a broker moved any of his/her share in the Universal Identification Number (UIN). Dwelling on structural issues that were hampering the market growth, he said included anomalies relating to corporate tax structure, lack of liquidity due to absence of banks from capital market, poorly designed imposed CGT, absence of market makers, lack of incentives for debt market, investment-related problems facing the Non-Resident Pakistanis and lack of a systemic, institutionalised effort to expose Pakistan’s capital market to global investors and the Pakistanis living abroad.
