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ISLAMABAD STOCK EXCHANGE
Specialization: Banking and Finance
Chairman, Department of Business Administration
Name: Komal Shujaat
DEPARTMENT OF BUSINESS ADMINISTRATION ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD
I would like to acknowledge and extend m y heartfelt gratitude to the following persons who have made the completion of this Internship Report possible:
Sir Waqar Akbar (Tutor) for his vital motivation and the assistance he provided.
encouragement, much needed
Sir Usman Rashid (Head of Investors Relation s Department-ISE) for the splendid help and inspiration he extended and most important, for the contribution of his knowledge.
The Staff of ISE, for assisting in the collection of the material for this report.
Most especiall y to my famil y and friends.
And to Allah who made all things possible.
LIST OF CONTENTS
List of Contents
1: Executive Summary of the Report
2: Objectives of Studying ISE
3: Overview of the Organization 3.1 Brief History 3.2 Nature of the Organization 3.3 Business Volume 3.4 Number of Employees 3.5 Product Lines of ISE
3 3 6 8 9 10
4: Organizational Structure of ISE 4.1 Board Composition 4.2 Management of ISE 4.3 Departments of ISE
15 15 18 19
5: Structure and Function of Finance Department of ISE 5.1 Structure of the Finance Department 5.2 Finance & Accounting Operations 5.3 Role of Executive Finance 5.4 Use of Electronic Data 5.5 Sources of Funds 5.6 Generation of Funds 5.7 Allocation of Funds
29 29 30 36 37 39 41 44
6: Critical Analysis of the Theoretical Concepts Relating Practical experiences 46
7: Financial Analysis of ISE 7.1 Balance Sheet of 5 Years 7.2 Income Statement of 5 Years 7.3 Ratio Anal ysis of 5 Years 7.4 Horizontal Anal ysis of Balance Sheet 7.5 Horizontal Anal ysis of Income Statement 7.6 Vertical Anal ysis of Balance Sheet 7.7 Vertical Anal ysis of Income Sta tement 7.8 Organizational Anal ysis with reference to Competitors 7.9 Future Prospects of the Organization
50 50 54 57 64 69 72 76 79 82
8: Weaknesses of ISE
10: Recommendations for ISE
List of Tables
Business Volume of ISE Number of Employees of ISE Main codes for Assets Depreciation Rate/Year Main codes for Liabilities Sources of Funds Allocation of Funds Balance Sheet (of Latest 5 Years) Income Statement (of Latest 5 Years) Liquidit y Ratios Solvency Ratios Activit y Ratios Profitabilit y Ratios Market Performance Indicators Horizontal Anal ysis of Balance Sheet Table 1 Horizontal Anal ysis of Balance Sheet Table 2 Horizontal Anal ysis of Income Statement Vertical Anal ysis of Balance Sheet Table 1 Vertical Anal ysis of Balance Sheet Table 2 Vertical Anal ysis of Income Statement Total Assets, Liabilities & Funds of KSE, LSE & ISE
7 8 30 31 31 39 44 50 54 57 58 59 60 61 64 66 69 72 73 76 80
List of Graphs
Graphs of Key Figures of Balance Sheet Graphs of Key Figures of Income Statement Liquidit y Ratios Graph Solvency Ratios Graph Activit y Ratios Graph Profitabilit y Ratios Graph Indexes Graph Turnover of Shares Graphs
51 55 57 58 59 61 62 62 64 67 69 72 74 76 77 81
Graph 1 of Key Values of Balance Sheet (Horizontal Anal ysis) Graph 2 of Key Values of Balance S heet (Horizontal Anal ysis) Graph of Key Values of Income Statement (Horizontal Anal ysis) Graph 1 of Key Values of Balance Sheet (Vertical Anal ysis) Graph 2 of Key Values of Balance Sheet (Vertical Anal ysis) Graph 1 of Key Values of Income Sta tement (Vertical Anal ysis) Graph 2 of Key Values of Income Statement (Vertical Anal ysis) Graphs of Key Figures of KSE -LSE-ISE
List of Charts
List of Acronyms
CCP CFS COT DCA DIC DIR ISE ISE-CTS KSE LSE MD NCCPL NCSS OTC RBQ RMS SECP TFC UIN UTS VAR Competition Commission of Pakistan Continuous Funding Settlement Carry Over Transactions Department of Companies‟ Affairs Department of Internal Control Department of Investors‟ relations Islamabad Stock Exchange ISE – Computerized Trading S ystem Karachi Stock Exchange Lahore Stock Exchange Managing Director National Clearing Company Pakistan Limited National Clearing Settlement S ystem Over the Counter Ready Board Quotation Risk Management Structure Securities Exchange Commission of Pakistan Term Finance Certificate Unique Identification Number Unified Trading Platform Value at Risk
1. EXECUTIVE SUMMARY OF THE REPORT
Islamabad Stock Exchange is the thir d largest and youngest stock exchange of Pakistan. I joined it as an internee on August 26, 2009 and worked there up to November 2, 2009.
Doing internship in a financial institution after completion of 15 courses and writing an internship report is a nec essary part m y MBA degree program. The main purpose of this report is to review the finance and accounting system and practices implemented by Islamabad Stock Exchange which I learnt during m y 8 weeks of internship at Islamabad Stock Exchange.
M y report contains overview of the organization, organizational structure, functions of finance department, critical anal ysis of theoretical concepts, financial anal ysis of the organization , weaknesses of the organization, conclusions and recommendations as required.
2. OBJECTIVES OF STUDYING ISLAMABAD STOCK EXCHANGE
To understand Stock Market and its working .
To appl y theoretical knowledge to practical practices .
To understand work performed by various departments of ISE .
To see the working of stock e xchange and brokerage houses .
3. OVERVIEW OF THE ISLAMABAD STOCK EXCHANGE (ISE)
3.1 Brief History of ISE
Islamabad stock exchange (ISE) was incorporated as a guarantee limited company on 25th October, 1989 in Islamabad capital territory wi th the main object of setting up of a trading and settlement infrastructure, information s ystem, skilled resources, accessibilit y and a fair and orderly market place that ranks with the best in the world. It was licensed as a stock exchange on January 7, 1992. For the first time, it started trading in Jul y, 1992.
Initiall y an outcry method of trading (a method of trading that uses verbal bids and offers in the trading pits) in shares was adopted which was replaced with the automated trading system (a compu terized system for matching orders in securities ) commonl y called “ISE-CTS” in 1997. In the year 2002, ISECTS gave way to “ULTRA TRADE” trading system which is not onl y very efficient but also has extended trading capacit y, internet trading functionalit y.
transparency in the securities trading. It has been designed in such a way to provide automatic matching of bids and offers for execution purpose. All orders are treated in strict price and tim e priorit y, thus ensuring a pure auction market where no order is overlooked or traded through. In this manner, the best trade is executed and passed on to the participants without human interference. Printed confirmation and status messages are
immediatel y received by a member for each of his order.
Remote Trading or Internet Trading has been implemented in ISE on 23 June 2003. Now Brokers can trade from anywhere in the world using remote trading software of ISE with the same robustness as working on the LAN.
Islamabad Stock Exchange joined hands with Lahore Stock Exchange on 30 April 2007 to establish a Unified Trading Platform to help in bringing increased liquidit y in the market, improv ing price discovery, maximiz ing transparency, increas ing turnover, broadening investor base, curtail ing risks and distortions in trade, provid ing cost effective service to the investing public and enhancing the image of both the Exchanges.
Investor Protection Fund has been established in ISE for the protection of investors. ISE took the initiative to introduce system audit of brokers in 2002 and made it compulsory for maintaining internal control on members. To increase market transparency and improve its surveillance capacit y, the Unique (Client) Identification Number (U IN) S ystem was launched at pre trade level in August 2006 in ISE.
Also a new risk management structure (RMS) was introduced in December 2006 in ISE. New RMS included, among others, a new netting regime; a margining system based on value at risk (VAR) and capital adequacy. The VAR is a state of the art risk management system practiced internationall y that takes into account risk associated with each share based on historical data. S ystem audit of brokers was introduced in 2003 and made necessary.
When ISE was established T+7 settlement cycle was used for settlement of shares. T+3 was introduced in 2001 which has been replaced by T+2
settlement cycle in August 2007 to reduce the overall settlement risk in the market.
ISE incorporated Code of Corporate Gove rnance in its listing regulations on 2002 to strengthen corporate governance practices in companies of Pakistan. In order to implement a good corporate governance practices in stock exchanges of Pakistan, ISE took the lead to elect a non -broker Chairman fo r the year 2006. Exchange Board of ISE was restructured in 2003 according to which the Board of Directors constituted of 10 members, of whom 5 are elected members of the Exchange, 4 are non -members nominated by SECP, and an independent non -member Managing Director is appointed by virtue of his office.
On 1 January 2004, ISE launched its own capital weighted index which is ISE-10 index with a base date of Dec 31, 2002 and a value of 1000. Before its launch ISE was using index of KSE -100 and ISE Network Inde x which was launched on November 1996.
Currentl y Islamabad Stock Exchange has 119 members against 200 as allowed to the exchange, in terms of Article 3(a) of Articles of Association. Of 119 members, 26 are individual and 93 are corporate members.
There are 261 companies listed in Islamabad Stock Exchange at them moment. However, number of listed companies varies from time to time due to delisting, mergers and default of companies.
3.2 Nature of the business of ISE
Islamabad Stock Exchange is a market where shares and securities are bought and sold by the Member/Broker on behalf of their clients and also on their accounts. The principal activit y of ISE is to conduct, regulate and control
the trade and business of stocks, shares securities, bonds, gover nment papers, loans and other investments or securities of like nature. It is the third largest and the youngest stock exchange of the country.
Islamabad Stock Exchange is registered as public company limited by guarantee (not having share capital) under the Companies Ordinance, 1984 and regulated as stock exchanges by the SECP under the Securities and Exchange Ordinance, 1969. It is a mutual body in which trading rights of members are embedded with ownership rights. It implies that when a person acquires membership of stock exchange by buying a membership seat he obtains perceived ownership right as well as the right to become the broker subject to relevant laws. Every member has one voting right. Every member of the Exchange guarantees to contribute a ce rtain sum in case at the time of winding up of the company, the liabilities of the institution exceeds its available assets, however, this guaranteed money does not exceed Rs.1000/ by each member.
Islamabad Stock Exchange is a non -profit organization. No part of its revenue can be distributed amongst its members. Their assets can onl y be distributed to members in case of winding up. Clause 24 VI of Memorandum of Association of ISE states that:
“The income and propert y of the Exchange whensoever derived shall be applied solel y towards the promotion of the objects of the Exchange as hereinabove provided and no portion thereof shall be paid or transferred, directl y or indirectl y by way of dividend or bonus or otherwise, howsoever, by way of profit to the persons who at any time are or have been members of the Exchange or to any of them or to any person claiming through any of them.”
Pursuant to the powers conferred on the Securities and Exchange Commission of Pakistan (SECP) through the Securities and Exchan ge Ordinance, 1969, the SECP has compiled a draft of the Stock Exchanges (Corporatisation, Demutualization and Integration) Bill, 2009 which has been passed by the National Assembl y on October 8, 2009 and is likel y to be taken up by the Senate soon. After enactment, the company will be corporatised and demutualized thereby it will transform into a public company limited b y shares. Then the profit earned from the operations would be distributed among the stakeholders and every share would have one voting rig ht.
3.3 Business Volume of ISE
De s cr ipt ion ( in M ill io ns) Re v e nu e In v es tm en ts De p os i ts A d va nc es 20 0 5 73 . 45 13 9 .7 8 1. 3 1 7. 8 9 20 0 6 86 . 46 10 8 .8 1 1. 1 2 11 . 23 20 0 7 88 . 71 24 8 .7 5 1. 2 4 9. 6 4 20 0 8 10 9 .1 6 17 6 .4 6 1. 2 4 11 . 43 20 0 9 13 0 .5 3 10 9 .6 9 1. 5 0 14 . 98
Business Volume in terms of revenue is increasing every year which is a good sign for ISE. Volume of Investments is varies in every period. They greatl y decrease in year 2009 due to their utilization by ISE. Volumes of Deposits show the same trend in all these 5 years. However, Volume of Advances seem to show a different rend and its main re ason of increase in year 2009 is on account of advance paid to Managing Director (wh ich is almost 2 million) pursuant to the approval of SECP.
3.4 Number of Employees of ISE
There are total 55 employees working at ISE as follows:
Ma n ag i n g D ir ec t or S ec r e t ar y, G M O p er at i ons , Ex ec ut i v e S ec r e t ar y De p ut y S ec r e t ar y, De pu t y Ma n ag ers , Ex ec u t i ve F i na nc e, Pr oj ec t D irec t or As s oc i a te Ma n ag er s Ma n ag er s O f f ic er s , Ac c ou nt a n ts , Pers o na l
7 3 4
S ec r e t ar y to MD S up p or t St af f , O per a to r s , Pr ot oc ol S ec ur i t y G u ar ds , O f f ic e B o y,
G ar dn er , L if t O p er a t or T ota l
3.5 Product Lines of ISE
ISE offers products and its services to investors, members and companies.
3.5.1 For Investors
The most important customer s of Islamabad Stock Exchan ge are investors. Investors can invest in one or more of the available products of ISE. ISE earn profits on the trade transaction fee earned from the transactions of investors. For investors, ISE has the following product line:
Ordinary Shares: The most common form of shares, other than preferred stock; entitles the owner to a share of the corporation‟s profits and a share of the voting power in shareholder elections. Holders may receive dividends,
rights or bonuses which vary in accordance with the profi tabilit y of the company and decision of the company. Ordinary Shares have historicall y been the highest return class asset class and one of the few that beat inflation; however the returns come with high, short to medium -term risk.
Preferences Shares: Preference shares are the shares have a preference over ordinary shares, carry a fixed/specified rate of dividend which is paid before the dividend on ordinary shares. The preference shares often do not carry voting rights. Preference Shares are less risky th an ordinary shares but few companies issue them.
Modaraba Certificates : Modaraba Certificate is a certificate of definite denomination issued to the subscriber of the Modaraba acknowledging receipt of money subscribed by him. Modaraba certificates are an Islamic
mode of financing which hold s less risk and can hold high yi elds in case of increase of shares.
Bonds: Bonds are debt securities usuall y having a fixed income. The returns from fixed income in struments are lower than share s, and are usuall y lower than inflation. However, the low returns are compensated by low risk and low volatilit y. ISE doesn‟t have a very active bond market.
Term Finance certificates (TFCs): A debt instrument issued for the purpose to raise fund in the form of redeemable capital . They also have fixed income and maturit y of more than one year. Currentl y, there are no TFCs registered in ISE
Future Contracts : A Futures contract involves purchase and sale of securities at some future date at a price fixed today. Futures contracts ar e volatile since the price of the securities involved in these contracts can vary. As a result futures contracts entail a substantial risk to the investors involved in futures trading. ISE offers the following two t ypes of future contracts: Deliverable Futures: The amount specified of the underl ying
securities of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. They are considered to be very risky due to which they are discontinued o n 8 April, 2009 on the notice of SECP . Deliverable Future market has already been re-launched since last week of July 2009 at other bourses and very soon be operative at ISE.
Cash Settled Futures: A cash payment is made based on the underl ying reference ra te of the securities. They are less risky then deliverable future contracts.
Mutual Fund Units : Mutual Fund is a diversified portfolio of securities invested on behalf of a group of investors and professionall y managed by Asset Management Companies. Mutua l Fund Units can provide investor with regular income or consistent capital appreciation. They are riskier than fixed income securities but they offer more return than them. ISE offers following two t ypes of Mutual Funds: Close-Ended Mutual Fund: Closed-end mutual funds are activel y managed funds that raise capital onl y once, by issuing a fixed number of shares. The price of a share in a closed -end fund is determined entirel y by market demand, so shares can either trade below their net asset value ("at a di scount") or above it ("at a premium"). Open-Ended Mutual Fund: Open ended mutual fund is a type of mutual fund that does not have restrictions on the amount of shares the fund issues. If demand is high enough, the fund will continue to issue shares no matt er how many investors there are. For most open-end funds, shareholders are free to sell their shares at any time, although the price of a share in an open -end fund will fluctuate dail y, depending upon the performance of the securities held by the fund. Ben efits of open-end funds include diversification and professional money
management. Open -end funds offer choice, liquidit y, and convenience, but charge fees and often require a minimum investment.
financing product is currentl y available in ISE. Carry over transactions (COT) or „badla‟ introduced in 1994 was stopped in 2005. Continuous Funding Settlement commonl y known as “CFS” system was introduced in 2005 to replace COT which was again repla ced by CFS MK -II on Jul y 2008. On 8 April, 2009 CFS MK -II was discontinued on the notice of SECP without offering of any substitute product. New Margin Financing S ystem as proposed by Consultative Group on Capital Market has been approved b y SECP. It has yet to be implemented.
3.5.2 For Members/Brokers
A member/broker of the stock exchange is entitled to do share trade for himself or his clients/investors . For members following products and services are provided by ISE:
Membership Seat : A member/broker is either an individual or corporate body that owns a membership of the exchange and is authorized to deal in scrips listed on the exchange. Members have to buy membership seat to become a broker of ISE and they also annuall y pay charges for being the member of ISE. ISE offers individual and corporate memberships .
Rooms for Members: Members usuall y prefer to sit inside stock exchange for trading transactions. ISE offers rooms in its new towers to brokers. It also provides services like electricit y, gas, gen erator, etc.
Technology: ISE also provides technology to members or brokers for trading in stock exchange. It provides “ULTRA TRADE” to members which is stock
trading software targeted for small to medium sized stock exchanges. It is a highl y scaleable exchanges. an d cost effective solution has for been the used emerging for the stock best
performance and very good response time to the end -user. Recent benchmark result shows that system is capable of at least 100,000 trades per hour. ISE also provides remote trading or internet trading to brokers.
3.5.3 For Companies/Issuers:
This segment contains the companies whose shares can be traded at the Exchange. For companies, ISE provide the following service :
Listings: ISE provides a place for listings of securities of companies. Companies pay listing fee to ISE for getting their securities listed in ISE. Following is the listing fees which companies have to pay for listing their securities: Companies Having Paid -Up Capital Upto Rs. 10 Million Above Rs. 10 Million Above Rs. 20 Million Above Rs. 30 Million Above Rs. 40 Million Above Rs. 50 Million Rate of annum) Million Million Million Million Fee (Rs. per
& & & &
upto upto upto upto
Rs. Rs. Rs. Rs.
20 30 40 50
1,250.00 2,500.00 3,750.00 5,000.00 6,250.00 7,500.00
4. ORGANIZATIONAL STRUCTURE OF ISE
Board of Directors
Department of Companies‟ Affairs
Department of Internal Control
Department of Investors‟ Relations
Department of General Administration/ Finance
IT Wing/ Department
Department of New Building and Towers
Org a ni za tio na l C ha rt o f I S E
Note: Organogram of the organization is in Annexure I
4.1 Board Composition
The affairs of the Exchange are governed by the Board of Directors. The Board of Directors of ISE consists of ten members. Five Directors are elected each year from amongst the members/brokers communit y. Four Directors are nominated by SECP for the corresponding term with the elected Directors. The Managing Director is a permanent Director on the Board by virtue of his
office. The Chairman of the Board is elected in the first meeting by the entire Board Members except for Managing Director who plays a neutral role during the course of such electi on.
The responsibilities, powers and functions of the Board of Directors are given in: 1. 2. 3. The Companies Ordinance (Sec 196) Articles of Association of ISE Listing Regulations of ISE
Following were the BOD for year 2009:
1. 2. 3. 4. 5.
Mr. Rashid Akhtar Chughtai (nominee director of ISE, Chairman) Mr. Aftab Ahmad Ch. (managing director of ISE) Mr. Mohammad Afzal Khan (nominee director of ISE) Mr. Waseem ul Haq Malik (elected director of ISE) Mian Humayun Parvez (nominee of M/s. Mian Parvez Aslam Securities (Pvt.) Limited)
Ch. Iftikhar Ahmad Lt. Col(Retd) (nominee of M/s. SIS Securities (Pvt.) Limited)
Mr. Aslam Khaliq (SECP‟s nominee) Syed Mukhtar Hussain Jaffery (nominee of M/s. Unex Securities (Pvt.) Limited) 16
Mr. Farrukh Younus Khan (nominee of M/s. Y.S. Stock (Pvt.) Limited)
Mr. Muhammad Shahid Sadiq (nomine director on the Board of Directors of the Exchange)
All elected and nominated Directors retire in the AGM by October 31 each year and new Board is elected accordingl y.
4.2 Management of ISE
The day-to-day affairs of the Exchange are managed by the management headed by a full time Managing Director, who is assisted by the Company Secretary and the General Manager. Other people in management include Deput y Manager Operations, Manager Operations, Hea d of Finance and Accounts, Deput y Manager of General Administration, Deput y Secretary, Deput y Manager Internal Control & Deput y Head of Surveillance
Department, Manager IT, Associate Manager IT, Project Director Towers, Deput y Manager Infrastructure, Build ing Support Officer and Building Accounts and Record Officer.
Besides, there are a number of committees which look after as well as facilitate various aspects of Exchange‟s working. For instance, there is a Listing Committee which takes care of listing of new companies on the Stock Exchange. Then there is Trading, Regulation and Technology Committee whose responsibilities pertain to issues relating to trading, regulations and technology. Arbitration Committee is another such committee which is entrusted with the task of arbitration in the matter of trading disputes among members and between members and investors when the same cannot be resolved amicabl y.
4.3 Departments of ISE
The main departments of Islamabad Stock exchange and their functions are given below in detail:
4.3.1 Department of Companies Affairs
Department of Companies Affairs is headed by Deput y Manager DCA who has to report to Manager Operations. Department of Companies Affairs oversees the following matters:
Ensure Listing Require ments: A company that seeks to offer its shares to the public and wishes to appl y for a listing on the Stock Exchange must compl y with the listing requirements of the Exchange, in addition to compliance with the provisions of the Companies Ordinance, 1984. The companies interested in getting listed in ISE send their applications with adequate disclosure documents to this department and listing fees. The department then processes and anal yzes the applications and the sent documents. After clearing those docu ments, it puts the case before Trading, Regulation and Technology Committee of Exchange for consideration and recommendation. Once approved by the Chairman, company is listed on the ready board quotation (RBQ) of the Exchange.
Compliance with Code of Corp orate Governance: The main document, which comes under consideration of department of Companies‟ Affairs, is the code of corporate governance. With continuous listing requirements,
department of Companies affairs has to ensure compliance of code of corporate governance as specified by SECP.
Post-Listing Monitoring: The requirements of the Exchange for listing relate to management and company procedures, disclosures, provisions concerning the issue of prospectus for the issue of shares to the public, distribution of financial statements and other matters to keep the public and the exchange(s) adequatel y informed on all aspects of the affairs of the company, which may affect the market value of its shares. Department of Company Affairs monitors that whether t he requirements of listing are completed by the listed companies or not.
This department also keeps an eye on the company affairs of the listed companies that whether they are going according to the rules and regulations of Islamabad Stock exchange, wheth er the company issues public notices, right issues, bonus issues and whether they pay their listing fee regularl y or not.
Quotation Wing: Quotation Wing of Department of Companies‟ Affairs provides ready board quotations of listed companies in Islamabad S tock Exchange. It calculates the index of market operations on the dail y basis after the closing of trading activities and forwards this index result to media.
Record Room: Department of Companies Affairs also has a record room which keeps the record of a ll the listed companies. These records include annual reports, semiannual reports & public notices issued by the companies time to time. It also dispatches the letters, reports & notices to the companies and members and keeps its record.
4.3.2 Departmen t of Internal Control
Department of Internal Control is headed by Deput y Manager DIC who has to report to Manager Operations. Department of Internal Control controls and members and oversees the following functions:
Grant of Stock Exchange Membership: Department of Internal Control deals with granting membership to brokers. Onl y a member of the stock exchange is entitled to do share trade for himself or his clients/investors. One can start the business of share trade as a broker onl y after having the membership of any stock exchange and then registration as broker with the SECP. The members of ISE are required to fulfill the eligibilit y
criteria/registration process defined by Islamabad Stock Exchange and the SECP. The authorized strength of membership at ISE is 200, but a far less number actuall y maintain an „active‟ brokerage house. The membership at ISE is of two t ypes namel y the corporate memberships and individual memberships.
Registration of Brokers/Agent with SECP: A member desirous of acting as broker makes an application to the SECP in Form as set out in the First Schedule of the Brokers and Agents Registration Rules 2001 for grant of a certificate of registration through the ISE. Department of Internal Control of ISE forwards the application to th e SECP within 14 days from the date of its receipt.
System Audit of Brokers: The system audit of the members is overseen by department of internal control. Under the system audit, members are bound for audit from reputable charted accountant firm. ISE has devised a
comprehensive procedural framework so that each and every broker must be s ystematicall y audited at least once in two years under system audit regulations. In this context ISE has constituted a panel of system auditors comprising 12 QCR rated Cha rtered Accountant Firms. After reporting from charted account firms a list is prepared for purpose of such audit regarding to members. If the report is unclear or qualified than some time is given for re audit, despite the time giving if the members fail t o re audit or for clearance such audit, the report is send to SECP. After the receiving the report from SECP, the action is taken against such member. During the year 2008 -09, s ystem audit of 18 brokers were completed whereas system audit of 2 brokers is under progress.
Monitoring & Surveillance: Department of Internal Control monitors price fluctuation and trading patterns to ensure compliance with regulations and detection of speculative activities. It does online monitoring during market operations and offline monitoring by post trading checking of concentrations and susceptible positions, etc. This department imposes circuit breakers and trade halts in order to save sudden volatilities like erosion or abrupt hike of scrip prices. It instantaneousl y veri fies the announcements and rumors from the concerned quarters.
IT Wing: IT Wing/(sub -)department also comes under Internal Control. The main responsibilit y of IT department is to monitor computerized trading. ISE has a full y computerized system. Bids (buy orders) and offer (sale orders) are placed in the trading software (currentl y “ULTRA TRADE”) and then executed. IT is also responsible for website designing, software upgrading, s ystem maintenance, database maintenance, networking and to resolve IT related problems of any department of ISE. IT Department is maintaining a
multiple VLAN network of about 250 nodes which is operating at 100 MBPS. Through it, ISE is connected with SECP and other stock exchanges of Pakistan.
Risk Management: Department of Inter nal Control also monitors risk management. Department of Internal Control ensures risk management at different levels and has taken the following measures: Circuit breakers are applied in case of price fluctuation 5% or Rs. 1.00, whichever is higher, from the closing price of the previous day. The requirement of Net Capital Balance has been enhanced by 10 times to Rs. 0.75 million for ISE. The definition of net capital balance is redefined to make it more realistic. (Rules of Net Capital Balance Certificate) The Members are required to maintain a capital adequacy ratio, which is 25 times of their net working capital. The exposure must not exceed 25 times the net capital employed. The members‟ ability to trade up to Rs. 50 million without margin was abolished and all exposure is now subject to margin. Investor protection fund and clearing house protection fund had been established on the directive of SECP. The undisclosed market system has been introduced. The trading cycle was reduced to T+3 net settlement sy stem from T+7 days. Now T+2 system is adopted. Blank selling is abolished.
Penalties are imposed on members on violation of rules of Islamabad Stock Exchange.
Clearing and Settlement: Clearing and settlement is done under the supervision of Department of Internal Control. Clearing and settlement s ystem has been outsourced by ISE to NCCPL. Now NCCPL performs trade settlement function at national level. NCCPL not onl y facilitates the trade of brokers executed through the official trading system within the ex change but also the broker to broker trades between brokers of different exchanges and institutional deliveries. On the settlement date the trading brokers fulfill their cash and share delivery obligations to NCCP L for the settlement of all trades.
4.3.3 Department of Investors’ Relations
Department of Investors‟ Relations is headed by Associate Manger DIR who has to report to Manger Operations. The main purpose of Department of Investors‟ Relations is to facilitate investors. Department of investors‟ relations performs the following main functions:
Provide Information to Investors: Department of Investors‟ Relations provides routine information related to market prices of shares, etc., to investors on their request. Its main objective is to facilitate i nvestors in every way it can. ISE has installed hotline for providing online repl y to some basic questions about the stock market. For this purpose ISE has obtained a Universal Access Number i.e. 111 -ISE-ISE (111-473-473). Extension of Department of IR is 113 on which it provides answers to queries of investors.
Deal Complaints of Investors: Department of Investors‟ Relations deals with all the complaints of the investors. Investor Complaint Registration Form is available on website of ISE. ISE receives co mplaints of a varied nature. Of these the most common are those that are lodged against the brokers/members of the stock exchange. These relate to:
• • • • •
Unauthorized trading Unauthorized transfer of shares Non-suppl y of statements of account order execution problems Introduction of fake, forged and stolen securities
Department of Investors‟ Relations reviews and evaluates complaints of the investor against member. After complaint seems appropriate the matter is then taken up with the concerned member who is/are requested to send his/their comments/observations to the ISE, a copy of which is also sent to the complainant. The matter is likel y to be resolved at this stage. In case reservations remain despite the exchange of correspondence, Department of IR may initiate an investigation in order to ascertain the true facts of the matter. This could involve inviting both parties to a face -to-face meeting for resolving the matter through Floor Committee. If even then the dispute remains unsettled, the case is referred to Arbitration Committee.
Complainant and members can also file an appeal against the award announced by arbitration committee.
Handle Legal and Default Cases: Investors can also file cases against members of ISE in Civil Court. The department of Investor relation is the representative and defender of ISE in the civil court in case of legal cases
against the member of ISE. It is responsible to provide all records regarding to member and concerned investor on the demand of court.
Department of Investors‟ Relations deals with default cases of members and the recovery and distribution of losses of the defaulters to the affectees. Board of Directors of ISE declares a member as default and then the matter is referred to Default Management Committee. ISE pays affectees of default cases on pro-rata basis from Investors‟ Protection fund and other assets of the defaulter. Department of IR handles this whole procedure and gives payments to affectees.
Educate Investors: Department of Investors‟ Relations h as taken initiatives of educating public about stock market in ISE. It arranges
presentations/briefings to the general public and students about the working and functioning of the stock markets. It also arranges seminars with speakers of great profile in t he corporate sector.
Maintain Records: This department maintains the records of the newspapers. Everyday they provide the news and articles related to stock exchanges and other important factors, which can affect the performance of stock market and related business, to Management of ISE for study. They also keep the record of cases of investors‟ complaints, default and legal cases which are often needed during audit.
Media Relations: Department of Investor Relations also maintains relations with media and provides them the information they need.
4.3.4 Department of General Administration/Finance
Department of General Administration and Finance is headed by Executive Finance who has and to report to company secretary. It performs of the
administration performs finance and administrative functions.
Administration Control: Department of General Administration performs the administrative functions such as planning activities, organizing events, recruiting staff and maintaining an overall control. Its main objective is to direct, supervise, plan and control the organization.
Finance Control: Mainl y this department has to carry out all book keeping related functions, make budget and ensure timel y au dit of the Exchange. It makes the accounting procedures for ISE. It also deals with corporate tax matters.
4.3.5 Department of New Building and Towers
This department has been newl y established within ISE to monitor the progress of ISE Towers and its mai ntenance and to do the marketing of ISE towers.
ISE Towers: ISE intended to construct a high -rise structure in order to cope with the up-coming demands of stock exchange business. For this purpose, ISE build new building which is properl y designed using l atest techniques to with stand against any natural disasters. Also the site selected for its
construction is situated in the respected area of federal capital territory. The salient features of this building are as under: ISE tower is 22 storey building lo cated at (plot no 3035) Jinnah Avenue Blue Area Islamabad. Area covered by the building is 562,629 sq.ft, it comprises of three levels of basements and ground plus 18 floors above. Basements have capacit y to accommodate three hundred cars at a time; also it has a plant room for latest HVAC system requirements. Ground floor is allocated for meeting the requirements of banks. First and second floor will provide space for the brokers, and above floors are reserved for Islamabad stock exchange offices. Each floor is provided with (6 No) passenger lifts, accompanied by one cargo lift and three stair halls. The central cooling and heating system is provided in the building and it is also equipped with latest communication and electrical systems. For a safe working environment, properl y designed fire fighting system is provided along with the emergency fire exists.
It was inaugurated by Prime Minister Syed Yousuf Raza Gilani on Jul y 31st, 2009.
5. STRUCTURE & FUNCTIONS OF THE FINANCE DEPARTMENT OF ISE
5.1 Structure of the Finance Department
ISE has a combined department for general administration and finance. It is headed by Sagheer Mushtaq who is Executive Finance of ISE. He is qualified CMA and holds sufficient experience of Audit and Finance fields. Under hi m works S yed Nayyer Ashfaq who is Deput y Manager of General
Administration. He is managing the accounts and administration of the Exchange. He is a Commerce Graduate and pursuing further studies in Business Administration field. Under him, work 2 Accounts Officers and 1 Accounts Assistant.
The main function of this department is to make accounting policies and procedure with the aim to present a true financial position of ISE financial statement. This department is also performs the administrative functio ns for the ISE such as sanction of leaves, approval of tour program.
Note: Organogram of the Finance Department is in Annexure II.
5.2 Finance & Accounting Operations
5.2.1 Charts of Accounts
ISE does data entry in electronic form. Charts of Acc ounts have been established in Sidat Hyder -Financials which is the Accounting Software of ISE. Further processing in ledger and trial balance is done by that software automaticall y. Chart of Accounts also contains codes of accounts and sub codes for further explanation of accounts. 2 digits number is used for main code and a 3 digits number is used for the sub -code of the account. Accounts are arranged in ledger in financial statement order that is assets first, followed by liabilities, funds, revenue and e xpenses.
Assets are directl y recorded in Sidat Hyder – Financials. ISE has no special journals or registers for recording fixed assets or other assets. Codes of Assets are in between range of 01 - 29. Following are first ten codes of asset:
Main codes for assets Fixed assets Accumulated depreciation Long term investment Capital work in progress Securit y deposit Advance against expenses Advance against salaries Advance against source Advance against tax deduction Advance prepaid
01 02 03 04 05 06 07 08 09 10
depreciation years or depreciation rate: Depreciation Rate/Year Leasehold land Furniture and fix tures Office Equipments Vehicles Computer and related equipment
99 years 10% 10% 20% 33%
Data-entry for Liabilities is also done directl y in the accounting software. Codes of Liabilities lie in range 30-49. Following are the first ten codes of liabilities:
Main codes for liabilities Accumulated deficit 30 Member fund 31 Clearing house taxes 32 Rent received in advance 33 Advance from companies 34 Accrued expenses 35 Payable audit fee 36 Securit y deposits from 37 companies Member default 38 Sundry creditors 39
Member Protection Fund was established to meet the counter part y liabilities caused by clearing house default by member. Similarl y, Investor Protection Fund was established for distribution to those investors who might suffer loss due to the default of members of the company. Till 2007 Members Protection Fee and Investors Protection Fee were included in funds but accounting practices changed in 2008 and instead of funds, they were
included in non-current
as per requirement
Regulations, instead of Member Protection Fund, ISE has established the Settlement Protection Fund on June 30, 2009 by transferring funds available in Members‟ Protection Fund and accumulated surplus to meet the counter part y liabilities caused by cleari ng default of a member. This Settlement Protection Fund is also treated as non -current liabilit y by ISE.
ISE is a company limited by guarantee which doesn‟t have the share capital. So, sponsor‟s equit y is represented by funds. General entrance fee fund is the main fund which represents the entrance fee taken from new members who enter the market of ISE. Codes of funds lie in 60s.
Codes of Revenue lie between 60 -79. All the sources of revenue whether in form of cash, cheques, pay order or demand draft are first recorded in receipt book which contains receipt vouchers. Receipt Voucher has to be signed by any accounts officer or assistant. Original receipt voucher is given to the person or company who made the payment and 2 carbon copies containing yellow and pink color are maintained by ISE for their own record. This revenue amount is then deposited in bank account of ISE. Before submitting the amount, an entrance is made in depository slip book of ISE. Depository slip contains source of revenue, amount of ca sh and cheque, pay order or demand draft number of the source of revenue. One side of depository slip is torn and given to bank while other is maintained with ISE for their record. After depositing the amount, it is also manuall y entered in Cash Book Register. Every quarter bank statements are reconciled with the amount on Cash Book register. If that amount in cash book register is collect, it is electronicall y entered in Accounts of Sidat Hyder – Financials.
Codes of Expense lie in between 80 -99. Expenses made are either in form of cash paid from pett y cash fund of ISE or in form of cheque. Expenses paid in form of cash are written on pett y cash voucher and their amount is entered in pett y cash voucher register. Expenses which are paid in form of bank che ques are recorded on vouchers made by Sidat Hyder – Financial Software and from there the amount is directl y recorded under expense head. Pett y Cash Voucher has to be signed by managing director, general secretary, or manager of general administration depa rtment. Incase of bank cheques, minute sheet of expenses signed by any one of managing director, general secretary or deput y manager of general administration, has to be attached with voucher.
ISE has onl y one voucher for cash receipts. Th ere are two vouchers for cash payment. One is for cash expenses made for pett y cash fund and other is for bank cheques which are made by Sidat Hyder Software. All vouchers contain the following particulars:
(i) (ii) (iii) (iv) (v) (vi)
Name of the Organization Voucher t ype Date of the voucher Voucher number Account title Account code
(vii) Reference (viii) Amount debit (ix) (x) (xi) Amount credit Amount in words Amount in figures
(xii) Name of person who made the expense or gave revenue (xiii) Authorization
The budget is made on quarterl y basis as we ll as on yearly basis. Every department sends its estimated expenses to the finance department. Finance department makes estimates for the revenues for the quarter and overall expenses estimates. According to both estimates, it makes the final budget. At the end of every quarter, comparison between the budgeted amount and actual amount using variance anal ysis is made in “Management Report”.
ISE conducts following two t ypes of audit:
Internal audit: There is a separate internal audit departmen t which overall sees the financial controls. The qualification of Internal Audit is ACMA.
External audit: The audit is done at the end of quarter in ISE by a reputable firm as selected in the Annual General Meeting. After the completion of quarterl y audi ts, the annuall y audit is also done. Since 2004, M/s. KPMG Taseer Hadi and Company, Chartered Accountants are being appointed as external auditors of ISE.
Special audits are also conducted when required like Regulatory Audit of ISE conducted in 2008.
5.3 Role of Executive Finance
Executive Finance performs the following functions as an overall finance manager:
Financial Management: Executive Finance takes the investment, financing and asset management decisions of ISE.
Corporate Planning: Finance Executive performs the process of drawing up detailed action plans to achieve an organization's goals and objectives, taking into account the resources of the organization and the environment within which it operates.
Fund Management: ISE has three different t ypes of funds. Executive finance administers all these three funds.
Analysis of Financial Statement: Executive Finance does the anal ysis of financial statements and takes decisions on is basis.
Internal/External Reporting: Executive Finance does the internal and external reporting of financial statements of ISE.
5.4 Use of Electronic Data
The finance department keeps all the financial data in electronic form. All financial statements such as balance sheet, income statement, statement of cash flows are prepared electronicall y through the software “Sidat Hyder Financials” prepared by a Sidat Hyder Morshed Associates (Pvt) Ltd. The main features of that software are as follow:
Sidat Hyder-Financials is an award winning suite of accounting applications catering to the accounting requirements of any organization. There is onl y need to just define a chart of accounts of all expenses, income, purchases, sales, suppliers, customers, assets and capital of all the major event of a business in the software. It then automaticall y makes ledgers, income statement and balance sheet of business on a specific date.
It contains sub modules of General Ledger and Fixed Assets. General Ledger Module can be easily configured to fulfill all the accounting requirements of any size and t ype of business organization. It offers features like budgeting, cost centers, user defined system configuration, customized reporting, choices of database (MS SQL Server, S ybase or Oracle), Secure Audit Control, Flexible Vou chers, flexible data processing, special provision for payments and tax, etc.
Fixed Assets module is an easy-to-use, full featured system that saves hours by streamlining organization, maintaining current fixed -assets records, maximizing controls and gene rating up-to-date reports. The module is designed to serve as an ideal tool for all asset management requirements
providing complete asset handling from acquisition, transfer, adjustment, write off to disposition, comprehensively maintaining and organizing all related records and producing depreciation schedules for financial and tax purposes.
Sidat Hyder-Financials also has a spreadsheet like “Report Writer” which enables to use any of available anal ysis parameters to design Financial Statements. Differen t mathematical operations, reporting layouts, fonts and options to make comparative anal ysis, etc., are available for effective and optimal report and design and utilization.
Data prepared by that software is used by management of ISE for decision making and preparing future plans. The first report which is generated is the budgeting report which contains the budgets allocated to various departments of ISE. Then Management Report is generated which contains the anal ysis of financial statements and comparis on between budgeted and actual figures is made for some time period.
5.5 Sources of Funds
Following are the sources of funds and their figures for latest five years:
20 0 5 G en e ra l Ent r an c e Fe e F und M embe rs' P rot ect ion Fu nd Inv e sto r s' P rot ect ion Fu nd Fe es a nd Sub s c ript ion L is t i ng F ee - A n n ua l L is ti n g Fe e - A d d it i on a l L is t i ng F ee - I n it i al Lis t in g Fe e In ac t i v e Mem b ers h i p Fe e T rad in g Fe e – L AG A Mem b ers h i p Co n v ers io n f ee P art n ers h i p/ M em be rs h ip T rans f er F e e O th er F ees a n d S ubs c r i pt i o n 270,357,074 20 0 6 270,357,074 20 0 7 270,357,074 20 0 8 270,357,074 20 0 9 281,457,074
4,417,500 21,863,582 3,841,474 30,122,556 2,985,000 3,821,917 1,800,000 210,500 8,817,417 38,939,973
4,680,000 38,089,506 1,413,868 44,183,374 3,500,000 1,528,444 1,099,750 78,000 6,206,194 50,389,568
4,815,000 54,494,132 1,200,000 60,509,132 7,500,000 760,839 105,000 700,000 109,050 9,174,889 69,684,021
4,980,000 46,157,089 1,700,000 52,837,089 7,400,000 1,486,788 40,000 800,000 109,840 9,836,628 62,673,717
5,135,000 63,089,486 360,000 68,584,486 7,300,000 264,792 10,000 500,000 172,120 8,246,912 76,831,398
O the r O p er at ing Inc om e Inc om e f rom f in anc i a l as s ets - P rof it o n In v es tm en t a n d B ank D e pos i t - G a i n o n s a le of as s e ts a v a il a b le f or s a le
3,049,684 Inc om e f rom Re l at e d P ar t i es - D i v id e n d I nc om e - P rof it o n l o ans f rom k e y m anag em en t pers o n ne l - I nc om e f r om of f ic es s u b l et t o d irec to rs Inc om e f rom n on f in anc i a l as s ets - I nc om e f r om of f ic es s u b l et t o m em bers - R oom T r ans f er Fe e - Fr om m em ber s ag a i ns t s er v ic es - O ld L i a bi l i t ies W ritten Bac k - M is c e l la n eo us 6,099,368 1,000,000
11,630,589 305,775 1,566,726 1,566,726
14,349,177 280,409 679,338 1,215,722 2,175,469 -
14,206,571 337,514 380,838 1,020,000 1,738,352 281,096,108
15,101,558 121,000 869,950 869,950 396,401,219
15,657,028 1,400,000 723,183 723,183 742,911,722
Long te rm Lo an
Adv an c es , de pos it and oth e r r ec ei pt s Sh a re of Pr of it of As s o ci at ed Comp an i es Long- t e rm inv e stm ent s Sho rt - t e rm inv e stm ent s
General Entrance Fund is the main source of revenue which has remained constant over 4 years and was slightl y increased in year 2008 -09 due to Entrance of new members in market of Islamabad Stock Exchange. Long-term loan was taken from year 2007 which is one of the biggest source of funds in
year 2007, 2008 and 2009. Advances and other receipts are also a big source of fund taken on account of ISE towers. Long -term investments also contribute a great deal towards funds of ISE.
5.6 Generation of Funds
Funds are generated from all the above sources in the following way:
Annual Listing Fee @ Rs.25,000 per annum from each listed company.
Additional Listing Fee @ 0.1% on the increased magnitude of paid up capital.
Initial Listing Fee @ 0.1% of the paid -up capital being listed by the Exchange from each of the new listing subject to a maximum of Rs. 1.0 million.
Trading fee – LAGA (trading Fee - laga in distributed in 3 parts; once part goes to members protection fund, other to investors protection fund and last t o income of ISE)
Inactive Membership Fee @ 100,000. Membership Subscription fee @ Rs.200,000 incase of individual member.
7. 8. 9. 10. 11.
Annual membership fee @ Rs.1,000 in case of individual member. Profits from Bank Deposits Profits on sale of assets available for sale Profit earned on loans given to key management personnel Income from offices sublet to directors
12. 13. 14.
Income from offices sublet to members Room Transfer Fee Income earned from members against services
5.7 Allocation of Funds
Following are the various places where funds of ISE are allocated and their figures for last 5 years:
2005 Ad m ini st r at iv e E xp ens e S al ar i es a nd b e n ef its O f f ic e r e nt T rav e li n g a nd lo d g in g P os t ag e , te l e ph o ne a n d f ax Pr i nt i ng a n d s ta t io n er y Ne ws p ap er s , bo ok s a nd per i o d ic a ls P ub l ic it y a nd ad v er tis em en ts A ud i t f e e Le g a l an d pr of es s i on a l c har g es Co ntr ac t s er v ic es : - S ec ur i t y - J an i tor i a l - O th er s Re p ai rs an d m aint e n anc e S em in ars , m eet i ngs a nd en t ert a inm en t T rad in g t ec h n ol o g y c har g es E lec tr ic it y, g as an d wa ter Ins ur anc e Mem b ers h i p f ee De pr ec ia t io n 201,600 276,000 458,806 4,149,015 952,825 1,039,881 155,432 197,710 6,300,656 7,924,225 11,550,715 1,553,058 720,306 590,449 96,023 80,080 100,000 1,784,604
8,837,221 12,952,216 1,139,498 515,525 677,451 104,472 12,500 150,000 1,170,698
11,863,513 14,078,673 578,120 345,950 934,897 120,399 96,025 250,000 1,802,257
15,370,231 16,519,861 692,891 360,634 537,873 71,765 733,450 300,000 3,103,416
21,612,584 16,524,313 1,197,186 416,501 1,042,462 55,450 578,400 350,000 2,428,700
201,600 276,000 546,523 1,098,850 1,643,917 1,042,301 896,466 712,757 7,920,008
264,000 420,000 769,631 1,038,283 3,034,837 1,212,194 971,315 1,062,136 7,259,318
241,597 485,000 90,475 751,570 964,451 3,523,099 1,321,895 935,559 1,182,749 8,309,352
366,900 684,000 75,691 947,694 1,146,530 3,228,836 1,549,578 1,362,554 1,046,226 11,533,815
Pr o v is i o n f o r ba d a n d do u btf u l d e bts B ank c h ar g es P es h a war tr a d in g f lo or ex p e ns es Dem ut ua l i za t i o n ex p e ns es M is c e l l an e ous Cor p ora t e Res p ons i b i l it y
97,829 116,580 795,454 39,141,248
101,500 56,767 182,772 2,093,349 42,332,391
661,040 118,075 363,889 2,177,871 49,422,423
1,228,464 82,029 129,355 638,203 1,004,031 58,577,950
1,689,375 82,702 86,642 3,476,115 752,311 920,000 73,154,565
T axat ion Los s of As s o ci at ed Comp an i es Fin an ce C ost a nd ot h er ch ar ge s
Office rent is the biggest place till 2008 where funds are allocated. 23 -30% of funds are allocated in office rent. 20 -31 % funds are allocated in salaries and benefits making it the second biggest expense till 2008. Salaries and benefits were the biggest expense in 2009. Depreciation utilizes almost 14 -19 % of the funds. Most of the funds of ISE are allocated in taxation. From 2009, a large portion of fund is also allocated in the finance an d other charges.
6. CRITICAL ANALYSIS OF THE THEORETICAL CONCEPTS RELATED TO PRACTICAL EXPERIENCES
During m y internship, I have examined the theoretical concepts what I studied as m y curriculum with those being pract iced and applied by the ISE .
ISE is a company limited by guarantee and so it has the following features: Company is without share capital Number of members is fixed by the articles Membership is transferable subject to the membership criteria as laid down by the Board Surplus funds ar e not distributable to the members in any manner The funds are used onl y for the purpose of promoting the objectives of the company
The income statement of ISE reveals the entire amount has been carried forward/retained and nothing has been distributed as the ISE is a not forprofit company and does not have a share capital as such no dividend is payable to any stakeholder.
Instead of Shareholder‟s equit y, ISE has funds and the main fund is general entrance fee fund collected from members when they join t he exchange.
ISE is following Companies Ordinance, 1984 and has its own Memorandum of Association and Articles of Association. The Islamabad Stock Exchange follows historical cost convention principles except for accounting for available for sale investm ents and gratuit y and compensated absences . The Finance Department has established a system of internal control.
ISE prepares following financial statements: 1. Balance Sheet 2. Income and Expenditure Account 3. Cashflow Statements 4. Statement of Changes in Funds ( in place of equit y ISE has funds so ISE prepares this financial statement in place of statement of changes in equit y) 5. Notes to the Financial Statements 6. Statement of Value Addition
These financial statements are presented in conformit y with the approved accounting standards which comprise of such International Reporting
Standards (IFRS) issued by the International Accounting Board and the requirements of the Companies Ordinance 1984. These financial statements are presented in Pakistani Rupees currency.
ISE uses accounting software for preparing financial statements. Data in the accounting software is directl y entered in ledger instead of entering in
journal first. ISE has no fixed assets register. ISE doesn‟t use any financial ratios in their reports. 0
Fixed assets are stated at cost less their depreciation and depreciation is charged to income on straight line so as to write off the depreciable amount of the fixed assets over their estimated useful lives. Provision for doubtful receivables is made on regu lar basis.
Revenues or income from various sources are recorded on accrual basis except for dividend income which is recognized when the company‟s right to receive dividend is established and except for income from bank and investments which is recognized on a time proportion basis.
Taxation is applied on ISE according to current income tax law and decision taken by the taxation authorities. ISE regularl y makes budgets every year using the variance method. ISE has both internal and external audits.
ISE is following the Code of Corporate Governance. Every year Annual General Meeting of ISE is held on October 31. Board of Directors of ISE contains of ten persons, half of which are broker Directors while remaining half are non-broker directors with Chairman also being the non-broker. ISE is using a functional departmentalization structure but there is no human resource department in ISE.
In theory we studied, New York Stock Exchange which is government regulated through SEC and is also self -regulated. Simila rl y, ISE is
government regulated through SECP and is also self -regulated.
There is a great inconsistency in the financial statements of ISE during different periods because ISE is still in growth phase. ISE still have to develop its market and is in the e fforts of doing it.
7. FINANCIAL ANALYSIS OF ISE
7.1 Balance Sheet (of Latest 5 Years)
P ART IC UL AR S FUN D S &LI AB I L IT IE S NO N- CU RR E NT LI AB IL IT I E S Mem b er s Pr ot ec t i o n F ee In v es t ors Pr o tec t i on F ee Def er re d L i ab i l it i es Lo n g- T erm Lo a n A d va nc es , D e pos i t & ot h er Rec e i pts T otal Non - Cu r re nt Lia bi lit ie s CU RR E NT LI AB I LIT I E S A d va nc es & D ep os its Ac c r ue d & ot h er L ia b i l it i es
17,371,648 12,892,573 3,270,545 0 256,406,338 289,941,104
19,187,644 14,397,076 3,200,174 0 454,944,048 491,728,942
19,855,014 10,145,084 3,348,685 281,096,108 653,734,496 968,179,387
20,852,480 11,143,164 11,231,205 396,401,219 948,106,033 1,387,734,101
0 12,589,569 25,989,945 742,911,722 1,449,372,572 2,230,863,808
39,835,123 11,453,316 0 0 4,209,099 55,497,538 345,438,642
25,754,074 36,472,497 0 0 4,371,224 66,597,795 558,326,737
48,838,790 55,818,507 0 0 0 104,657,297 1,072,836,684
57,014,110 29,664,743 0 0 0 86,678,853 1,474,412,954
41,177,468 101,231,360 34,305,127 222,873,517 0 399,587,472 2,630,451,280
Accrued mar kup Current portion of long term loan
Pr o v is i o n f o r T ax at i on T otal Cu r ren t L ia bi lit ie s T O T AL L I AB ILT IT I E S FUN D S G e ner a l E ntr a nc e F e e S urp l us o n r e m eas ur em ent of In v es tm en ts Ac c um ul at ed /( Def ic i t) S urp l us T O T AL F UN D S T O T AL L I AB IL IT I ES AND FUN D S AS S E T S NO N- CU RR E NT AS S E T S Fix ed T erm In v es tm en ts Lo n g T erm I n ves tm ent s Lo n g term a d v anc es a nd rec e i v a b les
874,228 43,903,912 345,399,435
2,669,589 77,253,839 383,865,222
14,246,664 105,000,043 419,603,879
3,086,255 143,366,218 416,809,547
(9,043,762) 123,432,318 395,845,630
386,844,611 39,778,024 3,866,901
562,286,730 51,181,299 6,623,517
1,086,893,187 65,916,033 5,332,083
1,567,912,127 48,332,843 6,712,744
2,745,922,534 88,012,935 9,562,179
Def er re d T ax a ti o n T ota l N on - C ur r e n t As s ets CU RR E NT AS S ET S Ac c ou nt R ec e i va b l es A d va nc es , D e pos i ts , Pr ep a ym en ts S hor t T erm I n ves tm en t A d va nc es tax - n et B ank Ba l a nc es - Fu n ds Cas h & Ba nk B a l anc es T ota l C urr e n t As s ets T O T AL AS S ET S
5,031,913 8,798,170 100,000,000 0 30,258,066 83,652,028 227,740,177 660,573,856
5,277,389 13,026,233 57,632,125 0 31,915,933 177,707,673 285,559,353 908,607,239
10,650,775 11,636,337 182,831,757 1,895,383 20,673,782 75,409,726 307,097,760 1,462,440,465
23,016,259 25,579,905 128,133,590 9,373,135 20,492,747 61,669,151 268,264,787 1,891,222,501
34,997,401 38,988,143 21,684,360 21,557,352 4,225,158 46,823,092 168,275,506 3,026,296,910
Graphs of Key Figures (in millions) of Balance Sheet
3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 2005 2006 2007 2008 2009 386.84 562.29 1,086.90 1,567.92 2,745.92
Long Term Investments
100.00 80.00 60.00 39.78 40.00 20.00 2004-05 2005-06 2006-07 2007-08 2008-09 51.18 65.92 48.34 88.01
350.00 300.00 250.00 200.00 150.00 100.00 50.00 2005 2006 2007 2008 2009 227.74 168.28 285.56 303.10 268.30
450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 389.59 350.27 315.14 416.81 395.84
450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 399.59
104.66 55.49 66.60
2,500.00 2,000.00 1,500.00 1,000.00 492.80 500.00 2005 2006 2007 2008 2009 289.94 968.17 1,388.46 2,230.86
7.2 Income Statement (of Latest 5 Years)
P ART IC UL AR S IN CO M E Fe e an d s u bs c r i pt i on O th er O p er at i n g Inc om e T otal In com e E X P EN DIT UR E A dm in is tr at i v e Ex p en s es
38,939,973 17,552,774 56,492,747
50,389,568 28,960,137 79,349,705
69,684,021 25,075,328 94,759,349
62,673,717 30,811,616 93,485,333
76,831,396 40,711,895 117,543,291
Pr o v is i o n f o r im pa ir m ent in th e v a l ue of i n v es tm en t S har e of Pr of i ts of As s oc i a te d C om pa ni es Su rp lu s f o r t h e ye a r befo r e t a xat ion
(6,049,524) 39,287,402 15,685,431 50,592,814
(9,358,029) 12,987,111 31,571,936
T ax at i on Su rp lu s f o r t h e ye a r af t er tax at ion Ac c um ul at ed s ur p l us bro u g ht f or war d Ac c u mul at ed S ur plu s ca r ri ed fo rw a rd
Graphs of Key figures (in millions) of Income Statement
140.00 120.00 100.00 80.00 60.00 40.00 20.00 2005 2006 2007 2008 2009 56.49 94.76 79.35 93.48 117.54
80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 2005 2006 2007 2008 2009 73.15 58.57 49.42 39.14 42.33
Profit before Taxation
60.00 50.00 40.00 30.00 20.00 10.00 2005 2006 2007 2008 2009 34.31 44.13 39.29 31.57 50.60
Profit after Taxation
45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 38.36 33.35 28.56 27.75
160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 43.90 143.36 123.43 105.00 77.25
7.3 Ratio Analysis
Note: Formulas used to calculate the following ratios are given in Annexure III.
7.3.1 Liquidity Ratios
Liqu idi t y R at i os W ork ing C ap i ta l ( in m il l io n) Curr e nt R at i o Q u ic k rat i o O p era t io n C as hf lo w R at i o 2005 172.25 4.10 3.45 -0.31 2006 218.96 4.29 3.61 0.47 2007 198.44 2.90 2.57 0.62 2008 181.62 3.10 2.46 0.73 2009 -231.31 0.42 0.26 -0.06
300 200 100 0 -100 -200 -300 2004-05 2005-06 2006-07 2007-08 2008-09
5 4 3 2 1 0 2004-05 2005-06 2006-07 2007-08 2008-09
4 3 2 1 0 2004-05 2005-06 2006-07 2007-08 2008-09
0.8 0.6 0.4 0.2 0 -0.2 -0.4 2004-05 2005-06 2006-07 2007-08 2008-09
Liq u id i ty Ra tio s G ra p h s
From liquidit y ratios we ca n see that Islamabad stock exchange does not have enough abilit y to meet its short -term obligations. Current Liabilities are a lot 57
more than their current assets which have led to great decrease in current ratio, quick ratio and working capital in 2009 . This is due to non -balance between current and fixed assets. ISE has acquired a giant fixed asset i.e. ISE towers but is not maintaining a proper balance between current and non current assets as most of economic resources of ISE are spend on that asset. Operating Cashflow Ratio also declined in 2009 as the operation cashflow was negative mainly due to transfer of cashflows to establishment of Settlement Protection Fund.
7.3.2 Solvency Ratios
So lv en c y Rat io s De bt t o T ot al As s ets R at i o Lo n g- T erm De bt R a ti o De bt t o Fu n ds R at i o Cas h Fl o w to T ot a l De bt Ra t io 2005 0.52 0.44 1.10 -0.05 2006 0.62 0.54 1.60 0.06 2007 0.73 0.66 2.75 0.06 2008 0.78 0.73 3.54 0.04 2009 0.87 0.74 6.65 -0.01
ISE has been greatly financed by debt which can be seen from solvency ratios. This debt was also taken to finance the project of ISE building. However, debt ratio has always remained less than 1 which means the firm doesn‟t has more debts than its assets. Long -term debt is increasing every
Debt to Total Assets Ratio
Long-Term Debt Ratio
1 0.8 0.6 0.4 0.2 0 2004-05 2005-06 2006-07 2007-08 2008-09
0.8 0.6 0.4 0.2 0 2004-05 2005-06 2006-07 2007-08 2008-09
Debt to Funds Ratio
Cashflow to Total Debt Ratio
8 6 4 2
0.1 0.05 0 2004-05 2005-06 2006-07 2007-08 2008-09 -0.05
0 2004-05 2005-06 2006-07 2007-08 2008-09
So l ve ncy Ra tio s Gra p h s
year because ISE is increasing its long -term debts for the construction of towers. Debt to Funds ratio is greatl y increasing as ISE is aggressivel y financing its growth with debt. It seems that ISE cannot cover its total debt with yearl y operating cashflow as it s operating cashflows were negative in 2005 and 2009 and very low in other periods.
7.3.3 Activity Ratios
Ac t iv it y Rat io s As s et T urn o v er Curr e nt As s e ts T ur n o v er W ork ing C ap i ta l T ur n o v er Ac c ou nts R ec e i va b l es T urno v er 2005 0.05 0.11 0.16 1.07 2006 0.05 0.15 0.20 7.70 2007 0.04 0.16 0.23 5.95 2008 0.03 0.16 0.25 2.78 2009 0.02 0.27 -2.37 2.03
Current Assets Turnover
0.06 0.05 0.04 0.03 0.02 0.01 0 2004-05 2005-06 2006-07 2007-08 2008-09
0.3 0.25 0.2 0.15 0.1 0.05 0 2004-05 2005-06 2006-07 2007-08 2008-09
Working Capital Turnover
9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00
Accounts Receivables Turnover
0.5 0 -0.5 -1 -1.5 -2 -2.5 -3
2006-07 2007-08 2008-09
Ac ti vi ty Ra t io s G ra p h s
Asset Turnover of ISE is decreasing meaning that ISE is not efficientl y utilizing its assets for revenue generation. However, due to decrease in current assets, current assets turnover has been increased greatl y in year 2009. Fixed assets have greatl y increased which led to the decrease of total assets turnover. Working capital turnover was almost constant for 4 years but greatl y declined in 2009 as the working capital was negative. Accounts Receivables Turnover seems to be decreasing which means that credit policy of ISE need to be stricken.
7.3.4 Profitability Ratios
P rof ita bil it y Ra t io s G ros s Pr of i t R at i o Pr of i t Ma r g i n Re tur n o n As s e ts Re tur n o n Fu n ds 2005 60.74% 77.71% 6.65% 13.93% 2006 55.61% 97.35% 8.50% 22.05% 2007 41.46% 110.81% 7.18% 26.95% 2008 54.13% 153.36% 7.58% 34.39% 2009 26.86% 105.01% 4.08% 31.18%
Gross Profit Ratio and Profit Margin of ISE has been decreased i n 2008-09 due to increase in expenses and some provisions made which decreased the profitabilit y of ISE . Financial costs and charges were also introduced in income statement of ISE in 2008 -09. However, it is expected that in year 2009-10, the new towers of ISE will start generating revenue which will 60
Gross Profit Ratio
Profit Margin Ratio
80.00% 60.00% 40.00% 20.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09
200.00% 150.00% 100.00% 50.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09
Return on Assets
Return on Funds
10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09
40.00% 30.00% 20.00% 10.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09
Pro f ita b il ity Ra tio s G ra p hs
cover most of the costs of ISE including financial charges. Return on Assets was decreased because of the great increase in fixed assets which was not much contributing toward s earning income. Return on Funds ratio is good. This is mainl y because ISE is not -for-profit Company and its funds are not distributed among any stakeholders.
7.3.5 Market Performance Indicators
M ark et P e rf o rm an ce IS E N e t wor k I n d ex IS E 10 I n dex T ota l T ur n o v er of Sh ar es (i n m i ll i o n) A v era g e Da i l y T ur n o v e r of S har es (i n m il l io n) 2005 11541.39 2432.59 666 3 2006 11528.16 2633.9 396.24 1.5 2007 11962.36 2716 236.85 0.96 2008 11016 2749.64 569 2.31 2009 6471.06 1713.03 272.97 1.11
Market performance of a stock exchange is usuall y measured by a stock market index. ISE has two stock indexes:
ISE Network Index
ISE 10 Index
2004-05 0 5000 10000 15000
2004-05 0 1000 2000 3000
Ind ex e s Gra p h s
ISE-Network Index is a price weighted index which is calculated on basis of price of shares. It has a base date of November 20, 1995
ISE-10 index is a capitalization weighted index calculated on basis of market capitalization (market capitalization is the total value of a company‟s equit y capital at the current market price) of ten stocks in the index. It has a base date of December 31, 2002 and a val ue of 1000.
Total Turnover of Shares
Average Daily Turnover of Shares
2004-05 0 200 400 600 800
2004-05 0 1 2 3 4
Tu rno ve r o f S ha r es G ra p h
Market indexes and other indicators of market performance show that stock exchange didn‟t performed well in year 2008 -09 as compared to previous years. This bad performance was mainl y a result of dried market conditions and high volatilit y of market of the country during year 2008 -09.
7. 4 HORIZONTAL ANALYSIS OF BALANCE SHEET
P ART IC UL AR S FUN D S & L I AB I LIT I E S NO N- CU RR E NT LI AB I LIT IE S Mem b ers Pr ot ec t i o n F ee In v es t ors Pr o tec t i on F ee Def er re d L i ab i l it i es Lo n g- T erm Lo a n A d va nc es , D e pos i t & o th er Rec e ip ts T ota l N on - C ur r e n t L ia b il i t ies CU RR E NT LI AB I LIT I E S A d va nc es & D ep os its Ac c r ue d & ot h er L ia b i l it i es T ota l C urr e n t L ia b i l it i e s T O T AL L I AB ILT IT I E S FUN D S G e ner a l E ntr a nc e F e e S urp l us o n r e - m eas ur e m ent of In v es tm en ts Ac c um ul at ed S ur p l us T O T AL F UN D S T O T AL L I AB IL IT I ES AND FUN D S
2005 % 83.31% 115.70% 29.12% 27.04% 20.89%
2006 % 92.02% 129.20% 28.49% 47.98% 35.43%
2007 % 95.22% 91.04% 29.82% 68.95% 69.77%
2008 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
2009 % 0.00% 112.98% 231.41% 187.41% 152.87% 160.76%
69.87% 38.61% 64.03% 23.43%
45.17% 122.95% 76.83% 37.87%
85.66% 188.16% 120.74% 72.76%
100.00% 100.00% 100.00% 100.00%
72.22% 341.25% 461.00% 178.41%
100.00% 28.33% 30.62% 75.61%
100.00% 86.50% 53.89% 84.04%
100.00% 461.62% 73.24% 93.47%
100.00% 100.00% 100.00% 100.00%
104.11% (293.03)% 86.10% 94.97%
Graph 1 of Key Values of Horizontal Analysis of Balance Sheet
500.00% 450.00% 400.00% 350.00% 300.00% 250.00% 200.00% 150.00% 100.00% 50.00% 0.00% 200405 200506 200607 200708 200809
Non-Current Liabilities Current Liabilities Total Funds
7.4.1 Non-Current Liabilities (Horizontal Analysis)
Member Protection Fund was transferred to Settlement Protection Fund Trust due to which its amount is zero in the year 2009 otherwise; its amount increased every year due to profit earned on member protection funds bank accounts. Amount of Investors Protection Fund also increased every year due to profit earned on Investor Protection Funds bank accounts except in 2005 when Rs.2,877,142 were paid to „affectees of default‟ and in year 2007 when Rs.4,844,748 per paid to affectees. Deferred liabilities increased greatl y due to slight increase in staff retirement gratuit y and great increase in deferred taxation from 2008. ISE didn‟t have taken long-term loan before 2007 but it was required in year 2007 for the construction of ISE towers. In 2007, ISE took term finance loan from Bank Alfalah Limited of Rs.700 million. In 2008, ISE obtained term finance loan from UBL of Rs.1,100 million from which it prepaid the loan of Bank Alfalah. ISE took further loan of Rs.569 million for construction of ISE towers in 2009 due to which long -term loan of ISE was greatl y increased. Deposits and other receipts increased every year on account of receipts from others which represents the amount of down payments and installmen ts received from parties against sub -lease agreement. ISE has entered into sub -lease agreement with many parties for sub -lease of various parts of ISE towers.
7.4.2 Current Liabilities (Horizontal Analysis)
Head of clearing house margin from members aga inst exposure increased in 2005 (which was then Rs.12,371,362), 2007 (which was then Rs.22,943,335) and 2008 (which was Rs.40,709,335) which led to increase in advances and deposits in those years. Accrued and other liabilities were increased
primaril y because of increase in portion of proceeds from sale of assets of members in default (which was Rs.35,719,531 in 2006, Rs.3,324,157 in 2007 and Rs.12,495,632 in 2009), accrued expenses (which was Rs.70,214,714 in 2009) and withholding tax payable (which was R s.12,681,019 in 2009). Some of the portion of long -term loan was taken to current liabilities for the start of repayment of long term loan which have increased current liabilities of ISE in 2009.
7.4.3 Funds (Horizontal Analysis)
General Entrance Fee rem ained constant for four years but as Soneri Bank was finall y inducted as member of ISE in 2009 and due to some other changes in membership of ISE, General Entrance Fee Fund was slightl y increased in 2009. Surplus on re -measurement of investments was record ed on Rs.14,246,664 in 2007 which led to its great increase but in 2009 Rs.9,043,762 was recorded as deficit on re -measurement of investments. Accumulated surplus was decreased in 2009 because of transfer of
Rs.19,933,900 to Settlement Protection Fund.
P ART IC UL AR S AS S E T S NO N- CU RR E NT AS S E T S Fix ed T erm In v es tm en ts Lo n g T erm I n ves tm ent s Lo n g term a d v anc es a nd rec e i v a b les T ota l N on - C ur r e n t As s ets CU RR E NT AS S ET S Ac c ou nt R ec e i va b l es A d va nc es , D e pos i ts , Pr ep a ym en ts S hor t T erm I n ves tm en t B ank Ba l a nc es - Fu n ds Cas h & Ba nk B a l anc es 2005 % 24.67% 82.30% 57.61% 26.67% 2006 % 35.86% 105.89% 98.67% 38.39% 2007 % 69.32% 136.38% 79.43% 71.19% 2008 % 100.00% 100.00% 100.00% 100.00% 2009 % 175.13% 182.10% 142.45% 176.10%
21.86% 34.39% 78.04% 147.65% 135.65%
22.93% 50.92% 44.98% 155.74% 288.16%
46.28% 45.49% 142.69% 100.88% 122.28%
100.00% 100.00% 100.00% 100.00% 100.00%
152.06% 152.42% 16.92% 20.62% 75.93%
T ota l C urr e n t As s ets T O T AL AS S ET S
Gra p h 2 o f K ey Va lu e s o f H o r izo n ta l A na l ys i s o f Ba la n ce S hee t
200.00% 180.00% 160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09
Non-Current Assets Current Assets
7.4.4 Non-Current Assets (Horizontal Analysis)
Fixed Assets have greatl y increased every year and especiall y from year 2007 because of construction of ISE towers. Lo ng-term investments increased in 2006 due to increase in investment in associate National Commodit y Exchange Limited. In other four years long term investments also increased except in year 2008 even though the ownership of ISE in associates remained same. This was mainl y due to classification of ISE investment in CDC as associate form that was formerl y classified as available for sale in short -term assets on December 31, 2007 due to change in the ISE‟s representation on the Board of Directors of CDC . Long-term advances were increased in 2006 due to increase in advances to staff which grew from Rs.66,901 to Rs.2,623,517. In 2007, these advances decreased to Rs.1,332,083 which led to decrease in long term advances and receivables. In 2008, this amount grew to
Rss.2,712,744 and in 2009 this amount suddenl y grew to Rs.5,562,179 on
account of advance of Rs.2,235,294 (@5% per annum) paid to Managing Director pursuant to the approval of SECP.
7.4.5 Current Assets (Horizontal Analysis)
Deposits and other receipts increased due to advances received on account of sale of rooms in ISE towers. Short-term investments, bank balances and cash decreased as they were utilized in the construction of ISE towers. In shortterm investments, Askari Income Fund was full y utilize d in 2009 and other reason of decrease in short -term investments is due to change in
classification of ISE investment in CDC.
7.5 HORIZONTAL ANALYSIS OF INCOME STATEMENT
P ART IC UL AR S IN CO M E Fe e an d s u bs c r i pt i on O th er O p er at i n g Inc om e T ota l I nc om e E X P EN DIT UR E A dm in is tr at i v e Ex p en s es S har e of Pr of i ts of As s oc ia te d Com pa n i es S urp l us f or th e ye a r b ef or e tax at i o n T axat ion Su rp lu s f o r t h e ye a r af t er t ax at ion Ac c um ul at ed s ur p l us b r ou g ht f or wa rd Ac c u mul at ed S ur plu s c a rr i ed forw a rd 2005 % 62.13% 56.97% 60.43% 2006 % 80.40% 93.99% 84.88% 2007 % 111.19% 81.38% 101.36% 2008 % 100.00% 100.00% 100.00% 2009 % 122.59% 132.13% 125.73%
108.11% 67.81% 47.00% 74.45%
45.36% 87.23% 88.19% 86.93%
(38.57)% 77.65% 94.39% 72.32%
100.00% 100.00% 100.00% 100.00%
82.80% 62.40% 196.72% 19.60%
Gra p h o f K ey Va lu es o f H o ri zo nta l A na ly s is o f In co m e S ta tem e nt
180.00% 160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 200405 200506 200607 200708 200809 Income Administrative Expenses
7.5.1 Income (Horizontal Analysis)
The main reason in the rise of the revenue in 2007 and 2009 has been the substantial increase in the additional listing fee which was Rs.54,494,132 in 2007 and Rs.63,089,486 in 2009 as compared to Rs.46,157,089 in 20 08. Other Operating income was increased in 2006 and 2009 because of increase in profit on investment and bank deposits which was Rs.11,382,332 in 2006 and Rs.10,801,803 in 2009. Other reasons for increase in other operating income in 2009 were room transfer fee taken from members on account of new rooms in ISE towers and gain earned on sale of available for sale investments . Other Operating Income was also increased in 2008 due to income from offices sublet to members was increased.
7.5.2 Expenditure (Horizontal Analysis)
Administrative expenses are constantl y rising over every period and had a sharp increase in year 2009. The reason of increase in these expenses was increase in expenditures on account of salary and benefits head, travel and lodging head and printing and stationery head in 2009. Other reasons for increase in expenses of ISE in 2009 were: 1. ISE also had to pay a penalt y of Rs.200,000 to Competition
Commission of Pakistan for imposing trading curbs or price floor in August 2008 (ISE took the i nitiative in paying the fine. KSE and LSE haven‟t until now paid the fine). 2. ISE donated Rs.920,000 to charit y. 3. ISE had to pay mark -up of Rs.15,665,982 on deposits for office space in ISE towers. 70
In other time period, administrative expenses increased due t o increase in salaries and benefits, audit fee, depreciation, demutualization expenses, etc.
7.5.3 Surplus (Horizontal Analysis)
Surplus for the year 2009 before taxation greatl y decreased due to increase in administrative expenses, decrease in share of profits of associated companies and provision for impairment in the value of investment. Taxation was greatl y increased which led to the decrease in surplus for the year after taxation. Accumulated surplus brought forward in 2009 was increased but due to transfer of Rs.27,453,003 to Settlement Protection Fund, accumulated surplus carried forward was decreased.
7.6 VERTICAL ANALYSIS OF BALANCE SHEET
P ART IC UL AR S FUN D S &LI AB I L IT IE S NO N- CU RR E NT LI AB I LIT IE S Mem b ers Pr ot ec t i o n F ee In v es t ors Pr o tec t i on F ee Def er re d L i ab i l it i es Lo n g- T erm Lo a n A d va nc es , D e pos i t & o th er Rec e ip ts T ota l N on - C ur r e n t L ia b il i t ies CU RR E NT LI AB I LIT I E S A d va nc es & D ep os its Ac c r ue d & ot h er L ia b i l it i es T ota l C urr e n t L ia b i l it i e s T O T AL L I AB ILT IT I E S FUN D S G e ner a l E ntr a nc e F e e S urp l us o n r e - m eas ur e m ent of In v es tm en ts Ac c um ul at ed /( D ef ic i t) S ur p l us T O T AL F UN D S T O T AL L I AB IL IT I ES AND FUN D S 2005 % 2.51% 1.87% 0.47% 0.00% 37.12% 41.97% 2006 % 2.04% 1.53% 0.34% 0.00% 48.29% 52.19% 2007 % 1.33% 0.68% 0.22% 18.83% 43.80% 64.87% 2008 % 1.10% 0.59% 0.59% 20.96% 50.13% 73.38% 2009 % 0.00% 0.42% 0.86% 24.55% 47.89% 73.72%
5.77% 1.66% 8.03% 50.00%
2.73% 3.87% 7.07% 59.26%
3.27% 3.74% 7.01% 71.88%
3.01% 1.57% 4.58% 77.96%
1.36% 3.35% 13.20% 86.92%
39.13% 0.13% 6.36% 50.00%
28.69% 0.28% 8.20% 40.74%
18.12% 0.95% 7.04% 28.12%
14.30% 0.16% 7.58% 22.04%
9.30% -0.30% 4.08% 13.08%
Graph 1 of Key Values of Vertical Analysis of Balance Sheet
120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09 Total Funds Current Liabilities Non-Currnt Liabilities
7.6.1 Non-Current Liabilities (Vertical Analysis)
From the liabilities side, non -current liabilities hold a great portion due to long-term loan taken for const ruction of towers and mainl y due to long -term advances and other receipts taken on account of sale of floors and room s of ISE towers. Every year non -current liabilities portion in total liabilities and funds increased till it reached to 73%. Member Protection Fee Fund and Investor Protection fee Fund hold less than 3 % in total funds and liabilities.
7.6.2 Current Liabilities (Vertical Analysis)
There is no balance between non -current and current liabilities. Current Liabilities hold almost 4 to 13 % of the total funds and liabilities which means that there is no working capital management by ISE.
7.6.3 Funds (Vertical Analysis)
The ISE is a non-share capital company. The sponsors‟ equit y is represented by Funds that accumulate to the tune of onl y 13% of the Liabilities and Equit y section of the balance sheet during the year 2008 -09. Portion of funds has been decreased to 13 % in 2009 from 50% in 2005 which is again not a healthy sign for ISE. This means ISE has too many liabilities which can create problems in future.
PARTICULARS ASSETS NON-CURRENT ASSETS Fixed Term Investments Long Term Investments Long term advances and receivables Deferred Taxation 2005 % 58.56% 6.02% 0.59% 0.35% 2006 % 61.88% 5.63% 0.73% 0.33% 2007 % 74.32% 4.51% 0.36% 0.08% 2008 % 82.90% 2.56% 0.35% 0.00% 2009 % 90.74% 2.91% 0.32% 0.48%
Total Non-Current Assets CURRENT ASSETS Account Receivables Advances, Deposits, Prepayments Short Term Investment Advances tax-net Bank Balances-Funds Cash & Bank Balances Total Current Assets TOTAL ASSETS
0.76% 1.33% 15.14% 0.00% 4.58% 12.66% 34.48% 100.00%
0.58% 1.43% 6.34% 0.00% 3.51% 19.56% 31.43% 100.00%
0.73% 0.80% 12.50% 0.13% 1.41% 5.16% 21.00% 100.00%
1.22% 1.35% 6.78% 0.50% 1.08% 3.26% 14.18% 100.00%
1.16% 1.29% 0.72% 0.71% 0.14% 1.55% 5.56% 100.00%
Gra p h 2 o f K ey Va lu e s o f V er ti ca l A na l ys i s o f Ba la nc e Sh eet
120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09 Current Assets Non-Current Assets
7.6.4 Non-Current Assets (Vertical Analysis)
The vertical anal ysis reveals that significant portion of the Balance Sheet comprise of Fixed Assets . Because of construction of the new building of the ISE, the capital work in pr ogress which is the major part of Fixed Assets is mounting rapidl y. Fixed assets comprise almost 55 -90 % of the balance sheet. Due to which non -current assets have the largest portion of balance sheet.
7.6.5 Current Assets (Vertical Analysis)
Current assets holding in balance sheet seem to be reduced every year and are left to onl y 5 -6 % of balance s heet which is even less than the portion of current liabilities which is 13 % of the total balance sheet . This is a clear sign than ISE can face liquidit y pr oblems.
7.7 VERTICAL ANALYSIS OF INCOME STATEMENT
P ART IC UL AR S IN CO M E Fe e an d s u bs c r i pt i on O th er I nc om e T ota l I nc om e E X P EN DIT UR E A dm in is tr at i v e Ex p en s es O p era t in g Pr of it S har e of Pr of i ts of As s oc ia te d Com pa n i es Pr of i t f or t h e ye a r bef or e t ax at i o n T ax at i on Su rp lu s f o r t h e ye a r af t er t ax at ion Ac c um ul at ed s ur p l us b r ou g ht f or war d Ac c u mul at ed S ur plu s c a rr i ed f orw a rd 2005 % 68.93% 31.07% 100.00% 2006 % 63.50% 36.50% 100.00% 2007 % 73.54% 26.46% 100.00% 2008 % 67.04% 32.96% 100.00% 2009 % 65.36% 34.64% 100.00%
30.02% 60.73% 10.17% 50.56% 27.16% 77.72%
8.97% 55.62% 13.59% 42.03% 55.33% 97.36%
-6.38% 41.46% 12.18% 29.28% 81.53% 110.81%
16.78% 54.12% 13.08% 41.04% 112.32% 153.36%
11.05% 26.86% 20.46% 6.40% 98.61% 105.01%
Gra p h 1 o f K ey Va lu e s o f V er ti ca l A na l ys i s o f In co m e S ta tem e nt
120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 200405 200506 200607 200708 200809 Other Income Fee and subbscription
Graph 2 of Key Values of Vertical Analysis of Income Statement
120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2004- 200505 06 200607 2007- 200808 09 Operating Profit Administrative Expenses
7.7.1 Income (Vertical Analysis)
The vertical anal ysis of Income Statement divulges that major segment of the Income Statement consist of Fee & Subscriptions for the studied five years period i.e. 2005 -2009, contributes almost 64% to 74% in the gross revenues during the past five years. If we see the expenditure portion for the above mentioned period, the ranges from 53% to 76% of the gross revenue each year during last five years. Increase in expenses consumed a large portion of total income in year 2009.
7.7.2 Expenditure (Vertical Analysis)
The expenditures in comparison to the income have been curtailed. There is an increase in portion of expenditure in income statement every year which means expenses need to be controlled. Operating profit has been decreased to
23% of the total income due to increase in expenditure . Portion of taxation in operating income is also increasing every year.
7.8 ORGANIZATIONAL ANALYSIS WITH COMPETITORS
The ISE belongs to the securities market industry in Pakistan wherein services are provided to members, listed companies and investors. The present securities market industry comprises of three Stock Exchanges viz. Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange which provide facilities to the listed companies to raise capital by enlistment of shares at stock exchanges, investors may sell and purchase shares in the stock exchange and the members provide services to the investors for consideration of their brokerage/commission.
The Karachi Stock Exchange was incorporated in 1949. The Lahore Stock Exchange was established in 1970 whereas Islamabad Stock Exchange was established in 1992. The KSE which is situated at Karachi, the economic and financial hub of Pakistan is the biggest stock exch ange of the country and is totall y dominant in all three stock exchanges Most of the financial sector is based at Karachi. Dail y trading on the KSE is 155 times that of the Islamabad bourse, according to Amjad Iqbal, head of quotations at the Islamabad Sto ck Exchange. Also, international portfolio investment also routes from KSE. The total turnover of shares of KSE was approximatel y 17 billion in 2008-09. On the other hand Lahore which is the host cit y of Lahore Stock Exchange is the second largest city of Pakistan and also lies on numbers two in economic and trade terms after Karachi. The total turnover of shares of LSE was 1.5 billion in 2008-09.
Then there comes the number of Islamabad Stock Exchange. ISE cannot compete with KSE and LSE and the trade vo lumes of the ISE remain at lowest level. The total turnover of shares of the ISE was in the range of 0.16
billion in 2008-09. As such the ISE is positioned at a very low profile as compared to other Exchanges. Trade transaction fee is the major source of income for a stock exchange but due to low trade volumes ISE cannot generate as much income as KSE and LSE can.
Listing Fees are also a great source of income for stock exchanges of Pakistan. ISE also has less listed companies than KSE and LSE which has reduced income of ISE. There were onl y 261 companies listed in ISE in year 2009, while KSE had 652 companies listed and LSE had 51 4 companies listed. To increase listings, ISE has introduced certain incentives such as one time waiver of listing fee for alrea dy listed securities, lesser reporting requirements and e -filing of annual accounts and price sensitive information, etc., instead of physicall y furnishing material in bulk quantities.
KSE P art i cul a r ( in t hou s a nds ) Cu rr ent As s et s Non - cu r ren t As s e t s T otal As s e t s 2,529,499 1,336,140 3,865,639 1,432,512 921,333 2,353,845 168,275 2,858,021 3,026,296 LSE ISE
Cu rr ent L iab il it i e s Non - cu r ren t L ia bi lit ie s T otal L i abi lit i es T otal F und s
619,813 118,952 738,765 3,126,874
980,558 169,699 1,150,257 1,203,588
399,587 2,230,863 2,630,450 395,845
Net I nco m e
Total Assets of KSE-LSE-ISE
Total Liabilities of KSE-LSE-ISE
ISE KSE ISE LSE
Total Funds of KSE-LSE-ISE
Net Income of KSE-LSE-ISE
Gra p h s o f Ke y Fig u re s o f K S E - L S E- IS E
ISE lacks current assets as compared to KSE and LSE but its non -current assets are more than the other two. So, in terms of total assets ISE isn‟t lagging behind. Also, ISE has more total assets than LSE. However, total liabilities of ISE are more than KSE and LSE due to big figure of long -term loan in non-current liabilities. Net income of ISE is a lot less than LSE and KSE owing to the r easons mentioned above. KSE and LSE have a lot more funds than ISE due to big surplus earned every year. ISE has capacit y to earn same level of income onl y if it had more companies listed and large volumes of trade.
7.9 FUTURE PROSPECTS OF ISE
The stock exchanges in Pakistan are mutualized entities. However, the pressure of globalization of the world economies has also imposed changes and reforms on the securities market of Pakistan so as to bring it at par with the rest of the exchanges of the world and create attraction for the foreign investors. With this view, the stock exchanges are soon to be converted into for profit companies instead of not for profit entities which are the present legal stature of the exchanges in Pakistan. After demutualizat ion, the stock exchanges shall not be owned by its members rather these would be owned by the shareholders.
Demutualization would bring innovations in the systems of the ISE as the management of the Exchange would be run by the professional exchange operators which would bring new technologies and procedures with them for adoption in the Pakistani environment.
ISE has been successful in creating a huge fixed asset in the form of ISE Towers. The ISE Towers would not onl y give a new identit y to ISE b y reenergizing and rebranding it to gain its due market share but the cash inflows in the form of rentals of the abundant offices space that would be rented out to the commercial entities would also greatl y help it to make investments for business expansion and diversification. The rental income would be one of the biggest sources of fund for the ISE in next year. Also, it will reduce the rental expense of ISE.
Approximatel y 87 % of the trading volume of common listed securities takes place on the KSE while the combined share of ISE and LSE is onl y 13 %
which creates certain issues for ISE by making KSE dominant in the market. Keeping in view this statement, ISE filed a complaint in the Competition Commission of Pakistan (CCP) to create a National Market S ystem o n November 12, 2007 to solve problems created by dominancy of KSE in securities market of Pakistan. This complaint was finall y accepted by CCP in 2009 and CCP decided that instead of operating three markets independentl y, there should be one market on the lines of unified trading system already in existence between ISE and LSE. This would help in solving issues like market fragmentation, liquidit y, regulatory, price discovery and
transparency, etc., for ISE.
8. WEAKNESSES OF ISE
8.1 Weak Working Capital Management
ISE is not maintaining balance between current assets and non -current assets and also not between current assets and current liabilities. It can fa ce liquidit y and solvency problems in future and is greatl y exposed to liquid it y and interest rate risk.
8.2 No Use of Financial Ratios
Finance Department of ISE doesn‟t use financial ratios due to which they can make wrong financing, investing and other important decisions. Financial Ratios are also not included in their Annual report.
8.3 Bad Presentation of Annual Reports
ISE doesn‟t spend much expenditure on annual report and their financial statements in annual report are not well designed. Annual reports of ISE are difficult to study as the data is not present in a good fo rm. Due to inconsistency in accounting practices, values are restated in annual reports of different periods
8.4 Increasing Expenses
Expenses of ISE are continuousl y increasing every year. ISE seem to have no control over these expenses. These expenses c onsume the major portion of the income of ISE.
8.5 No HR & Marketing Department
Human Resource and Customers are the two biggest assets any organization can have but unfortunatel y ISE is not focusing on both. There is no HR department in ISE and no prope r HR policies implemented. The onl y marketing in ISE is done for the new building and there is no proper marketing department in ISE. ISE has also has not developed any new market product and service.
8.6 Weak Internal Control
ISE has a weak internal con trol over its members which has increased the defaults of members in ISE. Almost 14 defaults have occurred in ISE over a period of 20 years. Regulations over members are quite ineffective and the s ystem audit of members does not achieve the specified objec tive. Brokers also usuall y have privileged access to corporate announcements due to which they can benefit more than others.
8.7 Less Listed Companies
Many companies in Pakistan are not seeking listing at ISE and little capital formation is taking place through ISE. Issuers seem not to have confidence in ISE and see minimal value addition in listing. Onl y 261 securities have been listed till June 30, 2009 in ISE. Listed companies are also not willing to accept ISE as a frontline regulator and ISE do not h ave sufficient powers over listed companies.
8.8 Presence of Market Abuse & Lack of Investor Protection
There are many market abuses like price manipulation, front running, insider trading and blank selling, etc., present for the investors of ISE and unfortunatel y, ISE do not has the capacit y to carry out surveillance and investigation in market abuse. There is a great lack of investor protection for investors of ISE. Due to weak internal control of members, non -capacit y of ISE over market abuse, weak ris k management and lack of regulations from SECP for investors‟ protection, ISE has been unable to meet the demands of investors in terms of their protection.
8.9 Large Number of Inactive Brokers
Out of 119, less than 40 members of ISE are active which makes more than 68 % brokers inactive who are unable to contribute any role for development of ISE. These idle licenses of these inactive brokers directly result in ISE being a lackluster market according to Rafiuddin Ahmad, ex -Chairman of ISE. Also the brokers who are registered in ISE are usuall y new comers with no market capacit y and have slow learning from the market.
8.10 Imperfect Competition
The stock exchanges competition in Pakistan is highl y imperfect and the fragmented market conditions are furthe r polarizing the market in favor of one exchange. There is virtuall y no competition among the stock exchanges of Pakistan and KSE is dominant exchange in all market segments. KSE has the highest number of listed companies and largest share of turnover. Mos tl y in case of development of regulations and product, ISE merel y follows KSE.
8. 11 Infancy of Technology/ Failure of UTS
In comparison with major capital markets around the World, the functioning of capital market in ISE is still very much in its infanc y and lacks advanced technology. In 2007, ISE joined hands with LSE to establish Unified Trading System which didn‟t gain much momentum. Upon a market survey,
participants highlighted that the trade execution at UTS is not speedy, spread expands during bea rish trends and it is a little bit expensive at certain slabs as compared to execution indirectl y through the market intermediaries of main bourse. ISE also isn‟t maintaining a good website.
8. 12 Financially Unstable
ISE is financiall y quite weak. Unlik e international exchanges, it derives most of its income from listed companies rather than trading charges and other fees on services. ISE lacks both economic and human capital. ISE has a low level of capital expenditure. ISE has spent a large portion of i ts funds on the new towers project. The inflation in the prices of construction material and devaluation of the Pak rupee has severel y hit the cost estimates of ISE towers which are making ISE very financiall y weak at the moment.
In comparison with major stock exchanges around the World, the functioning of ISE is still very much in its infancy and lacks advanced technology. ISE still has a long way to go before it is able to achieve its vision and fulfill its goal. It exists in an im perfect competition market which makes it very difficult to progress further. However, it should try not to follow other exchanges and try to bring innovation in itself. It should try to bring new innovative products in market and improve its functional sy stem. It should develop strong marketing campaign for its products and services.
Demutualization is expected to bring many changes in ISE like improving governance structure, providing access to economic and human capital, generate commercial pressure for growth and development, help change perception of ISE, etc. Process of Demutualization is greatl y in favor of ISE and it should be soon completed.
10. RECOMMENDATIONS FOR ISE
10.1 Separate Administration from Finance
There should be a separate department for finance and general administration in ISE. Finance and administration totall y have different functions and having the same department for both functions will overlap their tasks and create many problems for staff of ISE.
10.2 Use Financial Ratios
Financial ratios help in identifying problem areas and opportunities within an organization which makes them an important part in decision making of finance managers. Finance Department of ISE should stress on the use of financial ratios in generating reports and making investment and financing decisions.
10.3 Provide Innovative Products
ISE should bring innovative products in market to increase their income. They should also make marketing efforts for their products and services to attract new investors and more companies to get their securities listed with ISE.
10.4 Maintain Effective Working Capital Management
Every organization should have a balance between current and non -current assets and also between current liabilities and non -current liabilities . ISE
needs effective working capital management so that it doesn‟t face liquidit y or any solvency problems in the future. The working capital of ISE was negative in 2009 which is an indicator that ISE is facing liquidit y problems. Management of ISE should overlook this issue.
10.5 Improve Annual Reports
Presentation of annual reports of ISE is not good and they are filled with errors. They should allocate more funds in producing their annual reports and should check for errors before finall y publishing them.
10.6 Bring Consistency in Accounting Practices
There doesn‟t seem any consistency in accounting practices of ISE. They tend to change every year. Finance Department should review all their accounting practices and policies and fi nall y make proper accounting policies which will reduce restatement of values in financial statements every year.
10.7 Monitor Expenses
Expenses of ISE are moving higher than their income. ISE should try to control their expenses. Increase in salaries an d benefits is a good sign but other expenses like traveling and lodging should be reduced. One of the greatest expenses of ISE which is office rent will be reduced because of construction of ISE towers but the finance charges will be increased owning to the long-term loan for the construction of towers. ISE should try to keep a strict check on expenses so they don‟t increase from the previous year. 2009
is the onl y year when ISE has fulfilled its corporate responsibilit y by giving donation. ISE should fulfi ll its corporate responsibilit y every year.
10.8 Make HR Department
ISE need a HR department to implement HR policies in the organization. There should be proper reporting lines and division of work among employees in ISE and job securit y should be provi ded to the employees.
10.9 Introduction of New Technology
The securities markets around the globe are being reshaped by three powerful forces: competition, regulation and technology. ISE should continue its efforts to introduce new technology for better trading in ISE.
10.10 Improve Web-site
ISE should also improve its web -site and introduce features like those available on web -sites of KSE and LSE. Investor education section on the website needs special attention. This could also attract investors whic h will increase their trading volumes.
10.11 Use Sharia Complaint forum as Advantage
The normal trading at ISE in the scrips which are not generall y involved on interest based practices is sharia complaint. A lot of people opt for stock market investments for the sake of dividends and capital gains by investing within the confines of Islam. ISE should use this as its advantage. A lot of
banks are marketing their Islamic products and ISE can compete with banks by marketing its products as Sharia Complaint.
10.12 Improve Internal Control of Brokers
ISE should try to improve the system audit of brokers and its risk management system so that investors‟ confidence could be restored which will certainl y increase their trading volumes.
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Fundamentals, Semi-Annual Issue – Vol 1 (Jan – Jun 09).
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