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- Efficiency of Stock Markets in Pakistan -

Introduction
Market Efficiency is directly or implicitly tested any time a study is performed to identify stock price reactions to certain events such as dividend announcements (Bajaj and Vijh 1995), earnings announcements (Bamber 1987), stock splits (Copeland 1979), large block transactions, repurchase tender offers (Lakonishok and Vermaelen 1990), and other public announcements (Kim and Verrecchia 1990). Traditionally, event study methodology is used to evaluate the reaction of the market to certain corporate events. These studies, which are specific in nature, are designed to measure market efficiency at certain point in time and only in conjunction with specific events. A more encompassing or macro evaluation of market efficiency can be made by testing whether or not the returns in a market follow a random walk process over a longer period of time. Financial theory predicts that stock prices should fluctuate randomly in the short run if the stock market is efficient. The semi-strong form of the Efficient Market Hypothesis (Fama, 1970) holds that the market instantaneously absorbs all relevant information as it becomes publicly available. Hence, daily returns should fluctuate as random white noise. There has been phenomenal increase in the turnover of shares on the stock market from1.0 billion in 1991-92 to 67.6 billion in 1999-2000. Aggregate market capitalization has increased from Rs 218.4 billion in 1991-92 to Rs 392 billion in 1999-2000 a rise of 79.5 percent. Number of listed companies on KSE has increased from 628 in 1991- 92 to 762 in 1999-2000 (Table 1). Amongst global emerging markets, Pakistani stock

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market has been on the top with the highest percentage gain achieved during the year 2000, in automated and electronic trading and settlement system. The Securities and Exchange Commission of Pakistan (SECP) has accelerated its drive to enhance the efficiency of the stock exchanges and ensure protection of the interest of investors. Disclosure requirements are being made more stringent. Another phenomenon taking shape with the general rise seen in the stock markets is the revival of the mutual fund industry. The funds are becoming more attractive and their portfolios attracting new investors to capitalize upon the current trends. With the recovery of Pakistani stock market, it is the opportune time for foreign funds to make their entry into Pakistani stock markets. The longterm outlook is promising and the markets are giving enough movement to pick up blue chips at attractive prices with good chances of reaping sizable capital gains on medium to long-term basis. There is ample scope for income funds to be launched. In short, Pakistani stock markets are on the road to better performance and efficiency. Although their volatility - an essential part of all emerging markets, creates higher risks, they also magnify the potential for higher returns for any investor who has the patience and sophistication to participate in the growth of this emerging market.

1.1 Scope of Study: The scope of the study is limited to Karachi Stock Exchange. Being the oldest and the most mature market existing in Pakistan.

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Literature Review

2.1 What Is Market Efficiency? When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return but also to outperform, or "beat," the market. Efficiency of a stock exchange can be gauged in a number of ways some of them are described below (Pilbeam,1998). 1. Allocative Efficiency: Allocative efficiency of a stock exchange refers to how good are the markets in allocating scarce capital resources among competing users. In terms of allocative efficiency capital will be allocated to the firms that can achieve the best marginal returns. 2. Operational Efficiency: Operational efficiency refers to the cost of raising capital. An ideal market would be one, which provides lower costs of raising capital and viability of long-term projects to raise capital as easily as short-term projects. Furthermore investor would be faced with minimum transaction costs and competition between brokers should ensure only normal profits in the securities industry.

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3. Informational Efficiency: Financial literature has concentrated on another type of efficiency besides allocative and operational efficiencies. This type relates to the pricing of security. By definition, informational efficiency provides that the current market price of a security instantly and fully reflects all the relevant available information. However, market efficiency, detailed in the efficient market hypothesis (EMH), formulated by Eugene Fama in 1970, suggests that, at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price since no one has access to information not already available to everyone else. 4. Non-Predictability: The nature of information does not have to be limited to financial news and research alone; indeed information about political, economic and social events, combined with how investors perceive such information, whether true or rumored, will be reflected in the stock price. As prices only respond to information available in the market, and, because all market participants are privy to the same information, no one will have the ability to "out-profit" anyone else. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful.

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2.2 How Does A Market Become Efficient? In order for a market to become efficient, investors must perceive that a market is inefficient and possible to beat. Investment strategies intended to manipulate inefficiencies are actually the fuel that keep a market efficient. A market has to be large and liquid. Information has to be widely available, in terms of accessibility and cost, and released to investors at more or less the same time. Transaction costs have to be cheaper than the expected profits of an investment strategy. Investors should also have enough funds to take advantage of inefficiency until, according to the EMH, it disappears again. Most importantly, an investor has to believe that she or he can outperform the market. 2.3 Degrees Of Efficiency: Accepting the EMH in its purest form may be difficult; however, there are three classifications of market efficiency, which are aimed at reflecting the degree to which it can be applied to markets. EMH propagandists will state that profit-seekers will, in practice, exploit whatever abnormality exists until it disappears, leaving markets eventually to correct themselves. In instances such as the "January effect" (a predictable pattern of price movements), large transactions costs, moreover, will most likely outweigh the benefits of trying to take advantage of such a trend.

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In the real world, markets cannot be absolutely efficient or wholly inefficient. Markets are essentially a mixture of both, and daily decisions and events cannot always be reflected immediately into a market; moreover, if all participants were to believe that the market is efficient, no one would seek extraordinary profits, the force that keeps the wheels of the market turning. In the age of information technology (IT), however, markets all over the world are gaining greater efficiency. IT allows for a more effective, faster means to disseminate information widely. In the meantime, electronic trading allows for prices to adjust more quickly to news entering the market. However, while the pace at which we receive information and make transactions quickens, IT also restricts the time for the verification of information used to make a trade. Thus, IT may inadvertently result in less efficiency if the quality of the information we use no longer allows us to make profit-generating decisions.

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Findings
3.1 Stock Exchanges in Pakistan: The stock exchanges in Pakistan have witnessed a substantial improvement since 1999-2000. With the spectacular performance of the KSE 100 index, which crossed 5600 points in April 2004, (doubling the January 2003 level) and market capitalization increasing from Rs 555 billion ($ 9.5 billion) in January 2003 to Rs 1436.0 billion ($ 25.0 billion) in April 2004, (an increase of 159 percent). The KSE 100 index touched an all time high at 5620.7 points on April 19, 2004. A record turnover of over a billion shares was also seen twice in the year, first on August 8, 2003 and then on April 15, 2004. The fiscal year 2003-04 has been a record year for the stock market in Pakistan, with un-precedent growth in market activity. Pakistan has experienced substantial economic changes since 2001-02, supported by strong sectoral growth. The stock exchange has shown foresight in whole-heartedly accepting and successfully implementing reforms as a result of which the Pakistani market was ranked as one of the best performing markets in the world. The KSE is implementing further measures to increase the retail investor base in the country. The land-mark performance of the stock market during the current fiscal year can be attributed to a number of positive factors including; a continuation of pro-growth macro-economic policies; a stable macroeconomic environment; strong economic growth; stable exchange rate; a positive privatization process through the stock exchanges; a visible improvement in the Pakistan-India relationship; appropriate reforms initiated by the Securities and
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Exchange Commission of Pakistan (SEC); the availability of adequate liquidity in the market; good operating and financial results from the majority of blue chip companies and the enhancement of investor confidence, etc. This exceptional performance of the stock exchanges was also supported by the growth in rupee liquidity and the consequent availability of cheap credit to the private sector. In addition, the last four years have witnessed a recovery in the economy, which has helped improve corporate profitability and investor confidence. These factors have continued to drive the equity market in the current fiscal year as well. Over the past few years, the Securities & Exchange Commission of Pakistan (SEC) has taken measures to restore confidence of both foreign and domestic investors by endeavoring to ensure that the market functions in a smooth and transparent manner. Its regulatory mechanisms are aimed at minimizing the elements of systemic risk on the one hand and promoting institutional strengthening/capacity building of various segments of the stock exchanges on the other. The SEC has actively pursued a stock market reform program geared towards the development of a modern and efficient corporate sector and stock market, based on sound regulatory principles that provide the impetus for high economic growth. During the first ten months of the current fiscal year the KSE share index has increased by 59.6 percent (from 3402.5 points on June 30, 2003 to 5430.4 points on April 30, 2004). Similarly market capitalization has increased by 92.4 percent or from Rs 746.4 billion on June 30, 2003 to Rs 1436.0 billion on April 30, 2004. In terms of US dollars the market capitalization of the Karachi Stock

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Exchange was about $ 25.0 billion on April 30, 2004 increasing from USD 6.78 billion in the end of June 2002 and USD 12.92 billion in the end of June 2003. Primarily some heavy weight blue chip companies in power and communication sectors have brought the unprecedented boom in the stock market in the current fiscal year, although other trading groups also remained buoyant in the market. The share of the top ten scripts in total market turnover increased significantly from 67.2 percent in October 2003 to 71.1 percent in December 2003, reflecting a strong co-movement of trading in these scripts (the total market turnover increased from 4934.3 million shares to 6088.0 million shares in the respective months). Interest in the energy sector stocks was also an important factor in the movement of the KSE-100 index. The monthly trends of the leading stock market indicators are given in Table 1 and Fig: 1 (a) and (b).

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As documented below, (Table 2 and Fig: 2), out of the 15 leading stock markets in the world, the KSE share index increased by 61 percent in terms of US dollar during July-April 2003-04, surpassed only by India. The other 13 leading world stock markets recorded growth ranging from 7.0 percent (China) to 48 percent (Thailand). It is pertinent to mention here that unlike the previous year, all the leading stock markets of the world posted positive growth in the current fiscal year, which may be an encouraging indication of the world economic recovery. The SEC has introduced a number of significant reforms in
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the field of risk management. It has already constituted an expert committee comprising national and international market experts with the objective of formulating a comprehensive plan for the de-mutualization and integration of the stock exchanges. The recommendations of the committee on the demodularization of the stock exchanges will be implemented by the end of the year as part of an ongoing stock market reform process. Carryover transactions (COT) will also be phased out by the end of the current fiscal year. For the development of cross border scrip listing the SEC consulted with SAARC corporate regulators and a memorandum of understanding has already been signed with Sri Lankas corporate watchdog. A number of other structural reforms are also underway in the KSE and other stock exchanges which include: the introduction of trading in odd-lots; the development of an I.T. infrastructure for a backup system and the upgrading/expansion of the existing I.T. systems; the strengthening of the market monitoring and surveillance wing; the

commencement of internet trading; the introduction of an over the counter (OTC) market; index trading; margin trading rules; and cross border listing. A future reforms agenda will also include a code of corporate governance for unlisted public companies and statutory corporations, an enhancement of monitoring and surveillance to prevent market abuse, and a corporate social responsibility (CSR) sector. The SEC has addressed numerous distortions in the stock exchanges and the corporate sector with a view to evolving a fair, transparent and efficient system that engenders investor confidence. At the same time, the SEC has ensured stringent enforcement to curb market abuses, particularly, in the

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securities market. A number of new products are also being envisaged which include the introduction of index and option trading. To cater to the expected increase in trading activities, especially through Internet trading, the up-gradation and provision of backup trading and clearing systems is also in process. During the outgoing year, the KSE has further strengthened its international relations and continued to play an active role through the platform of the Federation of the Euro-Asian Stock Exchanges (FEAS) and the South Asian Federation of Exchanges (SAFE).

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3.2 Policy Measures and Progress The Securities and Exchange Commission of Pakistan (SEC) has actively pursued a stock market reform program geared towards the development of a modern and efficient corporate sector and stock market, based on sound regulatory principles that provide an impetus for high economic growth. Provided below are the various reform initiatives introduced during the year under review: a) Improvements in Governance In order to prohibit unfair trade practices, ensure a level playing field, inculcate good governance in business conduct and promote transparency in the securities market, a clause 187 (i) was inserted in the Companies Ordinance, 1984 which places a prohibition on any person from being appointed as a director of a listed company if he is a member of a stock

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exchange, engaged in the business of brokerage or a spouse of such a member. In order to safeguard public interest and improve governance and transparency in the business conduct of brokers, the Commission, issued a directive to brokers in February 2004. Pursuant to the said directive, brokers shall provide brokerage services to an investor only after ensuring that an account has been opened in the investors name using a standardized account opening form. In addition, a broker shall not recommend to an investor the purchase or sale of any security that is unsuitable for the investor with due regard to his/her age, financial situation and investment objectives. The Commission formulated a standardized account opening form in consultation with the stock exchanges and directed the exchanges to adopt/implement the standardized account opening form with effect from January 15, 2004. The standardized account opening form contains the standard terms and conditions which shall govern the broker-investor relationship at all the three stock exchanges. The form strikes a balance between the rights and obligations of both investors as well as brokers. The Commission issued a directive in August 2003 directing the exchanges to insert appropriate clauses in their listing regulations in order to establish the necessary framework for transfer pricing whereby transactions between related parties are measured at an arms length price and adequate records and disclosures are maintained in respect thereof.

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In terms of the amendments in the Listing regulations of the stock exchanges, companies must now seek the approval of the Audit Committees and the Board of Directors for the transfer pricing policy. They are also required to prepare and maintain complete records in respect of transactions with related parties.

After considering the amendments as proposed by the stock ex changes, the Commission accorded approval to the regulations for the system audit of brokers of the exchange, 2004 under section 34(1) of the Securities and Exchange Ordinance, 1969.

b) Risk Management Measures In order to strengthen market integrity and to reduce the incidence of systemic risk, the Commission has introduced a number of significant reforms in the field of risk management as provided below: Unlike other countries, COT/Badla financing is available only in Pakistan. While the system of Badla financing has added liquidity to the market, it has been one of the major causes of market crises experienced over the last few years. In order to avoid systemic risk associated with Badla financing, the SEC has finalized the Margin Trading Rules, 2004 to replace Badla financing in consultation with the stock exchanges as well the Margin Trading Rules, 2004 to replace Badla financing in consultation with the stock exchanges as well the Central Depository Company (CDC). The Margin Trading Rules, 2004 have been sent to the Ministry of Finance for approval by the federal

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Government. As a measure to gradually phase-out COT facility, the SEC has restricted the COT facility to the shares of 30 eligible companies only with effect from December 15, 2003. The National Clearing Company of Pakistan Limited (NCCPL), which is fully operational as of January 19, 2004 with 474 securities inducted in the system, will improve the efficiency of the settlement process, reduce systemic risk of the current clearance and settlement procedures and improve the investor confidence level in the integrity of the securities market. The integrated national clearing system would provide for the settlement of trades executed in respect of companies in the Central Depository System (CDS) on all three exchanges, under one system as opposed to the past practice of separate clearing houses of the exchange.

c) New Products/Developments The Commission had approved the regulations governing the over the counter market in December 2002 for establishing a quote-driven OTC Market for smaller capitalized companies and debt securities. The OTC market, which is expected to start operation by June 2004, would also serve as a second tier market for green field/illiquid scrip currently listed on the exchange. Appropriate amendments have been made in the Securities and Exchange Ordinance, 1969 and a new section 32D has been inserted exclusively for the regulation of business of the national commodity exchange limited (NCEL).

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The emergence of trading in futures contracts in commodities would provide investors and stakeholders with basic hedging instruments as well as enabling economic players to lock in costs. The NCEL is expected to be operational by June 2004. The Commission on February 17, 2004 constituted an expert committee comprising national and international market experts with the objective of formulating a comprehensive plan for de-mutualization and integration of the stock exchanges. The expert committee shall submit its report and recommendations to the Commission within 120 days of its first meeting or June 15, 2004, whichever is earlier. An interim report is to be submitted to the Commission within 60 days of its first meeting. The Commission has formulated a detailed terms of reference (TOR) for the expert committee to examine the feasibility of the integration of stock exchanges and to provide specific recommendations on de-mutualization of exchanges such as, an appropriate mode/structure for the de-mutualized exchanges and a plan of action for its implementation.

3.3 Sectoral Performance During the first nine months of the outgoing fiscal year, the KSE share index and aggregate market capitalization of 12 different sectors have increased by 50.1 percent and 80.3 percent respectively, as against their increase of 53.4 percent and 44.7 percent in the same period last year. Total turnover of shares on the KSE was 65.2 billion in the first nine months of 2003-04 as compared to

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36.2 billion in the same period last year. Funds mobilized by the KSE during this period amounted to Rs 61.7 billion as compared to Rs 23.8 billion in the same period last year. All the 12 major trading groups on the KSE (cotton and other textiles, pharmaceuticals & chemicals, engineering, auto & allied, cables and electric goods, sugar and allied, paper and board, cement, fuel and energy, transport and communication, banks and other financial institutions, and miscellaneous) witnessed record growth in their share indices, ranging from 15.7 percent (sugar & allied) to 65.2 percent (cement). During the calendar year 2003, total profit before taxation of the 12 trading groups amounted to Rs 136.8 billion as compared to their before taxation profit of Rs 90.9 billion in 2002. The performance of leading trading groups and companies for the first nine months of the outgoing fiscal year is discussed below (Table 3-5).

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Cotton and Other Textiles: In this group, there are three sub-groups: (a) textile spinning, (b) textile weaving & composite, and (c) other textiles. There were 229 companies listed with the KSE under this group in December 2003. The share index of cotton and other textiles recorded a growth of 37.4 percent during the first nine months of the current fiscal year as compared to a growth of 5.0 percent in the same period last year. Its market capitalization increased by 28.8 percent or by Rs 19 billion during July-March 2003-04 as compared to a rise of 16.6 percent (Rs 6.8 billion) in the same period last year.

Chemicals & Pharmaceuticals: A total of 38 companies were listed with the KSE under this group at the end of December 2003. During the first nine months of the current fiscal year, its share index increased by a record 54.3 percent as compared to an increase of 27.0 percent in the comparable period of last year. Its market capitalization stood at Rs 160.2 billion on 31st March 2004, showing an increase of 48.1 percent over June 2003 and 73.7 percent over March 2003.

Auto and Allied: A total of 25 companies were listed with the KSE under this group at the end of December 2003. Its share index increased by 50.1 percent, while its market capitalization increased by 42.8 percent.

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Sugar and Allied: Under this group, a total of 38 companies were listed with the KSE with a market capitalization of Rs 8.6 billion. The sugar and allied group is a minor player in the stock market although it has a weight of 8.6 percent in the production index of major industries. During the first three quarters of the current fiscal year, the share index of sugar and allied posted a growth of 15.7 percent as compared to a rise of 24.9 percent in the comparable period last year.

Cement: At the end of 2003, there were 22 cement companies listed with the KSE. The cement industry was one of the best performing sectors in the stock market. During July-March 2003-04 its share index grew by 65.2 percent, which was the highest among the 12 trading groups. Its market capitalization increased to Rs 57.2 billion on March 31, 2004 from Rs 33.5 billion in June 2003, recording a growth of Rs 23.7 billion or 70.7 percent.

Fuel & Energy: A total of 25 companies were listed with the KSE. It is the most dominant group in the stock market. While its share index grew by 24.5 percent during the first nine months of the current fiscal year, its market capitalization increased by a huge Rs 314.4 billion to Rs 506.0 billion in March 2004 from Rs 191.5 billion in June 2003. Its market capitalization constituted 37.6 percent of the aggregate market capitalization in March 2004. A swelling fuel and energy sector is one of

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the major market players in the current year along with transport and communication, banking and finance and cement. The energy sector has been identified as an engine of growth along with 3 other sectors, (agriculture, small and medium enterprises and information technology) by the government and its unprecedented growth is expected to further promote investment activities in the country.

Transport & Communication: At the end of 2003, there were 11 companies of this group listed with the KSE. Its share index and market capitalization increased by 37.2 percent and 47.9 percent respectively during July-March 2003-04 as compared to their rises of 58.5 percent and 43.5 percent in the same period last year. Its market capitalization at Rs 182.4 billion constituted 13.5 percent of the aggregate market capitalization (AMC) in March 2004 making it a major player on the KSE. The combined market capitalization of fuel and energy, and transport &

communication was Rs 688.3 billion on March 31, 2004, which constituted 51.1 percent of the AMC as compared to their share of 44.8 percent on the corresponding date of last year.

Banks & Other Financial Institutions: In December 2003, a total of 184 companies were listed with the KSE. There are 4 sub groups in this group: banks & investment companies, modarabas, leasing companies, and insurance. During the current fiscal year, the

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share index and market capitalization of this group has increased by 55.1 percent and 85.8 percent respectively. Its market capitalization increased from Rs 99.7 billion in June 2003 to Rs 185.2 billion in March 2004.

Miscellaneous: The miscellaneous group includes five sub-groups: jute, food & allied, glass & ceramics, vanaspati & allied, and others. In December 2002, a total of 98 companies were listed with the KSE, which came down to 92 companies at end December 2003. Its share index and market capitalization posted growth of 33.5 percent and 37.6 percent respectively in the first nine months of the current fiscal year, as compared to their growth of 23.1 percent and 16.9 percent respectively, in the same period last year. In December 2003, a total of 701 companies were listed on the Karachi Stock Exchange, including 229 companies in cotton and other textile, 184 in banks and financial institutions, 92 in miscellaneous group etc. In the calendar year 2003, the number of dividend paying companies increased to 312, from 307 companies in 2002. As compared to 429 companies in 2002, 431 companies were profit making in 2003. During 2003, 170 companies were shown as loss making as compared to 195 in 2002. In 2002, the total before taxation profit of the 12 trading groups, listed with the KSE, amounted to Rs 90.9 billion, which increased to Rs 136.8 billion in 2003, showing a growth of 50.5 percent. Transport and communication, which was the most profitable industry during 2003, earned a pre-taxation profit of Rs 41.4 billion compared to its pre-taxation

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profit of Rs 33.9 billion in 2002. Banking and other financial institutions recorded the second highest pre-taxation profit of Rs 37.1 billion in 2003 as compared to Rs 20.1 billion in 2002. Other sectors which earned higher pre-taxation during 2003 profits were; fuel and energy (Rs 20.5 billion); chemical & pharmaceuticals (Rs 10 billion); auto and allied (Rs 9.2 billion) and cotton and textiles (Rs 6.8 billion). The group wise number of companies and their performance is given in Table 4.

The KSE is primarily influenced by some big blue chip companies including; Hub Power, PTCL, Pakistan State Oil etc. During the first three quarters of the current fiscal year, the combined turnover of shares of ten big companies (OGDC, Hub Power, PTCL, Sui-Northern Gas, FF Bin Qasim, D.G. Khan Cement, Dewan Salman, PIAC, Fauji Cement and Lucy Cement) was 12.44 billion, which constituted 19.1 percent of the total turnover of the KSE.
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These ten companies earned a profit after taxation of Rs 55.1 billion in the current fiscal year up to March 2004. Out of Rs 55.1 billion after taxation profit, the share of PTCL and OGDC was Rs 43.8 billion representing 79.4 percent of the ten big companies. In the first nine months of 2003-04, PTCLs after taxation profit was (Rs 23.1 billion). The price-earning ratio of the ten big companies ranged from 6.62 in the case of PTCL to 325.64 in respect of Dewan Salman. This indicates that the business environment in the current fiscal year has improved appreciably. (Details in Table 7.5), a profile of the KSE is shown on Table 7.6).

The Lahore and Islamabad Stock Exchanges also showed a record performance during the outgoing year. The turnover of shares on the Lahore Stock Exchange (LSE) during July-March 2003-04 was 34.5 billion compared to
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19.5 billion shares in the same period last year. Total paid up capital with the LSE increased from Rs 280.1 billion in June 2003 to Rs 347.6 billion in March 2004. The LSE index, which was 2034.6 points in June 2003, increased to 2840.1 points in March 2004. The market capitalization of the LSE has increased from Rs 751.2 billion in June 2003 to Rs 1345.6 billion in March 2004. Ten new companies were listed with the LSE during July-March 2003-04, as compared to only one in the same period last year. The amount of funds mobilized at the LSE by way of subscription was Rs 55.4 million in the first nine months of the outgoing fiscal year. A profile of LSE is given in Table-7.

The turnover of shares on the Islamabad Stock Exchange (ISE) was 1.11 billion during July-March 2003-04 as compared to 1.30 billion during the same period last year. The ISE share index has increased from 8210.6 points in June 2003 to 10840.0 points in March 2004, recording a growth of 32.0 percent. Six new companies were listed and Rs 51.9 billion was mobilized on the ISE during the first nine months of the current fiscal year. The ISE started functioning in

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August 1992 and within 13 years; it has developed into a vibrant, efficient and stable market. Today, the ISE is one of the premier stock exchanges of the country known for the highest standard of transparency in its operations, excellent risk management, dynamic market technology and lowest overall costs of listing. A profile of the ISE is given in Table 8.

The total funds mobilized during July-March 2003-04 in the three stock exchanges (KSE, LSE & ISE) amounted to Rs 169 billion, as compared to Rs 39.4 billion in the last fiscal year. The total turnover of shares in the three stock exchanges during the first three-quarters of the current fiscal year was 100.8 billion, compared to 56.9 billion shares in the same period last year, recording an increase of 77.2 percent. During the period under review (July-March 2003-04) TFCs by 8 companies, amounting to Rs 3.90 billion were listed on the stock exchanges (5 on the Karachi Stock Exchange and 3 on Lahore Stock Exchange). Further more, during the period under review, 8 companies with a paid-up capital of Rs 49.44 billion, 9 companies with a capital of Rs 51.30 billion and 5 companies with a capital of Rs

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47.47 billion were listed on the Karachi, Lahore and Islamabad Stock Exchanges respectively.

3.4 Current Situation: Phenomenal increase in the turnover of shares on the stock market from 1.0 billion in 1991-92 to 67.6 billion in 1999-2000. Aggregate market capitalization has increased from Rs 218.4 billion in 1991-92 to Rs 392 billion in 1999-2000 a rise of 79.5 percent. Number of listed companies on KSE has increased from 628 in 1991- 92 to 762 in 1999-2000 (Table1). Amongst global emerging markets, Pakistani stock market has been on top with the highest percentage gain achieved during the year 2000, in automated and electronic trading and settlement system. The Securities and Exchange Commission of Pakistan (SECP) has accelerated its drive to enhance the efficiency of the stock exchanges and ensure protection of the interest of investors. Disclosure requirements are being made more stringent. Another phenomenon taking shape with the general rise seen in the stock markets is the revival of the mutual fund industry. The funds are becoming more attractive and their portfolios attracting new investors to capitalize upon the current trends. With the recovery of Pakistani stock market, it is the opportune time for foreign funds to make their entry into Pakistani stock markets. The long-term outlook is promising and the markets are giving enough movement to pick up blue chips at attractive prices with good chances of reaping sizable capital gains on medium to long-term basis. There is ample scope for income funds to be launched. In short, Pakistani stock

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markets are on the road to better performance and efficiency. Although their volatility - an essential part of all emerging markets, creates higher risks they also magnify the potential for higher returns for any investor who has the patience and sophistication to participate in the growth of this emerging market.

Developments during July-March 2000-01:

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After showing bearish performance in 1997-98 and 1998-99, the stock market reasonably picked up some of its bullish fervors of mid 1990s in 19992000. In 1999-2000, the leading market indicators displayed modest recovery, mainly as a result of a comprehensive socioeconomic package announced by the Chief Executive in December 1999. During 1999-2000 the KSE share index increased by 44.2 percent aggregate market capitalization increased by 35.5 percent. In the current fiscal year ending March 2001 the KSE share index exhibited stability and remained between 1600-1300 points. Since October 1999 and until March 2001, the KSE index is up by 135 points or by 11.4 percent and market capitalization is up by Rs 8.7 billion or by 2.7 percent. However, if compared with the performance of 1999-2000 the stock market displayed some slow-down in the current fiscal year. This was mainly due to the longest ever, dry spell in the country, causing huge shortage of water in the metropolitan city of Karachi, negative growth in agriculture sector, and continued recession in commodity markets. During the first three quarters of the current fiscal year the KSE price index and aggregate market capitalization have declined by 12.9 percent and 16.3 percent respectively, as against their growth of 89.6 percent and 72.9 percent in the same period last year. Total turnover of shares on KSE also declined from 34.7 billion in the first nine months of 1999-2000 to 24.1 billion in the current fiscal year up to March 2001. Funds mobilized by the KSE during the first nine months of the current fiscal year amounted to Rs 4.5 billion, including Rs 2.6 billion through right issues and Rs 1.6 billion through debt instruments. The funds mobilized in the corresponding period of last year were

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Rs 7.6 billion including Rs 6.3 billion through right issues and Rs 1.3 billion through debt instruments. Out of 12 major trading groups on the KSE (cotton and other textiles, pharmaceuticals & chemicals, engineering, auto & allied, cables and electric goods, sugar and allied, paper and board, cement, fuel and energy, transport and communication, banks and other financial institutions and miscellaneous) the share index of 9 groups showed declines including: cotton & other textiles, pharmaceuticals & chemicals, engineering, auto & allied, paper & board, cement, fuel & energy, transport & communications and banks & other financial institutions. The declines ranged from 1.5 percent (engineering) to 27.9 percent (cement). While three groups showed some improvement over there level in June 2000, including: cable & electric goods, sugar & allied and miscellaneous. Five trading groups including engineering, cable & electric goods, sugar & allied, cement, paper & board and miscellaneous showed growth in their aggregate market capitalization ranging from 1.6 percent (miscellaneous) to 15.0 percent (paper & board). A total of 351 companies declared dividends on the KSE during July-March 2000-01 as against 330 companies in the comparable period of last year. Total market capitalization of five leading groups namely; cotton & other textile, fuel & energy, transport & communication, financial institutions and chemical & pharmaceuticals was Rs 267.7 billion on March 30, 2001 or 81.6 percent of the aggregate market capitalization of Rs 328.2 billion. Market capitalization of transport and communication which was the most rapidly growing sector since 1996-97, has incurred a decline of Rs 58.8 billion in one year from Rs 129.6 billion in March, 2000 to Rs 70.8 billion in March 2001. Fuel

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and energy, the second most rapidly growing sector also incurred a loss of Rs 47.9 billion in its market capitalization in one year, declining from Rs 125.9 billion in March 2000 to Rs 78 billion in March 2001. The rapid increase of share prices of these two trading groups in 1999-2000 was reportedly triggered by speculative news about the privatization of some leading public sector organizations including PTCL and WAPDA. However, as the privatization process lingered on, investors euphoria started dying down and shares prices have considerably declined since March 2000. The combined market capitalization of fuel & energy, and transport & communications was however, still the highest representing 45 percent of aggregate market capitalization in March.2001.

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In 2000-01, 761 companies were listed on Karachi Stock Exchange, including 143 companies in textile spinning and 56 companies in textile composite sector. Sector-wise number of companies and their market capitalization are given in table 7.3.

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Mixed business trends were witnessed at the other two stock exchanges namely, the Lahore and Islamabad Stock Exchanges. The turnover of shares on Lahore Stock Exchange (LSE) during July-March 2000-01 was 6.2 billion compared to 12.0 billion shares in the same period last year. Total paid up capital with LSE increased from Rs 207.7 billion in 1999-2000 to Rs 227.7 billion in December 2000. The LSE index, which was 372.0 points in June 2000, declined to 272.0 points on March 30, 2001. Market capitalization has however, increased from Rs 365.9 billion in June2000 to Rs 398.1 billion in December 2000. A total

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of 104 companies announced dividend during July-March 2000-01 as compared to 207 companies in the same period last year. A profile of LSE is given in Table 7.4. Turnover of shares on Islamabad Stock Exchange (ISE) registered a decline of 54 percent from 2.4 billion shares in July-March 1999-2000 to 1.1 billion during the first nine months of the current financial year. Total mobilization at ISE was Rs 0.7 billion during the first nine months of the current year, as compared to Rs 2.5 billion in the same period last year. The ISE price index has also declined from 5327.2 points in June 2000 to 4531.3 points in March 2001. A total of 128 companies announced dividend with ISE during the first nine months of the current fiscal year as compared to 115 companies in the same period last year. (Table 5) Total funds mobilized during July-March 2000-01 in the three stock exchanges (KSE, ISE & LSE) amounted to Rs 6.8 billion, as compared to Rs 10.2 billion in the same period last year. Total turnover of shares in the three stock exchanges during first three-quarters of the current year was 31.4 billion, compared to 49.1 billion in the same period last year, recording a decline of 36.0 percent.

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During the one-year period from December 31, 1999 to December 31, 2000, the number of limited companies in Pakistan has increased by 1222, as compared to 968 companies in the previous year. Total number of companies stood at 42712 on December 31, 2000 including 42127 domestic and 585 foreign as compared to 41490 companies on December 31, 1999.

3.5 Major Institutional Developments: For rapid development of the stock market, Government of Pakistan has taken a number of policy decisions, which will go a long way in revamping the overall structure of the stock market and seek to create a conducive investment friendly environment. These include introduction of various laws and rules for the protection of small investors, measures for bringing efficiency and transparency in trade, curbing insider trading, strengthening the structure of the SECP and bringing the market in accordance with international norms. Details of the various policy measures are given below:

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All stock exchanges have been directed to make certain changes in their governance structure to ensure that the exchanges are managed in accordance with internationally accepted norms and in the best interest of the stock market.

Stock exchanges have been advised to follow international standards in governance.

The initiatives taken by the SECP are aimed at ensuring that the exchanges conduct themselves as a national institution fully protecting the interests of investors who are major stakeholders in the system.

The Securities Commission has taken various measures to strengthen the risk management of the stock exchange.

The net capital balance requirement has been substantially increased to Rs 2.5 million in case of a stock exchange having a turnover of securities exceeding 15.0 billion shares; Rs 1.5 million in case of turnover of securities exceeding 7.5 billion; and Rs 0.75 million in case of turnover of securities not exceeding 7.5 billion.

Members are required to maintain a capital adequacy ratio, which should be 25 times net capital.

Up until now, there was no margin required against exposure limits. From November 2000 onwards members are required to deposit 5% margin against their trade within the exposure limits.

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A new set of rules has been announced, in January 2001, to ensure smooth operation of Employees Stock Options. It would be ensured that employees are motivated to have greater share in the companies stock.

The SECP has finalized the draft regulations for venture capital companies and venture capital fund and the Government has already announced seven years tax-holiday for IT companies. The State Bank of Pakistan has also decided to provide funds to IT companies on inter-bank rate.

Blank selling has been restrained from inter-settlement carry over. All outstanding trades are required to be settled and no carry over is allowed unless the possession of shares is evidenced. This action would prevent volatility in price fluctuation; and stabilize the market. This restriction was extended to all listed companies as of December 4, 2000.

The SECP has prepared guidelines for small investors against various market risks and published in newspapers for raising public awareness.

The Securities Commission has set up a Monitoring and Surveillance Wing. The Surveillance Wing carries out on line monitoring of the stock exchange to effectively monitor the activities at the exchange and to take corrective measures as and when needed.

A complaint cell has been established in SECP and during July-December 2000, 697 complaints were received out of which 681 complaints were redressed.

The SECP has streamlined the procedure for issuance of TFCs by reducing cost and simplifying procedure of approval. Stock exchange listing fee,

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brokerage commission and bankers fee to the issue commission has been reduced. Self-registration has been allowed. TFCs can be issued in branches. Publication of abridged prospectus has been allowed; and Trustees responsibilities have been more clearly defined. The SECP has notified and prescribed cost accounting records for companies engaged in production of cooking oil, ghee and cement to, inter-alia, facilitate audit process. Similar rules for sugar industry have been made for which public opinion is being solicited. Draft Rules on disclosure for fertilizer and pharmaceutical industries have been proposed for discussion with the industry. Consultative process with trade and professional bodies has been initiated in respect of quarterly reports to be published by the listed companies. Further disclosure requirements would be prescribed on the basis of recommendations of the consultants under CMDPL. Two new International Accounting Standards have been adopted. The SECP has already created an Enforcement Division under a full-fledged Commissioner who is monitoring the performance of listed companies.

3.6 Future Development Programs: For future development of stock market in Pakistan the SECP has initiated the following road map:

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Brokers agent registration regulations would enable direct controlling of brokerage activities. It would enable smooth operation of stock market serve as tool for investor protection. These rules have been finalized and awaiting notification after clearance from the Law & Justice Division.

For curbing the use of insider information, guidelines are being developed for prohibition of insider trading in the securities of listed companies.

National clearing and settlement system (NCSS) project has been prepared with the assistance of the ADB and is being implemented. The system will be based on rolling system on T+3 based on Continuous Net Settlement (CNS). The NCSS project is expected to be operational from June 30, 2001.By adopting the above system design the ratio of trade with settlement would improve and in turn speculative trade would be reduced.

Report on master plan for automation of the SECP has just been submitted by Arthur Anderson under the CMDPL, which will be approved by the SECP after necessary scrutiny. Implementation on the plan as approved by the SECP started from July 2000 and is likely to be completed in 12 months. The SECP is already hosting a web site in which all the rules and current circulars are being made available to the general public.

To broad base the stock market, linkages to cities other than Karachi, Lahore and Islamabad are to be established. The SECP is in the process of developing a policy framework so that the operation is extended to other major cities.

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Software at all the stock exchanges is to be up-graded so that trade from small cities through the communication linkage is facilitated. An appropriate system design is to be prepared on the above basis.

A complete guide has been prepared which would be published by the SECP and would be made available to the general public at a nominal cost.

The SECP has a plan to strengthen its investigative unit by induction of properly qualified and trained staff for such purpose.

The SECP is designing a system for Internet trading along with a regulatory framework.

Necessary amendments in the existing software at the three stock exchanges regarding automated trading would be made so as to facilitate Internet trading. 3.7 CENTRAL DEPOSITORY COMPANY Central Depository Company of Pakistan Limited (CDC) was incorporated in 1993 to manage and operate the Central Depository System (CDS). CDS is an electronic book entry system to record and transfer securities. Electronic book entry means that the securities do not physically change hands and the transfer from one client account to another takes place electronically. An IBM led consortium along with the management of the company implemented CDS in Pakistan. The aim of CDC is to operate as a central securities depository on behalf of the financial services industry so as to contribute to the country's ability to
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support an effective stock market system which will attract institutional and retail level investors from Pakistan and abroad. The mission of CDC is to operate and maintain an electronic book entry settlement system for equity, debt and other financial instruments and to contribute to the country's ability to support and develop the Pakistani Stock market as the hub of financial activities in the region. Their goals are to eliminate paper based settlement, to diversify our services, and become a leading institution of the region.

Problems Faced by the Stock markets before CDS: Since the last decade, the stock markets of Pakistan have witnessed a substantial growth leading to a manifold increase in the trading volume. The custody and safe keeping of physical certificates required maintenance of huge vaults by the individuals and institutions and the physical settlement of certificates were no longer feasible. Moreover, the manual system was also plagued by lengthy delays, risks of damage, forgeries and considerable time and capital investment. Following is a list of the major problems faced by the Members of the Stock Exchange, Investors, Issuers of Securities and others are as follows: a) b) Increased volume of bookkeeping and paper work. Problems in settlement due to increased volume.

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c) d) e)

Maintenance of huge vaults for safe keeping of certificates. Long and cumbersome share transfer procedure taking up to 45 days. Payment of stamp duty on share transfers which ranged from 0.1% to

1.5% of the face value. f) In case of new issues the issuers would take more than two months for

the dispatch of certificates to the successful applicants and for the subsequent preparation and verification of transfer deeds. g) h) Risks of damaged, lost, forged and duplicate certificates. Lengthy and tedious procedure involved in pledging of physical

securities. i) Capital and time investment required for issue and dispatch of share

certificates, cash dividend, bonus and right issues. j) k) a. b. c. d. Issuance of duplicate certificates. Activities carried out for share transfer during book closure: Signature verification Checking correct value of transfer stamps Verifying genuineness of certificates Signature of Director for confirmation of transfer

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The answer to all these questions was to set up an electronic book entry system in Pakistan. This led to the establishment of Central Depository Company of Pakistan Limited developed to manage and operate the Central Depository System (CDS).

Benefits of Electronic Settlement through CDS: Following are some of the benefits of electronic settlement of securities through CDS: a) b) c) d) e) f) g) h) i) j) Reduced workload due to paperless settlement. Reduced manpower and requirements. Instantaneous transfer of ownership. No stamp duty on transfers in CDS. No risk of damaged, lost, forged or duplicate certificates. No impact in case of sudden increase of settlement volumes. Instant credit of bonus, rights and new issues. Substantial reduction of paperwork during book closure. Convenient pledging of securities. Substantial reduction in time & capital investments.

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Security Measures: The Central Depository Company of Pakistan Limited takes security of Central Depository System extremely seriously and is committed to provide a complete and secure system to its clients so as to ensure smooth and risk free settlement of security transaction. However, it is important to understand that most systems do not cater for all security features from day one and such features evolve with the system itself. Nevertheless, they are constantly

looking into the possibilities to further enhance the security of the system and are committed to make CDS an exemplary system in this regard. Following are some of the features implemented so far: 1. CDS IDs and Passwords: All CDS elements are

allocated unique IDs and Passwords through which to enter the system. 2. Dial-in IDs and Passwords: This feature is an

additional layer of security for those clients who are connected to us through telephone lines. 3. Terminal Authentication: CDS elements can only get

connected to us through their designated terminals. Contingency Site: CDC provides the backbone for smooth and efficient settlement operations of the Pakistani stock market. Almost all of the total settlement of the stock exchanges is now done through the CDS. By recognizing the computer facility being the core resource for the operation of CDS, we have critically
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evaluated potential risks of CDS becoming unavailable to the users and accordingly developed a contingency site office in Karachi. The site is installed with redundant hardware; software and requisite network to provide cost effective connectivity and support to all CDS users. A reliable data communication link is deployed to connect the remote site primary site and transmit the latest CDS status to the remote site at the shortest possible intervals. This arrangement is an additional to daily tape back ups made to keep record of the CDS status and will ensure convenience, safety, reliability and efficiency. Insurance Coverage: In order to protect itself from any loss arising due to claim lodged by any CDS element, the Central Depository Company of Pakistan Limited has obtained insurance coverage against the following risks: 1. 2. 3. Employees infidelity Computer Crime Professional Liability

The insurance coverage has been obtained from a consortium of two largest insurance companies of Pakistan i.e. EFU General Insurance Company and Adamjee Insurance Company. The sum insured is Rs. 50 Million. Customer Support Services: It is essential to understand the importance of effective and timely
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customer support in the success of a service providing organization. They believe that effective and timely customer support is the right of our clients and the key to our success. Customer Support Help Desk: Since inception, CDC has been providing timely and effective customer support to CDS elements through Customer Support Help Desk System regarding the use of CDS software and the workings of Central Depository Company of Pakistan Limited. The system works as an interface between CDC and its clients and is also being used as a tool to educate the clients. Highly trained professionals with complete and lucid knowledge of the CDS can be contacted in Karachi, Lahore and Islamabad through UAN 111-111-900 during operating hours. It is a completely automated system in which queries are entered in Customer Support Help Desk System by our staff and are either satisfied on receipt or referred to the concerned department electronically for resolution. This electronic transfer of queries reduces considerable paper work and processing time. To ensure early response to every problem, any query pending for over 24 hours is reported to the senior management. Just like Central Depository System, Customer Support Help Desk is also geographically neutral. This ensures consistent standard of services through out the country. Services Offered: Following is a brief description of some of the services provided by us:

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Account Statement Verification: An Account Holder / Participant can confirm the balance of the accounts maintained by them from Customer Support Services. In this regard, the Account Holders / Participants are required to provide a duly signed Account Balance Statement obtained from their terminal. Upon receipt of the statement, the same is generated from CDC's terminal and handed over to the requestor after due verification. Such requests are also entertained for sub account holders. However, they are required to provide a request letter and present their original NIC to obtain the report. This measure has increased the confidence level of investors substantially. Global Terminal Facility: All CDS elements are required to access CDS through their authenticated terminals only. For the benefit of its clients, CDC has provided computer terminals at its premises to be operated by clients, (all CDS elements) in case of any technical problem at their end. With this facility, clients can directly log on to their accounts from CDC premises and complete their transactions. Clients are required to bring a request letter duly signed by the authorized signatory (ies) of the account to avail this facility.

Training: In order to familiarize our clients with the concept & workings of the

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Central Depository System, CDC provides training to its clients on as needed basis. In a full-day training session, clients are walked through the Central Depository System enabling them to have a comprehensive understanding of the system. CDC does not charge clients for training and the clients can request as many session as they desire. In addition to the above, various other services like password reset, change in registration details of Account holders / Participants, change in user option, change of authorized signatories and installation / reinstallation / additional connection etc. are provided to the clients. Investor Account Services offered by Central Depository Company of Pakistan allows investors to directly open and maintain accounts in Central Depository System for electronic settlement of securities. Earlier, to settle the securities through Central Depository System, investors had to open client accounts (sub accounts) or group accounts with the Participants (brokers & financial institutions). Now with Investor Account Services, investors can also have direct access to CDC.

3.8 AKD Trade Pakistans First Online Investment Site:1


AKD trade is an online investment site dealing with the investments made in Pakistani stocks exchanges. This site has provided an opportunity for the small investors to invest in to the stock markets. AKD Trade is Pakistan's first Online Trading site that enables
1

Source: www.akdtrade.com
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- Efficiency of Stock Markets in Pakistan -

investors to trade at the Karachi Stock Exchange using their PCs from anywhere at any time. AKD Trade started operations in November 2002 and has since received an overwhelming response from investors. A division of AKD Securities, Pakistan's largest stock brokerage firm, AKD Trade's mission is to provide retail investors maximum access to Pakistan's capital markets. AKD Trade is the first fully automated order processing system for stock trades in the country. AKD Trade has made stock trading simpler, faster, transparent and cheaper for the retail investor. AKD Trade is an e-business in the truest sense and in its first year of operations, has already received an overwhelming response from the retail investor base of the Karachi Stock Exchange. AKD Trade has also contributed significantly in increasing the retail base at the Karachi Stock Exchange. After the first 12 months, over 1 billion shares have been traded using the AKD Trade Online Trading System. Mission: To provide retail investors maximum access to Pakistan's capital markets AKD Trade is proud to have in place a fully automated Settlement

system along with the only automated Risk Management system in the country, which ensures healthy equity portfolios both for clients and the business. Within a year, AKD Trade has managed to elevate the standards of the Stock Trading business to a level unimagined in the past by either the Members or investors at the Stock Exchange.

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AKD Trade, a responsible member of the Service Industry, is obligated to provide new and enhanced tools of access along with a high standard of customer service. AKD Trade has several initiatives planned for the future, such as trading via mobile phones, a 24x7 x365 Call Center, a country-wide branch network allowing convenient access to investors, and a whole lot more. In essence, AKD Trade has brought the stock exchange to the computer screen of the investor, enabling order placement at the Stock Exchange with utmost ease. In addition to broadening the investor base of the Karachi Stock Exchange, this initiative has also helped in strengthening the capital markets of Pakistan. It is a huge step forward towards creating the right opportunities for investors to make investment decisions with convenience and towards building an investor-friendly environment in the country.

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Analysis
As discussed earlier the analysis is based on various types of efficiency these are 1. Allocative Efficiency 2. Operational efficiency 3. Informational Efficiency

4.1 Allocative Efficiency: Allocative efficiency of a stock exchange refers to how good are the markets in allocating scarce capital resources among competing users. In terms of allocative efficiency capital will be allocated to the firms that can achieve the best marginal returns.

Indicators for Allocative Efficiency: Based on the concept of allocative efficiency following indicators can be used to determine the efficiency of a stock market.

Number of investment opportunities available Market Capitalization Number of Securities and Companies Privatization

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In one-way or other the above factors are increasing the allocative efficiency of the stock markets in Pakistan. The no of companies listed on the exchange are increasing day by day. Tremendous increase in capitalization is witnessed in year 2004, On the other hand privatization of state owned companies is taking place at a great pace. Many renowned institutions have been privatized and many are yet to come. This trend has provided an opportunity for investors to invest. Similarly other markets like commodity markets are also being introduced. All these factors are making positive contributions in developing the allocative efficiency of the stock markets.

4.2. Operational Efficiency: Operational efficiency refers to the cost of raising capital. An ideal market would be one, which provides lower costs of raising capital and viability of long-term projects to raise capital as easily as short-term projects. Further more investor would be faced with minimum transaction costs and competition between brokers should ensure only normal profits in the securities industry.

Indicators for Operational Efficiency: Operational Efficiency of an exchange can be judged using the following indicators.

Infrastructure

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Processes Taxes Brokerage fees & Commissions

By infrastructure we refer to the equipment being utilized for the operations of the market. Because of the developments in informational technology it is now easier to improve the efficiency of the exchanges. All the stock exchanges in Pakistan are being equipped with modern infrastructure, which is playing a vital role in the development of their efficiency. The government has revised taxes in order to control huge fluctuations in the markets. In the budget 2004 and 2005 every transaction is proposed to be taxed. As far as brokerage fees and commissions are concerned steps are being taken in order to regulate them and minimize the charges they take from the investors.

4.3. Informational Efficiency: Informational efficiency refers to the pricing efficiencies of the stock markets. It is based on the concept that the prices of the securities are dependent on the information whether the information is the history of the stock prices, public information or and sort of private information.

Indicators for Informational Efficiency:

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The informational efficiency can be analyzed by gauging stock prices. The price discovery process can be monitored using a number of statistical tools. Efficient market hypothesis is one of such tool. In the view of efficient market hypothesis the Pakistani market is a semi strong form of efficiency i.e. the stock prices fully reflects all the publicly available information and the historic stock prices. If we analyze the finding we would know that the stock prices have a great influence from certain factors like

Political stability Law and order situation Regulations Fiscal Budgets

Mentioned above are some factors, which have an impact on the stock markets in Pakistan. Political stability has a direct impact on the stock exchange performance. We can see the present government is able to provide somewhat stability, as a result of this stability the investors confidence is boosted and they are investing in stock market. Similarly, legal situation is improving providing greater opportunity to the investors. Regulations are being developed and some have been implemented to provide protection to the stakeholders. Keeping in view the analysis and the findings it is sale to conclude that the Pakistani markets are a semi strong form of efficiency since they react to historic stock prices and the publicly available information.

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Conclusion

Pakistani stock market has come a long way and is on the road to better performance and efficiency. Although their volatility - an essential part of all emerging markets, creates higher risks they also magnify the potential for higher returns for any investor who has the patience and sophistication to participate in the growth of this emerging market. The markets are developing at a very rapidly and measures are being taken to manage the growth of this market. As far as efficiency is concerned there is a lot of room for improvement. Many companies today are offering online investment opportunities to the stock exchange, one such company is AKD. Such developments in the market are helping both the investors and the businesses to access the capital resources. All the factors discussed above in the analysis and finding, depict a bright future for the stock exchanges. But there is dire need to further improve the efficiency since it is vital for the managing the growth of the market

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REFERENCES:
Aasmund, Eilifsen (1999).Earnings Announcements and the Variability Of Stock Returns, Norwegian School of Economics and Business Administration. Akd website. Available at www.akdtrade.com Bajaj & Vijh (1995). Trading Behavior and the Unbiasedness of the Market Reaction to Dividend Announcements, Journal of Finance. Bajaj & Vijh (1990). Dividend Clienteles and the Information Content of Dividend Changes, Journal of Financial Economics. Bamber (1987). Unexpected Earnings, Firm Size, and Trading Volume Around Quarterly Earnings Announcements, The Accounting Review. Central Depository Company website. Available at www.cdcpakistan.com Copeland (1979).Liquidity Changes Following Stock Splits, Journal of Finance. Fama, Eugene (1970). Efficient Market Hypothesis The Journal of Finance. Global Securities Pakistan limited website. Available at www.gslpk.com Islamabad Stock Exchange website. Available at www.ise.org Karachi Stock Exchange website. Available at www.kse.com.pk Keith, Pilbeam (1998). Finance & Financial Markets. W.W. Macmillan Press Limited, London. Kim, Verrecchia (1991). Market Reaction to Anticipated Announcements, Journal of Financial Economics. Lakonishok and Vermaelen(1990). Anomalous Repurchase Tender Offers, Journal of Finance. (NECL) National www.ncel.com.pk Commodity Exchange Limited Price Behavior Around at

website.

Available

Securities and Exchange Commission website. Available at www.secp.gov.pk State Bank of Pakistan website. Available at www.sbp.org.pk

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