impect of global recession on kse

Impact of Global Recession on Karachi Stock Exchange

INSTITUTE OF BUSINESS AND TECHNOLOGY

Impact of Global Rescission on Karachi Stock

Exchange

Final Project/Thesis

Course Code : MKT-606MBA (Banking and Finance)

FACULTY OFMANAGEMENT AND SOCIAL SCIENCES

SPRING - 2011

Institute of Business and Technology1


ACKNOWLEDGEMENT

First of all we would like to thank Almighty ALLAH who has guided us the way

for a bright future. We would like to express my gratitude to our teacher and

those who gave me the possibility to complete this thesis.

We are deeply indebted to our teacher Dr. Noor Ahmed Memon whose help,

stimulating suggestions and encouragement helped us in all the time of

research for and writing of this thesis.

We are also thankful to our parents who accommodated us during those long

hours of work in writing Synopsis for Dissertation and all the friends and

colleagues especially our UBL treasury member’s who equally encouraged

us.

We would also like to appreciate the co-operation we got from our classmates

at the institute, which boosted our morale and encouraged us to strive for

better results.

Lastly, we offer my regards and blessings to all of those who supported me in

any respect during the completion of the project.

Mohammad Farhan Shaikh Muhammad Sufyan



CONTENTS

ACKNOWLEGEMENT 1ABSTRACT 4

CHAPTER 1: INTRODUCTION

1.1 Introduction 61.2 Purpose of Study 71.3 Research Objectives 71.4 Research Methodology 8

CHAPTER 2: LITERATURE REVIEW

2.1 Literature Review 11 CHAPTER 3: STOCK EXCHANGE

3.1 History 16 3.2 Mobilizing Savings for Investment 17 3.3 Facilitating Company Growth 17 3.4 Redistribution of Wealth 17 3.5 Corporate Governance 18 3.6 Creating Investment Opportunities for Small Investors 18 3.7 Major Stock Exchange 18 3.8 Contribution to GNP 22 CHAPTER4:KARACHI STOCK EXCHANGE

4.1 Karachi Stock Exchange 234.2 KSE 100 Index 254.3 KSE 30 Index 284.4 KMI 30 324.5 Progress 37

CHAPTER 5: IMPACT OF GLOBAL RECESSION ON KSE

5.1 Global Recession 385.2 Attributes of Recession 395.3 Karachi Stock Market & Recession 395.4 Causes & Effects of recession 445.5 Global Impact on KSE 455.6 Recession & Politics 475.7 Consequences of KSE Recession 52



CHAPTER 6: CONCLUSION & RECOMMENDATIONS

6.1 Conclusion 556.2 Recommendations 55

REFERENCES 57



INSTITUTE OF BUSINESS AND

TECHNOLOGY

ABSTRACT SUBMITTED BY: Mohammad Farhan

Shaikh Muhammad Sufyan

DISCIPLINE: MBA (Executive)

TITLE OF PROJECT REPORT: Impact of Global Rescission on

Karachi Stock Exchange

MONTH OF SUBMISSION: April, 2011

NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon

Abstract

This report is covered the information related to the global stock exchange

recession and its overall functions and working procedure. The main influence

of this report is on Karachi Stock Exchange recession, its procedure of

affecting recession on stock and its role that he played in an economy and all

the related aspects are also covered of this report.

The global stock recession that started in the fourth quarter of 2008 is

expected to continue till mid-2010. It has affected almost all countries and

Pakistan as well.

In economics, the term ‘recession’ means "The reduction of a country’s (GDP)

for at least two quarters; or in normal terms, it is a period of reduced economic

activity" The International Monetary Fund regards periods when global growth

is less than 3% to be global recession. On the October 8, 2008, IMF released

its World Economic Outlook, according to which the world economy was

predicted to experience an all time low. While many economists and brokers

alike panicked; some shock their heads in dismay; some just planned on

waiting to see what twisted and interesting things might reap. We in Pakistan,

however, just laughed at the naivety of the IMF, for this prediction did not use



to us at all – we were already in the bottom and going to back to worst in it,

and had been so for over a year! Such predictions barely held any ground for

the once 26th largest economy in the world, and 47th largest in terms of the

dollar. It is sad to see our economy like this now, for Pakistan is actually a

very economically diverse country, growing industries of textiles, agriculture,

sports goods, chemicals, food processing, and fishing, to name a few etc. We

were, at one time, one of the top exporters of fish and shrimps to Europe. In

2005, the World Bank said Pakistan as the top reformer in the region; and by

2006 we had managed to decrease our poverty level by 21 %.

Unfortunately, now all these are a thing of the past, for right now is no better

than that of any other under-developed country. The main reason for this

downfall has largely been the political instability over the past few years; there

is no proper economic policies were implemented; at least none that

succeeded. This caused a very high rate of inflation, which, in 2008, had

increased to a whopping 25% as compared to a 7.9% of 2006. In addition to

this, we already had a negative balance of payments, with the quantity of

imports outstripping the quantity of exports. The result was that our main

stock exchange, the Karachi Stock Exchange, became stagnant for the first

time and then declined drastically, and on top of that, Pakistan’s Gross

Domestic Product (GDP) dropped to 4.9% in Pakistan after this declining.

What occurred afterwards is what we call the domino effect. The value of the

Pak Rupee crashed from 60-1 USD to 80-1 USD in only a month, the prices of

commodities soared through the roof, the majority number of people living

below poverty line increased from 60 million to 77 million, and consequently,

the working class layman became virtually deprived from basic necessities

like water, wheat, electricity, natural gas, and cooking oil; add to all this, the

preposterous amounts of load-shedding, and what we get is a nation in

shambles. This is the main reason for declining economy of Pakistan. So are

main influence of this study is that what is the impending of global recession

on Karachi stock exchange? The purpose of this study is to discuss the

various factors impacting negatively or positively in the global recession on

Karachi stock exchange in Pakistan.



1. INTRODUCTION

1.1 Introduction

A stock exchange, formerly a securities exchange share market or bourse is a

corporation or mutual organization which provides facilities for stock brokers

and trader s, to trade company stocks and other security in stock market.

Stock exchanges also provide facilities for the issue and redemption of

securities as well other financial instruments and capital events including the

payment of income and dividends. The securities traded on a stock exchange

include: shares issued by companies, unit trusts, derivatives, pooled

investment products and bonds. To be able to trade a security on a certain

stock exchange, it has to be listed there. Usually there is a central place at

least for recordkeeping, but trade is less and less linked to such a physical

place, as advance markets are electronic networks, which gives them benefits

of speed and cost of transactions. Trade on an exchange is by members only.

The initial offering of stocks and bonds to investors is by definition done in the

primary market and subsequent trading is done in the secondary market. A

stock exchange is often the most important element of a stock market. Supply

and demand in stock markets are driven by different factors which, as in all

free markets, affect the price of stocks.

There is usually no problem to issue stock via the stock exchange itself, nor

must stock be subsequently traded on the exchange. Such trading is said to

be off exchange or over-the-counter. This is the usual way that derivatives

and bonds are traded. Increasingly, stock exchanges are part of a global

market for securities.1

1.2 Purpose of Study

The main purpose of this study that we work with investments, so we are

particularly concerned with recessions because they can have a very negative

impact on investment account values. We are going to look at the global

recession on KSE with particular focus on how recession affected KSE on

1 Karachi stock exchange2 Theory and evidence from the Karachi stock exchange


http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Derivatives

http://en.wikipedia.org/wiki/Over-the-counter_(finance)

http://en.wikipedia.org/wiki/Free_market

http://en.wikipedia.org/wiki/Stock_market

http://en.wikipedia.org/wiki/Secondary_market

http://en.wikipedia.org/wiki/Primary_market

http://en.wikipedia.org/wiki/Investor

http://en.wikipedia.org/wiki/Electronic_networks

http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Derivatives

http://en.wikipedia.org/wiki/Unit_trust

http://en.wikipedia.org/wiki/Shares

http://en.wikipedia.org/wiki/Dividend


2008 The main purpose of this study is to highlight the shortcomings present

in different aspects of KSE and suggest the steps to overcome them to

accelerate the development process. As it is discussed above that the current

progress of Karachi Stock Exchange is the result of improvement in the

numbers of factor which are affecting the KSE directly or indirectly, like

political condition of country, regional issues, economical growth, GDP,

inflation rate, financial policies, financial reformation etc. In these factors some

are controllable but some are not or very difficult to control for a developing

country. In this study only three factors or aspects are considered

Which are highly involved in the development of any exchange and also

controllable for the authorities and can be changed according to the situation?

Organizational structure of the Karachi Stock Exchange

Recession on Karachi stock exchange

Impact of global recession on Karachi Stock Exchange

So what is the impact of global recession on Karachi stock exchange? The

purpose of this study is to discuss the various factors impacting negatively or

positively in the global recession on Karachi stock exchange in Pakistan.

1.3 Research Objectives

Through this research we would focus on the following area.

To know about Recession occurred in KSE

To know about impact of recession on KSE

To understand the causes of recession

To know how to measure or control over recession

To know about what has hit KSE during the time of recession

To understand various problems faced by KSE during the time of

recession

To understand the customer attitudes at the time of recession

To understand how Pakistan is hurt because of recession in 2008

1.4 Research Methodology



This research study is based on recession and the data taken from KSE

website, and other resources available on internet, The Karachi Stock

Exchange recession study is an explanatory study which is aimed at

explaining the impact of Global crisis and recession on Karachi stock

exchange and what affect it will have on the financial institutions of developing

countries. For this purpose content analysis was technique was used and

several website, research papers and articles related to stock exchange and

development economics were examined. This research initially included

impact of global recession and how stock market was hurt because of

recession in 2008.

As in conceptual analysis, a concept is chosen for examination, and the

analysis involves quantifying and tallying its presence, also known as thematic

analysis. A specific number and set of concepts were examined such as

“effects of global recession on stock and financial crisis”, its “contagion effect”

on “financial institutions” of “developing countries”. In this content analysis the

existence of a concept was examined. Set of rules were defined in this

research regarding the existence of concepts and the linkages between these

concepts.

Data Collection: Research reports, which have already been developed on

global recession and Karachi stock recession, have immense significance and

they will form an integral part of data.

International Review of Business Research Papers Vol. 5 No. 5

September 2009

2nd International conference on business and economic research 2nd

ICBER 2011

International Journal of Business and Social Science Vol. 2 No. 6; April

2011

World applied sciences journal 10 (5): 590-596, 2010

International Research Journal of Finance and Economics ISSN 1450-

2887 Issue 35 (2010) Euro Journals Publishing, Inc. 2010



European Journal of Economics, Finance and Administrative Sciences

ISSN 1450-2275 Issue 14 (2008) Euro Journals, Inc. 2008

Instruments: For collection of primary data, I decided that following

instruments will be used:

1. Questionnaire

2. Interview

3. Observation

Questionnaire: Questionnaires are very flexible as there are many ways to

ask the same questions from different respondents. So, I planned to prepare

questionnaire for

a. People work with investments

b. Treasurers’

c. Stock broker’s

d. People work with stock exchange

Since the focus of the study is to find the factors affecting having the most

significant impact on Karachi stock exchange recession in Pakistan, so, I

decided that the multiple choice questions will be asked from entire set of

respondents. 2

Interview: Personal Interviews are the most reliable source of getting

information from respondents. For this purpose, I shall interview the people

having the most knowledge about stock exchange. Following people will be

contacted on some future time.

a. Stock holders

b. Stock broker’s

c. Economists

2 Theory and evidence on Research Methodology



d. Government Officials

Observation: Another instrument that will be used in my study is the

observation. People will be observed thoroughly while conducting interviews

and getting questionnaires filled.

Data Analysis: This section of the report describes the descriptive and

quantitative analysis. Firstly, we provide an analysis of global market

recession under different aspects of recession on Karachi stock exchange

and Appling different models in various odd days as discussed in

methodology part. Secondly, we measure and discuss sector-wise

performance of IPOs under Normal, Boom & Recession period of economy.

Finally, the analysis of this recession is discussed on yearly base.

2. LITERATURE REVIEW



2.1 Literature Review

The Karachi Stock Exchange or KSE Situated in Karachi, Sindh, Pakistan. Founded

in 1947, it is Pakistan's largest and oldest stock exchange, with many Pakistani as

well as overseas listings. It is current premises are situated on Karachi Stock

Exchange Road, in the heart of Karachi's Business District.

Karachi Stock Exchange is the biggest and most liquidity exchange in Pakistan. It

was declared the "Best Performing Stock Market of the World for the year 2002". As

of Dec 8, 2009, 654 companies were listed with a market capitalization of Rs. 8.561

trillion (US$ 120.5 billion) having listed capital of Rs. 2805.873 billion (US$ 40.615

billion). The KSE 100TM Index closed at 9645.71 on June 19, 2010.By 30 July total

market capitalization of the KSE reached Rs2.95 trillion, approximately 350 billion

dollars.

The exchange has pre-market sessions from 09:15am to 09:30am and normal

trading sessions from 09:30am to 03:30pm. The Karachi stock exchange has

undergone a considerable deal of downturn partly due to global financial crisis and

partly on account of domestic troubles. It remained suspended in excess of 4 months

and resumed normal trading only on December 15, 2008. The KSE 100 Index and

KSE 30 Index after hitting the low around mid January has now rebounded and

recovered 20-25% till March 12, 2009. By 30 July 2010 total market capitalization of

the KSE reached Rs2.95 trillion, approximately 35 billion dollars. It was newly

appointed in 18th September 1948.

The KSE is the biggest and most liquid exchange in Pakistan and in 2002 it was

Foreign buying interest had been very active on the KSE in 2006 and continued in

2007. According to estimates from the State Bank of Pakistan, foreign investment in

capital markets total about US$523 Million. According to a research analyst in

Pakistan, around 20pc of the total free float in KSE-30 Index is held by foreign

participants.


http://sn122w.snt122.mail.live.com/wiki/State_Bank_of_Pakistan

http://sn122w.snt122.mail.live.com/wiki/Pakistan

http://sn122w.snt122.mail.live.com/wiki/Sindh

http://sn122w.snt122.mail.live.com/wiki/Karachi


KSE has seen some fluctuations since the start of 2008.KSE Board of Directors has

recently (2007) announced plans to construct a forty story high rise KSE building, as

a new direction for future investment.

Disputes between investors and members of the Exchange are resolved through

deliberations of the Arbitration Committee of the Stock Exchange.

Karachi Stock Exchange began with a 50 shares index. As the market grew a

representative index was needed. On November 1, 91 the KSE-100 was introduced

and remains to this day the most generally accepted measure of the Exchange.

Karachi Stock Exchange 100 Index (KSE-100 Index) is a benchmark used to

compare prices overtime, companies with the highest market capitalization are

selected. To ensure full market representation, the company with the highest market

capitalization from each sector is also included.

In 1995 the need was felt for an all share index to reconfirm the KSE-100 and also to

provide the basis of index trading in future. On August the 29th, 1995 the KSE all

share index was constructed and introduced on September 18, 1995.

World announced the Karachi Stock Exchange is the best performing world stock

market in 2002. Since then the KSE keep on maintaining the reputation as one of the

best performing markets in the world.

Since 1991, foreign investors have an equal opportunity together with local investors

to operate in the secondary capital market on the Karachi Stock Exchange. The

establishment of the new policy for foreign investors and initiated privatization in

Pakistan has accelerated the development of the KSE, which had even 663

companies listed in 2006. In addition, companies have a choice to be listed on one of

the two markets - the ready market and the over-the-counter (OTC) market, which

has lesser listing requirements. While the ready market requires listing companies to

have minimum paid up capital of Rs 200 million (about UK 1.8 m), the companies

with minimum of Rs 100 million can be listed on the OTC market.

The Karachi Stock Exchange trades the KSE-100 Index. It is a highly-diversified

index of 100 largest capitalization companies' stocks from all sectors of Pakistan


http://sn122w.snt122.mail.live.com/wiki/Board_of_Directors


economy. A constantly revised index is a good indicator of the overall Exchange

performance over a period of time. In 2005, 88% of the KSE total market

capitalization was represented by the KSE-100 Index.

The membership in the Karachi Stock Exchange is limited. Only 200 individual and

corporate entities can register as members in the KSE. In 2005, 162 members

traded actively on the Exchange. In addition, foreign corporate entities may also

become the members of the KSE with the condition that the nominee member of the

company is a citizen of Pakistan.

Its been for some time that the Karachi Stock Exchange has been ‘frozen’ for official

trading when on 28th August fearing a massive flight of capital the movers and

shakers of KSE set a Floor-Price-Level at 9144.93 points which was the KSE index

as of the last trading session on August 27th. The one month embargo was

extended even further.

Its been widely reported that many of the stalwarts of our stock market are practically

on their knees pleading the government for a bailout plan. As an outsider with little

insights on the specifics of this lucrative industry I feel there are two sides to the

argument. The investor with some stake in the stock market vehemently advocates

the implementation of the bailout package arguing that its geared up confidence

building measure trying to prevent the flight of the hefty foreign investor.

While the other side of the argument, advocated mostly by the layperson is to urge

the government to focus their attention towards other pressing issues in the country,

as they see these stock market goons as gamblers, who enjoyed the rewards in the

last three years, and suddenly when the gambling gave way are coming back to ask

for more money to help them resume

Admittedly my arguments may only represent a cursory analysis of a very complex

problem but I would like to use this opportunity to open this blog for the experts who

may help shed light on what is the best solution out of this mess, more along the

lines of what’s best for Pakistan and not making the rich richer



In economics, the term ‘recession’ means "The reduction of a country’s Gross

Domestic Product (GDP) for at least two quarters; or in normal terms, it is a period of

reduced economic activity".

Capitalism and Interest Based financial System are the root causes of world financial

system’s failure. It is going to convert into economic crisis. If it is not going to handle

properly, its results may be more adverse than Great Depression. Pakistan was in

crisis right from the beginning but financial crisis is increasing its rate of knots.

Financial crisis is one of the major challenges of 21st century. It is not only parting

negative impact on US but several rich countries' financial systems are also

trembling under its weight. Economies of major world including Pakistan are at high

level of risk. This crisis is also pointing fingers on the capitalistic companies and

banks, which somehow are bigger than many countries.

Pakistan was in crisis from the beginning of year 2007, but financial crisis triggered

this crisis and situation is going to worst. Pakistan is passing from crucial phase of its

life. Crisis in Pakistan was started when former President Pervez Musharraf

suspended Supreme Court Chief Justice. Later on Lal Masjid incident took place

which throughout Pakistan created huge tension because after this incident chain of

suicide attacks started in the country, which has not been ended as yet.

In large part due to fuel subsidies and other economic obligations, Pakistan's budget

deficit of $21 billion is the highest in a decade, and the current account deficit is 8.4

percent of GDP. In all of Asia, Pakistan has the highest interest rates, least valuable

currency, and riskiest financial obligations. As a result, Pakistani government debt is

considered one of the riskiest in the world.

Pakistan's currency, the rupee, has lost 20 percent against the falling dollar and is

now near record lows. The Karachi Stock Exchange—Pakistan's oldest and largest

stock exchange—has lost 40 percent of its value since April 2008. Just last August,

the KSE put a floor on the index to keep shares from falling even further.

Pakistan foreign currency reserves have dropped significantly due to the unstable

political and security situation. In less than a year, Pakistan's foreign reserves have



dropped from an all-time high of $14 billion last November to just under $6 billion

today. Pakistan has taken loan from International Monetary Fund (IMF) on harsh

terms and conditions to meet crisis. But financial crisis will be adverse due to this aid

because terms are directing Pakistan, not to support their financial sector.

Aid from USA and foreign remittance are one of the main contributions towards

current account balance of Pakistan. But after the financial crisis, American aid

stopped and foreign remittances to Pakistan also showing steep decline.

All the bailouts and nationalizations are not the permanent solutions to this financial

crunch. It may be possible that we will get rid of this crisis in few months or few

years, but it will again come and hit the economies and challenge the financial

systems of the world. We have to address the roots of this crisis. Basically all the

financial systems of the world revolve around "Capitalism" and "Interest", which will

somehow always invite such big recessions in the days to come.The basic economic

statistics paint a dire picture. Two-thirds of the Pakistani population lives on less than

$2 a day, with one-third of the population living below the poverty line. While the

Pakistani economy expanded 5.8 percent in the last fiscal year, this rate of economic

growth was the slowest since 2003 and is expected to fall to 4.6 percent this year.

But the benefits of this economic growth have not reached the vast majority of

Pakistanis.

The newly elected government faces interlinked challenges: tackling emboldened

militant groups and terrorist organizations, advancing political reform, and stabilizing

the economy. If Pakistan's economy experiences further collapse, the government

could lose further support of the people. Experts are saying that Karachi Stock

Exchange, one of the worst hit Stock Exchanges of the world in the financial

recession, has finally pulled through and that 3investors will make millions. Let us all

hope that this proves to be true and the now 'broke' stock-'Brokers’ finally recover

from this nightmare.

3 International Review of Business Research Papers Vol. 5 No. 5 September 2009

2nd International conference on business and economic research 2nd ICBER 2011

European Journal of Economics, Finance and Administrative Sciences



3. STOCK EXCHANGE

3.1 History

The Karachi Stock Exchange, the oldest exchange in Pakistan, KSE was

established in 1947 and became a registered company limited after a few

years later. Since then it has been experienced a remarkable progress with

only 5 companies listed and 90 members on the Exchange in the 1950s and

663 listed companies and 200 members in 2006.

In 2002, the Karachi Stock Exchange was recognized internationally by the

magazine 'Business Week' as one of the best performing stock exchange in

the world.

The Karachi Stock Exchange has started trading through the computerized

trading system KATS (Karachi Automated Trading System) since 1997. As

the need for Trading Workstations installation has been significant during the

consecutive years, today over 1000 KATS workstations are already installed.

In 2005, trading in the Internet was also started.

Since 1990, corporate entities can become members on the Karachi Stock

Exchange. However, they have to face stringent requirements of the Board of

Directors and own a minimum capital of Rs. 20 million (approximately UK

181,000).At the beginning of 2006, 120 corporate members were registered in

Stock Exchange.

The Karachi Stock Exchange introduced KSE-50 Index at the end of the 20th

century. However, just because of the growth in the stock market, the Index

did not represent the stock market performance anymore. Thus, in 1991 a

capital weighted KSE 100 Index launched. At the moment, the Exchange

successfully trades two world-famous indices KSE 100 Index and KSE All

Share Index, which was introduced in 1995. Karachi Stock Exchange is the

biggest and most liquid exchange and has been declared as the “Best

Performing Stock Market of the World for the year 2002”. As on May 30, 2008,

654 companies were listed with a market capitalization of Rs. 3,746.203 billion



(US$ 56.334 billion) having listed capital of Rs. 705.873 billion (US$ 10.615

billion).

History Graph of KSE 100 Index

Source Karachi stock exchange history

3.2 Mobilizing Savings for Investment

When people draw their savings and invest in shares, it leads to a more

rational allocation of resources because funds, which could have been

consumed, or kept in idle deposits with banks, are mobilized and redirected to

promote business activity with benefits for several economic sectors such as

agriculture, commerce and industry, resulting in stronger economic growth

and higher productivity levels and firms.

3.3 Facilitating Company Growth

Companies view acquisitions as an opportunity to expand product lines,

increase distribution channels, hedge against volatility, increase its market

share, or acquire other necessary business assets. A takeover bid or a

merger agreement through the stock market is one of the simplest and most

common ways for a company to grow by acquisition or fusion.


http://en.wikipedia.org/wiki/Stock_market

http://en.wikipedia.org/wiki/Mergers_and_acquisitions

http://en.wikipedia.org/wiki/Takeover

http://en.wikipedia.org/wiki/Asset

http://en.wikipedia.org/wiki/Market_share

http://en.wikipedia.org/wiki/Market_share

http://en.wikipedia.org/wiki/Product_line

http://en.wikipedia.org/wiki/Productivity_(economics)

http://en.wikipedia.org/wiki/Economic_growth

http://en.wikipedia.org/wiki/Industry

http://en.wikipedia.org/wiki/Commerce

http://en.wikipedia.org/wiki/Agriculture

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Bank

http://en.wikipedia.org/wiki/Deposit_account

http://en.wikipedia.org/wiki/Rationality


3.4 Redistribution of Wealth

Stock exchanges do not exist to redistribute wealth. However, both casual

and professional stock investors, through dividends and stock price increases

that may result in capital gains, will share in the wealth of profitable

businesses.

3.5 Corporate Governance

By having a wide and varied scope of owners, companies generally tend to

improve on their management standards and efficiency in order to satisfy the

demands of these shareholders and the more stringent rules for public

corporations imposed by public stock exchanges and the government.

Consequently, it is alleged that public companies (companies that are owned

by shareholders who are members of the general public and trade shares on

public exchanges) tend to have better management records than privately-

held companies (those companies where shares are not publicly traded, often

owned by the company founders and/or their families and heirs, or otherwise

by a small group of investors). However, some well-documented cases are

known where it is alleged that there has been considerable slippage in

corporate governance on the part of some public companies. The dot-com

bubble in the early 2000s, and the subprime mortgage crisis in 2007-08, are

classical examples of corporate mishandled. Companies like Pets.com

(2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Web van

(2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American

International Group (2008), Lehman Brothers (2008), and Satyam Computer

Services (2009) were among the most widely scrutinized by the media.

3.6 Creating Investment Opportunities for Small investor

As opposed to other businesses that need huge capital outlay, investing in

shares is open to both the large and small stock investors because a person

buys the number of shares they can easily afford. Therefore the Stock

Exchange gives the opportunity for small investors to own shares of the same

companies as large investors


http://en.wikipedia.org/wiki/Stock_investor

http://en.wikipedia.org/wiki/Satyam_Computer_Services

http://en.wikipedia.org/wiki/Satyam_Computer_Services

http://en.wikipedia.org/wiki/Lehman_Brothers

http://en.wikipedia.org/wiki/American_International_Group

http://en.wikipedia.org/wiki/American_International_Group

http://en.wikipedia.org/wiki/Parmalat

http://en.wikipedia.org/wiki/MCI_WorldCom

http://en.wikipedia.org/wiki/Adelphia_Communications_Corporation

http://en.wikipedia.org/wiki/Webvan

http://en.wikipedia.org/wiki/Sunbeam_Products

http://en.wikipedia.org/wiki/One.Tel

http://en.wikipedia.org/wiki/Enron_Corporation

http://en.wikipedia.org/wiki/Pets.com

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

http://en.wikipedia.org/wiki/Dot-com_bubble

http://en.wikipedia.org/wiki/Dot-com_bubble

http://en.wikipedia.org/wiki/Corporate_governance

http://en.wikipedia.org/wiki/Privately-held_company

http://en.wikipedia.org/wiki/Privately-held_company

http://en.wikipedia.org/wiki/Public_companies

http://en.wikipedia.org/wiki/Efficiency_(economics)

http://en.wikipedia.org/wiki/Management

http://en.wikipedia.org/wiki/Capital_gain

http://en.wikipedia.org/wiki/Stock_price

http://en.wikipedia.org/wiki/Dividend

http://en.wikipedia.org/wiki/Stock_investor


3.7 Contribution to GNP

To assess the relationship between stock markets’ development, and

economic growth in a small developing economy like Pakistan, we used the

log-linear model as follows:

(1)

Where; =Log of real Gross national product per capita, = Market

Capitalization (the amount of capital as share of GDP proxies by stock market

development) = Log of Financial Development (proxies by credit to

private sector as share of GDP), = Log of Financial Instability

(measured by standard deviation of the inflation rates), = Log of Inflation

Rate, = Log of Foreign Direct Investment (in millions of dollars) as share

of GDP, = Log of Literacy Rate (the ratio of the number of people

completing primary education to total population). The reason for taking log is

that taking the natural logarithm of a series effectively laniaries the

exponential trend (if any) in the time series data since the log function is the

inverse of an exponential function (Asteroid and Price, 2007).

Table-1: Theory Intuition and Expected Signs

Variable Theory intuition Expected sign

Market Capitalization

Improvement in the efficiency and

size of stock markets will circulate as

cholesterol in the process of

economic growth positively.

+

Financial Development

The expected sign of increase in

credit to private sector spurs the

economic activity in the economy

through their causal channels.

+

Financial Instability

Financial instability induces to decline

the investment activities directly and

indirectly that deters the economic

growth

-



Inflation Rate Inflation measures the monetary

instability that affects the economic

performance through its detrimental

impacts.

-

Foreign Direct Investment

Economic growth is expected to be

influenced positively by FDI along

with spillover effects through

employment generating process.

+

Literacy Rate

Higher literacy rate improves the

efficiency of an economy by

providing more productive labor

force.

+

Annual data of all variables have been collected from World Development

Indicators database (WDI, 2006), World Bank, Economic Survey of Pakistan

in (2006), and International Financial Statistics (IFS, 2006).

Descriptive statistics and correlation matrix of the variables of our selected

model are expressed in Table 2a and 2b respectively.

Table-2a

Descriptive Statistics

VariablesReal GNP Per

Capita

Market Capitaliz

ation

Credit-Private

FDI Financial

Instability

Inflation

Literacy Rate

Observations 36 36 36 36 36 36 36 Std. Dev. 0.356 4.226 0.128 0.942 1.264 0.549 0.236 Skewness -0.150 2.684 -0.559 -0.649 -0.319 0.192 -0.188 Kurtosis 3.259 10.697 3.687 2.605 2.308 2.653 1.912 Sum 332.880 88.462 115.192 -32.151 131.818 71.733 123.360 Sum Sq. Dev. 4.319 607.466 0.562 30.179 54.395 10.250 1.901



Table 2b

Correlation matrix

Real GNP per capita

1.000Market Capitalization

0.7303 1.000Credit-Private 0.7718 0.4207 1.000FDI 0.8397 0.5518 0.6083 1.000

Financial Instability -0.5058 -0.3936 -0.3458 -0.4959 1.000Inflation -0.5194 -0.1804 -0.5228 -0.2538 0.1444 1.000Literacy Rate 0.9252 0.6873 0.7100 0.8673 -0.3781 -0.4090 1.000

*The data has been collected from international monetary financial statistics

database (IFS) for Pakistan4

4 Theory and history about of Karachi stock exchange



3.8 Major Stock Exchange in the World

Region Stock Exchange Market Value(millions USD)

Total Share Turnover (millions USD)

AfricaJohannesburg Securities Exchange

432,422.1 17,999.7

Americas NASDAQ 2,203,759.6 2,325,238.3

Americas São Paulo Stock Exchange 611,695.0 30,748.5

Americas Toronto Stock Exchange 997,997.4 84,323.0

Americas New York Stock Exchange 9,363,074.0 1,517,615.7

Asia-Pacific

Australian Securities Exchange 587,602.7 37,400.1

Asia-Pacific

Bombay Stock Exchange 613,187.6 14,425.0

Asia-Pacific

Hong Kong Stock Exchange 1,237,999.5 80,696.8

Asia-Pacific

Korea Exchange 470,417.3 81,755.0

Asia-Pacific

National Stock Exchange of India 572,566.8 39,057.1

Asia-Pacific

Shanghai Stock Exchange 1,557,161.3 142,144.2

Asia-Pacific

Shenzhen Stock Exchange 389,248.3 75,365.5

Asia-Pacific

Tokyo Stock Exchange 2,922,616.3 301,781.5

Europe Euro next 1,862,930.9 146,173.3

EuropeFrankfurt Stock Exchange (Deutsche Borse)

937,452.9 264,970.3

Europe London Stock Exchange 1,758,157.7 241,151.1

EuropeMadrid Stock Exchange (Bolsas y Mercados Españoles)

871,061.4 114,994.0

EuropeMilan Stock Exchange (Borsa Italiana)

456,206.7 48,094.8

EuropeNordic Stock Exchange Group OMX1 503,725.8 55,299.9

Europe Swiss Exchange 761,896.1 63,435.6


http://en.wikipedia.org/wiki/Swiss_Exchange

http://en.wikipedia.org/wiki/Stock_exchange#fn_1%23fn_1

http://en.wikipedia.org/wiki/OMX

http://en.wikipedia.org/wiki/Milan_Stock_Exchange

http://en.wikipedia.org/wiki/Bolsas_y_Mercados_Espa%C3%B1oles

http://en.wikipedia.org/wiki/Bolsas_y_Mercados_Espa%C3%B1oles

http://en.wikipedia.org/wiki/Bolsa_de_Madrid

http://en.wikipedia.org/wiki/London_Stock_Exchange

http://en.wikipedia.org/wiki/Deutsche_B%C3%B6rse

http://en.wikipedia.org/wiki/Frankfurt_Stock_Exchange

http://en.wikipedia.org/wiki/Euronext

http://en.wikipedia.org/wiki/Tokyo_Stock_Exchange

http://en.wikipedia.org/wiki/Shenzhen_Stock_Exchange

http://en.wikipedia.org/wiki/Shanghai_Stock_Exchange

http://en.wikipedia.org/wiki/National_Stock_Exchange_of_India

http://en.wikipedia.org/wiki/Korea_Exchange

http://en.wikipedia.org/wiki/Hong_Kong_Stock_Exchange

http://en.wikipedia.org/wiki/Bombay_Stock_Exchange

http://en.wikipedia.org/wiki/Australian_Securities_Exchange

http://en.wikipedia.org/wiki/New_York_Stock_Exchange

http://en.wikipedia.org/wiki/Toronto_Stock_Exchange

http://en.wikipedia.org/wiki/Bovespa

http://en.wikipedia.org/wiki/NASDAQ

http://en.wikipedia.org/wiki/JSE_Securities_Exchange

http://en.wikipedia.org/wiki/JSE_Securities_Exchange

http://en.wikipedia.org/wiki/USD

http://en.wikipedia.org/wiki/USD


4. KARACHI STOCK EXCHANGE

4.1 Karachi Stock Exchange

The Karachi Stock Exchange (KSE) is the largest and most liquid of the three

stock exchanges in Pakistan. The KSE was established on 18th September

1947. It became a Limited Company by Guarantee on 10th March 1949.

There were initially 09 members and only five companies were listed with a

paid up capital of Rs. 37 million. The scale of operations has grown

substantially over the years. As of June 30, 2006 there were 652 listed

companies with a listed capital of Rs. 517,904.11 million (US$ 8,511.16

million) and a market capitalization of Rs. 2,942,739.59 million (US$

48,360.55 million). The daily turnover on average is 270.50 million shares with

average daily trade value being Rs. 32,869.61 million (US$ 540.17 million).

Membership strength has gone to 200. The representation index for the

market is the KSE 100 index, a capital weighted index initiated on November

1, 1991 which represents about 90% of the market capitalization of the Stock

Exchange. In 1995 the need was felt for an all share index to reconfirm the

KSE-100 and also to provide the basis of index trading in future. On August

29, 1995 the KSE all share index was constructed and introduced on

September18, 1995. (Table 1)

Some major sectors of the economy contributed extraordinary to the

performance of the stock exchange market during 2007-08. These sectors

include fuel and energy, banks and financial institutions, transport and

communication, and chemicals and pharmaceuticals (Table 2).



Table 1: Profile of Karachi Stock Exchange

2004-05 2005-06 2006-07 2007-08Number of Listed companiesNew Companies listedFund Mobilized (Rs billion)Listed Capital (Rs billion)Turnover of shares (billion)Average Daily Turnover of Shares (million)Average Market Capitalization (Rs billion)

65915

54.0438.588.3

351.9

2068.2

65814

41.4496.0104.7319.6

2801.2

65812

49.7631.168.8

211.0

4019.4

6525

49.2690.156.9

265.7

4622.9

Source: Pakistan Economic Survey 2007-08

Table 2: Scrotal Performance on Karachi Stock Exchange

Sector General Index(%)

Market Capitaliz

ation(%)

(ACM)*

(Rs Billion)

2006-

07

2006-07 2007** 2008**

1.Cotton and other Textiles2.Chemicals and Pharmaceuticals3. Engineering4. Auto and Allied5. Cables and Electrical Goods6. Sugar and Allied7. Papers and Boards8. Cement9. Fuel and Energy10.Transport and Communication11.Banks and Financial Institutions12.Miscellaneous Change

-3.218.949.829.718.23.027.711.09.244.040.97.528.2

38.023.465.945.235.912.348.324.41.435.8

117.362.743.9

103.3241.415.092.020.017.124.0

129.91098.2244.91341.8241.3

----

153.9369.928.6

100.526.520.638.6

156.61267.4241.91965.1286.5------

* Aggregate Market Capitalization; ** End April

Source: Pakistan Economic Survey, 2007-08

Decade wise Progress: The following is a decade wise progress of the

stock index since its incorporation in 1947: Year no: of listed companies



listed capital (Rs. in million) Market Capitalizing (Rs. in millions)

(1) 1950 : 15 117.3 -

(2) 1960 : 81 1,007.7 1,871.4

(3) 1970 : 291 3,864.6 5,658.1

(4) 1980 : 314 7,630.2 9,767.3

(5) 1990 : 487 28,056.0 61,750.0

(6) 2000 :762 236,458.5 382,730.5

The KSE is run by a Board of Directors that consists of 10 members including

the Managing Director. Out of these, 5 Directors are elected from the 200

members of the Stock Exchange and 4 non-member Directors are nominated

and appointed by the Securities and Exchange Commission of Pakistan

(SECP) from amongst the professionals belonging to various trades and

professions. The SECP is also the overall regulatory body over the KSE as

well as the rest of the Stock Exchanges in Pakistan. The Chairman of the

Board is elected by the Board from amongst the non-member Directors. The

operational and administrative activities of the Exchange are managed by the

Managing Director who is also the Chief Executive of the Exchange.

4.2 KSE 100 Index

The KSE 100TM Index was introduced in 1991 and comprises of 100

companies selected on the basis of sector representation and highest

market capitalization, which captures over 80% of the total market

capitalization of the companies listed on the Stock Exchange. Out of 35

Sectors, 34 companies are selected i.e., one company from each

Sector (excluding Open-End Mutual Fund) on the basis of the large

market capitalization and the remaining 66 companies are selected on

the basis of highest market capitalization. This is a total return index i.e.

dividend, bonus and rights are adjusted. The same methodology is

applicable in the case of All Share Index, which includes all the listed

companies, (except Open-End Mutual Funds).

Most recognized index of the Karachi Stock Exchange



Representation from all sectors of the KSE and includes the largest

companies on the basis of their market capitalization

Represents over 85% of the market capitalization of the Exchange.

Objective: The primary objective of the KSE-100 index is to have a

benchmark by which the stock price performance can be compared to over a

period of time. In particular, the KSE-100 is designed to provide investors with

a sense of how the Pakistan equity market is performing. Thus, the KSE100 is

similar to other indicators that track various sectors of the Pakistan economic

activity such as the gross national product, consumer price index, etc.

Brief About KSE-100 Index: The KSE-100 Index was introduced in

November 1999 with base value of 1,000 points. The Index comprises of 100

companies selected on the basis of sector representation and highest market

capitalization, which captures the over 80% of the total market capitalization

of the companies listed on the Stock Exchange. Out of the following 35

Sectors, 34 companies are selected i.e. one company from each sector

(excluding Open-End Mutual Fund Sector) on the basis of the largest market

capitalization and the remaining 66 companies are selected on the basis of

largest market capitalization in descending order. This is a total return index

i.e. dividend, bonus and rights are adjusted.

List of KSE Sectors

1 .Open-end Mutual Funds 19 Oil & Gas Marketing Companies

2 .Close-end Mutual Funds 20 Oil & Gas Exploration Companies

3 .Modarabas 21 Engineering



4 .Leasing Companies 22 Automobile Assembler

5 .Investment Banks/Inv. Cos./Securities Cos. 23 Automobile Parts

6 .Commercial Banks 24 Cables & Electric Goods

7 .Insurance 25 Transports

8 .Textile Spinning 26 Technology & Communication

9 .Textiles Weaving 27 Fertilizers

10 .Textile Composite 28 Pharmaceuticals

11 .Woolen 29 Chemical

12 .Synthetic & Rayon 30 Paper & Board

13 .Jute 31 Vanaspati & Allied Industries

14 .Sugar & Allied Industries 32 Leather & Tanneries

15 .Cement 33 Food & Personal Care Products

16 .Tobacco 34 Glass & Ceramics

17 .Refinery 35 Miscellaneous

18 .Power Generation & Distribution

Calculation Methodology: In the simplest form, the KSE-100 index is a

basket of price and the number of shares outstanding. His value of the basket

is regularly compared to a starting point or a base period. In our case, the

period is 1st November, 1991. To make the computation simple, the total

market value of the period has been adjusted to 1000 points.

Thus, the total market value of the base period has even assigned a value of

1000 points. example of how the KSE-100 Index is calculated can be

demonstrated by using a three-stock ample. Table 1 illustrates the process.

First, a starting point is selected and the initial value of the here-stock index

set equal to 1000.

Taking stock As share price of Rs. 20 and multiplying it by its total common

shares outstanding of 50 million in the base period provides a market value of

one billion Rupees. This calculation is repeated for stocks B and Stock C with

the resulting market values of three and six billion Rupees, respectively.

The three market values are added up, or aggregated, and set equal to 1000

to form the base period value. All future market values will be compared to

base period market value in indexed form.



4.3 KSE 30 Index

The primary objective of the KSE-30 Index is to have a benchmark by which

the stock price performance can be compared to over a period of time. In

particular, the KSE-30 Index is designed to provide investors with a sense of

how large company’s scrip’s of the Pakistan’s equity market are performing.

Thus, the KSE-30 Index will be similar to other indicators that track various

sectors of country’s economic activity such as the gross national product,

consumer price index, etc.

Globally, the Free-float Methodology of index construction is considered to be

an industry best practice and all major index providers like MSCI, FTSE, S&P,

STOXX and SENSEX have adopted the same. MSCI, a dominating global

index provider, shifted all its indices to the Free-float Methodology in 2002.

KSE-30 Index is calculated using the “Free-Float Market Capitalization”

methodology. In accordance with methodology, the level of index at any point

of time reflects the free-float market value of 30 companies in relation to the

base period. The free-float methodology refers to an index construction

methodology that takes into account only the market capitalization of free float

shares of a company for the purpose of index calculation.

Free-float Methodology improves index flexibility in terms of inclusion any

stock from all the listed stocks. This improves market coverage and sector

coverage of the index. For example, under a Full-Market Capitalization

Methodology, companies with large market capitalization and low free-float

can be included in the stock Index. However, under the Free-float

Methodology, since only the free-float market capitalization of each company

is considered for index calculation, it becomes difficult to include closely held

companies in the stock index during at the same time preventing their undue

influence on the index movement.

Introduced in 2006

Based on the “Free Float Methodology”

Includes only the top 30 most liquid companies listed on the KSE.



Free - Float Methodology: Free-Float means to say proportion of total

number of shares issued by a company that are readily available for trading at

the Stock Exchange. It generally excludes the shares held by controlling

directors / sponsors / promoters, government and other locked-in shares not

available for trading in the normal course.

Objective and Description: Free-Float calculation can be utilized to

construct stock indices for the betterment of market representation than those

constructed on the basis of total market capitalization of companies.

• It gives weight for constituent companies as per their actual liquidity in the

market and is not unduly influenced by tightly held large-cap companies.

• Free-Float can be used by the Exchange for regulatory purposes such as

risk management and market surveillance.

Determining Free-Float Factor: The listed companies shall be submitted

their pattern of shareholding, in the prescribed manner, to the Stock

Exchange. The Exchange will determine the Free-Float Factor for each such

company. Free-Float Factor is a multiple with which the total market

capitalization of a company is adjusted to arrive at the Free-Float market

capitalization. Once the Free-Float of a company is determined, it is rounded-

off to the top multiple of 5 and each company is categorized into one of the 20

bands given below.

Pre – Requisites to Qualify for Inclusion in KSE-30 Index:

1. The Company which is on the Defaulters’ Counter and/or its trading is

suspended, declared Non-Tradable (i.e. NT) in preceding 6 months

from the date of recomposition will not be considered for inclusion in

KSE-30 Index;

2. The Company will be eligible for KSE-30 Index if its securities are

available in the Central Depository System;

3. The Company should have been formal listing history of at least two

months on KSE;



4. The company should have an operational track record of at least one

financial year and it should not be in default(s) of the Listing

Regulations;

5. The Company should have been minimum free-float shares of 5% of

total outstanding shares;

6. The Company should be eligible for KSE-30 Index if its securities are

traded for 75% of the total trading days;

7. The Open-End and Closed-End Mutual Funds will not be eligible for

inclusion in the KSE-30 Index;

Selection Criteria: The companies which qualify the prerequisites will be

selected on the term of highest marks obtained as per the following criteria:

Free-Float Market Capitalization: The scrip should be included in the Top

Companies, ranked on the terms of free-float market capitalization.

The free-float market capitalization for each company is calculated by

multiplying its total outstanding free-float shares with the closing market price

on the day of composition / re-composition.

Liquidity: The scrip included in the top companies should also be

characterized by adequate liquidity i.e. transaction cost and one of the

practical, fact and accurate measures of market liquidity is Impact Cost. It is

defined as the cost of executing a transaction in a given stock for a specific

predefined order size of fixed rupee amount (currently set to Rs. 500,000).

The transaction cost referred here is not the fixed cost typically incurred in

terms of transaction charges or cost arising through CDC; rather it is the cost

attributable to the market liquidity, which comes from buyers and sellers in the

market. Average of the best bid price and the best offer price of a scrip at any

time, called ideal price, is considered as the best price to trade in that

particular scrip at that time. However, every buyer and seller suffers a cost in

excess of this ideal price while actually executing a transaction (buy or sell).

This price movement from the real price is known as the transaction cost and

when measured as the percentage of real price is called Impact Cost.



Under impact cost analysis high liquidity is represented by low impact cost. A

stock with high market capitalization cannot be assumed to be liquid just

because of its sheer size. Some large market capitalization stocks are in

reality very illiquid. Similarly, high trading volumes, in themselves, are not

enough to confirm consistent liquidity of a stock.

Impact cost analysis looks at the order book of each stock market throughout

the whole trading day and based on the bids and offers calculates impact

costs in terms of percentages for each instance of the order book.

The Impact Cost of each security is calculated as described hereunder:

• First the impact of cost is calculated separately for the buy and the sell side

in each order book for past six months.

• The buy side impact cost (or the sell side impact cost) is the simple average

of the buy side impact cost (or the sell side impact cost) computed in the last

six months.

• Impact Cost of reckoned for the purpose of all computation is the mean of

such buy side impact cost and sell side impact cost.

Final Rank: The scrip should include in Top Thirty companies on the basis of

final ranking. The final rank is arrived by assigning 50% weightage on the

basis of free-float market capitalization and 50% weightage to the liquidity

based on Impact Cost of the securities. The security having highest free-float

stock market capitalization and lowest Impact cost is assigned full marks and

the marks for rest of the securities are calculated proportionately.

Selection of 30 companies for inclusion in the KSE-30 Index: The

companies selected for inclusion in the KSE-30 Index are determined on the

basis of "Free-Float Market Capitalization" methodology. As per this

methodology, the level of Index at any point of time reflects the free-float

market value of thirty component stocks related to a base period. The market

capitalization of a company is determined by the multiplying price of its stock

by the number of free float shares determined for the purpose.

4.4 KMI-30

Introduced in September 2008



KMI comprises of thirty stock Companies that quality the KMI Shariah

screening criteria and are weighted by float adjusted market

capitalization.

12% cap on weights of individual securities.

Rebalancing of the Index will be done bi-annually.

Shariah Supervisory Board of Meezan Bank chaired by eminent

Shariah scholar Justice (Retd.) Mufti Muhammad Taqi Usmani.

A total return Index based on free float methodology

The objective of KSE-Meezan Index (KMI) is to serve as a gauge for

measuring the performance of Shariah compliant equity investments. It may

also act as a research tool for the Impact Costively of purposes in the

strategic asset allocation process. Besides tracking performance of the

Shariah compliant equities, its construction will increase investor trust and

enhance their participation.

Currently, the three indices being maintained at the Karachi Stock Exchange

are KSE-100 Index, KSE All-Share Index, and KSE-30 Index. The KSE-100

and KSE All Share Indices are market capitalization indices while KSE-30

Index is based on free-float capitalization.

The free-float methodology of index construction is being considered as the

best thing by all major index providers including MSCI, FTSE, S&P, STOXX,

and SENSEX, because it results in a performance measurement of stocks

that are readily accessible and well traded.

KSE-Meezan Index is also calculated using the “Free-Float Market

Capitalization”, wherein, the level of index at any certain point in time reflects

the free-float market value of the selected Shariah compliant shares in relation

to the base period. The free-float methodology refers to an index construction

methodology that takes into account only the market capitalization of free-float

shares of a company for the purposes of index calculation. The free-float

capitalization of the Islamic stock index constituents will be capped in relation

to the overall capitalization of Islamic index at 12% on the first day of

composition. At all subsequent re-compositions dates, any constituent



breaching this limit will thus be brought in line with this requirement. Any

surplus free-float capitalization will be distributed to the remaining companies

according to their relative capitalization in the index.

Free Float Methodology: Free-Float of a security is defined as the proportion

of total shares outstanding that are deemed available for buying in the Stock

Exchange. Therefore, it generally excludes the shares held by controlling

directors / sponsors / promoters, government and other locked-in shares is

not issuing for trading in the normal course.

Free-Float methodology reflect the true picture of liquidity present in the

market, hence the index movement is unbiased move towards the closely

held companies, High net-worth individuals, speculators, and hedgers, will

use the free float number for framing trading strategies, while regulatory

bodies may utilize these numbers for effective risk management and market

surveillance to minimize market manipulation incidences.

Not with standing to the above calculations, under no circumstances what so

ever, free-float of scrip shall exceed its book entry shares, available in the

Central Depository System. Share held by investors that would not, under

normal circumstances, be available in the market for trading shall be treated

as “Controlling / Strategic Holdings” and shall under no circumstances

whatsoever, be included in the Free-Float. Shares held by promoters,

directors, acquirers for the purpose of maintaining control, whether or not

related to Government, or held by associated groups in terms of cross-holding

or any shares which precisely cannot be sold in the open market shall

preclude such numbers while determining the free-float.

Determining the Free Float: Listed companies will be submitting their pattern

of shareholding in the prescribed manner to support the Exchange determine

a Free-Float Factor. Free-Float Factor is a multiple with which the overall

market capitalization of a company is adjusted to arrive at its Free-Float

market capitalization. The screened list of Shariah compliant securities will be

provided by the Al Meezan Investment Management Limited to provide its

Shariah screening services. Once the equity is approved by Shariah Board

and is included in the horizon for Islamic Index, its free-float is rounded-off to



the higher multiple of five and each company is categorized into one of the 20

bands.

Eligibility Criteria

Screening Filters: The companies whose primary business is related to any

of the following areas or Business Segments will not be eligible for inclusion in

the Islamic Index.

Conventional Banks and other Financial Institutions that are totally

engaged in interest related activities.

Enterprises having gambling or Alcohol also as a part of their concern.

Cable Networks, entertainment channels, advertising and media with

exception to the concerns engaged in the business for the news

dissemination.

Arms Manufacturing

Conventional Insurance both Life and General

Concerns involved in producing or financing concerns, which produce

Non-Halal Food or perform any activity relating to packaging and

processing of such foods items those are Non-Halal.

Determination of financial ratios after its discussion with the Sharia-

board

The Company which is on the Defaulters’ Counter and/or its trading is

suspended, declared Non-Tradable (i.e. NT) in preceding 6 months

from the date of re-composition shall not be considered for inclusion in

KMI-30 Index;

The Company will be eligible for KMI-30 Index if its securities are

available in the Central Depository System;

The Company should have a formal listing history of at least two

months on KSE;

The company must have an operational track record of at least one

financial year and it should not be in default(s) of the Listing

Regulations;

The Company should have minimum free-float shares of 5% of total

outstanding shares;



The Company will be eligible for KMI-30 Index if its securities are

traded for 75% of the total trading days;

Mutual Funds (both Open-Ended and Closed-Ended) are ineligible for

inclusion in the KMI-30

Screening - Financial Ratios and International Best Practice: The

companies are examined for compliance in financial ratios, as certain ratios

may violate compliance measurements. Al Meezan observes leverage,

investments, illiquid assets, and revenue as key areas in the following manner

from the prospect of non-compliant activities. All of these are subject to

evaluation on an ongoing basis.

Leverage Compliance: Compliance is measured as Interest bearing debt /

Total Assets < 40 %;

Investment Compliance: Compliance is measured as non-compliant

investment / Total Assets < 33%

Income Compliance: Companies with Revenues from non-compliant

activities are eligible only if they comply with the following threshold: Non-

compliant Income / Total Revenue < 5%

liquid Assets Compliance: Compliance is measured as Illiquid Assets / Total

Assets > 20%

Net Liquid Assets Compliance: Market Price per share should be greater

than Net Liquid Assets per share

Selection Criteria: All the eligible companies for the Islamic Index can be

included up to a maximum of thirty (30) companies. During the selection

process, each company’s financial reports are thoroughly reviewed by

research analysts of Al Meezan to ensure that the company meets

benchmarks or thresholds for Shariah compliance screening. Those that are

found to be non-compliant are screened out. The industries that are



considered non-compliant (as defined in the eligibility criteria) are not

considered for inclusion in the Islamic, as these would not be appropriate for

investment from Shariah perspective. From the list of Shariah compliant

companies, securities are selected on the basis of free float and Impact Cost.

While ranking the companies 50% weight is signed to free float capitalization

and the remaining 50% is allocated to Impact Cost such that the companies

with the highest free float and the lowest Impact Cost get the highest rank in

the selection process. Top 30 ranked companies as per above criteria are

included in Islamic Index.

4.5 Progress

Five Years Progress Report

5 YEARS PROGRESS 2007-2011

Upto

29-12-2007Upto

31-12-2008Upto

31-12-2009Upto

31-12-2010Upto

17-05-2011

Total No. of Listed Companies 654 653 651 644 638

Total Listed Capital - Rs. 671,255.82 750,477.55 814,478.74 919,161.26 930,556.69

Total Market Capitalization - Rs. 4,329,909.79 1,858,698.90 2,705,879.83 3,268,948.59 3,166,432.95

KSE-100TM Index 14075.83 5865.01 9386.92 12022.46 11930.24



KSE-30TM Index 16717.10 5485.33 9849.92 11588.24 11575.58

KSE All Share Index 9956.76 4400.76 6665.55 8359.31 8294.92

New Companies Listed during the year 14 10 4 6 -

Listed Capital of New Companies - Rs. 57,239.92 15,312.12 8,755.73 33,438.45 -

New Debt Instruments Listed during the year 3 7 1 4 2

Listed Capital of New Debt Instruments - Rs. 6,500.00 26,500.00 3,000.00 5,650.18 5,000.00

Average Daily Turnover - Shares in million 268.23 146.55 179.88 132.64 116.49

Average value of daily turnover - Rs. 25,262.97 14,228.35 7,450.75 4,405.20 4,559.86

Average Daily Turnover (Future TM) YTD 61.69 30.76 1.03 4.58 5.98

Average Value of Daily Turnover - YTD 9,077.61 5,229.97 89.66 396.90 708.71

Foreign Investment in Securities Market

Inflow – Rs - - - - -

Outflow – Rs - - - - -

Net Inflow/(Outflow) – Rs - - - - -

YTD = Year to date

a. The KSE 100 TM Index was introduced in November, 1991

b. The KSE All Share Index was introduced in September, 1995.

c. Listed companies reflected in the relevant year have been stated after 6 companies delisted in 2006, 7 in 2007, 6 in 2008, 2 in 2009, 8 in 2010 and 4 in 2011 and merger of 14 companies in 2006, 4 in 2007, 4 in 2008, 4 in 2009 and 5 in 2010.5

5. IMPACT OF GLOBAL RECESSION ON KSE

5.1 Global Recession

A global recession is a period of global economic slow downfall. The

International Monetary Fund (IMF) takes many steps into account when

defining a global recession, but it states that global economic growth of 3

percent or less is "equivalent to a global recession". By this measure, four

periods since 1985 qualify: 1990–1993, 1998, 2001–2002 and 2008–2009.

5 Karachi Stock Exchange Five Year Progress Report


http://en.wikipedia.org/wiki/International_Monetary_Fund


Overview: Informally, as a national recession is a period of declining

productivity. In a 1974 New York Times article, Julius Shiskin suggested

several rules of thumb to identify a recession, which included two successive

quarterly declines in gross domestic product (GDP), a measure of the

nation's output. This two-quarter metric is now a commonly held definition of a

recession. In the United States, the National Bureau of Economic Research

(NBER) is regarded as the authority which identifies a recession and which

takes into account several measures in addition to GDP growth before making

an assessment. In many developed nations other than USA, the two-quarter

rule is also used for identifying a recession.

Where as a national recession is identified by two quarters of decline, defining

a global recession is more difficult, because developing nations are expected

to have a higher GDP growth than developed nations. According to IMF, the

real GDP growth of the emerging and developing countries is on an uptrend

and that of advanced economies is on a downtrend since late 1980s. The

world growth is projected to slow from 5% in 2007 to 3.75% in 2008 and to

just over 2% in 2009. Downward revisions in GDP growth vary across regions.

Among the most affected are commodity exporters, and countries with acute

external financing and liquidity problems. Countries in East Asia (including

China) have suffered smaller declines because their financial situations are

more robust. They have benefited from falling commodity prices and they

have initiated a shift toward macroeconomic policy easing.

The IMF estimates that global recessions seem to occur over a cycle lasting

between 8 and 10 years. During what the IMF terms the past three global

recessions of the last three decades, global per capita output growth was zero

or negative.

5.2 Attributes of Recession

A recession has many attributes that can occur simultaneously and includes

declines in component measures of economic activity (GDP) such as

consumption, investment, government spending, and net export activity.

These summary measures reflect underlying and highlighting drivers such as


http://en.wikipedia.org/wiki/GDP

http://en.wikipedia.org/wiki/China

http://en.wikipedia.org/wiki/East_Asia

http://en.wikipedia.org/wiki/National_Bureau_of_Economic_Research

http://en.wikipedia.org/wiki/Gross_domestic_product

http://en.wikipedia.org/w/index.php?title=Julius_Shiskin&action=edit&redlink=1

http://en.wikipedia.org/wiki/Recession


employment levels and skills, household savings rates, corporate investment

decisions, interest rates, demographics, and government policies.

Economist Richard C. Koo said that under ideal conditions, a country's

economy should have the household sector as net savers and the corporate

sector as net borrowers, with the government budget nearly balanced and net

exports near zero. When these relationships look and become unbalanced,

recession can develop within the country or create pressure for recession in

other country. Policy responses are often designed to drive the economy back

towards this ideal state of balance.

A severe (GDP down by 10%) or prolonged (three or four years) recession is

referred to as an economic depression, although some argue that their

causes and cures can be different. As an informal shorthand, economists

sometimes refer to different recession shapes, such as V-shaped, U-shaped,

L-shaped and W-shaped recessions element.

5.3 Karachi Stock Market & Recession

THE “decoupling” hypothesis that the emerging world of which Pakistan is a

part of no longer so nearly tied to the old industrial world – that whatever

happens in the latter would affect the former – became popular before the

global economy went into what economists have begun to call, the “Great

Recession.”

Karachi Stock Exchange 100 Index


http://en.wikipedia.org/wiki/W-shaped_recession

http://en.wikipedia.org/wiki/L-shaped_recession

http://en.wikipedia.org/wiki/U-shaped_recession

http://en.wikipedia.org/wiki/V-shaped_recession

http://en.wikipedia.org/wiki/Recession_shapes

http://en.wikipedia.org/wiki/Depression_(economics)

http://en.wikipedia.org/wiki/Richard_Koo


Source Meta stock data

The down turn started in the United States in the summer of 2007. Initially

there was a consensus between economists that the downturn`s effect would

not be felt by the emerging countries to the extent it would influence the more

linked economies of the industrial world. That was not happened.

We know from Pakistan`s experience that even in an economy that was not

an integral part of the global production system, there were many negative

consequences influence from the economic crisis in the United States and

Europe. Pakistan`s exports were affected by the contraction in the global

stock markets. The Karachi stock market, shaken by the rapid deterioration in

the security situation, suffered as foreign capital flew out and joined the exit

from a number of other emerging stock markets.

KSE-100 Index 3 Years Performance



Source Karachi Stock Exchange Performance

It is an important thing, therefore, for Pakistan`s policy makers to stay abreast

of the developing situation in the global economy. Today I will explore some of

the current expert thinking on the subject of the Great Recession. I do belief

that there are lessons to be learned for the governments in the merging

markets.

How close was the Great Recession to the Great Depression of the 1930s?

One answer to the question was provided by Christiana Rumor, the head of

President Barack Obama`s Council of Economic Advisers. She is one of the

two senior officials in the new administration who have a good understanding

of the Great Depression. The other, of course, is Ben Bernanke, the Chairman

of the Federal Reserve, America`s central bank. Bernanke studied the subject

as a graduate student and then published a book about it. He is generally

credited with pulling the American economy back from the knee and brink of a

depression.

What is an economic depression? What distinguishes it from a deep

recession is the paralyzing fear of the unknown. That fear leads consumers,

investors and business managers to pull back from the stock market. They

begin to hoard cash by sharply cutting expenditure. According to the students

of economic depression, “a devastating loss of confidence inspires behavior


http://img.metblogs.com/karachi/files/2008/11/kse-100-3-year.jpg


that overwhelms the normal self-correcting mechanisms (lower interest rates,

inventory re-supply, and cheap prices) that normally prevent a recession from

becoming deep and prolonged a depression.” In other words, economic

managers should be try to address the situation by using new tools. As the

US economy got close to a depression, Bernanke, having lowered interest

rates to near zero, went for what is called the “quantitative easing” of money.

This he did by printing enormous amounts of money and got it to the credit

starved sectors of the economy. This was done while hundreds of billion

dollars worth of stimulus was being giving to the economy through the budget

by way of the President Obama`s large stimulus package.

Did the state of the US economy justify these extraordinary moves? A report

issued recently by Ms Rumor finds that the initial impact on the levels of

confidence for all categories of economic actors was much more severe than

was the case at the starting and during the Great Depression.

While it is correct that stock prices fell by one-third from September to

December 1929, the beginning of the downturn, it has to be recognized that

for few people owned stocks then is the case now. The effect on the

economy, therefore, was not as severe as was the case now when the fall in

stock prices affected the levels of wealth for much more people. At this time,

home prices barely dropped then but fell sharply now. From December 1928

to December 1929, households lost three percent of their accumulated

wealth. This time they lost a much larger proportion – as much as 17 percent.

There were some policy take missteps that accelerated the pace of economic

deterioration. Among them that was the decision not to support Lehman

Brothers, the fourth largest US investment bank. The anniversary of the

bank`s collapse inspired much commentary. While there was disagreement

about the wisdom of the decision – some people argued that even if the bank

had not been allowed to fail, some other would have become the victim of the

economic malaise. There is a consensus that the decision accelerated the

deterioration. As Robert J. Samuelson of Newsweek puts it, by “allowing

Lehman to fail almost certainly made the crisis worse. By creating more

unknowns – which companies would be rescued, how much were `toxic`



securities worth? It converted normal anxieties into abnormal fears that

triggered panic.” The economy, in other words, was brought near the state of

depression not only by the economy`s own internal dynamics, but by public

policy.

The Lehman decision froze credit markets and resulted in the collapse of the

stock markets. By year end, the Dow Jones industrial average was down 23

per cent from the level reached before the bank`s collapse and 34 per cent

from a year earlier. There was panic situation in the financial markets which

affected and cause an affect of financial markets and general confidence.

In September, the Conference Board`s Consumer Confidence Index was

61.4. By February 2009, it fell to 25.3. Spending on consumer durables fell at

the annual rate of 12 per cent in the first 3 quarters of 2008, accelerating to a

decline of 20 per cent in the fourth. Investment by businesses fell by 39 per

cent in the last quarter of 2008. When Obama administration decided to act.

The most important lesson to be drawn from this episode in recent American

economic history is that public policy plays an important role in the way

economies develop and how they should be steered out of the crises into

which they can given and find themselves as they look forward.

This lesson is particularly important for a country such as Pakistan that has

allowed economic institutions in the public sector to weaken greatly, has lost

the capacity to do some serious analytical work on the state of the economy in

both the public and the private sectors, and has not been developed linkages

between the private and the public sectors to developed. The last is

particularly important since it provides the policymakers advice from analysts

who do not have political axes to grind.



Recession Period of KSE

Source of KSE causes & effects recession in 2008

5.4 Causes & Effects of Recession

April 20: Karachi Stock Exchange achieved a major milestone when KSE-100

Index crossed the psychological level of 15,000 for the first time in its history

and peaked point 15,737.32 on 20 April, 2008. Moreover, the increase of 7.4

per cent in 2008 made it the best performer among major emerging markets.

May 23: Record high inflation in the month of May, 2008 resulted in the

unexpected increase in the interest rates by State Bank of Pakistan which

eventually resulted in sharp fall in Karachi Stock Exchange.

July 17: Angry investors attacked the Karachi Stock Exchange in protest at

plunging Pakistani share prices

July 16: KSE-100 Index dropped one-third from an all-time high hit in April,

2008 as rising pressure on shaky Pakistan's coalition government to tackle

Taliban militants exacerbates concern about the country's economic woes.

August 18: KSE 100 Index rose more than 4% after the announcement of the

resignation of President Pervez Musharraf but Credit Suisse Group said that


http://en.wikipedia.org/wiki/Credit_Suisse_Group

http://en.wikipedia.org/wiki/Pervez_Musharraf

http://en.wikipedia.org/wiki/Taliban

http://en.wikipedia.org/wiki/State_Bank_of_Pakistan

http://en.wikipedia.org/wiki/Interest_rates

http://en.wikipedia.org/wiki/Emerging_markets


Pakistan's Post-Musharraf rally in Stock Exchange will be short-lived because

of a rising fiscal deficit and runaway inflation.

August 28: Karachi Stock Exchange set a floor for stock prices to halt a

plunge that has wiped out $36.9 billion of market value since April.

December 15: Trading resumes after the removal of floor on stock prices that

was set on August 28 to halt sharp falls.

5.5 Global Impact on KSE

Financial crisis is one of the major challenges of 21st century. It is not only

parting negative impact on US but several rich countries' financial systems are

also trembling under its weight. Economies of major world including Pakistan

are at high level of risk. This crisis is also pointing fingers on the capitalistic

companies and banks, which somehow are bigger than many countries.

Pakistan was in crisis from the beginning of year 2007, but financial crisis

triggered this crisis and situation is going to worst. Pakistan is passing from

crucial phase of its life. Crisis in Pakistan was started when former President

Pervez Musharraf suspended Supreme Court Chief Justice. Later on Lal

Masjid incident took place which throughout Pakistan created huge tension

because after this incident chain of suicide attacks started in the country,

which has not been ended as yet.

In large part due to fuel subsidies and other economic obligations, Pakistan's

budget deficit of $21 billion is the highest in a decade, and the current account

deficit is 8.4 percent of GDP. In all of Asia, Pakistan has the highest interest

rates, least valuable currency, and riskiest financial obligations. As a result,

Pakistani government debt is considered one of the riskiest in the world.

Pakistan's currency, the rupee, has lost 20 percent against the falling dollar

and is now near record lows. The Karachi Stock Exchange—Pakistan's oldest

and largest stock exchange-has lost 40 percent of its value since April 2008.

Just last August, the KSE put a floor on the index to keep shares from falling

even further.


http://en.wikipedia.org/wiki/Market_value


Pakistan foreign currency reserves have dropped significantly due to the

unstable political and security situation. In less than a year, Pakistan's foreign

reserves have dropped from an all-time high of $14 billion last November to

just under $6 billion today.

Pakistan has taken loan from International Monetary Fund (IMF) on harsh

terms and conditions to meet crisis. But financial crisis will be adverse due to

this aid because terms are directing Pakistan, not to support their financial

sector.

Aid from USA and foreign remittance are one of the main contributions

towards current account balance of Pakistan. But after the financial crisis,

American aid stopped and foreign remittances to Pakistan also showing steep

decline.

All the bailouts and nationalizations are not the permanent solutions to this

financial crunch. It may be possible that we will get rid of this crisis in few

months or few years, but it will again come and hit the economies and

challenge the financial systems of the world. We have to address the roots of

this crisis. Basically all the financial systems of the world revolve around

"Capitalism" and "Interest", which will somehow always invite such big

recessions in the days to come.

The basic economic statistics paint a dire picture. Two-thirds of the Pakistani

population lives on less than $2 a day, with one-third of the population living

below the poverty line. While the Pakistani economy expanded 5.8 percent in

the last fiscal year, this rate of economic growth was the slowest since 2003

and is expected to fall to 4.6 percent this year. But the benefits of this

economic growth have not reached the vast majority of Pakistanis.

The newly elected government faces interlinked challenges: tackling

emboldened militant groups and terrorist organizations, advancing political

reform, and stabilizing the economy. If Pakistan's economy experiences

further collapse, the government could lose further support of the people.



Impact on Global Recession on KSE

Source meta stock data

5.6 Recession & Politics

Since inception, Pakistan has been facing complex issues on political and

economic fronts. At the time of creation of Pakistan, there was no education,

no industry, no agriculture, no trade, no commerce, and above all no

infrastructure. However, with the passage of time, the country s economy,

despite various shocks has managed to come out of pressure. The history of

Pakistan can be divided into two distinct struggles of epic proportions; the

struggle for independence and the struggle for survival. The struggle for the

independence of Pakistan culminated in the creation of Pakistan albeit at

great human cost. However, the struggle for survival continues despite the

nation having sacrificed a lot, both in terms of precious human lives and

socio-economic development. The people of Pakistan have lived through

difficult times. The country survived despite many odds and its

dismemberment. Today, the people are facing worst power crisis that is not

only hitting hard to the country s economy but also badly affecting the fellow

citizens. Now, Pakistan s critical issue is still the bad state of its economy. It

has inflation rate in double figure, prices of essential items have been

rocketing high and lack of investment in power generation capacity by the

previous rulers have halted wheels of industry causing unemployment. The

current state of our economy is related to war on terror with horrendous spill



over affects on the rest of Pakistan. Americans bomb in the northern areas,

the terrorists react to it by bomb blasting in rest of the country are making

investors insecure and unsafe thereby hitting hard Pakistan s economy.

In the back drop of Pakistan s economic outlook, first we need to understand

that high inflation, surge in oil prices, security concerns, decline in FDI,

widening trade gap and persistent load shedding are hitting hard to the

country s economy. The Foreign Direct Investment (FDI) has always been a

reflection of the success of foreign policy of any country but FDI statistics in

Pakistan are presenting a glomming picture, which is not a good omen for

economy at all. During the financial year 2007-08, the volume of US direct

investment in Pakistan was $ 1,309.3 million, while in FY 2008-09 it was $

875.3 million. Similarly, during FY 2007-08, volume of UK investment in

Pakistan was $ 460.2, UAE $ 589.2, Japan $131.2 million and Hong Kong $

339.8 million which came down to $263 million, $178.2 million, $74.3 million

and $156.1 million respectively during FY 2008-09. There was 31.2%

decrease in FDI during FY 2008-09 as compared to FY08 while 51%

decrease in total foreign investment in FY09 as compared to FY08. Chief

Operating Officer of Abbasi & Company Mohammad Ishaq Abbasi, while

sharing his views about the problems being faced by the country s economy,

said high inflation rate, surge in oil prices, depreciation in Pak rupee, decline

in FDI, security concerns, load shedding are major issues confronted to the

national economy. He said inflation remains the biggest threat to our

economy, jumping over 25% in October 2008 before decelerating this year in

June 2009 to 16 month s low of 13.13%. Depreciation in rupee, which has

fallen from 60-1 USD to over 83-1 USD in a few months, security concerns

resulting from our role in the War on Terror have created great instability,

decline in FDI from a height of approximately $8.4bn to $4.6bn for the current

fiscal year and extending trade gap as import growth exceeds export

expansion causing the current account deficit to growing on Pakistan

economy and Karachi stock exchange market in Pakistan as well.

Talking about Pakistan s Stock Markets, Mr. Ishaq Abbasi said prior 2008

recession leading international magazine Business Week declared KSE-100



Index as the best-performing stock market index in the world. Post 2008

General Elections, uncertain political environment, and aforementioned

factors resulted in the steep decline of the Karachi Stock Exchange. Now with

the SBP tighter and stable monetary policies in an effort to conserve

economic growth has contributed in reduction of money-market interest rates

and the inflation may drop back to single digits in 2010. Further Pakistani

government is now pursuing an export-driven model of economic growth

successfully implemented by South East Asia and now highly successful in

China. Recent announcement by the Ministry of Water and Power

Development that load shedding will end through employing rental power

units and that the country will be self-sufficient by the year 2011.Mr. Ishaq

Abbasi said Pakistan has a growing upper and upper middle class, estimated

at 6.8 million in 2002 and projected to grow to 17 million people by the year

2010, with relatively high per capita income. Thus middle term, however, may

be less turbulent, depending on the political environment/militants actions and

the GDP may pick up to over 4.5% per annum by 2011-12. This all

contributes to my optimistic view on Pakistan s Stock Markets from medium to

long term. At these levels, Benchmark Karachi Stock Exchange-100 Index

seems to be consolidating itself supported by healthy corporate

announcements. Had not been the uncertain political environment in the

country and Pakistan s participation in war on terror, Karachi stock exchange

100 Index would have been trading above 9500 point s level currently.

According to him, oil, utility, energy, fertilizer and cement stocks are still

trading at discounts and can provide growth and value to investors in medium

to long term. He further said the Securities and Exchange Commission of

Pakistan (SECP) registered 243 companies during the month of July 2009,

bringing the total corporate portfolio of registered companies to 53,424. Of

243 companies incorporated during July 2009, 240 companies were limited by

shares, comprising of 2 public unlisted companies, 224 private companies

and 14 single member companies. In addition, 2 associations not for profit

under section 42 of the Companies Ordinance, 1984 (the Ordinance) and one

foreign company were also registered. Total authorized capital and paid up

capital of 240 limited by shares companies, incorporated during July, 2009



amounted to Rs.1,463.9 million and Rs. 451.4 million respectively. During July

2009, number of new incorporation was highest at Lahore, whereby 91

companies have been registered, followed by Islamabad registering 66

companies, Karachi with 59 companies. Peshawar, Quetta, Faisalabad,

Multan, and Sukkur registered 13, 1, 6, 6, and 1 company, respectively. Major

share of new incorporation was witnessed in the trading sector comprising of

44 companies, followed by 26 each in services and construction, 19 in

information technology sector and 14 in tourism sector.

During the month, the Commission granted licenses to 2 associations not for

profit under Section 42 of the Ordinance of which one is for promotion of

education, and other for social services. Commenting on the state of country s

economy in the backdrop of decline in FDI, businessman Mohammad Pervaiz

Malik said foreign investment plays key role in making the economy of any

country stronger, as it helps to initiate new ventures, promotes

industrialization, creates new jobs and enhances government revenue. He

said present regime has failed to convince even countries like USA and UK to

increase their investment and support economy of Pakistan. Pevaiz Malik said

though economic crisis is getting further deepening with every passing day

but instead of evolving efficient policies, government has found an easy way

and put on stake the future of Pakistan by borrowing from IMF and other

financial institutions. He urged upon the government to take steps on war

footing to attract foreign investors otherwise situation would go out of control.

He said government should bind Pakistani diplomats posted abroad to make

extraordinary efforts to improve the Pakistan perception in the eyes of the

developed world. He said Pakistan embassies abroad should keep continuous

liaison with the businesspersons and investors of their respective countries

and strive hard to convince them to make investment in Pakistan. He said that

huge energy crisis is also a major reason to decrease the investment in

Pakistan.

At the time when a large number of industrial units have been closed down

due to more than 12 hours load shedding, how one can expect of any new

foreign project just because of energy crises in Pakistan.

The Vice President of SAARC Chamber of Commerce & Industry Iftikhar Ali



Malik said that the government would have to evolve a methodology for

cutting the cost of doing business in Pakistan. To achieve the goal, there is a

dire need to cut the rate of markup considerably as on the one hand it would

help make Pakistani merchandise competitive at the global market on the

other it would expedite the process of industrialization in the country. He said

improvement of Pakistan s perception in the eyes of potential foreign

investors should be the cornerstone of all the policies made for the future. As

the law and order situation must be given priority to attract foreign investment.

Human resource availability and its development is an important aspect,

which must not be ignored, he said. The Lahore Chamber of Commerce and

Industry (LCCI) President Mian Muzaffar Ali said that he understands well that

there is no overnight solution of the problems but definitely, there is a dire

need to set a direction in the larger interests of the country. Mian Muzaffar Ali

said, I strongly believe that today, we as a nation hold the utmost

responsibility to deliver.

We need to stop borrowing a few breaths in the form of funding from the

international donor agencies or our debt repayments just so we can go for a

few more steps yet not look for the cure for what we are plagued with. We

understand that interim relief might be absolutely necessary for right now to

continue, we need to start thinking of a long-term solution to our ills.

We must have political stability if we are to industrialize. Political stability can

only come with political maturity. Our politicians must now attempt to raise the

stature and level of their politics from the present day classroom type boyish

squabbles to more constructive criticism of their opponents. They must set

themselves down to the task of nation building, he added. The LCCI President

said that the law and order situation is indeed alarming these days. How can

you expect any investment in this kind of scenario? Where even the local

businessperson is shy to invest, how can you attract foreign investment? We

seem to have lost our sense of direction. There is no discipline or respect for

the Law left in our society. We will have to develop such a political and judicial

system, in which the common citizen must be assured of the safety of his

person and property. He must be confident of being able to obtain justice



when wronged. We cannot achieve economic development in a situation

when people cannot properly sleep due to fear of some untoward happening

in the surroundings.

5.7 Consequences of KSE Recession

The fall of once great KSE 100 index from the 15700 level to a meager 4500

was indeed the worst crisis condition that ever hit the Pakistani stock markets.

A lesser dreadful situation occurred in 1971 despite the fall of Dhaka. So far,

there has been no formal inquiry conduct for finding the responsible elements.

As it is always the case with the equity stock markets in Pakistan.

A large number of people believed in hidden elements involved in the events

that lead to the crisis. Fingers are pointed towards the previous and infamous

mythical cartel rumored to having been responsible for disasters like this in

the past as well. None of these accusations can be proven since all the

previous investigations hardly held anyone responsible of those crises.

Certainly, the instability brought on by the scuffle among the former president,

PPP and PML (N) worked as a catalyst in weakening the foundations of

Pakistani financial sector. Apparently, even the cool and calm nature of the

new Prime Minister wasn’t enough to bring a sense of calm in the highly

volatile market. In my view the disaster that hit the Pakistani stock market was

entirely home brewed. It may have intensified in the light of global financial

crisis but it was in no way a result of domino effect set off from stock markets

in the united state or Europe.

The foreign investors pulling out of the Pakistani stocks bazaar was the first

major step blow to the investor confidence in KSE. The departure of foreign

element was not due to the global financial crisis rather it was a result of

sudden devaluation of Pakistani currency. The rising oil prices had lead to a

large trade imbalance. The panic was further intensified by the actions of

State bank of Pakistan. SBP’s lack of refusal in lending stockpiles of money to

the central government needed the consequential rise in interest rate for

cutting down inflation. This hampered progress in industries and services

sector which severely hurt the investor sentiment.



Later SECP the so-called 'savior' of the common man intervened in the stock

exchanges when the fiasco had just started. By changing the upper and lower

circuit values, KSE rose to its top ever of 960 points in an intraday trade. The

math was very simple, your share could achieve 10% more value on a bullish

day whereas lose only 1% on a bad one. The TV channels were filled with

brokers cheering but critics shouting. The event was analogous to the

notorious ‘double shah’ scam. It was all perfect as long as the money kept

coming in and the outflow was lesser than the inflow. The danger of the latter

happening was foreseen by many with bigger consequences in mind like the

total rupture of confidence in the stock market. That’s exactly what was to

follow in KSE, a series of unprecedented low volume bearish weeks of trade

acting like poison for the investor confidence.

As the Pakistani equities continued to cataclysmically shed their value, the

government got promised a rescue fund which would help stabilize the shares

bazaar. The fund is in the beginning was supposed to be formed from the

capital reserves of NIT and other mutual fund cash dumps. As the days

passed by rescue fund seemed that more and more like a myth due to the

infinite delays caused by the government’s inability to convince fund

managers. NIT refused in the beginning to participate; pleading on the

grounds that they couldn’t be possibly risk gambling the money in their vaults

for a bailout since the deposits were ‘life savings of pensioners & widows’.

Almost all mutual funds including NIT later suspended trading in their units

ironically because of the scenario in KSE. In all likelihood if NIT had used a

small portion of its fund back then, the shares bazaar and the mutual fund

industry wouldn’t have been faced this avoidable crisis.

Afterwards KSE administration selects to freeze the floor. Months of almost

zero trade followed the decision. The act evidently ripped all expectation from

a small investor’s heart. Several shareholders defaulted during the tenure of

the floor freeze. Many were pushed to sell their valuables and property in

order to manage deficits. Was it a series of unfortunate events or a

culmination of unprofessional acts that lead to the paralysis of Pakistan’s

stock exchanges, a process that began in 2008? This is a question which still

requires an answer. Hopefully the restored judiciary will address the issue at



anyhow. At least finding the truth and apprehending the people responsible

will to some degree do justice to the thousands who lost their life savings just

because they chose to invest in their motherland.6

6. CONCLUSION & RECOMMENDATIONS6 The Avoidable collapse of Karachi Stock Exchange 2008 – KSE

Article Source: http://ezine.pk/?expert=Ali Hammad Raza


http://ezine.pk/?expert=Ali_Hammad_Raza


6.1Conclusion

Main objective of this study is to cover the whole crisis of Karachi stock

exchange an interest rates on the stock returns and volatility in Karachi stock

exchange for period of 2008. This study confirms that the global financial

crisis has a significant effect on the financial institutions of developing

countries. Our findings about impact of global recession on Karachi stock

exchange 2008 which support the impact of Global crisis and recession on

Karachi stock exchange and what effect it will have on the financial institutions

of developing countries.

The perception that they had broken the links with the larger economies has

been painfully disproved by the hard facts on those crises. Financial markets

of the world are closely interconnected, and the impact of the world financial

collapse on Emerging Economies is a witness to this fact. The government

should introduce programs to recapitalize banks, guarantee bank liabilities,

and provide liquidity to banks by funding markets and in some cases support

troubled asset markets. Asset price inflation should be made under the control

of monetary policy authorities by government. Responses to global crises

must be methodical, inclusive, decisive, and organized. As Global problems

may require global multilateral solutions. If the crisis will continue for long

period, state and local governments may begin to restrict as they try to shore

up new financing arrangements for their operations.

6.2Recommendations

In the current scenario of Pakistan, it was the dire need for the investors to

find the securities having less correlation that can be used to diversify their

portfolios for investments. In the volatile markets like Karachi Stock Exchange

(KSE), keeping in view the findings and conclusion of the current study, it was

proposed and recommended for the investors.

Individual investor should be preparing before investment of any stock

in stock exchange.

Individual always use the dividend stock for save side.



Purchase of common stock should be done when a company is up-

grading itself: as it is the time when the company’s share price is lower

and its future earnings will be more.

Investing across the board is a way more important during bear

markets, when your assets can really get hammered by volatility. Make

sure you can manage your risk with a diversified, well-balanced

portfolio.

Decisions for stock purchase should not be made by just considering

the market value of equity: as the company’s other internal and

external factors have high significance in determining stock returns.

If annual sales of a company are high, the wrong decision regarding its

stock purchase should not be made.

A company high variation in the market value of equity should not be

Considered good for investment.

If a Company is having negative correlation of Market Value of Equity

with EPS, it should be avoided for investment, because it may have

bad future prospects.

Technical analysis should be made which would be an easy predictor

of stock returns on the basis of Market Value of Equity and other

economic factors.

REFERENCES



History of the Karachi Stock Exchange

http://www.advfn.com/StockExchanges/history/KSE/KarachiStockExch

ange. History.

Karachi Stock Market & Recession.

Http://archives.dawn.com/archives/153612 Karachi stock market &

recession.

Five Year Progress Report on KSE http://www.kse.com.pk/

An Analysis on the performance of IPO- A Study on the Karchi Stock

Exchange of Pakistan by Miss Shama Sadaqat, Muhammad Farhan

Akhtar, Khizer Ali in April 2011 http:

//www.ijbssnet.com/journals/Vol._2_No._6;_April_2011/30.pdf

KSE-100 Index Years Performance

http://3.bp.blogspot.com/_RBeSQasZTWY/SYw2S03FkjIAM/2-

mrsbZvDqY/s1600-h/performance_big.gif.

KSE 100 Index http://www.docstoc.com/docs/32242077/KSE-100-

Index.

Karachi Stock Exchange

http://essaysforstudent.com/Business/Karachi-Stock-Exchange/80452.

html.

European Journal of Economics, Finance and Administrative Sciences.

http://www.eurojournals.com/finance.htm

http://www.forexpk.com/weekly-updates/editors-pick/struggles-for-

survival-independence-characterises-history-of-pakistan.html

Interest Rate Volatility and Stock Return and Volatility by Nosheen

Zafar, Syed Faiza Urooj, Tahir Khan Durrani in 2008

http://www.eurojournals.com/ejefas_14_13.pdf

International Review of Business Research Papers Vol. 5 No. 5

September 2009


http://www.forexpk.com/weekly-updates/editors-pick/struggles-for-survival-independence-characterises-history-of-pakistan.html

http://www.forexpk.com/weekly-updates/editors-pick/struggles-for-survival-independence-characterises-history-of-pakistan.html

http://essaysforstudent.com/Business/Karachi-Stock-Exchange/80452.html

http://essaysforstudent.com/Business/Karachi-Stock-Exchange/80452.html

http://www.docstoc.com/docs/32242077/KSE-100-Index

http://www.docstoc.com/docs/32242077/KSE-100-Index

http://3.bp.blogspot.com/_RBeSQasZTWY/SYw2S03FkjIAM/2-mrsbZvDqY/s1600-h/performance_big.gif

http://3.bp.blogspot.com/_RBeSQasZTWY/SYw2S03FkjIAM/2-mrsbZvDqY/s1600-h/performance_big.gif

http://archives.dawn.com/archives/153612%20

http://www.advfn.com/StockExchanges/history/KSE/KarachiStockExchange.

http://www.advfn.com/StockExchanges/history/KSE/KarachiStockExchange.


2nd International conference on business and economic research 2nd

ICBER 2011

International Journal of Business and Social Science Vol. 2 No. 6; April

2011

International Research Journal of Finance and Economics ISSN 1450-

2887 Issue 35 (2010) Euro Journals Publishing, Inc. 2010

ISSN 1450-2275 Issue 14 (2008) Euro Journals, Inc. 2008

http://www.nationsencyclopedia.com/economies/Asia-and-the-acific/

Pakistan-MONEY.html

The Impact of Recent Global Financial Crisis On the Financial

Institutions in the Developing Countries by Nida Iqbal Malik Subhan

Ullah Kamran azam Anwar khan in

Year2009http://www.bizresearchpapers.com/8.Nida.pdf

Volatilities Dynamics in Emerging Economies Case of Karachi Stock

Exchange by Mahreen Mahmud and Nawazish Mirza

http://en.wikipedia.org/wiki/Karachi_Stock_Exchange

World applied sciences journal 10 (5): 590-596, 2010

http://en.wikipedia.org/wiki/Global_recession Global Recession

http://en.wikipedia.org/wiki/KSE_100_Index Causes & Effects of

recession

http://en.wikipedia.org/wiki/Recession Attributes of Recession

http://karachi.metblogs.com/2008/11/04/karachi-stock-exchange-fiasco/

http://en.wikipedia.org/wiki/KSE_100_Index Causes & Effects of

recession

Sufyan Farhan


http://en.wikipedia.org/wiki/KSE_100_Index

http://karachi.metblogs.com/2008/11/04/karachi-stock-exchange-fiasco/

http://en.wikipedia.org/wiki/Recession%20

http://en.wikipedia.org/wiki/KSE_100_Index

http://en.wikipedia.org/wiki/Global_recession

http://en.wikipedia.org/wiki/Karachi_Stock_Exchange

http://www.nationsencyclopedia.com/economies/Asia-and-the-acific/Pakistan-MONEY.html

http://www.nationsencyclopedia.com/economies/Asia-and-the-acific/Pakistan-MONEY.html

impect of global recession on kse

Documents

global stock recession

impact of global recession

karachi stock exchange

karachi stock exchange

karachi stock exchange4

term recession

stock exchange3

global growth