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Karachi Stock Exchange (Guarantee) Limited

Karachi Stock Exchange is one important component of capital market, it is an organized

market for the purchase and sale of industrial and financial security. KSE is a place where

trading in securities is conducted in systematic manner as per certain rules and regulations.

Karachi Stock Exchange (KSE) offers useful services to investors and borrowing companies,

KSE in an investment intermediary and it facilitates economic and industrial development of

the Country.

Karachi Stock Exchange is Pakistan’s Largest and one of the oldest stock exchange in South

Asia by Market Capitalization. According to the reports of 2014 the Market Capitalization of

KSE is around Rupees 7 Trillion (US 70 Billion Dollars).

In KSE 579 companies are listed, KSE has 4 indexes which are KSE 100 Index, KSE-30

Index, KSE-All Share Index and KMI-30 Index.

History of Karachi Stock Exchange (KSE)

Karachi Stock Exchange (KSE) established on September 18, 1947 and incorporated on March

10, 1949 is currently the biggest and most liquid stock exchange in Pakistan. Initially only 5

companies with a paid-up-capital of 37 Million Rupees were listed.

The first index which was introduced in KSE was KSE-50 Index, it was based on 50 companies

and the trading used to be carried out on Open Out-Cry System.

As time with the growth in the number of listed companies and trading activities, the need

for a true index and computerization of trading activates was felt. Due to this in November 1,

1991 KSE 100 index was introduced. In 2002 computerized trading system called as Karachi

Automated Trading System was introduced with the capacity of 1 Million trades per day and

it also allowed connectivity to unlimited number of users.

In 1995, to re confirm the KSE-100 index and to provide the basis of index trading in future

an All Share Index was introduced, it became operational on September 18, 1995. Later on

to address the needs of the investor community two other indexes were introduced named as

KSE-30 Index and KMI-30 Index.

Karachi Stock Exchange is located on Stock Exchange Road, in the heart of Business District

of Karachi.

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Stock Exchange Management Team

The Karachi Stock Exchange is currently managed by 11 Board of Directors (it Includes a

Chairman who is Non-Executive Director named as Mr. Muneer Kamal, a Managing

Director who is an Executive Director named as Mr. Nadeem Naqvi and remaining Directors

are Non-Executive), Company Secretary, Chief Regulatory Officer, Chief Financial

Officer, Nomination Committee (4 members), Regulatory Affairs Committee (4

members), Audit Committee (7 members), Human Resources and Remuneration

Committee (8 members), Auditors, Legal Advisors (4 Firms), Bankers (17) and Share

Registrar.

Karachi Automated Trading System (KATS)

Karachi Stock Exchange (KSE) is a modern market where trading takes place electronically

and that electronic trading system is called as Karachi Automated Trading System (KATS). It

provides advantages of speed and minimum cost of transaction to the exchange, the trades

on an exchange are only carried out by the members of the Karachi Stock Exchange.

Trading Transaction in Karachi Stock Exchange (KSE)

Karachi Stock Exchange (KSE) has introduced a computerized trading system which is known

as Karachi Automated System (KATS), to provide a fair, transparent, efficient and cost

effective market mechanism to facilitate the investors. The following are the trading

transactions which are performed in Karachi Stock Exchange (KSE):-

T+2 Settlement System

In the T+2 settlement system purchase and sale securities is netted and the balance

is settled on the third day following the day of trade.

Spot/T+1 Transaction System

Spot transaction imply upon delivery upon payment, normally in spot transactions the

trade is settled within 24 hours.

Future Contracts

A future contract involves purchase and sale of a financial or tangible asset at some

future date, at a fixed price today.

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Foreign Investments

Foreign investment means to control an ownership in a business enterprise in one country by

an owner or an entity based in another country.

Risk involved in Karachi Stock Exchange (KSE)

1. Systematic Risk

Systematic risk can be a game changing risk. For example, political events, natural

disasters, and other unpredictable events could at any time affect the stock price of

many stock market assets. It is very difficult to avoid systematic risk

2. Credit Risk

Credit risk is the risk that a firm will be unable to deal with its obligations, and therefore

the asset will become unprofitable.

3. Market Risk

Market risk is risk associated with daily fluctuations in stock prices. Market risk is also

referred as volatility, assets with high volatility (market risk) are likely to have more

potential for profit but at the same time, there is also the possibility of intense loss.

The less volatile the investment, the less on average the return will be to that

investment.

4. Inflation Risk Inflation can be a risk that stock investors have to deal with it is also referred to

as purchasing power risk. This term just means that your money doesn’t buy as much

as it used to.

5. Country Risk

Country risk refers to the risk that a country will change the rules under which its

financial system operates in some way that affects that country's natural financial

instruments and assets, country risk is also known as political risk.

6. Liquidity Risk

Liquidity risk refers to risk that the stock will not be able to be traded fast enough to

avoid or loss or capitalize on a potential profit.

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7. Unsystematic Risk

Unsystematic risk is not as unavoidable as systematic risk, it generally affects the

individual stocks. It may occur due to fraud or allegations of fraud, a worker strike,

mergers and other events. This risk is specific to either industries or even specific

firms, and therefore, this risk is not impossible to avoid.

Risk Management Schemes in Karachi Stock Exchange (KSE)

Karachi Stock Exchange has adopted a number of different schemes to manage risk associated

with the Stock Exchange. The risk management schemes are discussed below:-

Unique Identification Number (UIN) which creates a link between every order entered

into the trading system and the entity behind that order to ensure greater

transparency and thus provide investor protection.

Introduction of new Risk Management System (RMS) based on internationally accepted

Value at Risk (VAR) principles with pre trade verification.

Netting of clients, prohibiting the settlements periods across different markets.

Implementation of T+2 system has helped to manage the risk.

Comprehensive default regulations/rules.

Collection of margins via valuation of security to protect both investors and brokers.

Market control & surveillance which will monitor the price fluctuation.

Designing of laws to restrict the insider trading.

Karachi Stock Exchange (KSE-100 Index)

Karachi Stock Exchange 100 Index (KSE-100 Index) is a stock index acting as a

benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period. Companies

with the highest market capitalization are selected, however to guarantee full market

representation, the company with the highest market capitalization from each sector is also

included.

KSE-100 index was introduced in November 2012, it captures 90% of the total market

capitalization of those companies which are listed on the Stock Exchange.

The base value of Karachi Stock Exchange 100 index (KSE-100 Index) is 1000 points.

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The Methodology of Karachi Stock Exchange (KSE-100 Index)

The methodology of KSE-100 index is based on three main things which are named as, Sector

rule, Capitalization rule and Default rule.

The companies which belong to top sector can also qualify for KSE-100 index on the basis of

their market capitalization, in simple words which may mean a company can solely qualify

under the Rule 1, solely under Role 2 or under both.

The Rule 1 which is named as Sector rule is important but mostly it is not implied, only just

screening is done for selection process. Rule 2 is named as the Capitalization Rule. Rule

3 is named as The Default Counter and Non Tradable Rule.

If a company is newly listed company or privatized company then for that Rule 4 is applicable

that is named as Rules for New Issues.

Rule 1: Sector Rule

In Karachi Stock Exchange (KSE) each sector with large market capitalization is considered

for inclusion in KSE-100 index except the Open-End Mutual Fund Sector. Sector rules

govern the selection or deletion of companies on the basis of being the top capitalization stock

in all KSE sectors except the Open-End Mutual Fund Sector. Two rules are recommended

to carry out selection in this area, one is Time Based Rule and the other one is Value-Based

Rule.

Time Based Rule

A company that is not in the index and it becomes the largest in its sector by any

amount of value will enter the index after maintaining its position as largest in the

sector for two consecutive re-composition periods.

Time Based Rule

A company that is not in the index and it becomes the largest in its sector by a

minimum of 10% greater in capitalization value than the present largest in the sector

(in the index) will enter the index after one re-composition period.

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Rule 2: Capitalization Rule

In Karachi Stock Exchange (KSE) the remaining places in the index is taken up by the largest

market capitalization companies in the descending order. Capitalization rules govern the

selection or deletion of companies on the basis of being among the largest capitalization

companies in the stock market. Only one rule applies here that is Time Based Rule.

Time Based Rule

A company that is not in the index will qualify for entry if it exceeds the market cap

value of the last stock in the index selected on the basis of market cap for two re-

composition periods. A qualifying company automatically pushes out the lowest cap

selected stock in the index.

Rule 3: The Default Counter and Non Tradable Rule

A Company which becomes default and is on the Defaulters Counter and/or its trading is

suspended is declared Non-Tradable in preceding 6 months is not considered in the re-

composition of existing KSE-100 Index.

Rule 4: Rules for New Issues

A newly listed company or a privatized company shall qualify to be included in the existing

index after one re-composition period, if the market capitalization of the new or privatized

company is at least 2% of the total market capitalization.

The Calculation of Karachi Stock Exchange (KSE-100 Index)

In Karachi Stock Exchange (KSE) the KSE-100 index can be calculated in two ways, one is

the existing calculation methodology which is no more being used in Karachi Stock Exchange.

The existing calculation methodology is named as Full Cap Methodology. Following is the

way to calculate KSE-100 index using the existing methodology:-

Let’s assume, that we have three stock sample (A, B, C) and their share prices at day 1 are

A=15, B=25 and C= 35 and there numbers of shares at day 1 are A= 40,000,000 B=

80,000,000 and C= 120,000,000. The Market value will be calculated by multiplying the Share

price of stock with the number of shares of the stock.

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After calculating the market values of all the stocks they will be added up and set equal to

1000 to form the base period value. All the future market values which will be calculated will

be compared to base period market value in indexed form.

After the base period value has been to set to 1000, let’s assume that the share prices of

the stocks increase respectively, A=17, B=27 and C= 37 on Day 2.

Step 1: Day 1 (The Base Period)

Stock Share Price (In

Rupees)

Number of Shares Market Value

A 15 40,000,000 600,000,000

B 25 80,000,000 2,000,000,000

C 35 120,000,000 4,200,000,000

Total Market Capitalization Rs. 6,800,000,000

Base Period Value/Base Divisor = Rs. 6,800,000,000 = 1000 Base

Step 2: Day 2 (Index Value)

Stock Share Price (In

Rupees)

Number of Shares Market Value

A 17 40,000,000 680,000,000

B 27 80,000,000 2,160,000,000

C 37 120,000,000 4,200,000,000

Total Market Capitalization Rs. 7,040,000,000

To calculate the Index Value on the second day the following formula is implemented

= (Market Capitalization/Base Divisor) * 1000

= (7,040,000,000 / 6,800,000,000) * 1000

=1.035 / 1000

Index = 1035

The Current Index on Day 2 is 1035

The Second way to calculate the KSE-100 index in Karachi Stock Exchange (KSE) is called as

Free Float Implementation Methodology. In Free-Float Methodology, only the Free-Float

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Market Capitalization is considered for calculating the index as against the full market

capitalization method. Free-Float Market Capitalization is that proportion of total shares issued

by the company, which is actually available for trading in the Market. In specific, the listed

companies are advised to calculate their Free-Float based on the formula below

Total Outstanding Shares XXX

Less

Shares Held by Directors/Sponsors XXX

Government Holdings as promoters/acquirers/controllers XXX

Shares Held by Associated Companies XXX

Shares Held with General Public in Physical Form XXX

Shares Held by Directors, Government Holding, Associates and in Physical Form XXX

Free Float XXX

Major Mutual Funds in Pakistan

In Pakistan there are many major mutual funds, but these mutual funds are of two types, one

is open ended and the other one is close ended. Some of Mutual Funds in Pakistan are

discussed below

JS Islamic Fund

JS Islamic Fund is an open ended fund, categorized under Shariah Complaint Islamic –

Equity Scheme. Js Islamic Fund works according to the Principles of Shariah Compliance

as advised by the Shariah Advisory board (SAB). JS Islamic Fund ensures to provide

liquidity, the funds in which the JS Islamic fund has invested are limited and they are

limited because the Shariah Advisory Board has put on a limitation to asset classes.

The Investment Manager of JS Islamic Fund is JS Investments Limited, it was launched in

December 27, 2002. The financial year of JS Islamic Fund ends on June 30, on October

31, 2014 the Net Assets of JS Islamic Fund was Rs. 354.0 Million and the NAV per share

on November 28, 2014 was 81.45.

The Benchmark of JS Islamic Fund is KMI-30 Index, their par value is 100, their risk profile

is high, the minimum investment amount is 1 unit and they are listed on Lahore Stock

Exchange (LSE). The Regulator of JS Islamic Fund is Securities & Exchange Commission

of Pakistan (SECP).

JS Islamic Fund has further invested in more funds and they are discussed along with the

% of the total assets they hold:-

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Indus Motor Co. Ltd. 13.10%

Abbott Laboratories Pakistan Ltd. 10.93%

Pakistan State Oil Co. Ltd. 10.27%

Rafhan Maize Products Ltd 9.61%

Cherat Packaging Ltd. (Formerly Cherat Papersack) 9.54%

Maple Leaf Cement Factory Ltd. 8.93%

Kohat Cement Ltd 8.56%

D. G. Khan Cement Co. Ltd. 4.93%

Attock Refinery Ltd. 4.77%

Millat Tractors Ltd. 4.53%

Atlas Stock Market Fund Atlas Stock Market Fund (ASMF) was established by a Trust Deed dated May 29, 2004

between Atlas Asset Management Limited (AAML), as Management Company and Central

Depository Company of Pakistan Limited (CDC), as trustee. It is open ended fund

categorized under Equity Fund.

The Fund invests mainly in high quality listed equity securities with at least 70% of net

assets invested in equity securities, while selecting equity securities, the Fund considers

the reputation of the management, liquidity, profitability, dividend record and prospects

of earning growth.

The remaining net assets are invested in cash and/or near cash instruments which include

cash in bank accounts (excluding TDRs), and treasury bills not exceeding 90 days

maturity. The asset allocation in each instrument will depend on prevailing market

conditions.

It was launched in November 23, 2004. Atlas Stock Market Fund has benchmarked KSE-

100 Index and is listed on Lahore Stock Exchange (LSE). The Risk profile of the fund is

high and the minimum investment amount is Rs. 5000.

Atlas Stock Market Fund has further invested in more funds and they are discussed along

with the % of the total assets they hold:-

Bank AL-Habib Ltd 7.9%

Pakistan Petroleum Ltd 7.4%

Bank Al-Falah Ltd 7.1%

Oil & Gas Development Corporation 6.1%

United Bank Ltd 4.9%

Hub Power Co. Ltd 4.8%

Pakistan State Oil Co. Ltd 4.7%

Fauji Fertilizer Company Ltd 4.5%

D.G. Khan Cement Co. Ltd 4.3%

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Pakistan Oilfields Ltd 4%

.Asian Stocks Fund Limited

Asian Stocks Fund Limited is a public limited company incorporated in June 1994 under

the Companies Ordinance, 1984 and has been registered with the Securities and Exchange

Commission of Pakistan (SECP) as an Investment Company under the Investment

Companies and Investment Advisers Rules, 1971 to carry on the business of a closed end

investment company.

Asian Stocks Fund Limited commenced its business in July 1994 and is listed on Karachi,

Lahore and Islamabad Stock Exchanges. Asian Stocks Fund Limited has benchmarked

KSE-100. The Net Assets of Asian Stocks Fund Limited was Rs. 118 Million and the NAV

per share was 17.52.

Asian Stocks Fund Limited objective is to provide its shareholders a vehicle for long-term

capital appreciation. The Funds try to achieve this objective through investment primarily

in high quality equity issues and by diversifying across sectors. Asian Stocks Fund also

promotes measures to stabilize revenues by investing an allowable portion of its assets in

other non - equity securities including listed fixed income securities and hybrid equity

issues.

Asian Stocks Fund Limited has further invested in more funds and they are discussed

along with the % of the total assets they hold:-

Thal Limited (THALL) 61.93%

International Steel Limited (ISL) 18.03%

KASB Bank Limited (KASBB) 2.13%

Over The Counter Market (OTC)

Over the Counter securities is a trading system in which brokers or dealers (called as Market

Makers) negotiate over telephone or computerized network instead of through stock

exchange. This market is also called as outside market or third market.

The trading of stock and securities are done without involving the stock exchange, the deal

between two parties negotiate for the financial instrument, most of the over the counter

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market deals with the small companies. The small companies are not registered (listed) in

the stock exchange due to their small capital or they possess cheaper assets than the listed

companies in the stock exchange.

Some of the small companies are growing with times by injecting finance or they get funding

from the financial institutions. The small companies also face problems due to their bad

management and lack of finance/funding.

Over the Counter Markets are not trading stock through formal exchanges, they trade through

brokers via E-Trade. The price of over the counter stocks are set by brokers/dealers with

respect to demand and supply of a stock. A single dealer/broker possess a large number of

shares, in general they are called as Market Makers.

Over the Counter Investments are risky investments because these are not secured or

assured by the issuing institution/ companies.

Over The Counter Market (OTC) in Pakistan

In Pakistan Over The Counter Markets do not have so much advancement, Karachi Stock

Exchange (KSE) said the purpose of OTC market is to provide investors an efficient and

transparent source of investment, beside encouraging promoter to setup new industries or

expand the existing enterprises by raising funds in a cost-effective manner in a listing

organization where requirements are less strict.

Karachi Stock Exchange on January 12, 2011 made an announcement that it is going to launch

Over The Counter Market through the listing of first ever Privately Placed Commercial Papers

(CP) of Rs. 1 Billion of Engro Fertilizers Limited on the Exchange. JS Global Capital Limited

has been appointed as the Market Makes of the Issue, who will quote bid/ offer spread for the

Engro Fertilizer’s Limited on daily basis.

Karachi Stock Exchange on June 29, 2012 notified the listing of Privately Place Term Finance

Certificates (PPTFC’s) of Rs. 2.0 Billion of Pakistan Mobile Communications Limited under the

Regulations Governing Over the Counter (OTC) Market of the Exchange.

JS Global Capital Limited has been appointed as the Market Makes of the Issue, who will quote

bid/ offer spread for the PPTFC’s on daily basis.

In Pakistan different banks have been also working under Over the Counter Market like, JS

Bank Limited, KASB Bank Limited, Silk Bank Limited and etc.