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KSE: Impressive and world-wide known results

Interview - September 21, 2015

United World sits down with Nadeem Naqvi, MD of Karachi Stock Exchange, talking about the present and future of the Pakistan Stock Exchange


News headlines about Pakistan gloss over the progress this country is making on the security front, the increased political stability, and on the economic front. In spite of this progress, two years into PM Nawaz Sharif government and the historic first democratic transition of power, Pakistan continues on a journey of a much overdue transformation.  How would you evaluate Pakistan’s growing pains over the last two years? Is Pakistan now in a much better shape than it was in 2013 in your opinion?

I think one of the advantages of being in the stock exchange is that you are at the nerve centre of corporate information, so not only do you have the macroeconomic and socio-political aspects that impact the market in the short term and therefore drive sentiments in the market movement either way, but you also are sitting on huge data about the fundamental corporate performance. I believe that in the last two years particularly, what we have seen is a revaluation of the market itself. We used to have a situation where Pakistan used to trade at a huge discount to regional markets but that has changed once we had the first democratic transition of government through a transparent and well-organized election process. That is why the market really kicked off. I think the overall macro picture is very important to investors. What we have also seen is that in the last year or so particularly, the domestic investor’s role has increased in tandem with the number of foreign investors. Before, it was the foreign investors who used to lead the market, so if you had inflow of foreign portfolio investors, the market used to move up, if you had a down flow, the market used to come down, but we have seen in these last 2 years particularly that despite a relatively lower participation by foreign portfolio investors the market has continued moving up from one record level to the other.

In terms of capital is raising, in 2012-13 the amount of total capital raise from the market, debt and equity, was about 22 billion rupees. This rose to about 31 billion rupees in 13-14 and the fiscal year that has just ended, it has crossed 57 billion rupees. We have seen a significant uptake from industry through the capital markets and after all that is our function, to provide long term risk capital to the industry.

Last June K-Electric completed the sale of a 22 billion rupees sukuk to refinance existing debt and fund future investments. According to the company “it is the largest listed sukuk issue in Pakistan’s corporate history”. In your opinion, how attractive are listed sukuks for its holders and to what extent can they become a main investment avenue?

The Islamic bonds issued by K-Electric were 22 billion rupees worth and it was fully subscribed and taken by institutional investors within 48 hours. Islamic finance is the fastest growing area in the banking sector and this issuance of Sukuk takes advantage of that. I feel that you’ll see more Sukuks coming in. In fact the finance minister has told the stock exchange he would also consider issuing infrastructure Sukuks.

Some of the great developers of the world are using infrastructure Sukuks to develop their projects. How effective do you think they can be to boost infrastructure in Pakistan and how can the Karachi Stock Exchange contribute?   

The emerging Asia will require over a trillion dollars’ worth of infrastructure finance if its growth is to be maintained anywhere near the past. In the case of Pakistan, I think the government has a clear idea about the huge potential for infrastructure here. Amongst infrastructure also comes in real estate. We had the first Real Estate Investment Trust (REIT) about two months ago, which was issued and listed on the Karachi Stock Exchange and is the first one in South Asia. No other country in South Asia has been able to reach that point because of the many of the problems in the real estate sector from licensing, from stamp duties, provincial vs. federal etc.  We really hope this will allow investors to participate in the real-estate sector of Pakistan. The Sindh finance minister was here a couple of months ago and now Sindh is thinking of issuing Sukuks for specific infrastructure projects. So I think we are beginning to move in that direction where finance comes into play for infrastructure and there is no shortage of takers. Despite a low savings rate, institutional savings are fairly large here. There is a pool of savings that can be deployed towards infrastructure and the stock exchange market and we would like to develop this aggressively.

The upcoming 9th Pakistan SME Forum 2015 will discuss a number of issues now challenging the SME sector in Pakistan under the theme "Fostering SME access to Finance & Innovative Technologies. Zulfikar Thaver, President, Union of Small and Medium Enterprises (UNISAME) recently said: "SMEs are the biggest stakeholders in Pakistan's economy and need the best facilities of finance and infrastructure”. How are the regulations for SME trade facilitating them to raise funds through capital market in a cost-effective way?

Well, as you know 95% of employment in Pakistan is generated by SMEs. Small and medium enterprises have a real problem because they are unable to provide sufficient collateral and in Pakistan and the banks usually lend based on the collateral, so about two years ago I thought about the concept and discussed it with my Board and they gave me the permission to start working on a SME counter within the stock exchange. We then spoke to SECP, the regulator, and they were extremely helpful to fix the regulatory part and all the requirements were met very quickly. At the moment you require a minimum of 250 million rupees paid up capital before you can list on the capital. What we have done with the SMEs is that the requirement has been brought down to 25 million so it’s one-tenth of the current number. Also listing requirements such as the corporate governance code that is mandatory on the main listed companies has been eased for them. In the initial years SMEs will not be required to perform to that, we just want them to come and get listed, get this undocumented sector documented and then educate them about the benefits of corporate governance, transparency and proper professional management.  So hopefully next month we will be launching the initiative. We have studied the SME counters at the Bombay stock exchange. We have also studied the SME counters with Bursa Istanbul and they have been very cooperative in sharing their experience, so I think we are ready to move now. My target is that in the first year at least 15 to 20 SMEs should be listed. The other factor of course is private equity, which is just starting in Pakistan. Our job is to bridge the link between the private equity and the public equity, so the idea of the SME exchange was that this would provide the right exit for the private equity, this is one area, which I’m very excited about.

The US is a major source of FDI in Pakistan: with a total stock of US$1.2bn, it accounts for over 10% of the total FDI.  What new opportunities does the new EFT (exchange traded fund) open to US investors and how can listed companies benefit from it? Which business sectors do you find more interesting for US investors?

I think any instrument that helps brand Pakistan´s market is positive. The Karachi stock exchange 100 Index has been one of the best performing in the world during the last 5 years according to Bloomberg. As far as the portfolio investment is concerned an EFT brings Pakistan into the radar of a large number of US investors.

For international investors sound and transparent regulation is key. How have the reforms proposed under the Rule Book for KSE to harmonize the different regulatory requirements affected the KSE?

Well, several things have happened on the regulatory side and the starting point was the demutualization of the exchange in 2012. Demutualization of the exchange created effectively two structures within the overall stock exchange: one was the commercial side which is basically focused in operations, technology, new products, increasing the investor base, providing larger number of services and the other is the regulatory side. A whole series of reforms started happening on the regulatory side, starting with putting all the different rules, regulations, corporate laws together into one book which has now become a central point. About a year ago we launched the rulebook of the Karachi stock exchange. It is now going to go under another reform because of the latest Securities Act passed by the parliament to ensure compliance by brokers and listed companies. I think from the regulatory point of view we have become very robust. Of course we got a lot of resistance initially by the brokers community because nobody wants to be put under a lot of rules and regulations but I think they have also understood that if the market is to develop, if investor confidence is to increase a transparent market where everybody obey the rules is needed.

On the strategic sale of equity of KSE, Deutsche Bank AG has finalized KSE´s information memorandum, which is being circulated among potential investors with a view to reach an agreement for acquisition of 40% shares of KSE. Could you tell us which investors have already expressed interest in acquisition of a strategic stake in the country's leading capital market?

Deutsche bank is our financial advisor and they were hired for two purposes: one was to value the exchange, initial evaluation in 2012 and the second was to find out potential strategic investor. According to the demutualization act, 60% shares of the exchange have been put into the escrow account. Out of that 60%, up to 40% can be given to a strategic investor with management control and the balance of the 20% will be given to the public through an IPO, so the exchange will become a publicly traded company. Now the question is the sequence. SECP has asked us to give a road map of this whole divestment, so in the next couple of days we should finalize it and we will forward it to them .In terms of potential investors Deutsche bank and ourselves jointly approached Tokyo stock exchange, Malaysia stock exchange, Qatar stock exchange, London stock exchange, Nasdaq and Bursa Istanbul. These are the formal approaches. In terms of concrete development, interests were shown by Qatar stock exchange and Bursa Istanbul. Nasdaq also showed interest but they would rather come through the Bursa Istanbul’s route than directly. Our objective is to have a partner who can bring great expertise and technology. We would like to have and advanced trading platform, advanced risk management platform, advanced market surveillance platform and also one that can do cross listing on a regional or international level. Qatar has certain percentage shareholding in the London stock exchange group which has Millennium as its main technology platform so we are also working towards that. My feeling is that by December we would have a clear picture of which partner we might want to go with and that will change the complexion of our global branding . Internally, the SECP has also asked all the exchanges markets in Pakistan to consider integrating,  so initial discussions are taking place regarding that. I have a feeling that by next year we will witness a big bang of the capital market in Pakistan, which will include demutualization, strategic investment, potential integration of the stock exchanges and reforms in the brokers community. I’m looking forward to that. It’s a big change but I believe that once we get over the transformation phase, we will be as good as any other international stock exchange.

The results of KSE are impressive and well known worldwide. To what extent do you think that your services help Pakistan build a brand abroad?  Do you feel as an ambassador of the country?  

We very much want to play the role of being an ambassador for the country, because unless you actively promote Pakistan the wrong perceptions of the country will not change. I’m a realist, I don’t want to go out and sell rose-coloured glasses to everybody. We have severe challenges; we are overcoming them one by one. The economy has moved from a crisis point to stabilization point. The first 2 years of the IMF program has helped us to become stable. Now, we need to go towards growth and there’s a debate going on within the Government, economists and the major public opinion leaders: austerity vs. growth. Austerity was very important at initial stage where the budget deficit was 8%. We had a large current account deficit, reserves were at a very poor situation and inflation was out of control. Now all those things required some disciplining and I think that policy needs to move towards pro-growth initiatives and this needs to be told to the world. We are beginning to do that. Every year we have two three major investment road shows where we show Pakistan’s growth potential. We take major economists with us and we take the top ten or twelve best companies listed on the stock exchange. They share their business plan, they tell their outlook and that gives a consolidated picture of what the corporate sector thinks about country. We have a global partnership with Bloomberg so once a year, either in New York, Hong Kong or London, we bring in the major international fund managers to look at the country and the companies. We are also addressing the overseas Pakistanis. They have very little information about what Pakistan has to offer to them in terms of investment. We have a plan with Bloomberg to host again a major road show in February in New York and we want to use that as a platform to have some meetings with non-resident Pakistanis in the US so we can send a message out to them: this is a market for you, it is one of the better regulated markets with an easy system to trade and make a profit. This message we are trying to promote, not just only for international investors or US fund managers but also to the Pakistani Americans with high incomes and a substantial amount of savings.

My message to Pakistan origin population in the US as well as friends of Pakistan is very simple: the stability and growth of Pakistan will help your stability and growth, and it is in our joint interest to make Pakistan a progressive country, a forward looking country and help the cities of Pakistan become a productive part of global economy. Once we do that, many of the issues that we have faced in terms extremism, fundamentalism are poverty related and these will diminish. If we are able to provide hope to the people and opportunities they will move towards a productive use of their life. Overseas Pakistanis are big contributors to the health and education sectors in Pakistan. I think the time is right now to become equally important contributors to the business and economic sectors in Pakistan and there are tremendous opportunities available here if they take a look to what is happening. We all know what the world is going through in terms of climate change. Solar power has a huge potential in Pakistan. That single industry, using American technology, can be scaled up massively here. This is just one example. E-learning applications, in a country where smart phone sales are touching one million per month, is another. There are a host of other sectors experiencing high growth as consumer incomes rise where opportunities abound. We would like American Pakistanis and American companies to participate in our growth journey.

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