Investment Climate

Equity Market

In 1991, the secondary market was opened for foreign investors on an equal basis with the local investors. This measure along with the government policy of privatization has resulted in rapid growth of the market since 1991. It may also be mentioned that "privatization" has bee n adopted as a philosophy and most of the business & finance activities which were previously reserved for the public sector have now been opened for the private sector. The change of policy is most visible in the financial sector where a number of commercial banks, investment banks, discount houses, leasing companies, modarabas, life insurance companies and mutual funds have been allowed in the private sector.

Liberalization policy has led to rapid deregulation of the national economy and the impediments to private initiative have been speedily removed. Foreign exchange holdings and transfers have been liberalised, industrial sanctioning has been done away with except for few sectors where, for strategic reasons, prior permission of the government is necessary.

Legal Framework

• The securities market and the corporate sector are regulated by the provisions of
• The Companies Ordinance 1984.
• The Securities and Exchange Ordinance 1969 and Rules framed there under in 1971.
• The Securities & Exchange Commission Act 1999.
• There are also Federal legislations relating to specific areas like
• Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970.
• Investment Companies and Investment Advisors Rules 1971.
• Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980.
• Companies (Issue of Capital ) Rules 1996.
• Leasing Companies (establishment and Regulation) Rules 1996.
• Asset Management Companies Rules 1996.
• Insurance Companies Ordinance 2000.
• Guidelines for insiders trading.
• In addition to above, the listed companies are also subject to the Rules and Regulations of
  the stock exchanges.

The Regulator

The regulatory authority for the securities market and corporate sector in Pakistan is the Securities and Exchange Commission of Pakistan. The Commission was established on January 01,1999 by dissolving the Corporate Law Authority which was formed in 1981 under a Special Law. The Commission administers the compliance of the Corporate laws in the country. The Commission is run by the Commissioners under a Chairman.

The Asian Development Bank's Capital Market Development Programmed envisaged the conversion of CLA into Securities and Exchange Commission of Pakistan, as an autonomous regulatory authority. The new system provides administrative, operational and financial autonomy to the Commission and at the same time provides an accountability mechanism through establishment of a Securities and Exchange Policy Board. All policy decisions are made by the Board on the recommendations of the Commission which is also empowered to take suo motto action. The Board is directly answerable to the Parliament.

Members of the stock exchanges are also subject to the discipline of self-regulation under various Rules and Regulations of the stock exchanges. Self-Regulation is the essence of market regulation and for this purpose the legal framework has been amended to facilitate the attainment of SRO status by the stock exchanges.

How Companies Raise Money

Some 30 companies have decided to list their shares on the Karachi Stock Exchange. But why? What do they get out of it? There are, after all, tremendous costs involved in gaining a stock market listing and maintaining it.

Quite simply, listing on the stock market is all about raising money to enable your business to expand. Imagine you have a brilliant idea for a new company but you don’t have the money necessary to buy equipment such as computers and office furniture. You might initially think about raising some money from family and friends and giving them a stake in your business in return. This is, in fact, the way many companies start life. Shares issued by companies not listed on the stock exchange are often referred to as ‘unquoted’.

But if you need money on a large scale or you are a small business looking to expand, you might need more than your close acquaintances can provide. At this stage some people look to borrow money from venture capitalists or the bank. Others decide to try and raise money from a wider group of investors through a stock market listing. These shares are known as ‘quoted’ or ‘listed’ on the stock exchange.

It is rare, however, that companies approach the market just once for money. As you flick through the financial pages of your newspaper you will often read about rights issues, share splits and share buy backs. These are all terms used to describe different ways companies raise money from investors and, pay it back.


IPOs/new issues
Bond issues
Rights issues
Stock splits and scrip issues
Share buybacks

IPOs/new issues

Raising money by issuing shares is a viable option for a company because investors have to rely on the company’s performance in the future to get their money back. If the company borrowed money from the bank instead they would have to make interest repayments on set dates.

A company that decides to raise money by issuing shares is said to be ‘floating’ on the stock market but this option is not open to all companies. It has to seek approval from various regulators and banks before asking the public for money. It also has to issue a prospectus, which explains what the company does why it is raising money and what opportunities and risks there are to investors from buying shares in the firm.

When you buy shares through an IPO you are buying them on what is known as the primary market. New issues of shares are distributed through a broker appointed by the company and are sold at a fixed price. Investors sometimes buy shares in a new issue hoping to sell them immediately at a profit rather than hold them. These investors are known as ‘stags’.

Once the new issue is completed and the company is officially listed on the stock market, it is known as a public limited company (plc) and shares can be traded between investors. This is known as the secondary market. Shares sold on the secondary market trade for whatever someone is willing to pay for them. The more valuable a company is perceived to be, the more investors are prepared to pay for it and vice versa.

Bond issues

If a company does not want to issue shares, it can issue bonds instead. Bonds are different to equities because rather than investors having to rely on the company’s returns to make money, the company pays a fixed sum back to investors every year. It also promises to repay the full amount it borrowed after a set number of years.

This way of raising money is called issuing debt as the company is effectively borrowing money from you.

Rights issues

A public limited company is free to go back to the market whenever it pleases to ask for more money. This is known as a rights issue. You are not, however, under any obligation to take up its offer.

Companies decide to raise more money for a variety of reasons but usually it is to fund expansion, perhaps to take over a rival or to diversify into a new business area. Rights issues are almost always offered to existing investors and the amount they are offered depends on how many shares they already own. They could, for example decide to issue two new shares for every one held.

Shares offered under a rights issue are usually offered at a discount, often between 20% and 40% of the current share price. Existing shareholders receive a Provisional Allotment Letter which tells them how many shares they are entitled to and what the price will be.

If you receive this letter you can either take up the offer or decide to sell the letter onto another person who can subscribe for the shares instead. This is known as ‘rights nil paid’. Another option is to do nothing. If you do this the company will sell the shares in the market, retain the subscription price and remit any excess proceeds from the sale to you.

You should remember that once a company has issued extra shares, you own a smaller proportion of it and so your shares should be worth a little less. How much less will depend on how much other investors are prepared to pay for them.

Companies can also issue new shares through a placing. This is when new shares are created and sold through the company’s financial adviser, usually at a price just below the price of the existing shares.

Stock splits and scrip issues

Companies can decide at any time to increase the number of shares they have in issue by doing a ‘stock split’. This often happens when a company decides its share price has got too high and is concerned that trading will decline as a result. If a stock splits and, for example, give you two shares for every one you own, there is no real change in the value of your holding, even though you own more shares.

Another way for companies to issue more shares is through a ‘scrip issue’. This happens when a company decides to turn part of the reserves it has accumulated into new shares. These shares are usually issued to existing holders but are not, as many people mistake them, free shares. The company is simply moving its money from one part of the balance sheet to another.

Share buybacks and special dividends

Companies have to have a certain amount of money in reserve to protect the business if, for example, profits were to collapse. If the company has done very well for a number of years it can build up excess reserves. It may decide to use this money to fund an acquisition or may pay a special dividend to investors.

Alternatively, it might choose to buy back some of its own shares. When a company buys back its own shares it makes the shares still in issue more valuable. Say, for example, a company has 100 shares worth Rs.100 each and you have five shares, you own 5% of the company. If it buys back and cancels 20 of those shares, you still own five but your stake in the company has increased to 6.25%.

Market mechanics

Once you have done your homework and decided which companies you feel are worth investing your money in, you can go ahead and buy their shares.

This is a simple process but there are some tips worth knowing before you start. Your first step should be to find a stock broker who offers the kind of services you need. Read more about choosing a broker.

Once you have registered you need to decide what type of order you want to place. There are a variety of ways you can buy or sell shares, not just at the best price your broker can get. You can, for example, set limits on the prices between which you are happy for your broker to trade. Remember that not all brokers will offer every type of order so check with them when you register.

At Best
Limit orders
Stop order
Fill and Kill orders
Trading systems

At Best

At best orders are used by the vast majority of private investors. If you choose to buy or sell shares at best you are simply instructing your broker to trade immediately at the best price they can get.

Limit orders

If you place a limit order you are simply asking your stockbroker to buy or sell shares at a price that matches or betters the level you specify. You might, for example, have noticed that shares in XYZ Plc have fallen to Rs.3.5 in the past few days and you think they are worth buying at Rs.3.5. You could, therefore, ask your broker to buy the company’s shares if they fall below this level.

There is no restriction on when these orders can be placed and then can stay in force for anything up to 90 days. This would be useful if, for example, you were going away on holiday but didn’t want to miss out on buying shares at a specific price.

Stop orders

This type of order enables you to buy or sell shares within a specified range once a price you determine has been reached and is a type of limit order. If, for example, you decide you want to buy shares at a specific level above the current market price you can ask your broker to place a contingent stop buy order. If you want to sell your shares once the price has dropped below a pre-determined level you can place a contingent stop sell order. This type of order can be useful if, for example, you are a momentum trader and want to reduce your exposure to a stock as prices fall or increase your holding as prices rise. Read more about momentum trading in strategies for investment.

Fill and Kill orders

If you want to buy or sell shares at a price that matches or betters the level you specify when the market next opens, you can place a fill or kill order. Your order with either be ‘filled’ if your broker gets a price matching your requirements or ‘killed’ if the price cannot be matched at the first attempt.

You can only place fill and kill orders outside market hours. These orders expire when the market opens on the first business day after the order has been taken. So, if you place a fill or kill order on a Tuesday evening, the order will be filled or killed at the start of the next day’s trading.

Who does what in the Market

When you buy or sell shares in a company your only contact will usually be with your stockbroker.

But if you read the financial pages of newspapers or the information sent to you by stockbrokers or companies, you will see a whole host of other business mentioned, such as market makers, registrars and regulators. Each of these organizations has a different but crucial role in the efficient working of the stock market. So, while you may not actually deal with them day to day, it is worth understanding the role they play.

The Karachi Stock Exchange
Regulators
Registrars
Stockbrokers
Market makers
Company advisors
Shareholders

The Karachi Stock Exchange

The Karachi Stock Exchange is the principle Pakistani exchange for investors who want to buy and sell shares or bonds. It is known in regulatory circles as a Recognized Investment Exchange, which means it provides a marketplace for investors.

Companies who list on one of the Exchange’s markets, have to abide by strict rules governing their listing and may have their shares suspended if they do not comply.

But the Exchange does not get involved in regulating the advisers and brokers individuals deal with. That is the responsibility of the Security Exchange Commission of Pakistan.

Regulators

Regulators are there to protect you and your money. The main regulator in Pakistan is the Security Exchange Commission of Pakistan (SECP). Any financial companies whose main business is investment must be authorized by the SECP. That includes stockbrokers and independent financial advisers. These firms are required to ensure all the people who work for them meet the standards laid down by the SECP.

Registrars

If a company lists its shares on the stock market it needs to appoint a company registrar. The company registrar is responsible for the upkeep of a legal record of the company’s shareholders.

This means that every time you buy or sell shares, the registrar will make a record of the transaction. This is useful if you lose the certificate and need to trace your holding. But registrars will not always know you are the owner of shares if you buy through a nominee account.

Nominee accounts, operated by stockbrokers, enable you to buy and sell shares more quickly than if you hold the paper certificate but as the shares are held under a nominee account, the registrar will only know how many shares are held in that account, not who the individual owners are. That then becomes the responsibility of your stockbroker.

Stockbrokers

Stockbrokers are the people who will buy and sell your shares on your behalf for a fee. There are different types of stockbroker.

If you want help with your investments you might be best suited to a full advisory service, where the broker will look at your individual circumstances and devise a strategy to suit your needs, monitor your investments and make suggestions on buying and selling shares. Some may even buy and sell shares for you without asking for your approval first. This service is highly tailored and, unsurprisingly, can prove expensive.

These days most people are prepared to do their own research. That is, after all, half the fun of investing. If you are in this camp you need to look for an execution only stockbroker. These brokers cannot legally offer you any advice on your decisions and to keep costs down usually operate over the phone or the Internet.

This does not, however, mean they will not provide you with any tools to help you make the best investment decisions. Many execution-only brokers, particularly the larger firms, offer all kinds of research and online tools for everyone from the novice to the real expert.

To a large degree, finding the right broker for you will depend on your individual requirements but there are four factors you should look for: quality of information, speed of execution, markets available and cost. Generally speaking, the better the information on offer, the more you will pay.

Market makers

When you give an order to buy or sell shares to a stockbroker, they pass the deal onto a market maker who will execute the deal. Market makers have to offer stockbrokers separate prices for buying and selling shares (known as bid and offer prices).

When you see a share price quoted in the newspaper it is usually the mid price (the average of buy and sell prices) and this determines the value, or market capitalization, of a company.

Market makers are ultimately responsible for how much share prices move up or down. If, for example, demand for a company’s shares is high, market makers will put up the price to attract shareholders to sell. If demand is low, the market maker will reduce the price to attract buyers.

Company advisors

If you read about one company taking over another, or that a company has diversified into a new area, you will usually see the reporter name a different firm as the company’s advisor.

While listed companies have boards of directors who are there to advise the business on any future developments, they usually employ outside firms to help independently analyze the prospects for the business. These firms, often investment banks, may, for example, do some research into which of the business’s rivals may be ripe for takeover.

Shareholders

If you have bought shares in a company you are a shareholder. Owning shares gives you the right to vote at company meetings and to get any dividends the company pays out. You may also qualify for shareholder perks, such as discounts off the company’s products, although you may have to hold the share certificate directly rather than through a nominee account.

Shareholders are usually split into two types: institutional and private. Institutional holders are companies who may, for example, invest the pension schemes of their staff in shares. They can also be fund managers who run investment schemes such as unit trusts or investment trusts. So, if you have a pension or another investment scheme, these institutions will be investing on your behalf.

Institutions have the biggest influence on the market’s performance simply because they have millions or billions to invest. If they, for example, own a reasonable percentage of a company’s shares, selling them will have a significant influence on the price.

How to buy shares and other Securities

Successful investing is not just a matter of picking the right investments at the right time but finding the best, and most cost effective way of buying them.

• Buying shares
• Trading in overseas stocks
• Buying funds
• Buying bonds
• Buying other investments

Buying shares

Investing in the stock market is as far removed from the image of the dapper city gent in his bowler hat as you can get. These days you can trade shares through your bank, over the phone or the internet.

The first thing you need to do is decide what type of broker you want. If you want help with your investments you might be best suited to a full advisory service, where the broker will look at your individual circumstances and devise a strategy specifically to suit your needs, monitor your investments and make suggestions on buying and selling shares. Some may even buy and sell shares for you without asking for your approval first. This service, known as discretionary broking, is highly tailored and, unsurprisingly, can prove expensive.

These days most people are prepared to do their own research, which, after all, half the fun of investing. If you are in this camp you need to look for an execution only stockbroker.

Execution only means that the broker will simply take your order and execute it for you. These brokers cannot legally offer you any advice on your decisions and to keep costs down usually operate over the phone or the internet.

This does not, however, mean they will not provide you with any tools to help you make the best investment decisions. Many execution only brokers, particularly the larger firms, offer all kinds of research and online tools for everyone from the novice to the real expert.

To a large degree, finding the right broker for you will depend on your individual requirements but there are four factors you should look for: quality of information, speed of execution, markets available and cost. Generally speaking, the better the information on offer, the more you will pay.

While telephone and internet services may give you access to instant dealing, completing your deal takes a little longer. By law all share deals have to be ‘settled’ two days from when they were struck, often known in the trade as T+2.

Deals can be settled so quickly because shares can now be held electronically rather than in paper form.

Buying funds

The main routes open to investors wanting to buy funds are: directly, through an independent financial adviser (IFA) or through a fund mutual fund company or distributor.

If you want some help picking your investments, you should choose an independent financial adviser who will research the entire market and look at your individual circumstance before recommending funds. Some advisers will charge a fee for this advice, others will take commission from the fund group.

Buying bonds

You can buy government issued bonds, known as ‘PIBs’ simply through the commercial banks or a stockbroker. Corporate bonds can only be bought through a stockbroker.

Buying other investments

If you are a more adventurous investor, you might want to buy other stock market- related investments, such as Exchange Traded Funds (ETFs) or derivative products you should be able to buy them through a stockbroker. The costs of trading should be similar to what you pay for trading ordinary shares.

Investing in Other Stock Market Instruments

Buying shares or funds aren’t the only way of getting exposure to the stock market. Over the past few years a whole host of different stock market related investments have been introduced that give investors access to a completely different way of making money.

Some of these investments, such as Exchange Traded Funds provide cheap ways for novice investors to get access to the moves in a specific stock market index or sector. Others, such as spread betting and Contracts for Difference, can give you the ability to make money when share prices fall and, perhaps, double up your exposure to the gain in a particular share’s value.

This does, however, make some of these investments more suitable for experienced investors so you should tread carefully and make sure you understand the risks you are taking before you invest.

Exchange Traded Funds

Exchange Traded Funds (ETFs) work like index tracker funds, giving you access to the performance of specific indices such as the KSE 100 or sectors, such as technology. But unlike index tracker funds, ETFs are set up as companies and rather than using computer modeling to track an index, they build portfolios of real shares.

While there should be very little difference between the performance of index tracker funds and ETFs, being set up as companies gives ETFs a real advantage – they can be traded throughout the day like ordinary shares. Index trackers can only be bought and sold at a price set at the end of the day.

The annual fees on ETFs are similar to tracker funds, but you will also have to pay stockbrokers’ commission.

Why invest in shares

Whether its retiring early, saving for the children’s education or paying off the mortgage, everyone has dreams they can achieve by saving.

Introduction

What are shares?

There are a number of different shares you can buy, including preference shares, bonds, and gilts but the most popular type is the ordinary share. Ordinary shares simply represent ownership of a company.

So, when you buy shares, also known as equities or stocks, you literally become a part-owner of that business. If, for example, a ABC Plc has 100,000 shares worth Rs. 1 each and you buy Rs. 1,000 of shares, you own 1% of the company.

Companies do not have to list on the stock market to issue shares. Many businesses start life with friends and family as shareholders. These businesses are called unlisted firms and their shares are often referred to as ‘unquoted’.

There are more than 654 companies listed on the KSE market, from big international brands such as P&G, SCB and etc to national household names such as OGDC, MCB, PSO and NBP.

As a shareholder you have a say in the company’s affairs by voting at company meetings and, of course, the ability to share in its fortunes. If the company does well, the value of your investment should rise but if it does badly, you could see your shares fall in value.

What are the benefits of share ownership?

There are two ways you can benefit from owning shares. The first way is through the growth of the company. Say, for example, ABC Plc earns revenue of Rs.100,000 in one year. After deducting its costs, it has Rs.50,000 left – its profit.

It then reinvests this money in the business, perhaps by investing in better technology, which enables it to cut costs and, therefore, make a bigger profit the following year. If it can continue to improve its profits, demand for its shares will grow and the share price will rise. This type of company, known as a growth stock, is popular with investors who do not need income from their investments.

Many companies also pay a dividend. Say, for example, XYZ Plc earns revenue of Rs.1,000,000. After deducting its costs and reinvesting in the business it has Rs.100,000 left over. It decides to return this money to shareholders by paying a dividend. If the company has 10,000 shareholders, each share will get a dividend of Rs.10 per share. So, if you own 100 shares, your total dividend will be Rs.1,000.

Shares that pay dividends are generally known as ‘Income’ stocks. Companies can return money to shareholders in other ways too such as buying back their shares. This increases the value of those shares still in circulation.

By investing in shares you are also linking your financial wealth to the health of the Pakistan and overseas economies. The proportion of goods and services sold in the Pakistan and abroad typically rises when economies are growing and falls when in recession, thus affecting profits.

The fact economies spend longer in a growth period than in recession has helped shares produce better returns than other assets and, crucially, beat the effects of inflation. If you left Rs.10,000 under your mattress, for example, it would be worth just Rs.9,750 a year later, assuming inflation had increased the cost of goods and services by 2.5% that year. After five years it would have fallen to just Rs.8,810.

Savings accounts do little to protect your money from inflation as your real rate of return is small, averaging 1.8% a year after inflation according to Credit Suisse First Boston’s Equity Gilt Study 2003. Shares, on the other hand, do have the ability to produce better gains. But, as investors it needs to be understood that share ownership is not without its risks.

The risks of investing

Inflation may eat away at your savings over the long term but if share prices fall, you run the risk of losing money. If a company you invest in goes bankrupt, your shares could become worthless.

But companies do not have to go under for you to lose money. Other investors may simply decide that the company is not worth as much as when you paid for it, perhaps because it is losing market share, and if enough of them think that, your investment will fall in value. Shares also tend to fall when the economy is deteriorating as investors recognize profits will be lower.

These are not, however, reasons for you to stay out of the stock market. But they should help you recognize the importance of building a broad portfolio with shares in different companies, industries and, even, countries. A good way for a beginner to do this is to invest in a fund, which spreads your money across 30-100 companies.

It is also worth noting that apart from those companies that go bust, shares that have fallen in value can recover in time. Sometimes if a share has fallen in value it can be worth holding on until it recovers but at other times it may be better to cut your losses and invest in a company that has better prospects. The option you choose will depend on the company you are invested in and your individual circumstances. Read more about How to build a portfolio and reducing investment risk.

Investor's Guide (Taxes and Legal Aspects)

Taxes and Legal Aspects

INCOME TAX

When you receive your dividend cheque, income tax has already been deducted by the company at basic rate. Basic-rate taxpayers have nothing more to pay.
Higher-rate taxpayers have to pay the difference between basic and higher rate at the end of the tax year.
Non-taxpayers can reclaim the tax deducted through their local tax office.

CAPITAL GAIN TAX

You make a capital gain when you sell shares at a higher price than you are paid. If you sell at a lower price, you make a loss.
There is no Capital Gain Tax in Pakistan at present.
Tax is a very complex subject - you should always speak to a properly qualified tax adviser to make sure you have a complete picture of the tax rules.

WHO IS INELIGIBLE TO OPEN A TRADING ACCOUNT?

Upon discovering that an investor fits any of the descriptions below, the stockbroker should refuse to accept his or her application to open an account, or refuse to take orders from such customer to buy, sell or subscribe securities:

• Minors who do not have the authorization of their legal guardian
• Personnel or employees of the authorities in charge of securities matters and regulators
• Person is declared bankrupt and rights have not been reinstated
• A person's opening an account that cannot supply proof of his identity
• Securities dealer who have not been approved by the competent authority.

DISPUTE RESOLUTIONS:

HOW DOES THE CLIENT KNOW IF HE/SHE HAS A CASE AGAINST STOCK EXCHANGE MEMBER?

Just because the client has lost money while dealing in securities doesn't mean that he/she has a case against the member. The financial markets have always gone through periodic down turns and upturns and these fluctuations are not always the fault of member. However, it is the responsibility of a member to invest money according to the client's instructions. There are certain malpractices against which a client can lodge a complaint such as:

• Unauthorized trading (Sale/Purchase)
• Unauthorized transfer/movement of shares
• Non-supply of statements of account
• Non-supply of trade confirmations within 24 hours
• Overcharged commission
• Failure to execute investors' instructions/orders
• Suspension of payment
• Non-Delivery of securities.

WHAT ARE THE DIFFERENT WAYS TO HANDLE A PROBLEM WITH STOCK EXCHANGE MEMBER?

1. AMICABLE SETTLEMENT:

Although the client has the recourse to approach the relevant stock exchange, SECP or the Courts for lodging complaint, it is strongly advised that the complaint/problem should first be taken up directly with the member. This will not only save the time consumed in correspondence and procedures but will also preserve the trust and confidence.

2. ARBITRATION COMMITTEES OF STOCK EXCHANGES:

The client also has the alternative of taking up his/her complaint with the management of the concerned stock exchange. All the stock exchanges have their own Arbitration Committees that look into the grievances/disputes between the Investor and the Members.

3. SECP:

The client can also lodge his/her complaint with the Vigilance Cell which has been setup at SECP to ensure that grievances/complaints of the general public are heard and redressed, in a quick and efficient manner. All the complaints received by the Vigilance Cell against Stock Exchange members are forwarded to the Investor Complaint Wing (“ICW”) of the Securities Market Division (“SMD”) for further processing. However, SECP is not empowered to force the member for compensation/damages.

4. CIVIL COURTS:

The client can also file his/her complaint with the Civil Courts.

WHAT ARE DIFFERENT FORUMS AVAILABLE FOR PURSUING A CLAIM AGAINST STOCK EXCHANGE?

There are three forums available for pursuing claims against Stock Exchange members:

1. ARBITRATION COMMITTEES OF STOCK EXCHANGES:

The Stock Exchanges are Self-Regulatory Organizations (SROs) empowered to take cognizance of complaints against the members under the approved Rules and Regulations. All the Stock Exchanges have their own Arbitration Committees that look into the grievances/disputes between investor and members. Arbitration Committees after perusing the documents and providing the parties an opportunity of being heard pass an Arbitration Award in accordance with the relevant Rules and Regulations of the Exchange.

2. SECP:

The SECP has established a Vigilance Cell which is responsible for ensuring that grievances/complaints of the general public are heard and redressed, in a quick and efficient manner. The client can file his/her complaint with the Vigilance Cell against Stock Exchange members on the prescribed Complaint Registration Form (“CRF”) which is available, free of cost in the offices of Stock Exchanges and the Commission including the Company Registration offices (“CROs”). CRF may be downloaded from the official website of SECP: http://www.secp.gov.pk/ComplaintForm1.htm. The ICW after perusing the documents and giving the parties an opportunity of being heard passes an Order according to the relevant Rules and Regulations. Any party dissatisfied with the Order can file an appeal before the Appellate Bench of the Commission within thirty days from the date of issue of such Order under Section 33 of the SECP Act, 1997.

3. CIVIL COURTS:

The client can also file his/her complaint with the Civil or Criminal Court. However this forum is more appropriate for claiming compensation or damages.

WHAT IS ARBITRATION?

Arbitration is an alternative dispute resolution mechanism provided by the Exchanges for those persons who do not wish to go to Court. Through this method disputes between the trading members and between trading members and their constituents (i.e. clients of trading members), may be addressed and resolved in respect of trades done on the Exchange. This process of resolving a dispute is comparatively faster than litigation.

WHO ARE THE PERSONS WHO CAN ACT AS ARBITRATORS?

The Arbitrators are members and management of the Exchange and non-member directors of the Exchange. For further details please refer to Regulation 29 of the General Rules & Regulations of Karachi Stock Exchange (Guarantee) Limited

Disclaimer: The information contained herein is subject to change without prior notice. While every effort is made to ensure accuracy and completeness of information contained, the Commission makes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information for any claim, demand or cause of action.

Investor's Guide (General Information)

General Information

WHY SHOULD I INVEST IN SHARES?

Almost everyone worldwide has an interest in shares, whether they realize it or not. Millions of people around the world own shares directly. However, many millions more have an indirect stake in the stock market through pension schemes, life insurance policies, NIT units, and other mutual funds. All of these, invest in shares traded on the stock market.

Today, increasing number of people own shares around the world, while many more invest in pension schemes, have an insurance policy, National Saving Schemes (NSS) or another form of collective savings invested in shares traded in stock markets.

However, investing in shares is different from saving in a bank or National Saving Scheme. There is more risk - but there is the opportunity for better reward over the longer term. With deposit accounts, you earn interest on your capital. When you take your cash back, you get back exactly the same amount that you first deposited (plus the interest it has earned). With shares, you may receive dividends but when you sell those shares, you might get back more than you bought them for, which is your reward for taking a risk.

Nevertheless, because shares can go up as well as down in value, it is important to understand that taking a risk means you might get back lesser than you had invested initially. You can minimize your risk by investing in different shares or a collective fund. There is, however, the possibility of greater rewards. Funds invested in equities in the long term (five or more years) have outperformed regular saving accounts.

You should remember that saving through the stock market should be seen as a long-term investment. Historically, money invested in shares over the long term (ten or more years) has almost always outperformed regular saving accounts.

Before investing in stocks and shares, you should understand your own financial position and what you hope to achieve with your investments. Your regular financial obligations should be protected and preparation should be made for unexpected expenses.

Having done this, you are ready to consider investing the surplus in stocks and shares. The three main rationales for owning shares are summarized below:

a. Ownership in a Company - when an individual invests in the stock market, he automatically becomes a shareholder of that company. As a stockholder, he is entitled to the following benefits: 1) voting rights; 2) dividends to be declared by the corporation and 3) share of the remaining assets of the company if it is to be liquidated.

b. Liquidity of Funds - a stock market investor has easier access to funds. Compared to banks, which have a high minimum balance requirement for deposits and credit, as an individual, you can start an investment with very low capital, and can expect high yields for your initial investment. You can always cash in or out your funds anytime, during trading hours, through your broker.

c. Make Money - investors in the stock market make money through dividends and capital appreciation. When a listed company declares dividends, it increases the shareholders' investing power. An investor who buys into the company at a low market price and sells it at a higher price will gain capital appreciation.

WHAT ARE THE RISKS OF INVESTING IN STOCKS?

While it is true, that stock investment is the most volatile of all securities, investors might well recall the fact that uncertainty, is a permanent feature of any investing perspective. This means that risk is always a part of any investment. A better attitude would be to limit and manage your risk. A maximum level of gain or loss should be set, and calculated decisions should be made when this level is reached.

WHAT IS THE MINIMUM AMOUNT OF INITIAL INVESTMENT?

Some brokers may require a minimum initial investment to open an account depending on their requirement or may charge or waive other fees depending on the amount you initially invest.

If you are just getting started with a small investment, look for an investment firm that would not penalize you based on the size of your investment.

The minimum amount of money needed to invest in the stock market depends on the minimum number of shares to be traded for the stock. The minimum shares will be determined by the prevailing market price of a particular stock, as each stock, the minimum number of shares to be traded is fixed, called the market-lot, which depends on the price range of the stock.

The market lot is calculated biannually by NCCPL, keeping the lot size to 500-shares for scrip which are priced less than Rs. 50 and lot size of 100-shares for scrip priced above Rs. 50

HOW CAN I BUY AND SELL SHARES?

You can buy shares when a company first comes to market - that is at flotation or privatization; or you can buy them through the stock market once they are in circulation and being traded.

Companies which are about to issue shares often advertise in a daily newspaper. If you decide to buy these shares, you can seek more information from the company's website or you can fill up the application form at the affiliated bank or ask the company for a prospectus. Fill out the application form and submit it with your pay order, at the bank. There is nothing more to pay. Alternatively, you can go to a stockbroker who will buy them for you.

Most share dealings take place in what is called the secondary market. This is where existing shareholders sell and new investors buy.

Today, buying shares is easy. You can buy and sell shares by making contact with a stockbroker, bank or investment adviser, either in person or over the internet or telephone.

HOW CAN I DECIDE WHICH SHARES TO BUY?

1) A stockbroker carries out buying and selling on his propriety accounts and on behalf of his clients as individuals cannot deal for themselves in the market. A list of stockbrokers is available from the Stock

Exchange on KSE website www.kse.com.pk. Stockbrokers offer a variety of services but if you know exactly what you want, simply call the broker for an 'execution only' service and ask them to buy the shares of your choice. KSE offers three market segments

a) Cash market based on two day clearing and settlement

b) Continuous Funding system (CFS) MKII where cash market's net purchases can be carried over for another 22 working days

c) Deliverable Future Contracts allow investors to purchase or sale on a forward contract basis clearing and settlement of these contract takes place on last Friday of the months and new contract starts on the following Monday Cash settled Future Contract where contract is for 90 days, but investor has a choice to enter into any of the three contracts that are always open for end of the month expiry based of cash settlement with under line cash market price of the scrip.

2) After having instructed your broker to buy shares, the broker will draw up contract notes, which typically are sent to your address or mobile phone number within next 24 hours. This will show details of the transaction carried out on your behalf.

3) You must send payment for your shares immediately upon receiving your contract note. In June 2007 the Stock Exchange adopted a two-day settlement system called T+2 system, under which transactions are due for settlement 2 working days after dealing.

4) Upon receipt of payment, the purchased shares are transferred in your name in your Central Depository Company (CDC) account electronically. You are now the proud owner of a portfolio.

5) At this stage you can sell your shares if you wish. You are now entitled to attend the company's Annual

General Meeting (AGM). Talk to the other shareholders, especially representatives from the institutional investors. Just one sizeable disinvestment could make all the difference to the outcome of your overall operation.

A stockbroker or financial adviser can help you choose which shares to buy, and advice on the best time to sell.

You will need to decide:

• Will I need the money soon?
• On the other hand, can I leave my money to grow over a number of years?
• Alternatively, Do I want a combination of both?
• How much money can I afford to invest?
• Will I spread this over a small number of shares, or a larger number?
• Do I want to invest directly in shares?
• Do I want shares in blue chip companies, medium-sized companies or new, small companies (which can be less secure)?
• On the other hand, do I want the relatively safe government backed investment schemes available through National Saving System (NSS), or Pakistan Investment Bonds (PIBs)?
• Am I interested in indirect ways of investing, through closed end Mutual Funds or through Term Finance Certificates available at the Stock Exchange?

HOW CAN I FIND A STOCKBROKER?

Stockbrokers today have a range of services tailored for the needs of the growing numbers of small shareholders. Some operate from the Stock Exchange Building, some from Queens Road and other similar locations around the city, and some only by telephone. Most large banks offer share-dealing services as well.

Before choosing a stockbroker, contact several of them and ask how much they will charge. They expect you to compare their fees with those of other brokers.

An individual investor should choose a retail broker, preferably one that meets his requirements in terms of services needed. When he lacks the time to analyze individual companies and stocks, then a full service broker is recommended. In choosing a broker, the investor should see to it that the broker is a member of good standing at the Karachi Stock Exchange. It is important that the investor should trust his broker and that he is satisfied by the services it is giving him, such as market reports, quality of advice regarding stock selection and timing of purchases and sales, quality of trade executions, on-time delivery of important documents and other services.

There are three levels of service you can take:

DEALING OR EXECUTION ONLY:

You simply call the broker and instruct them to buy or sell the shares you want. They carry out your instructions, but will not give you any advice on your decision. You can always take advice from any other properly qualified financial adviser.

ADVISORY:

With this service you will get the benefit of the broker's expert advice. They will discuss with you their views on various companies and recommend whether you should buy, sell or keep hold of your shares. Make sure you feel comfortable with and understand what your broker is saying to you.

DISCRETIONARY:

The broker will take all the buying and selling decisions, contact you regularly to keep you informed, and tell you how much your portfolio is worth.

You can get a list of stockbrokers from:

1. The Member's Info section of the Karachi Stock Exchange (www.kse.com.pk)
2. By telephoning the Karachi Stock Exchange on (+21) 111-00-11-22
3. By checking with the local branch of your bank or Investment Company.

A. WHEN YOU BUY

Once you instruct your broker to buy shares, he/she buys the shares for you at the best price available at the time. By the end of day's trading, you will receive a confirmation-note. This shows the details of the transaction. Your broker will indicate when he/she needs to have your money to pay for the shares.

B. WHEN YOU SELL

Immediately you give your broker an order to sell, he/she again negotiates the best possible price. By the end of day's trading, you receive a contract note confirming the deal. If you hold the share certificate, you must send this to your broker in accordance with his/her instructions. If your shares are held in Central Depository Company (CDC), you will not have a share certificate to worry about.

HOW DO I SAFE KEEP THE ACQUIRED SHARES?

Once you have bought your shares, there are two ways to hold them: as a certificate or electronically (via CDC account). Your stockbroker can advise which option depending on individual company's shares.

Traditionally shares have been held in paper form, known as certificates. A share certificate is a piece of paper that is evidence that you are the owner of the shares. Your name will appear on the company's share register and this entitles you to receive directly all the benefit of share ownership including dividends, the right to vote at a company's annual meeting and to receive company reports twice a year.

If you decide to sell your shares you will normally need to deliver the certificate to the broker in time for the transaction to be completed.

Today you can choose to hold your shares as an electronic record, receiving a statement from time to time. This is similar to your bank statement, which shows your cash balance as held by the bank.

If you choose to hold your shares electronically they are placed in a nominee account with the Central Depository Company (CDC). These accounts are often run by stockbrokers who administer the shareholding on your behalf. You do not have a certificate to keep safe or deliver to your broker in time for the transaction to be completed. You remain the real owner of the shares and you shall receive the dividends, even though the shares are registered in the name of the nominee.

Your company also provides you with copies of the company reports and with the right to vote at general meetings.

When you have bought or sold the shares, your transaction is completed (or settled) electronically through a service known as National Clearing & Settlement System (NCSS). This system links banks, stockbrokers and Central Depository Company (CDC).

HOW MUCH DOES IT COST TO BUY SHARES?

Costs of trading in stocks vary according to the level of service you get from your broker. You should select the service that meets your needs. Execution-only will generally be the cheapest service. You will pay more for research base advice. The most important figure to ask your broker is about the minimum commission you will be charged. You should also ask whether there are any other charges for their services. Ask if there are any ongoing costs, other than dealing commission, each time you buy or sell.

You should note that you will pay a tax, known as CVT, when you buy shares but not when you sell. This is currently 0.002% percent of the price of the shares.

The way you choose to hold your shares will also vary in cost. If you decide to hold a certificate, there may be an additional charge as it will be necessary to transfer it to you or the new owner.

HOW CAN I KEEP TRACK OF MY SHARES?

Once you have bought shares, you can put them away for a long term or short term, you can keep an eye on how the price is moving. Details of share prices are published in most national newspapers every day. The daily price is also available on our website www.kse.com.pk.

The newspapers' financial pages will comment on companies that are in the news - perhaps because they have published their profit figures, or they are subject to a takeover bid, or they have opened a new factory.

Every piece of information about your company helps you build a clear picture of how it is doing and is expected to do. In addition, there are several specialist magazines to assist private investors. As a shareholder, and therefore part owner, of a business, you can contact the company if you want further information. Alternatively, your stockbroker might keep you informed through a regular newsletter.

HOW ARE SETTLEMENT AND CLEARING DONE?

Clearing and settlement of all stock exchange transactions are provided by National Clearing Company (NCCPL), which acts as go between for KSE and Central Depository Company (CDC) which is the share depository company. Shares move between share-accounts held by the different participant-brokers of the Central Depository Company (CDC).

Stock market transactions are settled on the second day after the trade. Transfers are based on trades done at KSE. Shares are transferred on settlement date (T+2) to the buyer, and the buyer pays the seller through the clearing banks within the same settlement period. This means that transactions done on Monday must be settled by Wednesday. Settlements of accounts are done in the clearing house through National Clearing & Settlement System (NCSS), which is a fully automated electronic settlement system. Visit NCCPL website for further details regarding clearing and settlement, www.nccpl.com.pk.

WHAT IS THE CENTRAL DEPOSITORY COMPANY (CDC)/CENTRAL DEPOSITORY SYSTEM (CDS)?

The CDC is a company that operates an electronic share register called the Central Depositary System (CDS). The CDS eliminates the need for physical movement of share certificates. CDC electronically manages book entry system for custody and transfer of securities. CDS was introduced to replace the manual system of physical handling and settlement of shares at the stock exchange and is managed by the Central Depository Company (CDC), which is incorporated under the Central Depositories Act 1997. Investors can open their accounts directly with CDC called Investor Accounts or open sub accounts with a brokerage firm. It has also solved investor problems related to stock handling on the settlement date, registration of shares, and exercise of corporate action benefits. Visit CDC website for further details regarding shares safe keeping.

Investor's Guide (Market and it’s Working )

Market and it’s Working

WHAT ARE THE MEASURES OF MARKET PERFORMANCE?

There are four indicators of market performance:

1. Market Capitalization
2. Value Turnover
3. Traded Volume
4. Composite Index

WHAT INFLUENCES MARKET MOVEMENTS?

General investors' sentiment indicates the direction of the market movement. However, the over-all market sentiment is influenced by a number of factors - economic, political, fiscal, etc.

HOW DO OTHER ECONOMIC INDICATORS AFFECT THE MARKET?

Interest rates, foreign exchange, inflation, growth rates - these are some other economic indicators, which affect the performance of the Stock Market. Favourable growth and inflation rates, as well as stabilized interest rates and foreign exchange, are good news for the stock market. They usually give a boost to the market performance as these indicate sound economic status. Soaring interest rates, on the other hand, usually push investors from the stock market to some interest-bearing investments, as they offer better returns than stock investing.

WHAT ARE STOCK MARKET INDICES? HOW DO THEY WORK?

KSE INDEX:

The Karachi Stock Exchange KSE-100 Index is the bench mark for our market, it comprises of the top companies from each of the 34 sectors on the KSE, in terms of market capitalization. The rest of the companies are picked on market capitalization ranking, without any consideration for the sector to make a sample of 100 common stocks with base value of 1,000 in late 1991. There are two other indices; KSE-30 Index, which is based on free float capitalization of top 30 companies and KSE all shares Index which is based on full market capitalization of all listed companies at the Exchange.

An index, a composite figure, becomes a benchmark index when you choose it as the standard against which to measure your own portfolio's performance over time. Many investors like to keep track of how companies are performing in general. When a company's share price moves up or down, it shows, whether it is perceived to be lucrative by the investors.

Movements in share prices are measured by various indices. These provide a benchmark against which you can compare the performance of your shareholdings.

The most quoted index is the KSE-100. It comprises of the 100 largest companies on the Stock Exchange and is updated minute by minute during trading hours. The index reflecting all the companies on the Stock Exchange is the KSE-All Share Index and the KSE-30 Index comprises of top 30 companies.

Various investment companies have made their own indices to keep track of the performance of their portfolios. There are three major types of indices calculated to help private investors track the performance of their investment portfolios:

1. The Income Portfolio represents the performance of a portfolio designed to provide a regular flow of income.
2. The Growth Portfolio is for the investor seeking capital growth in his or her portfolio.
3. The Balanced Portfolio represents a balanced portfolio providing both capital and income.

The indices are made up of three broad types of asset: Pakistani equities, foreign equities, bonds and PIBs.

Investor's Guide (Regulating the Stock Market )

Regulating the Stock Market

HOW DOES KSE REGULATE TRADING ACTIVITIES?

The regulatory authority for the securities market and corporate sector in Pakistan is the Securities and Exchange Commission of Pakistan (SECP). The SECP administers the compliance of the corporate laws in the country and is run by commissioners under a chairman.

The Securities and Exchange Commission of Pakistan, is an autonomous regulatory authority, and at the same time provides an accountability mechanism through establishment of a Securities and Exchange Policy Board. All policy decisions are made by the board on the recommendations of the commission and the board is directly answerable to the Parliament.

THE REGULATORY INFRASTRUCTURE OF KARACHI STOCK EXCHANGE

Members of the stock exchanges and trading at the Exchange are also subject to the discipline of self-regulation under various Rules and Regulations of the Stock Exchanges.

KSE is regulated by the provisions of the following regulations:

1. General Regulations of Karachi Stock Exchange
2. Listing Regulations of Karachi Stock Exchange
3. Regulations Governing Over the Counter Market
4. Regulations Governing Future Contracts
5. Regulations Governing Cash-Settled Future Contracts
6. Regulations Governing Provisionally Listed Companies
7. Regulations Governing Short Selling, 2002
8. Regulations Governing Proprietary Trading
9. Regulations Governing Margin Trading, 2004
10. Regulations Governing Karachi Automated Trading System (KATS)
11. Regulations Governing System Audit, 2004
12. Regulations Governing Investors Protection Fund
13. Regulations Governing Continuous Funding System 2006
14. Regulations Governing Recovery of losses
15. Regulations Governing Risk Management
16. Regulations Governing Branch Offices
17. Regulations Governing Stock Index Future Contracts

Trading activities are being monitored through the surveillance terminal to ascertain that, there are no illegal postings and dealings made in any of the issues listed in the Exchange. Through the Compliance and Surveillance Group, compliance of members to set rules and regulations are monitored.

Investor's Guide (Introduction)

Introduction

WHAT IS STOCK EXCHANGE?

A stock exchange, share market or bourse is an organization which provides "trading" facilities for stock brokers and traders, to trade shares of the listed companies and other financial instruments such as Term Finance Certificates and Derivatives. Stock exchanges also provide facilities for the issue (listing), redemption (delisting) of securities and other capital events including the payment of income and dividends. Karachi Stock Exchange (KSE) is a modern market where trading takes place with electronic trading system called Karachi Automated Trading System (KATS), which gives the Exchange advantages of speed and minimum cost of transactions. Trades on an exchange are by members only.

WHY DO COMPANIES GO PUBLIC?

The primary purpose for companies to be publicly listed at the exchange is to cost-effectively raise capital. It reduces the company's reliance on the traditional financiers such as financial institutions and individuals. Listing allows business expansion without increasing borrowings or draining the company's cash reserves. History of listed companies indicate that companies that convert to public ownership are more likely to become successful than control companies that remain private. Companies that go public are also more likely to become acquirers than control companies. IPO companies grow faster than control companies after going public. However, both public and private companies must disclose financial information to regulators.

WHAT ARE SHARES?

Shares, as the name says, are shares in a limited company. Each shareholder is a partial-owner of the company in which they have bought shares and investors can buy and sell their shares on the stock exchanges. Companies on incorporation issue shares, (also called equities) and later perhaps when they are building up a business. The original shareholders might still own them, or they may have sold them to someone else through the stock market. If the company makes a profit, the shareholders normally have some of it passed to them in the form of dividends. The amount paid in dividends varies year by year, depending on how profitable the company has been and how much money the directors and the company management want to keep in reserve for future expansion.

There are different ways in which you can participate in the stock market:

1. Directly: by buying and selling shares;
2. Indirectly: through a collective vehicle, in which shares are grouped together, such as a mutual fund or Exchange Traded Funds (ETFs).

THE INITIAL OFFERING OF STOCKS (IPO):

The initial offering of stocks and bonds to investors is by definition done in the primary market (IPO) and subsequent trading is done in the secondary market. Initial Public Offering (IPO) is the initial sale by a company of shares of its stock to the public in the financial market.

BOOK BULIDING PROCESS FOR NEW COMPANIES:

Book Building is the process of price discovery and pricing a new share issue. The process by which an underwriter attempts to determine, at what price to offer an IPO based on demand from institutional investors for its efficient price discovery based on actual supply and demand by informed investors.

How to Invest

Exposure Limits:

The KSE has an effective var based Risk Management System under the regulation governing Risk Management of Exchange. As a part of risk management, KSE has devised circuit breakers as under.

T+2:

There shall be a circuit breaker in case of price fluctuation 5% or Rs. 1.00, whichever is higher, from the closing price of the previous day. Accordingly trading will be restricted within upper and lower limits of 5% or Re. 1.00 whichever is higher from last closing price.:

Futures Contract:

There shall be a circuit breaker in case of price fluctuation 5% or Rs. 1.00, whichever is higher, from the closing price of the previous day. No trade in the Futures Contract market will be allowed beyond the above price fluctuation In order to strengthen the Risk Management, the amount of Net Capital Balance has been enhanced to Rs.2.5 million under the Capital Adequacy Ratio the members are allowed to trade up to 25 times of the Net Capital balance.

Clearing House Protection Fund:

In order to ensure smooth settlement, the KSE has established a Clearing House Protection Fund. In case of default of a member, shortfall, if any, is fed through this fund up to a certain limit as approved by the Board from time to time. The contribution to the Fund is made by the members of the Exchange.

Investors Protection Fund:

An Investors Protection Fund has also been established to protect small investors from the consequences of a member's default. The fund is operated under a set of Regulations.

Market Surveillance:

The advent of the Automated Trading System has enhanced the market surveillance capability of KSE to devise a market control system. An independent Market Control and Surveillance department has been established to monitor price fluctuation and trading patterns to ensure compliance with regulations and detection of speculative activities.

Minority Shareholder's Interest:

The Exchange has played a proactive role in safeguarding small shareholders' interest and has strengthened its monitoring and enforcement capability to ensure corporate governance. During past couple of years a number of cases have been referred to the SECP in this regard.