KSE: Impressive and
world-wide known results
The following interview with Mr. Nadeem Naqvi,
Managing Director, KSE was published by
United World on September 22, 2015
[http://www.theworldfolio.com/interviews/kse-impressive-and-worldwide-known-results/3698/]
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 sociopolitical 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 wellorganized election process.
That is why the market really
kicked off. I think the overall
macro picture is ver y
important to investors. What
we have also seen is that in
t he last yea r 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
Karachi Stock
Exchange
Limited
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
Karachi Stock Exchange Limited
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 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 main stock market. 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
02
Karachi Stock Exchange Limited
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 an advanced trading platform, advanced
risk management and 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
03
Karachi Stock Exchange Limited
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.
Disclaimer: Investing in stocks & shares carries various risks, including loss
of the principal amount. Investors are advised to conduct their own research
before investing or take advice from professional investment advisors.
Karachi Stock Exchange Limited
Stock Exchange Building, Stock Exchange Road,
Karachi - 74000. Tel: 111-001-122, E-mail: [email protected]