Karachi Stock Exchange

Karachi Stock

Exchange

Mohammad Ali Jinnah University 0

“Empowering The Companies of Tomorrow”

Karachi Stock Exchange

Financial Institution

Section: B

Mohammad Ali Jinnah University 1

Karachi Stock Exchange

KarachiStock

Exchange

By;

Mohammad Ali Jinnah University 2

Karachi Stock Exchange

Syed Owais Ali (SP07-BB-0135)

M. Moez Siddiqui (SP07-

BB-0124)

M. Laraib (SP07-BB-0082)

Vinod Kumar (Sp07-BB-0177)

Shahbaz Nawaz (Sp07-BB-0150)

TABLE OF CONTENTS

OVERVIEW..................................................................................................................4

INTRODUCTION.........................................................................................................5

HISTORY......................................................................................................................9

ROLES OF STOCK EXCHANGE.............................................................................11

Raising capital for businesses..............................................................................11

Mobilizing savings for investment.......................................................................11

Facilitating company growth...............................................................................11

Redistribution of wealth......................................................................................11

Corporate governance.........................................................................................11

Creating investment opportunities for small investors.......................................12

Government capital-raising for development projects.......................................12

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Barometer of the economy.................................................................................13

MAJOR STOCK EXCHANGES................................................................................14

KARACHI STOCK EXCHANGE..............................................................................15

MARKET INDICES....................................................................................................16

KSE 100 Index.........................................................................................................16

KSE 30 Index...........................................................................................................19

KMI-30....................................................................................................................25

PROGRESS REPORT.................................................................................................31

ROLE AND FUNCTIONS OF A STOCK EXCHANGE.........................................33

LISTING REQUIREMENTS......................................................................................34

Requirements by stock exchange........................................................................34

Requirements by Karachi stock exchange...........................................................34

LISTED SECTORS.....................................................................................................36

PRODUCTS AND SERVICES...................................................................................37

THE FUTURE OF STOCK EXCHANGES................................................................39

FUTURE PLANS OF KSE.........................................................................................41

REFERENCES............................................................................................................42

OVERVIEW

This report will cover the information related to the Stock Exchange and its overall functions and working procedure. The main influence of this report is on Karachi Stock Exchange, its procedure of working and its role that he played in an economy and all the related aspects are also a part of this report.

Karachi Stock Exchange Incorporated on March 10, 1949 Premier Stock exchange of the country

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Started with 5 companies that had a paid up capital of Rs. 37 million.

Trading was done through an open-out-cry system The first index was the KSE 50 Index Exchange owned by 200 members 652 companies listed 4 indices Modern Risk Management System

a. Var Based Marginb. Pre Trade Margin Verification

KSE is FIX Compliant Electronic Trading through KATS Market capitalization*: US $ 26.04 billion Publicly Listed Company with strategic investor Products to include:

a. Optionsb. ETFsc. Tradable Sector Indicesd. Debt Market Trading

Broad based investor participation Cross border listings of companies Opening up of branches in other cities and in the region

INTRODUCTION

DefinitionA stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and trader s, to trade company stocks and other security.

A stock exchange, (formerly a securities exchange) is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as

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other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

Vision

To be a leading financial institution, offering efficient, fair and transparent securities

market in the region and enjoying full confidence of the investors.

Mission

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To strive and provide quality and value-added services to the capital market in an

efficient, transparent and orderly manner, compatible with international standards and

best practices;

To provide state of the art technology and automated trading operations driven by

a team of professionals in accordance with good corporate governance;

To protect and safeguard the interest of all its stakeholders, i.e. members, listed

companies, employees and the investors at large; and

To reflect country’s economic health and behaviour and play its role for the growth,

development and prosperity of Pakistan.

KSE POSITIONED TO BE A HUB OF CAPITAL FORMATION IN THE REGION

South Asian Federation of Exchanges (SAFE) Vice Chairmanship of the South Asian Federation of Exchanges

Member Federation of Euro-Asian Exchanges (FEAS) Affiliate Member of the World Federation of Exchanges (WFE) Affiliate Member of International Organization of Securities

Commissions (IOSCO)

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Agreements with other Exchanges Dubai Financial Markets Abu Dhabi Securities Market Shanghai Stock Exchange

THE FUTURE SUCCESS WILL DEPEND ON THE QUALITY OF HUMAN RESOURCES

A spirit of youthful energy, high intellect and superior skills characterizes our people.

Our workforce consists of a combination of youth and experience – perfectly suitable to the organization’s current requirement and future challenges.

KSE employs the best available human resource from the capital market and financial industry.

Candidates are selected based on their individual energy, quick thinking ability, confidence, decision making ability, integrity and professionalism – attributes that define the person’s compatibility with KSE culture.

The key to our long-term success is the creative genius of our people and their drive towards excellence.

Our employees are exposed to an organizational commitment to continuous personal and professional development.

Our people get involved in various initiatives ranging from management skills, development and personal improvement, to technology advancement and process enhancement.

On a regular basis, some of our best performers are selected for our Mentoring Program, where seasoned mentors groom their portages towards positions of greater responsibility and influence.

Promoting a performance driven culture where ‘high performers’ are recognized for their exceptional contributions.

KSE PLAY A KEY ROLE IN PAKISTAN’S ECONOMY

The KSE is one of Pakistan’s largest tax payer and in the fiscal year 2006- 2007 contributed over Rs. 4 billion towards the national exchequer.

Listed Companies contribute over 10% of total revenue collected by the Government of Pakistan.

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KSE brokers on average pay more than 50% of their profit before tax as presumptive tax.

Our investors pay 10% tax on dividends.

THIER CUSTOMER

Issuers (Listed Companies) Brokers and Members Investors

THE TECHNOLOGY

The Information Technology Group forms the Core of the Business Operations

Development, implementation and monitoring of state-of-the-art trading system known as Karachi Automated Trading System (KATS), introduced in 2002 with a capacity of 1 million trades a day and unlimited number of users.

Disaster Recovery Management and Business Continuity Programs database backups.

Software Development, Testing and Training. Customer Services Support. Caters to member’s complaints regarding computer network and

trading systems. Administration and Maintenance of servers and operating systems. Partnerships with Microsoft, Oracle and Unisys for I.T. infrastructure.

HISTORY

In 11th century France the courtiers de change was concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.

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Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.

However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighboring counties and "Bourses" soon opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke.

The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits—or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London.

On May 17, 1792, twenty-four supply brokers signed the Buttonwood Agreement outside 68 Wall Street in New York underneath a buttonwood tree. On March 8, 1817, properties got renamed to New York Stock & Exchange Board. In the 19th century, exchanges (generally famous as futures exchanges) got substantiated to trade futures contracts and then choices contracts.

Karachi Stock Exchange was incorporated on March 10, 1949; it is the premier Stock exchange of the country. It was started with 5 companies that had a paid up capital of Rs. 37 million, the trading was done through an open-out-cry system.

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The first index was the KSE 50 Index. Karachi Stock Exchange is the biggest and most liquid exchange and has been declared as the “Best Performing Stock Market of the World for the year 2002”. As on May 30, 2008, 654 companies were listed with a market capitalization of Rs. 3,746.203 billion (US$ 56.334 billion) having listed capital of Rs. 705.873 billion (US$ 10.615 billion). The KSE 100TM Index closed at 12130.51 on May 30, 2008.

KSE has been well into the 4th year of being one of the Best Performing Markets of the world as declared by the international magazine “Business Week”. Similarly the US newspaper, USA Today, termed Karachi Stock Exchange as one of the best performing bourses in the world.

ROLES OF STOCK EXCHANGE

Stock exchanges have multiple roles in the economy, this may include the following:

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Raising capital for businesses

The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public.

Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels and firms.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Redistribution of wealth

Stock exchanges do not exist to redistribute wealth. However, both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses.

Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in

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corporate governance on the part of some public companies. The dot-com bubble in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Web van (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the most widely scrutinized by the media.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

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MAJOR STOCK EXCHANGESRegion   Stock Exchange  

Market Value(millions USD) 

Total Share Turnover(millions USD) 

Africa Johannesburg Securities Exchange 432,422.1 17,999.7

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

Americas São Paulo Stock Exchange 611,695.0 30,748.5

Americas Toronto Stock Exchange 997,997.4 84,323.0

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

Asia-Pacific Australian Securities Exchange 587,602.7 37,400.1

Asia-Pacific Bombay Stock Exchange 613,187.6 14,425.0

Asia-Pacific Hong Kong Stock Exchange 1,237,999.5 80,696.8

Asia-Pacific Korea Exchange 470,417.3 81,755.0

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Asia-Pacific National Stock Exchange of India 572,566.8 39,057.1

Asia-Pacific Shanghai Stock Exchange 1,557,161.3 142,144.2

Asia-Pacific Shenzhen Stock Exchange 389,248.3 75,365.5

Asia-Pacific Tokyo Stock Exchange 2,922,616.3 301,781.5

Europe Euronext 1,862,930.9 146,173.3

Europe Frankfurt Stock Exchange (Deutsche Börse) 937,452.9 264,970.3

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

EuropeMadrid Stock Exchange (Bolsas y Mercados Españoles)

871,061.4 114,994.0

Europe Milan Stock Exchange (Borsa Italiana) 456,206.7 48,094.8

Europe Nordic Stock Exchange Group OMX1 503,725.8 55,299.9

Europe Swiss Exchange 761,896.1 63,435.6

Twenty Major Stock Exchanges in the World: Market Capitalization & Year-to-date Turnover at the end of January 2009

KARACHI STOCK EXCHANGE

The biggest Stock exchange of Pakistan located in Karachi is the Karachi Stock Exchange. Due to the liquidity offered by the Karachi Stock Exchange, it is known as stated as the “Best Performing Stock Market of the World for the year 2002”.

Evolution of the Karachi Stock Exchange

By 2007, the number of listed companies reached 754 by the year 2007. The market capitalization at the same time was US $52 billion whereas the listed capital was US $8.27 billion. Following the estimates of the State bank Of Pakistan, we see that the foreign investments in the capital market are as large as US $ 523 million.

Arbitration

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The disputes that arise between members and the investors in the Karachi Stock Exchange are resolved through the advices of the Arbitration Committee of the Exchange.

Settlement

The settlement in the Karachi Stock Exchange takes place through the centralized clearing house. The shares that are traded from the Karachi Stock Exchange on Monday and Tuesday of any week are settled the following Monday. The payments that are made to the members or the investors are channelized through the Clearing House. The shares of only those companies can be traded in the Karachi Stock Exchange which has offered the shares to the public either through the prospectus or an offer for sale. The trades in the Karachi Stock Exchange are settled through the weekly clearing system.

Nature of the Karachi Stock Exchange

Although initially the Karachi Stock Exchange was a physical exchange where trading took place by an open outcry system, now the Karachi Stock Exchange is fully automated.

MARKET INDICES

KSE 100 Index

The KSE 100TM Index was introduced in 1991 and comprises of 100 companies selected on the basis of sector representation and highest market capitalization, which captures over 80% of the total market capitalization of the companies listed on the Exchange. Out of 35 Sectors, 34 companies are selected i.e., one company from each Sector (excluding Open-End Mutual Fund) on the basis of the large market capitalization and the remaining 66 companies are selected on the basis of highest market capitalization. This is a total return index i.e. dividend, bonus and rights are adjusted. The same methodology is applicable in the case of All Share Index, which includes all the

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listed companies, (except Open-End Mutual Funds).

Most recognized index of the KSE

Representation from all sectors of the KSE and includes the largest

companies on the basis of their market capitalization

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

1. OBJECTIVE

The primary objective of the KSE100 index is to have a benchmark by which the stock price performance can be compared to over a period of time. In particular, the KSE 100 is designed to provide investors with a sense of how the Pakistan equity market is performing. Thus, the KSE100 is similar to other indicators that track various sectors of the Pakistan economic activity such as the gross national product, consumer price index, etc.

2. BRIEF ABOUT KSE-100 INDEX

The KSE-100 Index was intorduced in November 1999 with base value of 1,000 points. The Index comprises of 100 companies selected on the basis of sector representation and highest market capitalisation, which captures over 80% of the total market capitalisation of the companies listed on the Exchange. Out of the following 35 Sectors, 34 companies are selected i.e. one company from each sector (excluding Open-End Mutual Fund Sector) on the basis of the largest market capitalisation and the remaining 66 companies are selected on the basis of largest market capitalisation in descending order. This is a total return index i.e. dividend, bonus and rights are adjusted.

LIST OF SECTORS

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

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

3 Modarabas 21 Engineering

4 Leasing Companies 22 Automobile Assembler

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

Accessories

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6 Commercial Banks 24 Cables & Electric Goods

7 Insurance 25 Transport

8 Textile Spinning 26 Technology & Communication

9 Textile Weaving 27 Fertilizer

10 Textile Composite 28 Pharmaceuticals

11 Woollen 29 Chemical

12 Synthetic & Rayon 30 Paper & Board

13 Jute 31 Vanaspati & Allied Industries

14 Sugar & Allied Industries 32 Leather & Tanneries

15 Cement 33 Food & Personal Care Products

16 Tobacco 34 Glass & Ceramics

17 Refinery 35 Miscellaneous

18 Power Generation & Distribution

3. STOCK SELECTION RULES

The selection criteria for stock inclusion in the recomposed KSE100 Index are:

Rule # 1 Largest market capitalisation in each of the 34 Karachi Stock Exchange sectors excluding Open-end Mutual Fund Sector;

Rule # 2 The remaining index places (in this case 66) are taken up by the largest market capitalisation companies in descending order.

Rule # 3 Company which is on the Defaulters’ Counter and/or its trading is suspended, declare Non-Tradable (i.e. NT) in preceeding 6 months from the date of recomposition shall not be considered in the recomposition of KSE-100 Index.

A number of the 34 top sector companies may also qualify for inclusion on the basis of their market capitalisation. In other words, companies may qualify solely under rule 1, solely under rule 2, or under both.

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The fact that the sector rule is identified as Rule 1 does not imply that it is more important, only that the nature of the selection process is such that it is the screening that is done first.

4. CALCULATION METHODOLOGY

In the simplest form, the KSE100 index is a basket of price and the number of shares outstanding. he value of the basket is regularly compared to a starting point or a base period. In our case, the ase period is 1st November, 1991. To make the computation simple, the total market value of the ase period has been adjusted to 1000 points.

Thus, the total market value of the base period has een assigned a value of 1000 points. n example of how the KSE100 Index is calculated can be demonstrated by using a three-stock ample. Table 1 illustrates the process. First, a starting point is selected and the initial value of the hree-stock index set equal to 1000.

Taking stock A’s share price of Rs. 20 and multiplying it by its total common shares outstanding of 50 million in the base period provides a market value of one billion Rupees. This calculation is repeated for stocks B and C with the resulting market values of three and six billion Rupees, respectively.

The three market values are added up, or aggregated, and set equal to 1000 to form the base period value. All future market values will be compared to base period market value in indexed form.

KSE 30 Index

The primary objective of the KSE-30 Index is to have a benchmark by which the stock price performance can be compared to over a period of time. In particular, the KSE-30 Index is designed to provide investors with a sense of how large company’s scrips of the Pakistan’s equity market are performing. Thus, the KSE-30 Index will be similar to other indicators that track various sectors of country’s economic activity such as the gross national product, consumer price index, etc.

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Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P, STOXX and SENSEX have adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002.

KSE-30 Index is calculated using the “Free-Float Market Capitalization” methodology. In accordance with methodology, the level of index at any point of time, reflects the free-float market value of 30 companies in relation to the base period. The free-float methodology refers to an index construction methodology that takes into account only the market capitalization of freefloat shares of a company for the purpose of index calculation.

Free-float Methodology improves index flexibility in terms of inclusion any stock from all the listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-Market Capitalization Methodology, companies with large market capitalization and low free-float can be included in the Index. However, under the Free-float Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes difficult to include closely held companies in the index while at the same time preventing their undue influence on the index movement.

Introduced in 2006

Based on the “Free Float Methodology”

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

FREE - FLOAT METHODOLOGY

Free-Float means proportion of total shares issued by a company that are readily available for trading at the Stock Exchange. It generally excludes the shares held by controlling directors / sponsors / promoters, government and other locked-in shares not available for trading in the normal course.

1. Objective and Description:

• Free-Float calculation can be used to construct stock indices for better market representation than those constructed on the basis of total market capitalization of companies.

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• It gives weight for constituent companies as per their actual liquidity in the market and is not unduly influenced by tightly held large-cap companies.

• Free-Float can be used by the Exchange for regulatory purposes such as risk management and market surveillance.

2. Free-Float Calculation Methodology:

Total Outstanding Shares XXX

Less: Shares held by Directors/sponsors XXX

Government Holdings as promoter/acquirer/

controller XXX

Shares held by Associated Companies

(Cross holdings) XXX

Shares held with general public in

Physical Form XXX XXX

_______

Free-Float: XXX

_______

Notwithstanding to the above calculations, under no circumstances, free-float of a scrip shall exceed its book entry shares, available in the Central Depository System.

Share holdings held by investors that would not, in the normal course come into the market for trading shall be treated as “Controlling / Strategic Holdings” and shall not be included in the Free-Float. In pecific, the following categories shall be excluded in determination of Free-Float:

• Holdings by promoters / directors / acquirers which has control element

• Holdings by persons / bodies with "Controlling Interest"

• Government holding as promoter / acquirer

• Equity held by associated/group companies (cross-holdings)

• Shares that could not be sold in the open market, in normal course.

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3. Determining Free-Float Factor:

The listed companies shall submit their pattern of shareholding, in the prescribed manner, to the Exchange. The Exchange will determine the Free-Float Factor for each such company. Free-Float Factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-Float market capitalization. Once the Free-Float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below.

4. Free-Float Bands:

% Free-Float Free-Float Factor>0 – 5% 0.05

>5 – 10% 0.10

>10 – 15% 0.15

>15 – 20% 0.20

>20 – 25% 0.25

>25 – 30% 0.30

>30 – 35% 0.35

>35 – 40% 0.40

>40 – 45% 0.45

>45 – 50% 0.50

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>50 – 55% 0.55

>55 – 60% 0.60

>60 – 65% 0.65

>65 – 70% 0.70

>70 – 75% 0.75

>75 – 80% 0.80

>80 – 85% 0.85

>85 – 90% 0.90

>90 – 95% 0.95

>95 – 100% 1.00

PRE - REQUISITES TO QUALIFY FOR INCLUSION INKSE-30 INDEX

1 The Company which is on the Defaulters’ Counter and/or its trading is suspended, declared Non-Tradable (i.e. NT) in preceding 6 months from the date of recomposition shall not be considered for inclusion in KSE-30 Index;

2 The Company will be eligible for KSE-30 Index if its securities are available in the Central Depository System;

3 The Company should have a formal listing history of at least two months on KSE;

4 The company must have an operational track record of at least one financial year and it should not be in default(s) of the Listing Regulations;

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

6 The Company will be eligible for KSE-30 Index if its securities are traded for 75% of the total trading days;

7 The Open-End and Closed-End Mutual Funds will not be eligible for inclusion in the KSE-30 Index;

SELECTION CRITERIA

The companies which qualify the prerequisites will be selected on the basis of highest marks obtained as per the following criteria:

1 Free-Float Market Capitalization

The scrip should include in the Top Companies, ranked on the basis of free-float market capitalization.

The free-float market capitalization for each company is calculated by multiplying its total outstanding free-float shares with the closing market price on the day of composition / re-composition.

2 Liquidity

The scrip included in the top companies should also be characterized by adequate liquidity i.e. transaction cost and one of the practical, realistic and accurate measures of market liquidity is Impact Cost. It is defined as the cost of executing a transaction in a given stock for a specific predefined order size of fixed rupee amount (currently set to Rs. 500,000). The transaction cost referred here is not the fixed cost typically incurred in terms of transaction charges or cost arising through CDC, rather it is the cost attributable to the market liquidity, which comes from buyers and sellers in the market. Average of the best bid price and the best offer price of a scrip at any time, called ideal price, is considered as the best price to trade in that particular scrip at that time. However, every buyer/seller suffers a cost in excess of this ideal price while actually executing a transaction (buy or sell). This price movement from

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the ideal price is known as the transaction cost and when measured as the percentage of ideal price is called Impact Cost.

Under impact cost analysis high liquidity is represented by low impact cost. A stock with high market capitalization cannot be assumed to be liquid just because of its sheer size. Some large market capitalization stocks are in reality very illiquid. Similarly, high trading volumes, in themselves, are not enough to confirm consistent liquidity of a stock.

Impact cost analysis looks at the order book of each stock throughout the whole trading day and based on the bids and offers calculates impact costs in terms of percentages for each instance of the order book.

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

• First the impact cost is calculated separately for the buy and the sell side in each order book for past six months.

• The buy side impact cost (or the sell side impact cost) is the simple average of the buy side impact cost (or the sell side impact cost) computed in the last six months.

• Impact Cost reckoned for the purpose of all computation is the mean of such buy side impact cost and sell side impact cost.

3 Final Rank

The scrip should include in Top 30 companies on the basis of final ranking. The final rank is arrived by assigning 50% weightage on the basis of free-float market capitalization and 50% weightage to the liquidity based on Impact Cost of the securities. The security having highest free-float market capitalization and lowest Impact cost is assigned full marks and the marks for rest of the securities are calculated proportionately.

4 Selection of 30 companies for inclusion in the KSE-30 Index

The companies selected for inclusion in the KSE-30 Index are determined on the basis of "Free-Float Market Capitalization" methodology. As per this

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methodology, the level of Index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of free float shares determined for the purpose.

KMI-30

Introduced in September 2008 KMI comprises of 30 Companies that quality the KMI Shariah screening

criteria and are weighted by float adjusted market capitalization.

12% cap on weights of individual securities.

Rebalancing of the Index will be done bi-annually.

Shariah Supervisory Board of Meezan Bank chaired by eminent Shariah

scholar Justice (Retd.) Mufti Muhammad Taqi Usmani.

A total return Index based on free float methodology

The objective of KSE-Meezan Index (KMI) is to serve as a gauge for measuring the performance of Shariah compliant equity investments. It may also act as a research tool for a Impact Costiety of purposes in the strategic asset allocation process. Besides tracking performance of Shariah compliant equities, its construction will increase investor trust and enhance their participation.

Currently, the three indices being maintained at the Karachi Stock Exchange are KSE-100 Index, KSE All-Share Index, and KSE-30 Index. The KSE-100 and KSE All Share Indices are market capitalization indices while KSE-30 Index is based on free-float capitalization.

The free-float methodology of index construction is considered as the best practice by all major index providers including MSCI, FTSE, S&P, STOXX, and SENSEX, because it results in a performance measurement of stocks that are readily accessible and well traded.

KSE-Meezan Index is also calculated using the “Free-Float Market Capitalization”, wherein, the level of index at any point in time reflects the

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free-float market value of the selected Shariah compliant shares in relation to the base period. The free-float methodology refers to an index construction methodology that takes into account only the market capitalization of free-float shares of a company for the purposes of index calculation. The free-float capitalization of the Islamic index constituents shall be capped in relation to the overall capitalization of Islamic index at 12% on the first day of composition. At all subsequent re-compositions dates, any constituent breaching this limit will thus be brought in line with this requirement. Any surplus free-float capitalization will be distributed to the remaining companies according to their relative capitalization in the index.

1 Free Float Methodology

Free-Float of a security is defined as the proportion of total shares outstanding that are deemed available for purchase in the Stock Exchange. Therefore, it generally excludes the shares held by controlling directors / sponsors / promoters, government and other locked-in shares not available for trading in the normal course.

Free-Float methodology reflect the true image of liquidity present in the market, hence the index movement is unbiased towards the closely held companies, High net-worth individuals, speculators, and hedgers, may use the free float number for framing trading strategies, while regulatory bodies may use these numbers for effective risk management and market surveillance to minimize market manipulation incidences.1.1 Free Float Calculation

Total Outstanding Shares XXX

Less: Shares held by Directors/sponsors XXX

Government Holdings as promoter/acquirer/controller XXX

Shares held by Associated Companies (Cross holdings) XXX

Shares held with public in Physical Form XXX XXX

____

Free-Float: XXX

____

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Notwithstanding to the above calculations, under no circumstances whatsoever, free-float of a scrip shall exceed its book entry shares, available in the Central Depository System. Share held by investors that would not, under usual circumstances, be available in the market for trading shall be treated as “Controlling / Strategic Holdings” and shall under no circumstances whatsoever, be included in the Free-Float. Shares held by promoters, directors, acquirers for the purpose of maintaining control, whether or not related to Government, or held by associated groups in terms of cross-holding or any shares which precisely cannot be sold in the open market shall preclude such numbers while determining the free-float.

1.2 Determining the Free Float

Listed companies shall submit their pattern of shareholding in the prescribed manner to help the Exchange determine a Free-Float Factor. Free-Float Factor is a multiple with which the total market capitalization of a company is adjusted to arrive at its Free-Float market capitalization. The screened list of Shariah compliant securities will be provided by Al Meezan Investment Management Limited to provide its Shariah screening services. Once the equity is approved by Shariah Board and is included in the horizon for Islamic Index, its free-float is rounded-off to the higher multiple of five and each company is categorized into one of the 20 bands.

2 Eligibility Criteria

2.1 Screening Filters

The companies whose primary business is related to any of the following areas or Business Segments shall not be eligible for inclusion in the Islamic Index.

Conventional Banks and other Financial Institutions that are engaged

in interest related activities.

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

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Cable Networks, entertainment channels, advertising and media with

exception to the concerns engaged in the business of news

dissemination.

Arms Manufacturing

Conventional Insurance both Life and General

Concerns involved in producing or financing concerns, which produce

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

processing of such foods items.

Determination of financial ratios after its discussion with the Sharia-

board

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

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

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

KMI-30 Index;

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

available in the CentralDepository System;

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

months on KSE;

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

financial year and it shouldnot be in default(s) of the Listing

Regulations;

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

outstanding shares;

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

traded for 75% of the total trading days;

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

inclusion in the KMI-30

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2.2 Screening - Financial Ratios and International Best Practice

The companies are examined for compliance in financial ratios, as certain ratios may violate compliance measurements. Al Meezan observes leverage, investments, illiquid assets, and revenue as key areas in the following manner from the prospect of non-compliant activities. All of these are subject to evaluation on an ongoing basis.

2.2.1 Leverage ComplianceCompliance is measured as Interest bearing debt / Total Assets < 40 %;

2.2.2 Investment ComplianceCompliance is measured as non-compliant investment / Total Assets < 33%

2.2.3 Income ComplianceCompanies with Revenues from non-compliant activities are eligible only if they comply with the following threshold: Non-compliant Income / Total Revenue < 5%

2.2.4 Illiquid Assets ComplianceCompliance is measured as Illiquid Assets / Total Assets > 20%

2.2.5 Net Liquid Assets ComplianceMarket Price per share should be greater than Net Liquid Assets per share

3 Selection Criteria

All the eligible companies for the Islamic Index can be included up to a maximum of thirty (30) companies. During the selection process, each company’s financial reports are thoroughly reviewed by research analysts of Al Meezan to ensure that the company meets benchmarks or thresholds for Shariah compliance screening. Those that are found to be non-compliant are screened out. The industries that are considered non-compliant (as defined in the eligibility criteria) are not considered for inclusion in the Islamic, as these

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would not be appropriate for investment from Shariah perspective. From the list of Shariah compliant companies, securities are selected on the basis of free float and Impact Cost. While ranking the companies 50% weight is assigned to free float capitalization and the remaining 50% is allocated to Impact Cost such that the companies with the highest free float and the lowest Impact Cost get the highest rank in the selection process. Top 30 ranked companies as per above criteria are included in Islamic Index.

PROGRESS REPORTIn million except companies, index and bonds data

5 YEARS PROGRESS 2005-2009

Upto30-12-2005

Upto29-12-2006

Upto31-12-2007

Upto31-12-2008

Upto07-04-2009

Total No. of Listed Companies

661 652 654 653 652

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Total Listed Capital - Rs. 470,427.47 519,270.17 671,255.82 750,477.55 773,070.08

Total Market Capitalisation - Rs. 2,746,558.97 2,771,113.94 4,329,909.79 1,858,698.90 2,300,750.23

KSE-100TM Index 9556.61 10040.50 14075.83 5865.01 7635.88

KSE-30TM Index 12521.54 16717.10 5485.33 8279.35

KSE All Share Index 6444.64 6770.06 9956.76 4400.76 5509.85

New Companies Listed during the year 19 9 14 10 2

Listed Capital of New Companies - Rs. 30,090.28 14,789.76 57,239.92 15,312.12 1,541.38

New Debt Instruments Listed during the year

8 3 3 7 -

Listed Capital of New Debt Instruments - Rs. 10,900.00 3,400.00 6,500.00 26,500.00 -

Average Daily Turnover - Shares in million 365.64 260.69 268.23 146.55 187.75

Average value of daily turnover - Rs. 33,583.29 31,610.71 25,262.97 14,228.35 5,315.36

Average Daily Turnover (FutureTM) YTD 117.16 82.68 61.69 30.76 0.02

Average Value of Daily Turnover - YTD 15,461.42 13,587.63 9,077.61 5,229.97 1.90

Foreign Investment in Securities MarketInflow - Rs - - - - -

Outflow - Rs - - - - -

Net Inflow/(Outflow) - Rs - - - - -

YTD = Year to datea. The KSE-100TM Index was introduced in November, 1991 and was recomposed in

November 1994.b. The KSE-All Share Index was introduced in September, 1995.

c. Listed companies reflected in the relevant year have been stated after 5 companies delisted in year 2000, 12 companies in 2001 and 24 companies in 2002, 8 in 2003, 44 in 2004, 15 in 2005 and 1 in 2006 (total 109) and merger of 1 company in 2000, 7 companies in 2001, 16 companies in 2002, 8 in 2003, 12 in 2004, 4 in 2005 and 12 in 2006 (total 61) and addition of 1 companies by splitting/ bifurcation in year 2001. In year 2004 preference shares of Chenab Limited was listed and company offered ordinary shares in year 2005.

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ROLE AND FUNCTIONS OF A STOCK EXCHANGE

• Established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities.

• Provides a market for the trading of securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities.

• Provides a physical location for buying and selling securities that have been listed for trading on that exchange.

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• Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules.

• The exchange itself does not buy or sell the securities, nor does it set prices for them.

FairThe exchange assures that no investor will have an undue advantage

over other market participants.

Efficient marketThis means that orders are executed and transactions are settled in the

fastest possible way.

Doing businessPeople who buy or sell stock on an exchange do so through a broker.

The broker takes your order to the floor of the exchange looks for a broker representing someone wanting to buy/sell. If a mutually agreeable price is found the trade is made

Transparency• Investor makes informed and intelligent decision about the particular

stock based on information.• Listed companies must disclose information in timely, complete and

accurate manner to the Exchange and the public on a regular basis.• Required information include stock price, corporate conditions and

developments dividend, mergers and joint ventures, and management changes etc.

LISTING REQUIREMENTS

Listing requirements are the set of conditions imposed by a given stock exchange upon companies that want to be listed on that exchange. Such conditions sometimes include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.

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Requirements by stock exchange

Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded there, but requirements vary by stock exchange:

Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of Rs.250 Million and minimum public float equivalent to Rs.100 Million.

London Stock Exchange: The main market of the London Stock Exchange has requirements for a minimum market capitalization (£700,000), three years of audited financial statements, minimum public float (25 per cent) and sufficient working capital for at least 12 months from the date of listing.

NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years.

New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE) a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years.

Requirements by Karachi stock exchange

• Equity Listing on Normal Counter • Listing on Over-the-Counter (OTC) • Listing of Long Term Debt Instruments, both Listed & Non-Listed

Companies • Listing of Short Term Debt Instruments, both Listed & Non-Listed

Companies • Listing of Closed-End Mutual Funds • Listing of Open-End Mutual Fund • Listing of Different Kinds & Classes of Shares

Major Requirements of Listing include:

Minimum paid up capital of Rs. 200 million for a company seeking listing • To succeed public offer of equity, it has to be subscribe by at least 500 applications

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• Provisions of Listing Regulation 6-A relating to minimum fresh public offering through prospectus as well as the minimum public offering requirements by way of Offer For Sale as laid down under the Companies (Issue of Capital) Rule, 1996.• The offering document has to be cleared by KSE before it is submitted to the Securities & Exchange Commission of Pakistan for approval.• The company seeking listing is required to fulfill the relevant requirement of the Exchange under the Listing Regulations and the disclosures as required under the Second Schedule of the Companies Ordinance 1984 & Companies (Issue of Capital) Rules, 1996.

Simple Admission and Listing Fee

Application made along with prescribed Documents and Fees to KSE; For Fees –Initial Listing Fee:1/10 of 1% of the paid-up capital (subject to a maximum of Rs. 1.5 million.

Annual Listing Fee (companies having paid-up capital of): Upto Rs.50 mill. and above….Rs.15, 000 Upto Rs.200 mill.………...........Rs.30, 000 Above Rs.200mill…………........Rs.60, 000In addition, Service Charges of Rs. 25,000 are also applicable

LISTED SECTORS

OPEN-END-MUTUAL FUNDS 0

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CLOSED-END-MUTUAL FUNDS 23MODARABAS 34LEASING COMPANIES 18INVESTMENT BANKS/COS./SECURITIES 31COMMERCIAL BANKS 27INSURANCE 39TEXTILE SPINNING 107TEXTILE WEAVING 18TEXTILE COMPOSITE 36WOOLEN 06SYNTHETIC and RAYON 19JUTE 06SUGAR and ALLIED INDUSTRIES 41CEMENT 24TOBACCO 04REFINERY 04POWER GENERATION and DISTRIBUTION 13 OIL and GAS MARKETING COMPANIES 08 OIL and GAS EXPLORATION COMPANIES 05 ENGINEERING 13 AUTOMOBILE ASSEMBLER 14AUTOMOBILE PARTS and ACCESSORIES 13CABLE and ELECTRICAL GOODS 10TRANSPORT 08TECHNOLOGY and COMMUNICATION 11FERTILIZER 06PHARMACEUTICALS 09CHEMICALS 26PAPER and BOARD 10VANASPATI and ALLIED INDUSTRIES 10LEATHER and TANNERIES 06FOOD and PERSONAL CARE-PRUDUCTS 24GLASS and CERAMICS 12MISCELLANEOUS 26BONDS 38FUTURE CONTRACTS 46STOCK INDEX FUTURE CONTRACTS 105

Total 869

PRODUCTS AND SERVICES

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Ready Market:A conventional stock market also known as the regular market, where

buyers and sellers come together to trade shares. Settlement of trade occurs 2 days after the trade.

Cash Settled Futures:A standardized contract, to buy or sell a certain underlying instrument

at a certain date in the future, at specified price. All settlement occurs purely on cash basis. Depending on the contract, settlement occurs 30, 60 & 90 days after the contract is purchased.

Stock Index Futures:Stock Index Futures are traded in a number of contracts. Each contract

is to buy or sell a fixed value of the index. Stock Index Futures Contract occurs 90 days after the contract is purchased.

Deliverable Futures:Forward contracts to buy or sell a certain underlying instrument with

actual delivery of the underlying instrument occurring. Settlement occurs 30 days after the contract is purchased.

- CFS(discontinued) - COT (discontinued)

Company Services • Customized services and state-of-the-art technology infrastructure,

have given us an edge over other exchanges in the region. • Fully automated trading, clearing and settlement system. • Internet routed trading facility. • Gateway trading (Order Management System). • Investors and fund managers can also access information through

Display Only Terminal • Internet trading facilities available. • Order-driven system . • Brokers connectivity to KSE through VPN (to ensure security of data).

Data Services:• TV channels also display KSE ticker through live feeds from KSE system.• Investors provided customized data packages for trading and

assessment of their portfolio on a real time basis.

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• Data feed provided to major international redistributors (Reuters, Bloomberg) on real time basis.

• KSE website offers data of market on real time basis, including listed company profiles, snap shot of financials, press releases and summary of market activities on real time basis.

FINANCIAL INFORMATION EXCHANGE (FIX)

Financial Information Exchange Protocol has been adopted by the KSE for both trading and market data. Powered by FIX based technology, the KSE will be able to attract local, regional and global liquidity by providing KSE members to seamlessly interact with their automated trading platform and offer market access to their international trading partners.

THE FUTURE OF STOCK EXCHANGES

The future of stock trading appears to be electronic, as competition is continually growing between the remaining traditional New York Stock Exchange specialist system against the relatively new, all Electronic

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Communications Networks, or ECNs. ECNs point to their speedy execution of large block trades, while specialist system proponents cite the role of specialists in maintaining orderly markets, especially under extraordinary conditions or for special types of orders.

The ECNs contend that an array of special interests profit at the expense of investors in even the most mundane exchange-directed trades. Machine-based systems, they argue, are much more efficient, because they speed up the execution mechanism and eliminate the need to deal with an intermediary.

Historically, the 'market' (which, as noted, encompasses the totality of stock trading on all exchanges) has been slow to respond to technological innovation, thus allowing growing pure speculation to continue. Conversion to all-electronic trading could erode/eliminate the trading profits of floor specialists and the NYSE's "upstairs traders", who, like in September and October 2008, earned billions of dollars selling shares they did not have, and days later buying the same amount of shares, but maybe 15 % cheaper, so these shares could be handed to their buyers, thereby making the market fall deeply.[citation needed]

William Lupien, founder of the Instinet trading system and the OptiMark system, has been quoted as saying "I'd definitely say the ECNs are winning... Things happen awfully fast once you reach the tipping point. We're now at the tipping point."

One example of improved efficiency of ECNs is the prevention of front running, by which manual Wall Street traders use knowledge of a customer's incoming order to place their own orders so as to benefit from the perceived change to market direction that the introduction of a large order will cause. By executing large trades at lightning speed without manual intervention, ECNs make impossible this illegal practice, for which several NYSE floor brokers were investigated and severely fined in recent years.[6] Under the specialist system, when the market sees a large trade in a name, other buyers are immediately able to look to see how big the trader is in the name, and make inferences about why s/he is selling or buying. All traders who are quick enough are able to use that information to anticipate price movements.

ECNs have changed ordinary stock transaction processing (like brokerage services before them) into a commodity-type business. ECNs could regulate the fairness of initial public offerings (IPOs), oversee Hambrecht's OpenIPO

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process, or measure the effectiveness of securities research and use transaction fees to subsidize small- and mid-cap research efforts.

Some[who?], however, believe the answer will be some combination of the best of technology and "upstairs trading" — in other words, a hybrid model.

Trading 25,000 shares of General Electric stock (recent[when?] quote: $7.54; recent[when?] volume: 216,266,000) would be a relatively simple e-commerce transaction; trading 100 shares of Berkshire Hathaway Class A stock (recent quote: $72,625.00; recent volume: 877) may never be. The choice of system should be clear (but always that of the trader), based on the characteristics of the security to be traded.

Even with ECNs forming an important part of a national market system, opportunities presumably remain to profit from the spread between the bid and offer price. That is especially true for investment managers that direct huge trading volume, and own a stake in an ECN or specialist firm. For example, in its individual stock-brokerage accounts, "Fidelity Investments runs 29% of its undesignated orders in NYSE-listed stocks, and 37% of its undesignated market orders through the Boston Stock Exchange, where an affiliate controls a specialist post."

FUTURE PLANS OF KSE

The following are in process:

• Demutualization of the Exchange – publically listed with strategic investor

• Promotion of Derivative Products• New Services (Data Vending)• Debt Market Trading Platform

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• Investors education programs (road shows, seminars & online training)

REFERENCES

o http://www.kse.com.pk/

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o http://www.kse.com.pk/

o http://en.wikipedia.org/wiki/Karachi_Stock_Exchange

o http://www.advfn.com/StockExchanges/about/KSE/

KarachiStockExchange.html

o http://www.economywatch.com/stockexchanges/karachi.html

o http://karachistockmarket.blogsome.com/

o http://thecurrentaffairs.com/index.php/bull-run-continues-at-

karachi-stock-exchange/

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