Despite the turmoil and uncertainty that grips the global economies, Pakistan’s stock markets have remained relatively stable, and have continued showing an upward trend – which many analysts attribute to the government’s favourable policies. Coupled with this prosperity is the markets’ pro-activity – new products, initiatives, and a focus on digital trading have made the Pakistani stock markets an exciting space to watch.

The Correspondent spoke with Farrukh H Khan, Managing Director of the Pakistan Stock Exchange (PSX), about the various factors impacting trends, the expectation of new products, and the role of individual brokers and the Securities Exchange Commission of Pakistan (SECP) in the Pakistani market, and what to expect in the current year.

We’re noticing an upward trend in Pakistan’s stock market on account of government policies. Where are you expecting the Pakistan Stock Exchange (PSX) to stand at the end of this fiscal year?

As you rightly pointed out, Pakistan’s stock market has been showing an upward trajectory over the last year. This is due to a number of factors with the government policies being a major catalyst. Among the other external factors that affected the market movement, an important one was that the impact of COVID-19 was not as severe on the economy as was expected. The market’s upward movement was also augmented by certain internal factors and initiatives as well.   

Several initiatives were taken at the policy level by the government which supported the economy to cope with the challenges created by the COVID-19 pandemic. These steps include reduction of interest rates, deferment of loan repayments, and other flexibilities that were introduced due to the onset of COVID-19 and the broad economic reform agenda of the country.   

Having said that, I would like to emphasize that the efforts of the SECP, PSX management, TREC Holders, and the SROs who are working closely together for the last two years to bring forth, enact and implement reforms and take initiatives as part of the Capital Market Development plan which was initiated a few years ago, have helped create a conducive environment for investors, issuers, and other stakeholders to participate in the market which in turn supported the market to move upwards. These steps and initiatives include improving the technology side and introducing a robust trading and surveillance system, improving access to the market for investors and potential investors, increasing our footprint and reaching out to potential issuers, consistently revisiting and reviewing our regulatory framework, and bringing it in line with not only the international standards but also with the developing economic, financial, and business landscape of the country. Furthermore, the efforts to regularize and create a level playing field for all asset classes including prize bonds and property investments will go a long way to help the stock market as more and more companies will enter the documented domain and the parallel economy will be reduced. This creation of a level playing field will help the growth of the stock market vis a vis other asset classes like commodities, bonds, and properties, etc. So all these steps will have a positive impact on the development of the capital market.   

With the availability of the new trading and surveillance system, online digital account opening, and other developments taking place such as Roshan Digital Account’s console providing for facilities of investing in the stock market, payment of bills, e-commerce, etc., we will be geared to continue the momentum. We look forward to banks taking the lead and promoting their offerings within which the stock market can be one of their prominent offerings as it translates into the constant activity of accounts and financial transactions. This works in favour of the banks, the capital market, and the investors. It is important for banks to aptly and appropriately market and promote the stock market. This will be a win-win situation that will not only lead to the growth & development of the capital market but also of the economy. We cannot predict where the market index will be at the end of the fiscal year; however, we are further improving and developing our capital market in terms of ease of doing business, brokerage firms to thrive, listed companies to perform, and investors to reap benefits.

We were expecting new products in the stock market after its demutualisation. Recently, PSX launched only four Exchange Traded Funds (ETFs). Why was this necessary for the market when Mutual Funds are already being traded?  What is the percentage of the volume of ETFs as compared to the volume of ready and futures market?

In terms of Exchange Traded Funds, there are more ETFs in the pipeline for listing on the Stock Exchange. PSX also launched the Growth Enterprise Market (GEM) Board, worked with NIFT, SBP and others to improve on the Government Debt Securities offerings, issued a Sukuk (PHL’s PES II) through book-building via the Exchange platform, and revitalized the debt market over the last year. Pakistan Stock Exchange is working very closely with the Ministry of Finance, SBP, and banks on further improving this. We are also signing up banks as market makers for the debt market and activating banks to act as Advisors for issuers on the GEM Board. We are launching new indices, further improving future contracts with a 60-day and 90-day duration option, and launching an E-IPO system for an electronic subscription of IPOs through the PSX platform:  so there is a lot of activity, amongst other initiatives, that we are anticipating in the next few months.

In terms of your question as to why was it necessary to launch ETFs when there are already mutual funds in the market, I would like to say that mutual funds and ETFs are two separate asset classes and should not be confused. Both have their distinct objectives, attributes, and management styles or processes. From an investor’s perspective, they offer different options for an investor. The reason ETFs are so popular globally is that a single trade investor can get exposure to a diversified basket of stocks. The management fees of ETFs are also lower than mutual funds.

With regard to the volume of ETFs in the market, I would like to mention that it takes years for a particular product to attract substantial attention from investors and other market participants. ETFs have been recently introduced in the market and a combination of marketing, promotional, and awareness campaigns by brokers and relevant market participants will lead to a sufficient increase in the number of investors of ETFs over time. As it is, while the volumes of ETFs are minimal compared to the regular and future markets, yet we are constantly seeing an increase in them. 

The implementation of the new trading system will enable the Exchange to introduce new products like options.

Despite the demutualisation of PSX, the brokers’ control is still upheld. Why are individual investors not coming directly?

This is not strictly correct. There are only 3 elected directors on the board that represent the local shareholders, including TREC Holders. 

However, brokers are members of the ecosystem of the Pakistan Stock Exchange; it is through brokers that the capital market on-boards investors and trading accounts and that is how the system works. The role of brokers in this ecosystem is integral in that they introduce investors to the Stock Exchange. Brokerage firms and their traders help build portfolios of investors and it is through brokers only, that investors can invest on the Stock Exchange. The Exchange itself does not open trading accounts. There are more than 250,000 UINs and more than 350,000 investors of mutual funds in the market. So, the situation is improving and the number of accounts is increasing.

On its part, Pakistan Stock Exchange is consistently working to increase its outreach to potential investors by creating awareness about stock investment, the different asset classes and the advantages of investing in the stock market, the difference between savings and investment, and promoting the capital market to the general public to elicit their interest in investing in the market. Furthermore, the online account opening facility is being leveraged to promote the stock market to potential investors who up until now did not have easy access to account opening.  

Do you think SECP is playing its due role at PSX? What measure should it take to enhance investors’ confidence?

SECP is the apex regulator and by virtue of this role, they are entrusted with protecting the investors while promoting the stock market. They are major stakeholders in the capital market development and they play the primary role in introducing ease in the regulatory framework. Simultaneously protecting and securing investors is also an essential task of the SECP. So it is a balancing act and we see that SECP teams are at the forefront in outlining amendments in existing regulations while encouraging newer opportunities and developments in Pakistan’s capital market to bring Pakistan closer to international standards. I am very happy that PSX and SECP have a very good relationship of respect and trust.

At PSX, we have strong risk management processes which are practiced and implemented to protect the investors. There is the provision of a complaint management system, Base Minimum Capital, and Settlement Guarantee Fund to secure investors in case of a defaulting broker. So Pakistan Stock Exchange keeps a keen eye and lookout to serve the interest of investors and protect their investment as a risk management measure. Furthermore, we have a robust trading and surveillance system in place which enables us to observe any malpractices or violations of rules and regulations. This system will be further augmented within this year. This trading & surveillance system combined with our implementation of the risk management rules & regulations allows us in totality to protect the interest of investors and thereby increase investor confidence.

What measures are you taking to protect investors when some of the companies (stocks) leak information prior to their announcement on the PSX website? Many companies never disclose information and continue their businesses without any notices.

This is an assumed question on your part and there is no evidence to support the claim that companies’ information is leaked prior to its announcement on the PSX website. PSX has a robust system to monitor all trading activities in the market and this allows us to protect the interest of investors at all times. As it is, the declared mission of the Pakistan Stock Exchange is to facilitate capital formation by providing a fair, transparent, and efficient marketplace for the benefit of investors, issuers, and all stakeholders. All listed companies have to abide by the Code of Corporate Governance. They also have to publish quarterly accounts that comply with all relevant accounting standards. So listed companies are required to make a very high degree of disclosure.

The author is a senior business reporter with bylines in leading newspapers and magazines across Pakistan.

The author is a senior business reporter with bylines in leading newspapers and magazines across Pakistan.


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