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PSX taking steps in the right direction to uptick foreign inflows, local response

PSX taking steps in the right direction to uptick foreign inflows, local response

Market posts foreign money movement of $67m in first 11 months of CY19
Total revenue of PSX for the FY2018-19 was recorded at Rs1.28 billion

Interview with Muhammad Rafique Umer, — Acting Managing Director, Pakistan Stock Exchange

[box type=”shadow” align=”” class=”” width=””]Profile:

Muhammad Rafique Umer has been associated with Pakistan Stock Exchange (PSX) since 2001 and currently holds the position of Acting Managing Director in addition to the role of Secretary to the Board and Head of Legal Affairs.

He is a graduate in Commerce and Law from University of Karachi. He has also achieved certification in selected subjects, as a regular student of Institute of Business Administration. Further, he obtained Banking Diploma and Banking Certificate from Institute of Bankers Pakistan with first position throughout the country. Muhammad Rafique has attended seminars and workshops on various subjects, within and outside the country, including Capital Market Compliance and Examination workshop arranged by the US Securities & Exchange Commission at USA. He is also a certified director from Pakistan Institute of Corporate Governance.

Mr. Rafique has local and foreign experience of more than four decades in the field of finance, banking & capital markets. Prior to joining PSX, he remained with United Bank Ltd; Saudi French Bank (Saudi Arabia) and Atlas Group of Companies. At PSX, apart from Company Secretary, he also performs secretarial functions of certain committees, which include Human Resource & Remuneration Committee, Nomination Committee and IT Procurement Committee. He is one of the Trustees of Centralized Customers Protection Compensation Fund and Clearing House Protection Fund of PSX. He also represents PSX at General Meetings of associated and other companies, where PSX has equity stake. In the past, he represented PSX as nominee director on the Boards of Central Depository Company and National Clearing Company of Pakistan Limited.

Mr. Rafique remained actively engaged in the entire process of corporatization, demutualization, divestment and self-listing of PSX as well as integration of three Exchanges and was instrumental in smoothly completing all time-bound activities.[/box]

PAKISTAN & GULF ECONOMIST sought views of Muhammad Rafique Umer about Pakistan Stock Exchange. Following are his viewpoints:

The KSE-100 Index closed at 33,902 on June 28, 2019, with a market capitalization of Rs.6,887 billion. The average daily value traded (T+2 & DFM) was Rs.9.5 billion and the average daily turnover was 234 million shares. The KSE-100 Index, however, declined by over 19% from June 30, 2018 and the KSE-30 Index closed at 15,893 indicating a decline of around 23% from June 30, 2018, which was a result of weakening of the macroeconomic situation including increased risk to Pakistan’s economic and financial outlook and instability in the political front of the country.

PSX recorded a pre-tax profit of Rs.92 million for the year ended June 30, 2019 against Rs.113 million for the year ended June 30, 2018 i.e. 19% lower than last year. Total revenue of PSX for the FY2018-19 was recorded at Rs.1.28 billion versus Rs.1.24 billion in the comparative year i.e. higher by 3%.

Increase in the revenue compared to last year was a result of higher income generated from the following revenue streams:

–  Annual Listing Fee — PSX had implemented revised fee structure (which was last revised in the year 2011).

–  Facilities including IT services provided to TREC & Non-TREC holders and Companies — in order to optimize the cost base PSX had reduced the subsidies on the facilities provided.

– Mark-up Income — higher income generated due to better rate of return compared to last year.

However, the impact of the above mentioned incremental revenue was mitigated due to the following:

–  Trading fee: low activity in the market had negative effect on the traded values i.e. Rs.9.5 billion (Rs.6.7 billion – Ready market and Rs.2.8 billion – DFM) in FY18-19 against Rs.12.1 billion (Rs.8.7 billion – Ready market and Rs.3.4 billion – DFM) in FY17-18.

–  Initial Listing fee: although during the year, one-time additional listing fee of Rs.24 million was received on account of increase in paid-up capital, mitigating the adverse impact on revenues, however, last year one-time initial listing fee of Rs.51 million received on account of merger/amalgamation was not available this year and lower income from new listing and right issues.

–  Income from LAN Connectivity charges received from NCCPL was lower as NCCPL only paid the LAN administrative costs incurred by PSX (under an agreement) which was earlier paid @1% on the exposure margin of TREC holders maintained by NCCPL.

–  Total operating expenses of PSX for the FY2018-19 was recorded at Rs.1.19 billion versus Rs.1.13 billion in the comparative year i.e. higher by 5%.

–  The Management adopted a cost conscious approach by incurring expenses on need only basis which resulted in saving in the business routine expenses. However, the increase in operating expenses (excluding depreciation & amortization) of Rs.32 million is mainly due to one-time expenses incurred by the company with respect to payments made on account of ex-gratia/redundancy cost, subscription fee paid to international associations (IOSCO, WFE), etc.

–  Further, depreciation and amortization expense increased over the year by Rs.28 million mainly due to additions made during the year and full year depreciation charged on additions in the last quarter of FY2017-18 in order to upgrade the IT infrastructure in line with best practices.

–  PSX delivered a post-tax profit of Rs.88 million for the FY18-19 versus Rs.62 million in the FY17-18, as the tax charge was lower in current year i.e. Rs.4 million in FY18-19 vs. Rs.51 million in FY17-18 mainly due to:

–  Tax on bonus shares was abolished and no dividend was received from NCCPL during the period, hence, bringing down the current tax charge.

–  Deferred tax expense showed a favorable variance due to deferred tax asset booked on carry forward losses to the extent of availability of future taxable profit.

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There were various positive developments seen in the capital market. Securities and Exchange Commission of Pakistan (SECP) approved the necessary amendments in the Exchange Traded Fund (ETF) regulations enabling market participants to effectively work for the launch of Pakistan’s first ETF. It is expected that ETFs will be listed on the exchange in due course of time. Improved Market Maker regulations drafted by PSX were also approved positively by SECP for the betterment of capital market. Risk management framework was also somewhat streamlined in order to make participation in the capital market easier. PSX also standardized the brokerage commission and SECP has worked on number of areas to reduce the cost of doing business. PSX is also working with SECP to establish a separate board named as Growth Enterprise Market (GEM) for the small enterprises, Start-up and green field companies with a relatively relaxed regulatory requirements. Significant system development has been done in BATS for trading of fixed income securities like Ijara, Sukuk and PIBs. PSX has also partnered with several market makers to launch the variety of fixed income products. Enhanced circuit breakers and imposition of market wide trading halt are introduced which is aim to prevent irrational price fluctuations by providing a cooling period. The market data business has been restructured by implementing international best practices, thus increasing the global reach of our data products and live market feeds which is expected to increase the accessibility and depth of research of PSX-listed companies on fin-tech platforms.

On the listing side, initial public offer (IPO) of the Interloop Limited was successfully conducted and the company raised Rs 5.025 billion in the IPO. PSX also listed Pakistan Energy Sukuk-I, which is the largest listed Sukuk issue of size Rs. 200 billion. Purpose of the Sukuk issue is to provide liquidity to the energy sector and to promote domestic Sukuk market. Under the Financial Literacy Initiative of PSX, number of awareness sessions were held in Karachi, Lahore and Islamabad regions. Some prominent organizations facilitated this initiative include IBA, University of Sindh, FBR, OGDCL, PPL, ACCA, FPCCI, National Highway & Motorway Police etc.

The recent economic slowdown in Pakistan had indeed put a dent in foreign investor sentiment and our capital markets, being the most used proxy for the health of the economy, has reflected the macro trend. However, the recent downturn has also created extraordinary investment opportunities for investors in our capital markets. Our stock market trades at a considerable discount compared to regional peer markets while our bonds are offering double digit yields. The governments’ efforts to improve business environment and restructure the economy towards sustainable export led growth coupled with greatly improved security situation in the country and a recent rating upgrade by Moody’s has made Pakistan an interesting prospect for global investors. Foreign Investors bought 1-year bonds worth $642 million in November alone. Whereas our stock market, so far in the first 11 months of CY19 has recorded a net positive foreign inflow of over $67 million. This is the first time since 2014 that this figure has recorded a positive number. This uptick in foreign inflows can be seen as an indicator for things to come and also boost sentiment among local investors. We believe that an improving macro environment can drive more foreign investors to take advantage of the value and opportunities our capital market has to offer at the moment compared to other emerging markets. Chinese investors have shown their interest in listed companies and aim to invest around $2 billion. Government of Pakistan is requested to persuade the Chinese government to let Chinese investors invest in PSX listed companies.

PSX is regularly pursuing government of Pakistan for listing of government owned enterprises such as Pakistan Railway, State Life, Steel Mills, etc as foreign investors have shown their keen interest in these enterprises. PSX has also suggested Federal Board of Revenue to exempt foreign investors from capital gain tax in order to increase the foreign investment in the stock market.

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