Successful launch of ETF is very important product available for PSX investors
Advent of Roshan Digital Account is a hugely positive step for the growth of economy
Pakistani capital market has performed very well and has presented attractive valuations for investors
New offerings and services also planned for the near future at PSX
Interview with Mr. Farrukh H. Khan – CEO, Pakistan Stock Exchange Limited
PAGE: Tell me something about yourself and Pakistan Stock Exchange, please:
Farrukh H. Khan: About myself, I can start with my educational background. I did my BA (Hons.) in Economics & Finance from the University of Manchester and qualified as a Chartered Accountant from the Institute of Chartered Accountants in England & Wales, UK. My education helped me prepare for the various positions I have been responsible for. These responsibilities include senior positions in banking, starting companies as well non-executive directorships in major public and private companies.
I was head of treasury and investment banking at American Express Bank in 1991 when I started BMA Capital with some other partners. I was the founding CEO. This was at a time when the Pakistan Stock Exchange was opened to foreign investors for the first time. At BMA, I helped lead manage the US$813 million GDR offering and London listing of OGDCL, Pakistan’s largest listed company, and successfully advised Etisalat on their $2.6 billion acquisition of Pak Telecom, which was the largest mergers and acquisition transaction and the largest foreign direct investment in Pakistan’s history.
In brokerage, we developed a blue chip domestic and international client base, as well as a larger retail branch network. The responsibilities I have held so far allowed me to equip myself with the necessary experience required for the position I am right now as Chief Executive Officer (CEO) and Managing Director (MD) of Pakistan Stock Exchange. I think it’s a challenging job wherein one has to keep the balance between the external factors affecting the Exchange while ensuring that all processes are working smoothly. As a frontline regulator, balance also has to be kept between all stakeholders, which include investors, issuers, shareholders and market participants.
About Pakistan Stock Exchange (PSX), it is the only national stock exchange of the country. It came into existence in January 2016 after the merger of Karachi Stock Exchange (established in 1947), Lahore Stock Exchange (established in 1970) and Islamabad Stock Exchange (established in 1992). Hence, PSX has a distinguished and long history, and is amongst the oldest exchanges in Asia. Presently, 40% shareholding in PSX is held by a consortium of leading Chinese exchanges (Shanghai Stock Exchange, Shenzhen Stock Exchange, & China Financial Futures Exchange), and 60% by general public, which includes initial shareholders, local and foreign investors. Pakistan Stock Exchange is a remarkable example of a capital market. It has weathered several storms, quite literally and otherwise, and has come out strong. I can highlight some external factors of late such as the terrorist attack on June 29, 2020, the thunderstorms affecting the city of Karachi, and the Covid-19 pandemic, which could have had a debilitating effect on the performance of the Exchange. Yet, the market forces at work and the business continuity measures enforced by PSX, enabled the Exchange to withstand all these pressures and stay on top despite these challenges. This speaks volumes about the resilience, strength, and stability that has become the hallmark of PSX. Today, PSX stands tall as an Exchange with a brand & image that makes Pakistan proud all over the world. It is no wonder that PSX has been rated the best performing market in Asia in September 2020.
PAGE: Could you tell us about the recent developments in Pakistan Stock Exchange?
Farrukh H. Khan: The year 2020 has been a significant and eventful year for Pakistan Stock Exchange. New products and listings were achieved at the Exchange. Significant amongst these was the launch of the first Exchange Traded Funds (ETF) in the history of the Exchange. This product took 8-10 years to be launched in the market. But we finally did it and the product was introduced successfully. ETF is the single largest asset category in most markets across the world. So it was very important that this product be available for PSX investors. We are highly appreciative of the role played by Securities and Exchange Commission of Pakistan(SECP) in supporting the successful launch of ETFs in Pakistan. No less important are the roles played by the AMCs, the Market Maker and other market participants in this regard.
Another important event for the Exchange was the book building process for Power Holding Limited’s Pakistan Energy Sukuk II, a Shariah-compliant debt instrument offered by the Government of Pakistan. PSX’s state of the art competitive book building allowed for larger number of investors, transparency and better price discovery for this debt issuance. It was a highly successful issue of the power sector Sukuk. The result of the book building held at the Exchange was a phenomenal final pricing of the Sukuk at 90 bps lower than the bank offer through syndication to the Government, which translates to a saving of about Rs 18 billion interest payment by the GoP over the life of the Sukuk. This was truly a landmark issue as it was the first debt issue in Pakistan done on a book building basis.
We have had equity and debt listings in a relatively higher number this year. Already three equity listings have taken place this year and there is a robust pipeline of issues coming up. Debt listings have also taken place with TFCs and Sukuks such as those of K-Electric, BankIslami, and Power Holding Limited being listed on the Exchange. So this is a welcome and important development at the Exchange.
On the technological front, Pakistan Stock Exchange integrated and successfully completed the pilot run of the surveillance system in the last week of March 2020 in close coordination with the SECP. In this exercise the SZSE (Shenzhen Stock Exchange) pilot version of Surveillance Software has been successfully integrated with existing trading system of PSX to further strengthen the market surveillance capabilities of PSX. This is part of implementing a state of the art trading system at PSX, which will be operational by end of first quarter, 2021. This will give further comfort to investors as PSX will have an extremely robust and transparent trading platform.
Of course, one of the most impactful of these developments has been how the Exchange has dealt with the Covid-19 pandemic. The pandemic not only affected the economy but also had far reaching impact on the capital market. However, we at the Exchange, undertook proactive steps to avoid any lapses in business continuity and functioning. Even before the lockdown, we took necessary precautions to arrest the possibility of spread of the virus whilst making sure that business continuity measures are re-tested and in place. Manual attendance system, checking temperature of all visitors and staff of the Exchange, installation of hand-sanitisers, and reduction of foot-fall were some of the rules enforced at the Exchange. Furthermore, we reduced attendance of the staff by over 80% during the initial days of the lockdown to gradually easing it to 50% over the course of the pandemic and enabled resources for our staff to work from home to avoid the contagion. The PSX management, under the guidance of the SECP and coordination with its associated companies and SROs, NCCPL & CDC, as well as TREC holders, undertook exercises of trading and technology functionality and risk management process drills to ensure business continuity, whilst ensuring safety of all its employees. Even at this point in time, we continue following the SOPs strictly and work from home option is available to all employees to make sure that no one is affected by the virus while business as usual continues at the Exchange.
PAGE: How much interest do the foreign investors exhibit in the stock exchange of Pakistan?
Farrukh H. Khan: Since 1991, when foreign investors were allowed to invest in the Pakistan Stock Exchange, some of the largest global institutional investors have been active in Pakistan. Pakistan is included in the MSCI Emerging Markets Index and PSX continues to attract significant interest from foreign investors. Currently approximately $3.13 billion is invested by foreign investors on PSX (Based on closing market value of equities held under SCRA scheme as at week ended 23/10/20// Source: SBP).
Recently, with the advent of the Roshan Digital Account facility which can be opened online through designated banks, the possibility of investing in PSX by foreign investors, specifically non-resident Pakistanis, has become much easier. Infact, as per latest news reports, NRPs have remitted about $24 million into the country through more than 21 thousand digital accounts that have been opened. It is hoped that much of these funds will also be channelized to Pakistan Stock Exchange for investment. The Roshan Digital Account is a hugely positive step taken by the State Bank of Pakistan and this will help the capital market of Pakistan in terms of liquidity and growth. This in turn will help the economy of the country as a whole.
So far this year, overseas Pakistanis have done net investment of more than of $12.8 million in the Pakistani capital market as per latest the numbers provided by the NCCPL regarding foreign investors portfolio investment. This is positive news as despite the global economic challenges brought on by various factors, not least of which is the global pandemic, non-resident Pakistanis continue to repose confidence in the capital market of the country and are remitting funds to add to their growth and that to the economy of the country.
PAGE: Your views on the performance of Pakistan Stock Exchange over the period of last two years:
Farrukh H. Khan: I think overall the market has performed tremendously allowing various opportunities for investors to enter the market at different periods of time with attractive valuations of scrips. From a high of above 52,000 points in May 2017, the market went down to around 38,000 points in Dec 2017 and thereafter showed signs of recovery. With a re-tracing of reaching more than 46,000 points in April 2018, the market slid to 28,764 on August 16, 2019. This has been the general trend over the last two years with the market settling around the 40,000 point range as the situation stands now.
As it is, Pakistan Stock Exchange has performed immensely well to be labeled as one of the best performing markets – amongst the top 5 — in the world in September, 2020. Infact, PSX has also been considered as the best performing market in Asia in the same month. We have had record-breaking volumes of late. In September this year, PSX crossed the 1 billion mark of shares traded in a day; the last time such trading volumes were witnessed was 11 years ago. Moreover, in August this year, the total volume traded on the system of the Exchange was 12.8 billion shares, which was the second highest volume traded in a month since the year 2003. So all these numbers at the Exchange give evidence of the fact that the market has performed really well and has attracted interest from market players and investors. Part of this progress can be attributed to the fact that the Government, SECP and SBP have been taking steps and initiatives that have helped increase confidence in the market. These reforms include regulatory amendments for launch of Exchange Traded Funds, revamping of REIT Regulations, reduction in annual monitoring fees in mutual funds & pension funds, removal of tax anomalies for mutual funds industry, expansion in allowable mutual funds, and book building of the PHL Energy Sukuks through competitive book building at the PSX platform in line with international best practices.
With the economic challenges, change of Government, and meeting these economic challenges along with the onslaught of the pandemic, the market has seen certain amount of volatility within the last two-year period. Yet, the Pakistani capital market has performed very well and has presented attractive valuations for investors. As it is, the optimal form of investment is long term investment; of course the market will see periods of consolidation, downturns and upswings in any period. Markets present opportunities as well as challenges which need to be met or welcomed by investors and issuers alike.
PAGE: What are the offerings and services that PSX plans to introduce in the near term/future?
Farrukh H. Khan: Currently we are working on several new product offerings and amendments in the Regulations at the Exchange to be brought about in the near term or in the near future. One of the amendments is in the sphere of Futures Market where we plan to introduce, amongst other changes, the 90-day contract maturity instead of the 30-day contract maturity. More debt instruments and equity listings are also planned for the near future at PSX. Moreover, additional indices and Exchange Traded Funds are also expected at the Exchange. In a recent development, a new Market Maker for debt securities is in the process of being introduced in the market. Introducing new Market Makers for debt securities is the right way forward as the fixed income market is a large market with immense potential which needs to be focused upon and developed.
On the equity side, several IPOs are expected to take place in the near future as the Consultants to the Issue/Lead Managers are currently engaged with issuers to bring these companies to the fore for their IPOs and their listing. The recently introduced Growth Enterprise Market board provides a potential capital raising avenue for medium sized companies and start-ups. The simplification of rules and regulations for listing in GEM board will also add impetus to bring forth more companies on this board of the Exchange. Once the new trading system is in place in early 2021, we will also be able to introduce options on single stocks and indices.