ZAFAR & ASSOCIATES - LLP | Capital Markets Services - Pakistan

Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies and other financial assets via stock trading.

Capital markets refer to the venues where funds are exchanged between suppliers of capital and those who demand capital for use. Primary capital markets are where new securities are issued and sold. The secondary market is where previously issued securities are traded between investors. The best-known capital markets include the stock market and the bond markets.

These markets are divided into two different categories: primary markets—where new equity stock and bond issues are sold to investors—and secondary markets, which trade existing securities. Capital markets are a crucial part of a functioning modern economy because they move money from the people who have it to those who need it for productive use.

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Capital markets may provide investment management services, lending services, equity sales and trading, research, consulting services, or number of distinct types of services, likewise:

• Capital markets are units of a company or investment firm that handle fiscal and banking services for a set of clients or customers.

• These corporate domains may exist within larger monetary institutions to assist with specific services such as leasing, acquisition of companies or issuance of debt.

• Capital markets are also responsible for investment banking services along with the issuance of a company's securities.

The types of services that may be provided by capital markets vary widely and depend on the focus of the company as a whole and on its customers' needs. Notable examples include helping a healthcare company to lease or finance expensive equipment, helping a young company find investors, helping an existing company expand its operations (or even providing financing for a company's customers), and other operational tasks such as corporate restructuring.

In order to help companies that face increasingly complex sets of challenges and opportunities, capital markets effectively provide assistance to assist them in operating their business functions and stay competitive while facing challenges or uncertain situations.

The resulting alliance provides an enhanced ability for a company to navigate the sophisticated economic and business landscape, providing analysis, advice, and high-quality execution that assists propel a company's growth. Capital markets teams focus on building on these types of strategic relationships in order to build a deep understanding of clients' needs that will enable them to deliver advice and solutions that will make a significant difference.

Legal Services in Capital Markets

Investment Banking Services

From syndicated loans to import solutions and integrated receivables, capital markets domain offers universal, strategic advice and solutions that make a significant difference in their clients' futures.

Mergers & Acquisitions

Capital markets domain assist clients with their most critical and complex business issues, such as mergers and acquisitions. Typically, this sort of expertise comes from seasoned, senior bankers that are able to leverage their long-established industry relationships and specialised insights to help ensure that every merger or acquisition transaction is executed flawlessly.

Debt Capital Markets

Capital markets domain assists companies raise capital and assemble financing through a broad range of sophisticated solutions. Usually spearheaded by senior-level bankers with long-standing industry, these domains assist companies in corporate structuring and execute supporting solutions.

Equity Capital Markets

Capital markets domains assist companies develop the origination and execution of equity offerings, such as initial public offerings, follow-ons, and convertible notes. Capital markets domains provide potential issuers with advice and education on transaction size, timing, structure, execution alternatives, along with the selection of underwriters.

Importance of Capital Markets in Pakistan

Capital Market are the financial markets where the financial securities such as bonds and stocks including long term investments between suppliers of capital such as retail investors and institutional investors etc. are bought and sold is undertaken by the participants such as individuals, institutions and the government. Furthermore, the trades are mostly in long term securities because the magnitude of a capital markets is directly interconnected to their economy which, means that any ripples in one corner may cause major waves. The financial securities such as the bonds and the stocks which, are issued for medium term (during a year) and long-term period (may be more than one year). The capital market can either be a primary market or secondary market so the most important capital markets are the stock market (for the equity securities, also called as shares where investors gain ownership of companies) and bond market (are often known as debt securities) which, is the market where the investors become creditors. Also, the stock market consists of exchanges in which stock shares and other financial securities of publicly held companies are bought and sold, and the bond market is the collective name given to all trades and issues of debt securities. The bond and the stock market which are, attempted to aim to enhance transactional efficiencies. Also, these markets bring suppliers together who seek for capital and provide them a place where they can be traded. In primary market, new stock or bond are issued directly from companies to investors, business and other institutions through a mechanism called as underwriting. This refers to a process where it can be found in banking, insurance and stock markets which, takes on financial risk for a fee. The risk may be a loan, insurance or investments. Also, it helps set rates for loans and premiums for insurance policies. The ‘underwriting’ term comes from the practice of having risk taker who write their name under total amount of risk for accepting a specified premium. In secondary market, existing securities such as equity shares, bonds, preference shares, treasury bills and debentures etc. are traded by the investors or traders usually on an exchange or over the counter. The benefits of the secondary market are to improve willingness of investors in primary markets as they are aware that they are likely to immediately to swiftly cash out their investments if the need arises.

The structure of the capital market consists of three stock exchanges such as Lahore Stock Exchange (LSE), Karachi Stock Exchange (KSE) and Islamabad Stock Exchange (ISE) (together combines to form a Pakistan Stock Exchange (PSX)), the National Clearing Company of Pakistan Limited (NCCPL) the Pakistan Mercantile Exchange Limited (PMEX). Also, The Securities Exchange Commission of Pakistan (SECP) performed as a regulatory body to ensure functioning of these markets including the participants in the market such as brokers who handle transaction of shares in capital markets on behalf of investors. There have been some new developments that are made to the capital markets such as the new Securities Act 2015 and the demutualization of exchanges. Also, the new Securities Act 2015 which, has replaced Securities and Exchange Ordinance 1969. There are new provisions that has been added to the new law such as International Organization of Securities Commission (IOSCO), principles of securities’ regulation and investor protection. These provisions provide implementation of advanced reforms for preventing market abuses and manipulation practices. Also, there has been more provisions that were introduced to the new law such as full disclosure at a time of the initial offering, continuous disclosure requirements and an inclusive compliance regime for promoting public confidence. The SECP provides that all investors must have access to same information at the same time. If you want to know what is the SECP so it is the financial regulatory agency in Pakistan and their aim is to build a new advanced technology and efficient corporate sector and a capital market based on sound authority principles, may help to promote economic growth in Pakistan.

Although capital markets are concentrated in financial centres around the world, most of the trades occurring within capital markets take place through computerized electronic trading systems. Some of these are accessible by the public and others are more tightly regulated. Also, their fundamental part is that they lead the users to mobilizing domestic resources and leading them in an efficiently way to productive uses to raise the national productivity higher.

In Pakistan capital market plays an important role in supporting the growth of an economy and provides an effective source of investment in the economy. Whereas, to resource provision, capital markets also provide a medium for risk management which allows the diversification of risk in the economy and provide excellent route of disinvestment to take place. In Pakistan it plays an important role in mobilizing savings for investments in productive assets and in order to enhance the country’s long term growth prospectus it also acts as a major catalyst in transforming the economy to be more efficient and also supports periods of technological process. However, it tends to improve information quality as it plays an important role in encouraging the adoption of stronger co-operates governance principles. As an important imperative for Pakistan has been to develop its capital market to provide alternative source of funding for the companies in doing so it would achieve more effective mobilization of investor’s savings and it also provides a valuable source of external finance. Capital market benefits investors in a way that the investment which is done in the stock market provides a source of income, shares are paid to the dividends when the company declares profit after that the shares are dividend to the relevant shareholders.

Pakistan Stock Exchange (PSX)

During a second phase of the Stock Exchanges Demutualization and Integration Act 2012, the three stock exchanges: 1) Karachi Stock Exchange (KSE), 2) Lahore Stock Exchange (LSE) and 3) Islamabad Stock Exchange (ISE) which, combines together to form a national stock exchange called as a Pakistan Stock Exchange (PSX) on January 11, 2016. This is an important step towards demutualization of the shares market in Pakistan. Their aim is to help reduce market fragmentation and build a strong case for attracting strategic partnerships which, may be necessary for providing technological expertise and assistances. Furthermore, the Pakistan Stock Exchange (PSX) was classified by MSCI as a frontier market on 8th September 2021. One of the PSX's constituent stock exchanges, the Karachi Stock Exchange, was listed among the world's best performing frontier stock markets: between 2009 and 2015 it delivered an average 26% return annually, however, today the Pakistan Stock Exchange (PSX), was taken over by the consortium of Chinese exchanges which, has affected the capital market because of the recent acquisition of a new Chinese trading platform and push on innovation. However, in 2020, the Pakistan Stock Exchange despite being affected by the coronaviruses pandemic, the IPOs were oversubscribed, exchange traded funds were launched for first time and the trading regime saw introduction of index halts and wider circuit breakers. Also, the operational structure of the Pakistan Stock Exchange (PSX) which, allows for electronic trading, clearing and settlement including corporate debt instruments and government securities.

The main purpose of creating PSX was to enhance operational efficiency of Pakistan’s Capital Market by providing investors, listed companies and the trading right entitlement certificate holders with a single and fully integrated national trading platform which internationally raised the profile of Pakistan’s Capital Market. This integration process is not a new concept introduced in our country as many other countries also have a single capital market and it is expected that it would be beneficial for our country and would open the way for more foreign investments in this sector. The market witnessed monotonous activity during first three quarters of the current fiscal year but now it has been witnessed that the PSX is breaking previous records.

Islamabad Stock Exchange (ISE)

This stock exchange was the youngest of all of the stock exchanges of Pakistan. In October 25, 1989, it was incorporated as a guarantee limited company which, was located in ISE Towers and the structure comprises of three levels of basements and ground 18 floors above. During July till April (2014-15), there has been a decrease amount in levels by 20.1 %. The highest level of index 4,800.33 was witnessed on July 24, 2014 as compared to the lowest level of 3,314.05 as on March 30, 2015. However, the total amount of capital was increased during July-March (2014-15). The total listed capital grew to Rs.894.4 billion during this period. The market capitalization also as compared to last year. The offer for sale for 40.475 million shares Engro Powergen, Qadirpur Limited; 48.308 million ordinary shares by Saif Power Limited; 13 million ordinary shares by systems Limited; 19.349 ordinary shares by Synthetic Products Enterprises Limited, 131.275 million shares of Allied Bank Limited by the Privatization Division, Government of Pakistan and 27.350 million shares of Mughal Iron and Steel industries Limited to the general public, institutional investors and high-net-worth individuals and disinvestment of 609.317 million shares of Habib Bank Limited by Privatization Division, Government of Pakistan. According to Section 57(1) and 62 of the Companies Ordinance, this offer was accepted by the SECP to all of the companies as mentioned above.

Lahore Stock Exchange (LSE)

The LSE Guarantee Limited was introduced in October 1970 under the Securities & Exchange Ordinance of 1969 by the Parliament in Pakistan because the needs of the provincial metropolis of the Punjab as the province should be met. There were 83 members and was situated in a rented building in the bank-square area of Lahore. The total amount of the capital was increased from Rs. 1,042.2 billion in June 2014 to Rs. 1,096.1 billion in March 2015. There are various reports that clearly shows that the market capitalization in LSE has been increased

Karachi Stock Exchange (KSE)

It was established in 18 September 1947 and was the largest stock exchange of the Pakistan. KSE Limited was located at the Stock Exchange Road (the heart of Karachi Business district near I. I. Chundrigar Road . Also, the Khaleej Times reported that it listed as the one of the best ten stock markets in the world in 2015 and the Pakistani equities delivered 26 percent a year for US dollar investors, making Karachi the best-performing stock exchange in the world. As of 10th July 2015, total market capitalization reached to Rs. 7.33 trillion (US$72 billion approximately). According to Bloomberg, the Pakistani benchmark stock market index is the third-best performer in the world since 2009.

Formation of Pakistan Stock Exchange (PSX)

The owners of three stock exchanges; 1) Karachi Stock Exchange (KSE), 2) Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (ISE) held a few meetings and the Securities and Exchange Commission of Pakistan (SECP) facilitated the process throughout.Furthermore, a document known as a Memorandum of Understanding (MoU) which, is a non-binding agreement that states each party’s intentions to take action, conduct a business transaction or form a new partnership. This document may be known as a letter of intent (LOI) or memorandum of agreement (MOA). However, this document was signed b/w the Demutualization Committee of three stock exchanges to integrate operations of two of the stock exchanges such as ISE and LSE combined together to form into a KSE (Karachi Stock Exchange). And then prior to the formal launch, the Karachi Stock Exchange held a two-day pre-production mock trading session for all certificate holders of the three exchanges. Their aim is to help reduce market fragmentation which, then build a strong case for attracting strategic partnerships. This case may be important for providing technological expertise and assistance. Overall, this process has completed the second phase of the Stock Exchanges Demutualization and Integration 2012, which was passed by a joint session of the Parliament. And then KSE was renamed as Pakistan Stock Exchange Limited (PSX) which, was accepted by the SECP (Securities and Exchange Commission of Pakistan). The Competition Commission of Pakistan (CCP) also accepted this. Their aim is to increase operating efficiency of Pakistan’s Capital Market which, provides a single deep liquidity pool and fully integrated national trading platform, raise profile of Pakistan Capital Market internationally, motivate cross listing and global capital raising by Pakistani not only to investors, listed companies including trading right entitlement certificate (TREC) holders. Later, the ‘strategic investor’ will be offered a Pakistan Stock Exchange must be a stock exchange, a depository company, a derivative exchange or a clearing house meeting a certain criteria approved by Securities and Exchange Commission of Pakistan (SECP).

Some of the reasons that why should a company list on PSX is that it enhances the company’s profile and because of greater reputation it attracts and retain the best talent for the company. All the stakeholders involved use fair valuation of the company by market which is generally higher than the book value by going public and outlines the true worth of an organization. There are some of the extra tax benefits and compliance relaxations for the issuer under which the companies do not need to comply with the provisions of the PSX rule book as it only applies to the main board.

Therefore, this would bring so many benefits to Pakistan such as leading them to have many accesses to foreign investment in financial sector etc.

Sector-wise Progress in Capital Markets

The performance of the Pakistan Stock Exchange which, was driven by some major sectors of the economy including Oil & Gas, Banking, Pharmaceutical and Auto etc. Following by the performance of some of the major sectors are:

Industry	Performance Data
Oil & Gas Exploration Companies	4 companies are listed at Pakistan Stock Exchange. Exchange with total paid up capital of Rs.66,194.40 million and market capitalization of Rs.886,007.20 million. The profit after tax of this sector is Rs.135,611.67 million. Even though it is a dominant sector, it didn’t perform as expected because of continuous decreasing of oil in prices as compared to previous years.
Cement	It consists of 21 companies. Due to higher local consumption, the growth of exports is smoothly rising, decrease in costs of the fuel of the plants and both of the CPEC projects’ activities and construction has been arising, which shows a good financial result. Total listed capital of Rs.71,893.34 million and the market capitalization of Rs.618,375.90 million.
Chemicals	27 companies are listed. There has been good performance during current year because of rising of the construction activities and growth in industrial sector. Total paid up capital of Rs.34,434.65 million and the market capitalization of Rs.179,548.75 million. The profit after tax was Rs.2,836.408 million.
Automobile Assembler	It consists of 12 companies. During current year, there has been good performance because of success in construction activities and growth in industrial sector. Total paid up capital of Rs.7,357.964 million and the total market capitalization was Rs.259,754.34 million. The profit after tax of this sector was Rs.26,170.217 million.

Table: Sector-wise Progress in Capital Markets

Companies in Capital Markets

Companies are a leading form of business association though they are not the only form of business association; a company can be formed by applying to registrar of the companies with a constitution. The companies which are limited by shares are mainly discussed under the company law. Some companies are limited by guarantee which are designed for charitable or public interest ventures where no profit is envisioned. Companies limited by shares are divided into public and private companies limited by shares. The companies which are held for small businesses are known as private limited companies and the shares of the private limited company cannot be publically traded or cannot be listed on a stock exchange.

The company which is legally allowed to offer its shares for sale to the public is called a public limited company or a public listed company. These types of companies are formed specially to raise large amounts of money from the general public. Public limited companies can be listed on a recognized stock exchange and the stocks are traded publically. These types of companies are generally subjected towards a lot of regulations than private companies. However, as the companies grow they may also wish to raise capitals in the form of shares from the general public.

The market which brings buyers and sellers together to trade stocks and bonds and other financial assets is called a capital market. In Pakistan the capital market consists of an vertex regulator of the markets ‘the Security and Exchange Commission Pakistan (SECP) (a financially regulatory agency and a capital market based on sound authority principles with an objective to develop an efficient and modern cooperate sector), Pakistan Stock Exchange(PSX), Mercantile Exchanges (it is regulated by SECP and provides a centralized and structured place for commodity future trading), Clearing and Settlement Company (provides centralized clearing and settlement services which are performed at PSX) and Central Depository Company(it provides securities for financial instruments, equity and debt).

Company law in different jurisdictions has evolved to cater to specific business needs by designing suitable corporate vehicles. For instance, the company law in Pakistan caters to small businesses through Small & Medium Enterprises (SMEs) or Single Member Companies (SMCs). This brief however focuses primarily on Public Listed Companies.

Why opting for a Public Listed Company?

For a private company, the main source of capital is typically either bank loans, private investors / creditors or the savings of the shareholders that they inject into the company. But the aforementioned can be very limited sources of capital. Shareholder savings are not unlimited, and often times shareholders will be hesitant to put all their money in a single corporate venture. Additionally, given the relatively fewer disclosure and regulatory requirements associated with private companies, and the protection that principles of limited liability offer shareholders, banks and other creditors are often hesitant to approve large loans to the private company.

In comparison, the Public Listed Company (PLC) offers a greater source of capital for long term expansion and investment. PLCs are legally able to access a large pool of capital that isn't available to private companies by selling their shares to the public.

For this purpose, stock exchanges offer a convenient platform for PLCs to sell their shares to the public. And since public funds are involved, PLCs naturally carry exponentially greater disclosure and compliance requirements as compared to private companies.

Role of Pakistan Stock Exchange (PSX)

The PSX allows Public Companies a platform where they may offer their securities (shares or debts, as the case may be) to the public in order to raise capital. For this purpose, the PSX has the following four boards (listing sections) where the company may list its securities:

• Main Board;

• Growth Enterprises Market (GEM) Board;

• Publicly issued Debt Securities Board; and

• Privately issued Debt Securities Board.

Each board is essentially a specific type of market where only companies fulfilling the board’s requirements may offer their securities to investors on the board. For instance, one requirement for being listed on the Main board is that the Company should have a minimum post issue paid up capital of PKR 200 million. Such companies can offer their shares to the general public. Whereas companies listed on the GEM board are required to have a minimum post issue paid up capital of PKR 25 million and can only offer their securities to institutional investors.

At this moment it is important to note that since the general public is involved in the Main board, companies applying for listing on the Main board are exposed to greater scrutiny and documentary requirements as compared to those listing on the GEM Board. The same principle applies with respect to Publicly issued Debt Securities and Privately issued Debt Securities.

Listing is the procedure where you can offer the shares of your company to the general public as equity on the stock exchange where the eligibility criteria for listing under PSX for the main board with minimum post issuance paid up capital of 200 million and a minimum post issuance paid capital of 25 million for the GEM board.

Growth Enterprise Market (GEM) Board

PSX Gem board is a platform where companies can raise capital to fund growth and expansion. Where only eligible investors could buy and sell shares of a GEM board listed company with a minimal annual fees ranging from 50k-200k. After listing the company on PSX the trading should take place through KATS (Karachi Automated Trading System). For post issue paid up capital the issuer has to maintain a minimum free float of 10% and for a lock in period which is not less than 3 years the sponsor would h old at least 25% of the post issue paid up capital of the issuer. The initial listing fee is capped at 50k whereas the annual listing fee varies depending upon the amount.

The Growth Enterprise Market (GEM) Board specifically caters to the listing of small, medium or greenfield businesses (companies that have not started commercial production or operation at the time of listing - defined under Sec. 2(XXIIIA) of the Public Offering Regulations, 2017).

Companies listed on the GEM cannot sell their shares to the general public. Only institutional investors (financial institutions, companies, trusts, stock brokers and other approved entities) or accredited individual investors (people registered with the National Clearing Company of Pakistan as having assets of at least Rs. 5 million) are allowed to trade shares on the GEM market.

Since the general public is not involved in the GEM Board, per se, the capital, disclosure and compliance requirements for companies listed on the GEM Board are less onerous than for listing on the Main Board.

The requirements for which a company can be listed under the GEM board and the main board are different. For a GEM board an information memorandum is required and only eligible investors can participate whereas the general public can invest under the main board with a requirement of a complete prospectus. Its initial fees is capped at 1.5M and only approved TREC (Trading right entitlement Certificate) holders by SECP can act as advisors to the issue.

The company appoints an advisor who formulates the company’s business plan moving forward and does the initial due diligence in regards to financial, legal and regulatory requirement. Moving forward by using different policies a business plan is evaluated by the consultant who demands a final offer structure to get maximum value of the shares to be offered. After finalizing the terms of underwritings bankers to the issue and share registrar are appointed and also the pre listing investors are finalized with the help of the company’s advisor whereas the Central Depository Company checks for eligibility into their virtual share depository system. After that requisite regulatory documents are submitted for PSX and SECP in order to obtain necessary approvals than some marketing and sales events and other investor presentations are conducted in order to create awareness about the forthcoming issues. The share registrar and balloter collect subscription results which form all bankers to the issue than the post IPO clearance would be made where the bank will transfer the money from the subscriber to the issuer and then the company’s shares could be traded on the GEM board. The issuer may migrate from the GEM board to the Main board after fulfilling the PSX rulebook criteria.

Main Board

Under the main board companies may list through an initial public offer, where an initial public offer (IPO) is the process where a company issues a stake of its ownership to the public for the first time. The investors who wish to gain ownership in the company subscribes to that company’s share. The eligibility criteria for the main board with the minimum post-issue paid up capital of 200 Million.

The company who wants to list under the main board must prepare periodic financial statements and the statements must be audited by the Quality control review (QCR) rated chartered accountants and should be published on the website. The website must contain the basic business information and prospectus of the company. The company must fulfill the operational requirements that it must be in business for at least three years and before getting listed the company must be profitable for at least two preceding years. The initial listing fees is the one tenth of 1% of paid up capital packed at PKR 1.5 Million and the annual listing fee would be capped at PKR 3 Million.

For listing the company under the main board the company should appoint a consultant and must have submitted all the documents. The company must be initially reviewed and necessary due diligence to ensure adequate disclosure in the prospectus within the time period of one month. Than on behalf of the Exchange, the PSX listing committee allows approval of the company’s listing application with a timeline for approval validity for sixty days. After that the company’s prospectus must be accepted by SECP within the time period of one month. Within seven to ten days the public offer is held through fixed price or book building method and soon after the public subscribes the company, the company than the company is formally listed in the main board.

Buying back the shares by the sponsors at a price approved by the exchange one can get their company delisted through the method of voluntary delisting. Another method is involuntary de-listing where a company is removed from the list due to violation of any PSX regulations and the last way to exit is that a company can migrate to the main board by fulfilling the requirements.

Conclusion

It is concluded that the main purpose of PSX is to provide a completely integrated national trading platform which enhances the operating efficiency of Pakistan’s Capital Market. Pakistan has entered the new era of equity trading during the current fiscal year after merging KSE, LSE and ISE into PSX.

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