Presentation by:

Nadeem Naqvi Managing Director

Karachi Stock Exchange

February 15, 2012

Karachi Stock Exchange

Issues & Prospects

www.kse.com.pk

Karachi Stock Exchange (KSE): Profile I

KSE is owned by 200 members

There are 10 directors; 5 elected by members; 5 nominated (including MD) by the Securities & Exchange Commission of Pakistan

Active members are approximately 135 at present

Over 600 companies are listed on the Exchange

Market Cap. is currently at US$34bn (US$75bn in Mar 2008)

Value Creation : 2.94x Market Value of paid up capital of the listed companies

01

Karachi Stock Exchange (KSE): Profile II

Benchmark indices

1) KSE-100 Index 4) KMI-30 Index

2) All Share Index 5) Oil & Gas Index

3) KSE-30 Index 6) Banking Index

Strong Systemic Risk Management System

State-of-the-art technology platform

Seamless electronic integration of Trading (KSE), Clearing

(NCCPL) and Settlement/Custody (CDCPL)

New Product Pipeline: SLB, MTS, ETFs, Sector Indices,

Cross Border Index Listings, Options

02

Business Functions of the Stock Exchange

Mobilise savings into

productive investment for

economic development

Maximise liquidity at the

lowest cost per

transaction

Pre-trade; trade execution;

post trade clearing and

settlement of transactions

03

A

B

C

PRIMARY

MARKET

SECONDARY

MARKET

RISK

MANAGEMENT

Regulatory Functions of the Stock Exchange

Licensing of members / brokers

Listing regulations of companies

Corporate Governance of listed companies

Market monitoring & surveillance of trading activity to

ensure fair play, efficiency & auditability

Penalty for infractions of regulations

Formal Reporting to SECP

04

Asset Class Comparative Performance

KSE Gold DSC PIBs T-bills Deposits*

2001 -16% 8% 15% 13% 11% 6%

2002 112% 9% 13% 10% 6% 4%

2003 66% 9% 9% 6% 2% 2%

2004 39% 15% 8% 7% 2% 1%

2005 54% 12% 8% 8% 7% 3%

2006 5% 26% 10% 10% 8% 3%

2007 40% 22% 10% 10% 7% 4%

2008 -58% 32% 11% 13% 11% 6%

2009 60% 33% 12% 13% 13% 6%

2010 28% 30% 12% 13% 13% 6%

Average 33% 20% 11% 10% 8% 4%

* Weighted average deposits rate as per SBP data

05

Capital raised from the Stock Market

Total amount of equity capital raised by listed companies through issuance of rights shares during the last 10 years

(2002-2011) was Rs316bn

Demonstrates the important role that KSE has played in allowing companies to raise long term capital for growth

Over PkR122bn was raised by the Government of Pakistan between 2003-2007 from privatization through the

stock exchanges

Indicates how the Government of Pakistan has been the direct beneficiary of a thriving capital market that

allows market driven valuations of state owned companies

06

Examples of private sector fund raising

DG Khan

Cement

Co.

Rs5.4bn

in 6 years

2006 1.7bn 2009 1.0bn 2010 1.2bn 2011 1.5bn

Engro

Chemical

Rs11.4bn

in 4 years

2006 1.2bn 2007 3.2bn 2008 3.2bn 2009 4.3bn

NIB

Bank

Rs34.0bn

in 6 years

2006 19.0bn 2007 12.0bn 2011 3.0bn

07

KSE-100 Index History

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

KSE-100 Index

12,262

15,676

4,815

Source: KSE

08

Regional Performance - I (June 30, 2011 Dec 31, 2011)

09

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%P

hili

pp

ines

Th

aila

nd

Ind

on

esia

Mal

aysi

a

Pak

ista

n

Sri

Lan

ka

Sin

gap

ore

Ho

ng

Ko

ng

Ind

ia

Vie

tnam

Ch

ina

1.9%

-1.6% -1.7%-3.1%

-9.2%

-11.0%

-15.2%

-17.7% -18.0%-18.7%

-20.4%

Source: KSE; Bloomberg

Regional Performance - II (Jan 2, 2012 Feb 14, 2012)

10

-19.0%

-14.0%

-9.0%

-4.0%

1.0%

6.0%

11.0%

16.0%In

dia

Vie

tnam

Ho

ng

Ko

ng

Sin

gap

ore

Ph

ilip

pin

es

Pak

ista

n

Th

aila

nd

Ch

ina

Ind

on

esia

Mal

aysi

a

Sri

Lan

ka

15.5%13.9% 13.5% 12.9%

9.2%8.1% 7.9%

6.6%

3.4%2.3%

-17.5%

Source: KSE; Bloomberg

Market Cap to GDP Unrealized Potential

*As at Mid Feb 2012 Source: KSE; Economic Survey FY11

11

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

9.9%

15.6%

24.9%

31.6%

36.5%

46.4%

33.7%

16.1%18.3% 18.2%

16.5%

Average Daily Turnover (Shares mn)

Source: KSE

12

50

100

150

200

250

300

350

400

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

344 365

257 258

133

171

121

79 94

(Shr mn)

* CY12: Jan todate

*

KSE-100 Crisis Period Performance

4,000

8,000

12,000

16,000

03-M

ar-0

8

17-M

ar-0

8

31-M

ar-0

8

14-A

pr-0

8

28-A

pr-0

8

12-M

ay-0

8

26-M

ay-0

8

09-J

un-0

8

23-J

un-0

8

07-J

ul-0

8

21-J

ul-0

8

04-A

ug-0

8

18-A

ug-0

8

01-S

ep-0

8

15-S

ep-0

8

29-S

ep-0

8

13-O

ct-0

8

27-O

ct-0

8

10-N

ov-0

8

24-N

ov-0

8

08-D

ec-0

8

22-D

ec-0

8

05-J

an-0

9

19-J

an-0

9

02-F

eb-0

9

16-F

eb-0

9

02-M

ar-0

9

16-M

ar-0

9

30-M

ar-0

9

KSE-100 Index

Market All Time

High at 15,676

(Apr 18,08)

Imposition of Floor

at 9145 (Aug 27, 08)

Market Bottom

at 4815

(Jan 26, 09)

Source: KSE

13

Key Causes of 2008 Market Crisis

High leveraging, a phenomenon in most global markets since mid-2000s

Sell-off by foreign funds in tandem with global market sell-off in the summer of 2008

Investor defaults leading to brokerage houses receivables build up and pledging of clients shares to banks

SBPs sudden change in regulation regarding banks exposure quantum to equities/broker loans

Margin calls by banks & associated forced sell-off of securities collateral, accentuating downward pressure on market

Regulatory panic via artificial floor imposition & no arrangements for short-term liquidity for Pakistan market in contrast to full liquidity support by regulators in other markets

14

Capital Market Contribution to Taxation

15

-

1.0

2.0

3.0

4.0

5.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11

2.8

3.6

4.2

4.7

0.6 0.5 0.4

(PkRbn)

KSE Collected Taxes worth PkR17bn between FY05 FY11

Source: KSE

Declining Volumes Impact Broker Performance

Source: KSE; Based on a sample of 50 active brokerage houses

16

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2008 2009 2010 2011

6.1

2.4 2.3

1.7

PkRbnBrokerage Commission

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2008 2009 2010 2011

2.2

-2.2

1.4

-1.3

PkRbnNet Profit

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2008 2009 2010 2011

8.4

3.9

5.7

3.2

PkRbnTotal Income

KSE: 5-Year Financial Performance

17

-

200

400

600

800

1,000

1,200

1,400

2006 2007 2008 2009 2010 2011

771

668

1,397

701

320 303

PkRmn

Operating Revenue

(400)

(200)

-

200

400

600

800

1,000

2006 2007 2008 2009 2010 2011

458

243

868

198

(295) (314)

PkRmn

Operating Profit

0

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010 2011

603

508

772

314

68 50

PkRmn

Net Profit

Source: KSE

Lessons from past crises

INVESTOR PROTECTION

Brokers quality & capability

Strong financial penalty & regulatory coordination

Preemptive risk management regime

Power to the Investors

Investor Protection Fund

SYSTEMIC RISK MITIGATION

Market Liquidity

Robust margining regime

Trade settlement guarantee

Clearing House Protection Fund

18

Investor Protection a Key Point of Focus

While enhancement in post event investor compensation has occurred, more work is required on the prevention side

Strengthening of brokers financial, professional and risk management capability is one area of priority

Regular reporting of brokers payables & receivables is another area to be focused upon to preempt problems turning into crisis

Brokers sales personnel training emphasising financial planning and longer term investment rather than just trading

Technology driven separation and management of custody accounts can significantly reduce risk of comingling

19

Empowering Investors to Protect Themselves

Universal Identification Number (UIN)

for each individual investor

Auto tagging of CDC Sub A/C with

UIN & KATS Code

No comingling of investors funds

with broker's funds (separate bank

accounts)

SMS & email alert service on any

share movement / transaction in UIN

from CDC & NCC

Strengthened regulatory regime, driven by technology

CDC KATS

Code

20

Investor

UIN

KSE

NCC

KATS

CodeCDC

Managing Operational Risk: Key Measures

Information Security

No removable storage devices in KSE employee computers

All personal e-mail/media sites blocked

Information flow matrix strictly enforced

Security cameras at sensitive locations

Risk Management Gateway to Members

Client Level Margining Client shares by the broker can not be utilized for his own business or trades of other clients

New Margining Regime Concentration margins at all leveraged & futures markets; liquidity margin in the ready market over and above existing VAR margins

21

New Initiatives to Broaden Investor Base

Launch of vision 2014: 500,000 investor base by Dec 2014

versus approx. 250,000 at present

Comprehensive, time bound action plan to generate investor

awareness by joint forum of all capital market institutions, SECP

and the reactivated Institute of Capital Market

New regulations by SECP to encourage individual investor

participation

New product rollouts including sector indices, Options, ETFs,

market-maker regulations, cross-listing of Regional Index

derivatives

Initiation of personal financial planning / wealth management

training program for brokers and mutual funds sales personnel

22

New Initiatives to Increase Listed Companies

Launch of IPO Initiative by the three exchanges under

umbrella of South Asian Federation of Exchanges (SAFE)

Cooption of investment banks, DFIs, investment banking

divisions of large banks & top-tier brokers to market the

IPO concept to privately held businesses

Detailed review of listing regulations in order to reduce

paperwork/application process timeline for listing, under

guidance of SECP

Initiative for launching a dedicated SME Exchange

23

KYC & CDD Initiative

Changes in Exchanges regulations mandating brokers to

follow international KYC and Customer Due Diligence

(CDD) guidelines by Anti Money Laundering Task Force as

per international compliance standards

Rollout of Broker education programme regarding anti

money laundering laws & regulations, KYC and CDD

Mandatory creation of compliance function by all brokers

Assisting brokers in defining internal KYC guideline and

implementing KYC and CDD activities on an ongoing basis

Stronger system audit regime to monitor KYC Compliance

24

Structural Issues Hampering Market Growth

Corporate Tax Structure Anomaly

Partnership/Proprietorship Tax rate of 20-25% versus corporatized business tax rate of 35%. This is a huge disincentive to listing on the stock market

Lack of liquidity

Banking sector nearly absent from capital market financing; partially due to stringent regulations and partially due to crowding out by Govt. borrowing

Capital Gains Tax Conundrum

Poorly designed and inappropriately timed imposition of new CGT regime. Perception of unfair treatment for equity investors (c.f. investment in govt. securities; no tax on agricultural sector; non implementation of RGST on trade services). Further, perceived fear of harassment by tax-officials of individuals has driven out retail investors from the market

25

Structural Issues Hampering Market Growth

Absence of Market Makers

Till date, absence of market makers has been a key cost of low or nil liquidity in the derivatives market. This is changing

Lack of Incentives for Debt Market

SBP still to focus on developing a robust domestic secondary market for Govt. debt at retail level. As that happens the stock market and brokers can became a strong retail distribution network for the Govt. and help reduce cost

Problem facing NRPs

Cumbersome SCRA regulations a major disincentive for Non-Resident-Pakistanis (NRPs) to invest in the domestic equity market

Lack of international marketing

No systematic, institutionalized effort to expose Pakistans capital market to global investors and the Pakistani Diaspora

26

Sustainability of an Exchange

THE

VALUE

PROPOSITION

Quality of Human Resources

Rules & Regulations

Capital Resources

Risk Mgmt. Regime

Licensing of Brokers

Supportive Govt. Policy

Products & Services

Information Technology

Access to Customers

27

THANK YOU

28