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Merger of 3 stock exchanges into Pakistan stock market

Pakistan Stock ExchangeStock exchange enjoys an important place in the financial markets of an economy. Typically, a stock exchange is a trading platform that exists for sufficing the mutual relationship between traders and stock brokers. Therefore, the forum plays role in facilitating the relationship between the two above said parties by aiding the sale and purchase of securities and stocks. Also known by the names of securities exchange or bourse, a stock exchange within any economy performs some key operations including but not limited to accumulation of business capital, gearing savings for investments, helping companies to grow, redistribution of wealth, corporate governance, establishing investment opportunities for small and medium sized investors, etc.

At the time of creation of Pakistan, historically there were three stock markets operational in the country. However, the idea has been discussed in almost every political regime to form one unified national stock market. In lieu of making this concept a reality, the present government have made efforts to establish a single stock exchange for the country. According to the sources, in August 2015 a merger between the three stock exchanges of Pakistan had been approved. As a result of which, a Memorandum of Understanding (MoU) was signed at the Securities and Exchange Commission of Pakistan, under the procuration of Finance Minister, Ishaq Dar.

In wake of the above discussed MoU, January 11, 2016 saw the operational integration of Islamabad, Lahore and Karachi stock exchanges to form one unified bourse, Pakistan Stock Exchange (PSE). However, seemingly facile, this merger has certain technical complications to offer. Looking at the stock market statistics in the three isolated markets before unification reveals that there are almost 555 companies listed on the three exchanges, offering a market capitalization of US $ 67 billion, as on December 23, 2015. The investors’ composition in these markets divulges 1886 foreign institutional investors and 886 domestic institutional investors, with a 0.22 million retail investors. According to the rough estimates, there are approximately 400 brokerage houses with 21 asset management companies. An amalgamation of the three markets means a merger of these invaluable attributes. Henceforth, PSE is seen as a step towards a quantum jump in taking the capital market of the country to new heights.

It is really important at this point to shed light on the need theory that triggered this unification. What is the main reason that forced for such a leap in the capital market structure of the country? Well! the answer to this question is kitted in the steep decline observed in Chinese equities. This steep decline in Chinese equities has resulted in creating pandemonium in global financial markets, Pakistan being no exception. Karachi Stock exchange has suffered the most in this unanticipated and abrupt change in stock value. Apart from this, Pakistan is also facing surging pressures from the International Financial Institutions. Because of the keen interest shown by Sri Lanka and UAE in acquiring Pakistan’s stock exchange, the government also plans to offer the stock exchange to foreign investors at a later stage.

The Finance Minister of the country is of the opinion that increased efforts have been made by the government to improve the outlook of the Pakistani capital market. This will help in attracting the foreign direct investments and merger is a step towards this goal.  In an attempt to strengthen the national economy, the minister put forth the government’s resolve of creating a strong, vibrant and competitive capital and financial market. The integration of the three financial markets will result in lowering the fragmentation of the market, thus attracting the much needed strategic partnerships for supplementing technological expertise and assistance.

Despite of the need and listed benefits of the unification, there are a lot of parties that raised their concerns on the process. These concerns were mainly voiced from Lahore and Islamabad stock exchanges.  It is because of the reason that ISE and LSE will suffer significantly, as KSE is experiencing a downward trend for months. Hence, the move is a way towards stabilizing KSE, the biggest stock market of Pakistan. Addressing the concerns of the aggrieved parties, Finance Minister termed it as a win-win situation for both the parties.

The demutualization of stock markets and integration will assist in bringing the market on par with global markets, alongside increasing the stock values due to inheritance of LSE and ISE. The consolidation scheme will help in shedding the local competition, focusing and concentrating all the energies in attracting FDIs. This will facilitate PSE in having better resilience against the financial upheavals of the international markets. The increased volume of foreign investments in Pakistani stocks will instrument local and international investors to trade locally; previously the situation was not as simple as the company has to be listed in all the three stock exchanges.

About Emaad Qureshi