CONSOLIDADO INDIVIDUAL

The ISE belongs to the securities market industry in Pakistan wherein services are provided to members, listed companies and investors. The present securities market industry comprises of three Stock Exchanges viz. Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange which provide facilities to the listed companies to raise capital by enlistment of shares at stock exchanges, investors may sell and purchase shares in the stock exchange and the members provide services to the investors for consideration of their brokerage/commission.

The Karachi Stock Exchange was incorporated in 1949. The Lahore Stock Exchange was established in 1970 whereas Islamabad Stock Exchange was established in 1992. Although ISE is the youngest of three exchanges yet it has given splendid performance both in terms of operations as well as finance. The ISE is not behind the other Exchanges for offering the range of products to its members and investors. The operations are the total simulation of other two Exchanges. The only difference comes from the level of liquidity. The liquidity means the volume of the business that is available in a particular stock exchange. The KSE which is situated at Karachi, the economic and financial hub of Pakistan has the biggest pool of the liquidity. Most of the financial sector is based at Karachi. The daily traded volumes of KSE have almost 95% of the institutional trade. Besides, international portfolio investment also routes from KSE. The public trade chunk is just around 5%. The average daily turnover of KSE is approximately 400 million shares. On the other hand Lahore which is the host city of Lahore Stock Exchange is the second largest city of Pakistan and also number two in economic and trade terms after Karachi. However, there is not significant trade participation by the institutions yet it has a significant potential for growth.

The average trade volume of LSE is 50 million.

Then there comes the number of Islamabad Stock Exchange. The ISE does have great potential but the problem is that, the Islamabad is mainly the city of government and corporations employees who do not have good propensity to save and invest. Besides, Islamabad does not have any considerable institutional base. The technological advancements have also enabled the members of other exchanges to establish their roots of business in Islamabad at the cost of trade volumes of the ISE. As a result the trade volumes of the ISE remain at lowest level. The trade volume of the ISE is in the range of 2.5 million shares a day. As such the ISE is positioned at a very low profile as compared to other Exchanges. The low trade volumes of the ISE are also resulting in the lesser income of the Exchange. The trade transaction fee is the major source of income for a stock exchange but due to the factors stated above, the ISE income being derived from the trade transaction fee is quite below the desired level.

ISE-LSE-KSE

The listed companies also provide a big source of income. At KSE, there are more than 725 listed companies while at LSE, there are 635. However, at ISE, there are only 263 listed companies which are quite dynamic, progressive and vibrant. Therefore, low number of listed companies provides less income from this sector to the ISE. As a result thereof the ISE is earning quite lower than its potential. Even odds are not quite favorable for future as the competition is likely to grow in securities market industry in Pakistan as besides local exchanges, the globalization is also paving way for other exchanges especially of the region as well as from US and western European countries. Therefore, ISE needs vigorous strategic planning to meet the future requirements.

The ISE belongs to a services oriented industry. In a service oriented organization, efficiency, transparency, vibrancy, innovation both in the product lines and delivery/

execution and dynamism are the keys to success. Every organization must allocate its resources in a manner so that it must remain competitive in foreseeable future. The ISE has also developed its mission and vision statements in a manner that it must perform vibrantly in the years to come. The strategic planning of the ISE is also based on this core parameter.

I have analyzed the investment pattern of all the exchanges particularly the comparison of ISE with other two exchanges viz. LSE and KSE. In order to cater the futuristic needs of the business directions, both these exchanges are investing major portion of their resources in technology and advancement of the securities market outreach in the length and breadth of the country as well as abroad. However, the ISE has not prioritized its preferences to that direction.

The ISE is in process of construction of its own building at Jinnah Avenue, Blue Area, Islamabad which would be in the shape of a twin towers to be known as ISE Towers. This is a two billion worth project and once it would be completed, it would add to the grace of the beautiful city of Islamabad. The ISE is utilizing its own resources as well as more than one billion debt has been raised by the Exchange to finance this project which would be repaid through sale of offices in the building. This project envisages providing enormous funds to the ISE upon completion. Thereafter, abundant funds would be available with the Exchange which would definitely be employed for the acquisition of new technologies and collaboration with the world renowned institutions so as to bring a turnaround for the ISE and bring it in competition with the other exchanges.

Key Figures & Ratios of KSE, LSE & ISE

KSE LSE ISE

Particular (thousand Rs.)

Debt to Equity Ratio 0.236 0.956 6.645

Return on Assets 0.081 0.044 0.002

Return on Equity/Funds 0.100 0.087 0.019

Cross-Sectional Analysis of ISE

Ratios Avg

Ratio Deviations

KSE LSE ISE

Current Ratio 1.987702 2.093 -0.527 -1.567

Debt Ratio 0.516327 -0.325 -0.028 0.353

Debt to Equity Ratio 2.612368 -2.376 -1.657 4.033 Return on Assets 0.042692 0.039 0.002 -0.040 Return on Equity/Funds 0.068719 0.032 0.018 -0.050

ISE lacks current assets as compared to KSE and LSE causing a big deviation in Current Ratio of ISE but its non-current assets are more than the other two. So, in terms of total assets ISE isn’t lagging behind. Also, ISE has more total assets than LSE. However, total liabilities of ISE are more than KSE and LSE due to big figure of long-term loan in non-current liabilities which leads to a big debt ratio and debt to equity ratio. Return on Assets of ISE is also less than KSE & LSE as the net income of ISE is a lot less than LSE and

KSE owing to the reasons mentioned above. KSE and LSE have a lot more funds than ISE due to big surplus earned every year. This is the reason which results in negative deviation of Return on Equity/Funds ratio of ISE. ISE has capacity to earn same level of income only if it had more companies listed and large volumes of trade.

CHAPTER 4:

FINDINGS & RECOMMENDATIONS

4.1 FUTURE PROSPECTS OF THE ORGANIZATION

The stock exchanges in Pakistan are mutualized entities. However, the pressure of globalization of the world economies has also imposed changes and reforms on the securities market of Pakistan so as to bring it at par with the rest of the exchanges of the world and create attraction for the foreign investors. With this view, the stock exchanges are soon to be converted into for profit companies instead of not for profit entities which are the present legal stature of the exchanges in Pakistan. After demutualization, the stock exchanges shall not be owned by its members rather these would be owned by the shareholders.

The ISE has appointed IGI Investment Bank as its financial adviser to undergo the process of demutualization. This process would bring innovations in the systems of the ISE as the management of the Exchange would be run by the professional exchange operators which would bring new technologies and procedures with them for adoption in the Pakistani environment.

The ISE is likely to get billion of rupees through its building project in near future. Besides, ISE would be getting a sizeable perpetual income from rental of the abundant offices space that would be rented out to the commercial entities. The rental income would be one of the biggest sources of fund for the ISE in near future.

The ISE upon having ample funds in hand would initiate the developmental activities with more zeal in future. Besides, the ISE would also initiate the projects for the promotion of investment knowledge in the length and breadth of the country.

Thus the future of the ISE looks bright in the days to come.

4.2 SHORTFALLS/WEAKNESSES OF THE FINANCE DEPARTMENT

The ISE presently has a small scaled finance department. However, the way the operations and monetary size of the organization is increasing, this department would be needing expansion. I have observed a few weaknesses of the Finance Department of the ISE which have been narrated critically by me as under:

1.Presently only one chartered accountant is serving as a head of finance department which I think is not sufficient. I therefore, foresee the induction of two or three more persons from the field of finance like ICMAs and MBA (Finance) graduates etc. are needed to be inducted in the said department.

2. I have also observed that the budget prepared by the organization from the expenditure side is not very practical and it is prepared in isolation with relevant

departments. In certain circumstances the budget is often kept side while making some corporate decisions.

3. The persons deputed for book keeping are not quite proficient and even they don’t know properly about different heads of accounts and all the time they have to consult the head of the department for certain entries of the accounts.

4. The balance sheet as well as the other statements of accounts like income statement and statement of cash flows are not automatically prepared and a lot of manual processes are involved to generate these reports from the system. Therefore, the ISE needs to revamp its computerized accounting software.

5. Payments through cheques are made through manual handwriting. No software is installed for the purpose although several cheques are issued in a day.

6. The organization does not have fixed assets register. The Exchange’s policy of depreciation needs review and instead of straight-line method. Declining Balance Method should be employed as the ISE is mostly using the IT equipment which becomes obsolete in a period of at maximum three years. Therefore, more depreciation is needed to be charged in the earlier years.

7. The investment policy is not run on principles of finance. I never saw any body making capital budgeting and projecting its cash inflows/outflows and discounting on the basis of opportunity costs. They only compare the existing rate of returns and make huge investments.

8. Except for the above shortfalls/weaknesses the department is performing its functions quite diligently.

4.3 SWOT ANALYSIS

The following are the SWOT factors with their brief analysis:

4.3.1 Strengths

The strength factors of the ISE are as under:

a. Most sophisticated trading system

The trading system of the ISE is fully automatic equipped with most modern technology. This has boosted the overall efficiency of the system. Thus 3000 trades can now be conducted in a minute’s time.

b. State of the Art Risk Management System

The Risk Management System of the ISE has been revamped recently and now the risk management system may be ranked with any developed country’s stock exchange. This has increased the efficiency of the system thus increased the confidence of the investors not from inland but also of foreign fund managers.

c. Close Liaison with SECP

The management of the Exchange maintains a close liaison with the apex regulator of the capital market of the country i.e., Securities and Exchange Commission of Pakistan unlike other exchanges in Pakistan. Thus both the institutions are working closely for the development of stock market in Pakistan.

d. Skillful Professional Employees

The employees of the ISE are highly skillful in their respective fields. They are qualified enough to meet the future challenges.

e. Formation of CDC

The ISE is an equity partner of the Central Depository Company of Pakistan (CDC). This company has phased out the physical handling of the shares certificates and now shares are dealt with in book entry form in electronic mode.

f. Formation of NCC

Earlier the three stock exchanges were having their own respective clearing houses. Now a company named National Clearing Company of Pakistan Limited has succeeded those clearing houses. The ISE is also a shareholder of NCCPL. This company provides a central system for clearing and settlement of trade executed at each exchange.

g. Equity Partner of National Commodity Exchange

The ISE is also an equity partner in the formation of National Commodity Exchange. This exchange shall provide a venue for offering future prices in all commodities. Thus a better pricing mechanism for commodities will be introduced in the country. At the same time diversity of investments would also be achieved.

e. Monitoring and Surveillance

ISE has a good monitoring and surveillance team which is quite effective to save the market from abuses by any quarters. Thus this aspect also caters as an effective tool for risk management.

f. Self Regulatory Organization

The ISE is a Self Regulatory Organization (SRO) under Securities and Exchange Ordinance, 1969. By virtue of SRO status, it can also frame rules and regulations for any need that may rise for efficient market operations.

g. Sharia Compliant Investment Forum

The normal trading at ISE in the scrips which are not generally involved on interest based practices is sharia complaint. A lot of people opt stock market investments for the sake of dividends and capital gains by investing within the confines of Islam.

h. Maximum Returns

The investments in stocks fetch more returns as compared to any other ordinary contemporary investments. This fact is proven performer.

i. Financial Health

The financial health of the ISE is quite strong. It is making profits for the last many years. This sound financial health allows the company to undertake diversified market operations and make investments in assets building.

4.6.2 Weakness

The following are the weaknesses of the ISE:-a. Small Sized Organization

The ISE is a small sized company as compared to other two Stock Exchanges in the country. At present there are 263 listed companies at the ISE whereas at KSE this number is 725.

b. Shortage of Manpower

The ISE is in short of professional manpower. There being unique nature of its business, the skillful human resource is not ordinarily available in the market.

The ISE has to appoint untrained qualified persons and then to groom them for sophisticated jobs which is a time consuming job.

c. Outsourced Trading System

The trading system of the ISE is totally outsourced and it is operated by outside people who don’t have any affiliation with ISE, therefore, at items there occurs problems regarding service level.

d. Mutualized structure

The Exchanges are presently mutualized entities and so is also the ISE being a guarantee limited company. Often the members make influence on decision making affairs therefore, interest factor cannot be eliminated and transparency issues must be addressed accordingly.

e. Car Parking Problem

Being situated at Blue Area, investors face a lot of problems for parking their cars. As a result, the climate of investment is suffering due to this sole problem.

f. Illiquid Market

The buyers and sellers are not in huge number; therefore, the ISE market is not very liquid. At times, investors face problems while disposing their investments.

g. Lack of CFS Financing

Financing plays a great role for development of trade volume in an exchange.

At ISE, the investments in CFS are comparatively lower. Therefore, sometimes, financing is either not available or it is available at much higher cost.

h. Less Reliable Remote Trading

The remote trading based on internet is not highly reliable and at times problems occur in it.

i. Less Adaptive to Automation

Many departments of the ISE are still operating manual practices and automation has not been adopted as yet.

4.3.3 Opportunities

The following are the opportunities of ISE

a. Improving Economic Fundamentals of the Country

The economic fundamentals of Pakistan like GDP, per capita income etc are improving with the result the stock markets investments are also giving better results.

b. Pro-Stock Market Policies of the Government

The current regime of Pakistan is highly supportive of the stock market reforms and its expanded role for the economic uplift of the economy.

c. Increasing Portfolio Investment

The portfolio investments in the country are gradually increasing and now it is touching a figure of 4 billion US dollars. Therefore increasing interest of the foreign fund managers would definitely increase investment level in the ISE.

d. Privatization of State Owned Enterprises by GOP

The privatization of the state owned units like OGDCL, PTCL, SNGPL, and SSGPL etc are adding diversity and depth of the stock market. Issues offered by the way of privatization would boost investments at ISE.

e. Mass Media Campaign

The ISE is spending a modest size budget for mass media campaign for promoting stock market awareness. For this purpose several seminars across the length and breadth of country has been conducted by the ISE. As a result the number of investors is increasing rapidly.

f. Introduction of CFS Mk II

The SECP is introducing a CFS market irrespective of the Exchange magnitude.

This level playing field would provide tremendous boost to the ISE.

g. Demutualization

The ISE would be demutualized during 2010 which would eliminate the interest of the members of the exchange. Thus demutualization would pave a way for the improvement of overall affairs of the Exchange.

h. Unified Trading Platform

The ISE in collaboration with LSE is making a unified trading platform which would make a healthy campaign with KSE.

i. Merger of All Stock Exchanges

The SECP is mobilizing efforts to unify all the three stock exchanges. Once demutualization is occurred, this objective would be pursued more aggressively.

The ISE would get great benefit out of this scheme.

j. Formation of South Asian Federation of Exchanges

The ISE has been very instrumental in forming federation of South Asian Stock Exchanges. This would provide a forum or mutual cooperation. Thus ISE would be benefiting by learning the experiences of bigger Indian Stock Markets.

k. E-Commerce

The E-Commerce has provided great opportunities to the Exchange to trap the uncovered market. The Exchange has swiftly moved towards the electronic internet based trade.

l. New Building

The ISE is in process of construction its own building which would be a 22 storey tower. This building would make more visibility of the ISE and trade

The ISE is in process of construction its own building which would be a 22 storey tower. This building would make more visibility of the ISE and trade

In document INVERCAP S.A. Memoria Anual y Balance General 2005 (página 25-30)