Pakistan Capital Markets: Scope, Challenges and Much Needed Reforms – By Mir Mohammad Alikhan
By: Mir Mohammad Alikhan Investment Banker, Entrepreneur & Ex-Advisor to the President of Pakistan
www.mirmohammadalikhan.com
The article was published in Journal of the Institute of Bankers Pakistan, March 2013 Edition.
The Karachi Stock Exchange has outperformed majority of the stock markets around the world in the year 2012, up almost 50 percent from a low of 12,213 on February 9th 2012 to a high of
17,408 on February 6th 2013. Total capitalization of the market which includes some 650 companies exceeded USD $ 43 Billion Dollars. Stellar corporate earnings and one of the lowest overall market multiples in the region, the Pakistani markets, in my view, are still the cheapest markets to invest in when it comes to developing countries within the region.
Over $15 Billion dollars worth of wealth was created through the stock markets of Pakistan within the last year alone. Looking at this phenomenal number, a simple question comes to my mind, how has it benefited the younger generation of our country. Another question that goes hand in hand with Capital Markets and its growth is, how many young people were abl to get financing for their ideas through this platform. Stock markets are not only a vehicle to make your company liquid by listing its shares after it has matured or to raise additional funding for expansion or corporate takeovers, it should primarily be the place where younges less capitalized companies can also come and raise funds for their ideas. The most importa role of any stock market is to fund those ideas which commercial banks will not entertain because usually a startup company may not have assets to pledge to a bank and get the financing. As an investment banker, your true talent lies in the ability to gauge the pros ar cons between an idea company with almost no assets to a company with millions of dolla in tangible assets. After all, almost all the innovations of the past 100 years have been by companies which had great ideas and little or no initial funding.
Just look at the past 35 years of the world corporations coming up with the best of innova and you will get the clearer picture. Imagine if Netscape, the first internet browser compar the world never received any financing because it had no tangible assets, which it did not Would you be surfing the web today with the much better and improved versions of the w
browsers.
If Bill Gates (Microsoft), Jeff Bazos (Amazon.com) to Mark Zuckerburg (Facebook) and hundreds of founders of other companies in the world had to go to seek financing from a commercial bank, having no assets except a brilliant idea, instead of the stock markets, the world would have lost out on the most recent technological wonders of the past 50 years.
New and young companies are the backbone of an economy. They not only bring the best of ideas to the market keeping up with the need of the ever changing times, they also create millions of new jobs, create a much larger tax base and in many cases, enhance a country’s export and bring in financial stability, all of which Pakistan badly needs. NASDAQ (National Association of Securities Dealers Automated Quotation) Stock market within its past 42 years of history has become the primary market for raising funds for new ideas. Along the way it has created a Market Capitalization of USD $4.5 Trillion dollars just by listing little over 2784 companies. The more mature and well established companies go to NYSE (New York Stock Exchange) for listing. NASDAQ is the backbone of corporate America, not to mention the products these companies export to the rest of the world and create a larger corporate tax base for their nation through the profits they earn.
We do not have to go that far away from Pakistan to look at the benefits of less stringent listing requirements by a stock exchange and its positive effects on the New Economy. The Bombay Stock Exchange was founded in 1875 and as of 2012 had 5163 listed companies with a total market capitalization of USD $1.2 Trillion Dollars. It took BSE 137 years to create $ 1.2 Trillion in market capitalization. On the other hand, The National Stock Exchange, also situated in Bombay, founded in 1992 with the aim to become a source of funding for young and upcoming companies, has attracted some 1652 new companies since its inception. The astonishing difference is that it also has a market capitalization of about USD $1 Trillion dollars. What took BSE 137 years to create a market cap with 5163 companies, took NSM just 21 years with a mere 1652 companies.
