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Presented By: TAUSEEF LADAK

SR MANAGER EQUITY SALES
TAURUS SECURITIES LIMITED
 
° KSE Introduction

° 100-index

° COT/ CFS

° New Trends

° Mkt slang

° Notes of advice
| 
 

° Overview

° 100 - Index

° Products, Trading & KATS

 
 Currently there are three stock exchanges operating in Pakistan.

r The |    !" |  -1947

r The Lahore Stock Exchange    - 1970
r The Islamabad Stock Exchange   - August 1992

 KSE is a @#$%# &"' " by its Board of Directors consisting of

brokers, nominees of the Securities & Exchange Commission of Pakistan (SECP)
and representatives from the private sector

 * !!&@: out of which the corporate members are Ô
%  of which

#@" !(@

r Most of the members are involved in brokerage business or they have huge
asset management companies
 "))
 Biggest and most liquid exchange in Pakistan.

 Declared ´best performing stock market of the world for the year 2002 AND
2006µ

 @!*Ô@ * 
r 663 companies
r Market capitalization Rs. *+* *& (USD $ 54.28 bn)
r Listed capital Rs. 486.489 bn (USD $ 8.11 bn)

 Began with a 50 shares index- when the market grew the KSE-100 was developed
which is a capital weighted index and consists of 100 companies representing
about 90 percent of market capitalization of the Exchange

 KSE management has recently made an index of top 30 companies of most liquid
and higher free-float companies. It is believed to give a better picture of the
market compared to our existing capitalization based 100-index

 Proper future derivatives are also in the pipeline

 "))
   
,
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 Minimum paid up capital Rs 150 mn

 Publishment of ¶prospectus· or ¶offer for sale·.

 Application for shares to be accepted through bankers to the issue.

 Directors can not participate in subscription of shares offered to general public.

 Co. must disclose the list of successful applicants within 10 days of subscription
date.

 Atleast 500 applications are subscribed to.

 Initial listing fee: 10% of paid up capital or 1.5 mn whichever is lower.

 "))


,
- 

A Co. may be de-listed from KSE ,if:

 securities are quoted below 50 per cent of face value for a continuous period of
three years.

 It has failed to declare dividend or bonus for five years from the date of
declaration of last dividend or bonus; or commencement of business.

 it has failed to hold its annual general meeting for a continuous period of three
years.

 liquidation - either voluntarily or under court order.

 it has failed to pay the annual listing fees for a period of 2 years of penalty.
 "))

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 "))
LISTED CAPITAL & MARKET CAPITALIZATION

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  .  

  /0 @'"!!@@$/@1 The company is the

regulatory body and is responsible in framing the rules and regulations of the stock
market and to keep track of activities taking place in the stock market. The
company is also working as a middleman between stock exchanges and the finance
ministry or govt.

  0 #"(@'!('1Shares of public listed entities can be traded

only through the stock exchange, whether in the physical form or in the electronic
form (CDC form). Previously, all shares used to trade in the physical form as in
the paper form, imagine the labor required for trading millions and millions of
shares.
 "))

 

 Presently 97% of the settlements are routed through CDC.

 With the implementation of CDC and automated trading system, trading and
settlement of securities have become transparent and efficient.

 CDC is like a bank account, where investors keep shares instead of cash, where KSE
members, brokers, institutional investors and the retail investors have their
account.

 Retail investors may have a Private Individual investor a/c or they may have a CDC
Sub a/c with the Broker they do their business with.
 "))


 Stands for # # " #! '@!  to replace the
separate and individual Clearing Houses operated by each of the three Pakistani
Stock Exchanges, was incorporated on July 03, 2001.

 Established to provide Clearing and Settlement services to Pakistani Capital Market

with full automation of pay & collect and Broker to Broker delivery system (BTB),
Institutional Delivery System (IDS), cross exchange netting and such other value
added features expected in future.

 CDC is a depository company like banks are for money, whereas NCSS chiefly deals
with clearing, settlement, transfer of shares/securities between the three local
bourses (stock exchanges) and between broker-to-broker and institutional
investors.
Ô %

° What is an index? Need for an index?

° What is index· history of indexes at KSE

° Compare index levels with GDP

° Types of index at KSE: all share/ 100-indexs

° Index·s composition recomposing

 Ô %

 2 @  "1 basically just a barometer of the overall movement of stock

price in the exchange. It is a statistical measure by which one can gauge the price
performance of listed securities, just like we have CPI for measuring inflation.

 Index weightage of share can be calculated by:

Market cap of that scrip (* on a particular day)

-------------------------------------------------------------- X 100
Total market cap of 100-index

 Subsequently you can calculate new index value by the following formula:
r {  ! ( 3 #" ! (4 5 #" " #
r For e.g. market cap on 27th July was 2627 bn, & of 28th July was 2607 bn, where as the
index was at 10430 levels. Put the values in the formula and you will get index·s closing on
28th July i.e. yesterday.
 Ô %

 KSE never had proper index until, 1991, prior to which there was small 50-share
index in the traditional time of trading.

 The KSE 100 Index was introduced in November 1991 and was recomposed in
November 1994 whereas the KSE All Share Index was introduced in September 1995.
Ô %

Ô %

Index and GDP

 Ô %

COMPOSITION OF 100 INDEX

 /   !#$"@"$!($Ô %"

 Inclusion of companies in 100-index is based market capitalization of the listed

companies - ¶capitalization based· index.

r Top companies (in terms of market capitalization) from each of 34 sectors of

KSE are selected first.

r Then the remaining 66 companies are selected as follows: All listed companies,
other than the top 34 that were earlier selected are listed in a descending
order such that, company with highest market capitalization is at the top, while
one with the lowest market capitalization is placed at the bottom. Then top 66
companies are selected.
 Ô %

CALCULATION METHODOLOGY
 The formula for calculating the KSE100 Index is :
i!$@@"5/3.@/"6#45Ô 

 The KSE100 Index calculation at any time involves the same multiplication of share
price and shares outstanding for each of the KSE100 Index component stocks. The
aggregate market value is divided by the base value and multiplied by 1000 to
arrive at the current index number.

 Subsequently you can calculate new index value by the following formula:
r { New market cap / old market cap} * old index value.

 Maintenance of the index over time will require an on-going semi-annual

recomposition process done effective from every March and September based on
sector and market capitalisation rules.
 /"@0 "7| 
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/ 

 From investing stance:

r Day jobbers
r Short term traders
r Punters
r Investors

 From Legal/portfolio stance:

r Members
r Brokers
r Traders
r Institutional investors
r Retail investors
r High net worth individuals
 /"@0 "7| 


 Tax on transactions
r CVT
r Withholding tax

 CDC charges

 Commission

 Zakat deduction

 Tax on dividends

 Capital gain tax ² exempt till June 2008

 Stamp duty
 /"@0 "7| 
/
 

 ."@

 @
r Equity Futures
r Equity Provisional

 8'
r Ready T+3
r Ready T+2
r Badla/CFS
r Physical
r Odd lot
r Spot T +1
 /"@0 "7| 
. 

 Bond market is relatively small at KSE. As of March 2006, it only contributed to 23%
of total market capitalization.

 Following are key features:

r Types of bonds are traded at KSE, j" ! $  2 / + (
."@ $  j9@ " ! ."@

r Traded and settled both in physical and in scripless form.

r TFC·s are mostly traded over-the-counter through market makers. Price quoted
is a clean price. Since trading is mostly OTC, settlement terms are all
negotiable although the settlement cycle for TFC·s is generally on a T+1 basis.
 /"@0 "7| 
EQUITY DERIVATIVES - FUTURES
j j"

 # -@1 Both futures and forwards are hedging instruments, better known as derivatives. One thing
that is common between them is that they both ¶Y
  







 
     



    
    

     

   




 
  




+'"$$@+!""
Once they are made, they are openly traded on stock Forward contracts are usually tailor made contracts,
exchanges. between two parties, which are not traded after their
initiation.
Since they are traded, they are marked to market on a They are not traded and they are not marked to market,
daily/weekly basis, and therefore gains/losses are noted and no profit/losses settled between initial date and
accordingly. settlement date. Default risk remains there.

Due to daily/weekly adjustment of price changes are
recorded as profit/losses, its default risk decreases.
There are no requirements of physical delivery of the
underlying asset, at the future date transaction are settled
by simply settling the differences
Absence of this profit/loss adjustment, the default risk
increases, as if the rates change drastically, depending on
the case, either the buyer or the seller does default out of
the contract.
The contracts are physically settled, on the contract date.
 /"@0 "7| 
EQUITY DERIVATIVES - FUTURES

/@ !1 In Pakistani market, we have a rather 8 $#

(", which is blend of both these Future and Forward. Following are its
features;
 It·s a contractual agreement, made between two parties to buy/sell a particular
share at a pre-determined price on a certain specified future date. ‰




 




 These contracts are traded openly on the Exchange. ‰ 


 Weekly profit/losses are settled, between initial price and weekend price.
‰ 


 These contracts are settled through physically shares on the settlement date.
‰




 /"@0 "7| 
EQUITY DERIVATIVES - FUTURES

KSE offers equity futures in selected securities. Presently, * &#(

!(@ are being traded on the futures counter
 The number of companies to be traded on the Futures Counter is determined by
the Board every six months with the prior approval of the SECP. The KSE Board
with the prior approval of the SECP determines the selection criteria.

 When a buyer/seller accepts a bid/offer of a contract (quantity of shares) the

contract as per format attached to these regulations shall be deemed to have
taken place between buyer/seller.

 Futures contracts are held in !&# #@ $  @@.

 Non-resident investors have just recently been allowed to trade in futures.

 /"@0 "7| 
EQUITY DERIVATIVES ² PROVISIONAL
 |' j@ #"1

r Cos. under the process of 1st time subscription and listing, subject to a min
subscription of Rs 150 mn.

r It is just like local futures counters, just that this provisional trading ceases
when the company is formally listed on the trading board. And its settlement is
done on the third day preceding the ceasing date. From the date of formal
listing, trading in the shares of the company is shifted to the Ready Board
Counter under T+3 Settlement system.

r Provisional trading is also ceased if the shares of the company are left under
subscribed.
 /"@0 "7| 
EQUITY


"'  :*

r Transactions executed on the Ready Board Counter are settled according to the
T+3 settlement cycle.

r Transactions are settled through the clearinghouse that nets out the purchases
and sales and the financial obligations thereon of each member / firm for the
notified clearing period and issues instructions for deliveries of netted
outstanding business .
 /"@0 "7| 
EQUITY

 (  :Ô

› 






 
 


 

r Prior to book closure, securities are placed on spot settlement on a T+1 basis.
Securities are placed on spot in the preceding clearing from the clearing during
which the book closure commences. Securities can therefore be traded on spot
for about 5-7 days prior to book closure.
 /"@0 "7| 
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r Securities are delivered or received at the custodian banks· counters.

r Deliveries of physical shares are generally received by 10:00.

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 /"@0 "7| 
TRADITIONAL TRADING BEFORE KATS

 No unison rates.

 No transparency.

 Physical shares ² no electronic shares.

 Index was calculated at the last registered rate at the ´Batlaµ counter.

 Last rate was treated as the rate of the day.

 KATS came in 1998.

/"@0 "7| 
 /"@0 "7| 

  | 

 #@
: The price of the stock at the end of previous day·s trading session.

 
1 Current market price of the stock, if the trading session is in
progress. However, if it is not in progress then it shows the closing rates of today·s
session, whereas the ¶close rate· will reflect closing price of previous session.
 /"@0 "7| 

  | 

 .",': Quantity of shares for which buyer is available on the market, at a given
bid price.

 ."/: Price at which buyer is available to purchase a particular quantity of

shares.

The price and quantity combination that is displayed on KATS is that of the @ bid
price. For instance let us assume that there are only three bids placed at KATS;
r 5000 shares for Rs 50
r 6000 shares for Rs 49.50
r 4000 shares for Rs 50.50

Since, volume/price combination  has the highest bid price of Rs 50.50, it will be
reflected on KATS. Once combination (c) has been executed then the combination
of second highest bid-price will be reflected on KATS, i.e. combination (a). And so
and so forth, it goes on in a matter of fraction of seconds. If, following the
execution of combination (c) another bid is placed of 1000 shares at Rs 50.20 then,
instead of (a) this new bid will be reflecting on KATS.
 /"@0 "7| 

  | 

 $$3 @ ,': Quantity of shares for which seller is available in the market at a
given offer price.

 $$3 @ /: Price at which seller is available in the market for a given
quantity of shares.

The mechanism of offer quantity/price is exactly the opposite of bid price/quantity«.

that is to say the price and quantity combination for offer that is displayed on KATS
is that of the #@ offer price. For instance let us assume that there are only
three offers placed at KATS;
r 5000 shares for Rs 50
r 6000 shares for Rs 49.50
r 4000 shares for Rs 50.50

Since, volume/price combination & has the lowest offer price of Rs 49.50, it will
be reflected on KATS. Once combination (b) has been executed then the
combination of second lowest bid-price will be reflected on KATS, i.e. combination
(a). And so and so forth, it goes on in a matter of fraction of seconds. If, following
the execution of combination (b) another offer is placed of 1000 shares at Rs 49.80
then, instead of (a) this new offer will be reflecting on KATS.
 /"@0 "7| 

  | 

 # 6#!: Total Quantity of shares traded during the day.

 
1 The maximum price at which the share is traded during the day. It may
be higher or lower than the last closing rate.

 
1 The minimum price at which the share is traded during the day. It may
also be higher or lower than the last closing rate.

 $$1 The change in price between the current price and the last closing
rate.
3j%j-
° Cot demystified

° COT/CFS
 3j
UNDERSTANDING COT/BADLA

| ;j 
1

 3 party involvement: Purchaser, broker, financer.

 Broker·s market.

 Financed at closing rate, and not purchasing rate.

 Interest is charged in paisas.

 3j
COT
Since traditional times till phased out in august
2005
No separate counter for COT
Financing available for Ô "'@!, if
unreleased
($!!!#!$
@! for the market.
Officially Badla was only available in top volume
30 scrips in past 3 years before its phase out.
Prior to that all companies could be financed
through Badla, some times in-house Badla.
Finding of financer after the market (as
discussed earlier)
CFS
Implemented in august 2005 working to date,
by- passing the proposed phase out date of
February 2006
Separate counter for CFS
Financing available for * "'@!, then
refinance if unreleased.
-!!@!
@&
Was only available in top 14 scrips, recently
changed to Future eligible 30 scrips
Finding it within market hours at a real time
basis (though actual system for really time was
only placed sometime in January 2006)
 2


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° #&@@

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CFS CFS Mkt II
Implemented in august 2005 working to date, by- Yet to be implemented, discussions between
passing the proposed phase out date of February brokers, banks, SECP, and KSE under process
2006
No such commitment Min commitment of Rs 200 mn required from
CFS financers i.e. banks, DFI·s, Financial
institutions
Financing available for * "'@!, then Financing pool proposed to be atleast for 90
refinance if unreleased.
days
-!!@!
@*& No cap

Max finance rate 18% No such cap

Finding it within market hours at a real time Finding it within market hours at a real time
basis (though actual system for really time was basis, however it may even extend upto 45
only placed sometime in January 2006) minutes after the market.
 - = )-@#
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 j##'" !#<" j 

 # 

 "j !"#+ the three stock exchanges should merge into a

single FIDE. The ?
 
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 Lower Monetary/Managerial/Time Cost For Listed Companies.

 Lower Monetary/Managerial/Time Cost For Associated bodies (CDC, NCSS).

 Improved price discovery/ Trading Volume & Broader Investor base.

 Exchange to become a vocal body for the listed companies.

 - = )-@#
/1  0 -'$#@@

 Listing requirements/corporate governance .

 Facilitation among market participants/intermediaries.

 Market surveillance/settlement risk management.

 Abuse of power.
 | * %")&
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 Free Float Based index. $&


(  
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" +) 
.

 Selection criteria for listed companies include:

 Co. should have financial results for atleast 1-full year.

 Should be listed atleast 2-months
 Free float be atleast 5% of paid-up capital (exception given to OGDCL)
 Both types mutual funds excluded
 Co. has NOT been in default for atleast six months before the selection
period.
 | * %")&
INCLUSION METHOD

 Inclusion of companies in 30-index is based on free float market capitalization &

average traded value, where 50% weightage is given both parameters.

 30-companies are to be selected on the basis of there ranks. These ranks are
calculated in the following manner

r First, free-float market capitalization will be calculated of each company.

r Second, average daily traded value of review period will be calculated of each
company ² "" # means o   
  
  



  

   µ.

r Now, a factor (rank) would be arrived at by giving 50% weightage to both these
values.

r Finally, top 30 companies with highest factors would be selected for the index.
 | * %")&
100-INDEX 30-INDEX
Introduced in 1991- Restructured in 1994 To be introduced from 1st September 2006

Base divisor = 1000 Base divisor = 10000

Selection base ² market cap. of outstanding Selection base ² market cap. of free float
shares. shares and liquidity (ADTV)

Daily movement of index on basis of market cap Daily movement of index on basis of market
of outstanding shares. cap of free float shares.

Recomposed biannually: March & August Recomposed biannually: June & December

Not adjusted for dividend Adjusted for dividend

-
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