Capital Market

Capital markets are markets for buying and selling equity and debt instruments. Capital
markets channel savings and investment between suppliers of capital such as retail
investors and institutional investors, and users of capital like businesses, government
and individuals. Capital markets are vital to the functioning of an economy, since capital
is a critical component for generating economic output. Capital markets include primary
markets, where new stock and bond issues are sold to investors, and secondary
markets, which trade existing securities
Capital markets help channelise surplus funds from savers to institutions which then
invest them into productive use. Generally, this market trades mostly in long-term
securities.
Capital market consists of primary markets and secondary markets. Primary markets
deal with trade of new issues of stocks and other securities, whereas secondary market
deals with the exchange of existing or previously-issued securities. Another important
division in the capital market is made on the basis of the nature of security traded, i.e.
stock market and bond market.
Why Capital Markets Matter?
Capital markets matter. Globally, they convey trillions of dollars each year from savers
to business opportunities, and the returns from this investment back to savers. Locally,
how well our capital markets work is a key determinant of our economic performance
and prosperity. Capital markets provide crucial tools for ordinary individual to achieve
their financial goals: putting money aside for future spending, withstanding unexpected
shocks, growing wealth and enjoying a more comfortable retirement. They are also a
major source of funding for our businesses. They enable aspiring entrepreneurs to put
their ideas into action, and larger companies to grow in international markets, bringing
new jobs and higher incomes. If capital markets work well, all these things can happen.
If they work poorly, we squander our savings and our talents as a nation. Over the past
18 months, the Capital Market Development Taskforce has explored what capital
markets are, how they function as a system, how well they are working right now, and
what needs to change. Some parts of our markets are great; some are working okay;
and other parts are simply broken. We have come to understand that, in large part, the
way our markets work is a result of deliberate choices that we have made as
individuals, as businesses, and government. Accordingly, different choices can
substantially improve things.
This summary explains why capital markets matter, before setting out the challenges to
address looking first at issues for investors, and then at what prevents capital markets

playing their full role as an engine of growth. Following a brief discussion of regulatory
and tax settings we present our package of key recommendations and the impact we
expect them to have. Our complete recommendations are set out at the end of this
summary. Further analysis is contained in the full Taskforce report and the associated
background research.1 Capital markets are a system. How well each part functions
depends on how the rest of the system works. Although there are some fundamentals
that simply must be got right in all capital markets, there are many successful ways of
creating the right environment for savers and companies. The critical thing is that all the
design elements work together. Our key recommendations should be seen as a
mutually reinforcing package of measures to improve the system as a whole. Tinkering
is unlikely to deliver capital markets that contribute to our economy as they should.
Whether and How Capital Markets are important for Economic Development?
Capital is the requirement of commerce, industry, government and local authorities. The
capital market is a medium for the allocation of long term funds usually for the formation
of capital assets. These funds come from private investors, insurance companies,
banks, pension funds arranged by issuing houses and merchant banks.
The capital market collects funds from surplus sectors and channels it to those who are
in need of finance. Competitive forces in the capital markets form the basis of efficient
working of financial intermediation. However in the developing countries the facility for
raising industrial and commercial capital is either absent or rudimentary in the latter.
Reforms in the Pakistani Capital Market
Capital markets in the world need to be stringently monitored and regulated as they are
considered the backbone of the economy and a reflection of its stability. The purpose of
such governance is to safeguard investors from fraud and deception, leading to
minimizing financial losses, secure capital markets, stability in the economy, causing a
cyclical impact on long-term investments.
Upon careful comparative analysis of international capital markets, it can be observed
that markets with consistent bullish trends attract greater Foreign Direct Investments
(FDIs); relaying a sense of trust and guaranteed returns on their investments, which is
all that matters to an investor. Consequently, continuous investments in return
effectively support the economy while maintaining stability in the market; a cyclical
pattern of a stable market
Capital markets like UK, USA or Turkey which observed significant growth in 2012, are
prime examples of stable markets and are implications of well managed and governed
systems. Pakistan as a developing economy needs to cater to the needs of investors by
applying rigorous mechanisms that secure its investors.

All three stock exchanges in the country, particularly Karachi Stock Exchange (KSE),
have seen steady times following a series of downfalls in 2008. However, in 2011-2012,
KSE reached 16,218 points and was labeled as the best emerging market in Asia with
financial returns of 4050%. In the 2013-2014, KSE hit a record high of 28,913 points
(the index has since then crossed the 30,000 mark) which was an increase of 45.2%
than the previous year.
The year 2014, has proven to be a year of growth and high spirits for the Pakistani
capital market. Pakistan ranked third in 2014 amongst the top ten best performing
markets in the world, for the third consecutive year. Throughout the year, the benchmark
KSE 100-index exhibited outstanding performance, touching historic levels in terms of
value and volume.
Although in order to maintain such record highs, continuous measures need to be
adopted. In 2012-13, a number of market reforms were implemented which in return led
to the apparent bullish trends. The Securities and Exchange Commission of Pakistan
(SECP) introduced legal and structural changes, while strengthening its Risk
Management and improved transparency that led to a build in trust and credibility in the
markets.
Firstly the SECP, corporatized and demutualized the stock exchanges in Pakistan,
which was considered one of the most revolutionary reforms of all times in 2012. This
led to segmentation of commercial and regulatory functions and a separation between
ownership and trading rights. This not only led to greater governance and transparency
but also projected a positive image internationally, attracting global strategic investors of
good stature and increase the depth of primary and secondary markets.
With the initiation of Trading Right Entitlement Certificate (TREC), a Base Minimum
Capital (BMC) was required that was to be maintained at all times, and was used as
collateral in the event of a default.
To fulfill the hedging requirements of various investors in the commodity markets and to
further enhance the product Suite at Pakistan Mercantile Exchange (PMEX) was
approved in silver. They further implemented regular inspections and audits to follow
compliance and the regulatory framework.
With the introduction of the code of corporate governance in 2012 applied to all listed
companies as a part of stock exchange regulations. This code also incorporated
international best practices and standards to ensure transparency and good
governance.
Moreover, SECP has also in the past made similar moves to bring investor confidence
back, especially by setting up a centralized clearing company in the form of National
Clearing Company of Pakistan Limited (NCCPL). NCCPLs introduction in to the market

replaced the separate and individual Clearing Houses of three Stock Exchanges by a
single and centralized entity. NCCPL introduced the National Clearing and Settlements
System (NCSS), an electronic clearing and settlement system, which ended the need
for 3 separate clearing houses in the country and provided relief on time involved for
clearing trades between parties.
Since its inception, NCCPL has not only grown as a clearing and settlement service
organization in terms of its capacity and capability, but has also started making valuable
additions in its products and services portfolio to facilitate the capital market investors
and contribute towards development and transparency of capital market operations.
NCCPLs latest offering to the public, the National Custodial Services (NCS), is another
product which looks to build investors confidence and increase investor participation in
capital market activities.
Similarly with the introduction of NCS, by NCCPL, it takes away one liability of investing
in the stock markets and lets the investor only worry about the natural course of events.
The capital market investors opting to avail the NCS can continue to transact in the
capital markets through their respective TREC Holders. Further, custody of cash and
securities will also be maintained with NCCPL.
NCS is one of the key institutional products introduced in the capital market that shall
significantly reduce market risk, add transparency, and enhance transactional
efficiency, said Mr. Nadeem Naqvi, MD, KSE and Chairman NCCPL Board. The TREC
holders should be welcoming this development as it increases the credibility of the
capital market as whole. NCS provides investors the option to have national capital
market institutions look after their assets if they so wish and this should go a long way to
avoid the issues related to the custody of their assets. The reignited fears around
investing should be put to bed and potential investors should look towards the stock
exchange to invest money in instead of just properties.
Speaking about NCCPLs latest offering, Mr. Muhammad Lukman, CEO, NCCPL stated,
The NCS is an effort made by NCCPL to add to the effectiveness of the capital market
operations. It offers safe custody of investors cash and securities in a cost effective
manner and facilitates the TREC Holders by providing relief in margin and capital
adequacy requirements. Further talking about overseas Pakistanis, he added,
Through this product we are also targeting overseas Pakistanis, who are not investing
money back home in the capital market. A campaign will soon be launched to create
awareness amongst non-resident Pakistanis about this.
Change over the years and recognizable improvements in the Pakistani capital markets
was due to the implementation of stringent reform, revolutionary strategic legal and
structural changes and efficient transparency and security offered to its investors. The
attempt to improve the capital structure was fruitful with the results reflected in 2014 and

the consecutive third position for three years running as the top ten best performing
markets in the world.