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Chinese consortium devises strategy to transform PSX

The Express Tribune 2019-02-11 09:48:41

Market will be transformed by increasing retail and professional investors. PHOTO: FILE

KARACHI: A Chinese consortium, which bought 40% stake in the Pakistan Stock Exchange (PSX) about two years ago and lost almost half of the value to poor market performance, has devised a strategy to transform the bourse into a world-class capital market, which will automatically give a boost to the national economy.

Both the Chinese and Pakistani shareholders came to the conclusion that they should transform the PSX in the next two to three years, “which is the extent of my mandate – two years,” PSX Managing Director Richard Morin said in an interview with The Express Tribune.

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Morin, a Canadian national and first-ever foreign head of the bourse, joined the PSX in January 2018.

The key to transforming the market is to increase the number of retail and professional investors. “They (people belonging to the middle-income group earning around Rs1.5 million a year and over 10 million overseas Pakistanis) should be the driving force behind the Pakistani market and when they will do they will help transform Pakistan’s economy,” he said.

“Pakistan’s capital market is at the centre of transformation that this country needs,” he remarked.

Listed companies at the PSX, which play a significant role in economic growth every year, may attract Rs1 trillion in financing through an increase in the number of investors to at least one million from a meagre 250,000 at present.

The expected new investment would boost the average share price to multiples of around 11 to 12 of the earnings per share compared to the multiple of eight (price-to-earnings ratio) at present. It would also encourage a notable number of companies to get listed while investors were expected to enjoy unmatchable return on investment of around 15-20% per annum, on an average, Morin said.

The market has offered, on an average, 20% return per year. “My prediction is that…the next 10 years will be similar. I think average annual return on the PSX, in my view, over the next 10 years should be what it had been in the past 10 years; something 15-20% annual return,” he said.

To do all that, he emphasised, Finance Minister Asad Umar put the wheel in motion by removing two major anomalies in the second mini-budget. The minister abolished 0.02% advanced withholding tax on share sale and purchase and allowed the adjustment of losses on sales in the next three years against future profits.

“The two (measures) are in line with best international practices. It means the after-tax return will be better…to attract more investors,” Morin said.

However, the need is to keep the rules consistent and these should not be changed with the change of government. “Canada has not changed its rules…since I started investing 30 years ago and I have never sold the stocks I have ever bought,” he said, citing his home country’s example. “This is what Pakistan needs to do; do not change rules.”

“So, when we will be succeeding we will be counting investors in millions,” he stressed while pointing to Bangladesh, which was a similar market like that of Pakistan, but had an investor base of 2.5 million.

PSX is targeting the listing of around new 20 companies a year compared to only three last year. “We are reviewing certain of our requirements to attract more start-ups, SMEs and growth companies to come to the exchange.” The Chinese strategic investors bought a 40% stake in PSX at Rs28 per share in January 2017. Soon after getting listed at its own trading platform, the PSX share price faced a downturn. On Friday, the stock closed at Rs14.38 with a fresh loss of Rs0.26 and trading in just 51,000 shares.

Game plan

Morin revealed that they had made some recommendations to the finance minister in an attempt to attract a large number of investors to the PSX. “We can persuade the finance minister that our ideas have value. If he gives the go-ahead, we will come up with more details,” he said. Besides, they are working on regulations to provide a cover of up to Rs1 million to each investor in case his broker goes bankrupt. They are also educating the middle-income group and overseas Pakistanis about benefits of investing in the PSX.

“We are reviewing investor protection fund rules to provide better protection to investors. We want to offer them the same protection in the stock market that investors enjoy in the banking sector. We have drafted the rules…will be sent to the SECP for approval by the end of March,” he said.

“India provides (up to) Rs1-million protection fund to each investor, no questions are asked…we are aiming to do the same,” he pointed out.

Morin emphasised that the PSX was engaged in a very constructive way with the government and the SECP to implement measures in order to promote long-term savings and investment.

“The stock market is a place where you invest to meet, what I call, life goals like down-payment for your house, sending your children for higher education and providing comfortable retirement.”

Besides, the PSX is also revising rules to provide ease of opening an investment account at the bourse.

Cross-border listing

In an effort to attract more foreign and domestic investment, Chinese and Pakistani shareholders are at an advanced stage of getting a Pakistani product – exchange-traded fund (ETF) – listed at one of the Chinese stock markets.

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The ETF will buy stocks listed at the KSE 30-share Index and deposit them with a custodian in Pakistan. Later, Chinese asset management companies (AMCs) will sell ETF units in their respective markets. Simultaneously, the units will remain available for trade at a Chinese stock market like a listed firm.

Cross-border listing is one of the three major areas that Chinese strategic investors are committed to developing at the PSX. Two other areas of attention are transfer of technology and developing new products, which are in progress.

Everything is in place and ready in China to launch the ETF. It is just waiting for regulatory approval. “Chinese cannot freely invest in overseas stocks like buying Pakistani stocks. So, the approval is required from the Chinese regulator before the ETF is offered in China,” Morin said.

Similarly, the PSX management is also working on listing of an ETF at the Pakistan stock market.

PSX staff, in consultation with stakeholders, is preparing rules, which will be presented to the board and the SECP for approval by the end of March. Simultaneously, the management is in talks with four to five AMCs to offer ETF units to investors in Pakistani markets. After March, as soon as the PSX found an AMC, it would get the firm listed at the PSX trading platform, he said.

the writer is a staff correspondent

Published in The Express Tribune, February 11th, 2019.