KSE Directors Report

The Governing Board of Directors of the Karachi Stock Exchange is pleased to present the Annual Report for the year 2004 and the audited Accounts for the period ended June 30, 2004, together with Auditors Report thereon.

The   Economy

The remarkable economic performance & growth achieved during the last year continued its momentum during the current year. With the prevailing macro-economic stability, the economy is heading towards a higher growth rate. The fiscal year ended June 30, 2004 has been a period of exceptional growth in industrial production, higher than targeted tax collection, sustained low inflation, persistent buildup of foreign exchange reserves and continued low interest rate environment. The economy performed strongly as the real GDP growth rate of 6.4% for the fiscal year was achieved as against the target of 5.3%. This higher growth rate has come in the backdrop of record high growth of 13.1% in the industrial sector. 

The economy has shown signs of growth and resilience in the face of ever increasing geo-political challenges. The prudent monetary and fiscal policies, besides tight fiscal stance during the period ensured stability and will continue to provide enabling environment essential for accelerated economic growth. Record revenue collection, rescheduling and early repayment of expensive debt have given the policy makers the desired room to allocate additional amount for developing projects. However, unemployment and increased poverty are the major problems being faced by the present government. There is a need to initiate a strategy to enhance industrial activity thereby creating employment opportunities in order to provide sustained reduction in poverty prevailing in the society.

Stock Market

The improved economic fundaments and continuation of pro-growth economic policies, brisk pace of privatisation through capital market (IPOs of OGDCL & PPL and additional public offerings of NBP, PIA, SSGC), improved Indo-Pak relations, low interest rates, wide range of structural reforms, prudent and consistent macro-economic policies pushed the KSE-100 Index from 3402.48 points at the end of June 2003 to an all time high of 5620 with the market capitalization of Rs. 1,511,986 million (US$25.41 billion) on April 19, 2004 and a record turnover of over 1.12 billion shares on a single day on April 16, 2004. After the announcement of Federal Budget in last June and introduction of CVT and other levies on the capital market transactions coupled with the decision to phase-out Carry Over Transactions (COT)(BADLA) and to be replaced with margin financing, the market temporarily reacted adversely and the KSE-100 Index had slightly gone down. However, the strong economic factors again prevailed and the market gradually reversed positively, which is reflected by the fact that the KSE-100 Index touched at 5299.53 points while market capitalisation recorded at Rs. 1508.32 billion as on 6.10.2004 and the average daily turnover also picked up considerably and now stands to 350.51 shares.

During the period, under review, the Exchange has taken various initiatives in different areas, interalia including, market promotion & investors awareness, enhancements in IT facilities & infrastructure, improvement in operational efficiency, improvement in building security, infrastructure & environment, strengthening of risk management measures & market surveillance. The significant achievements of the year include:

·                    Promotion of new equity & debt listings by reducing listing fee.

·                    Held series of investors education/awareness programs and publication of investors awareness guide

·                    Procurement of new hardware to upgrade level of automation and to enhance efficiency of existing IT facilities/services

·                    Development of system & operating procedures of Over the Counter Market

·                    Refurbishing Exchange buildings and improving the physical security measures

·                    Enhancement of operational efficiency in Risk Management Systems by receiving on-line pledge from CDC

·                    Strengthening the Surveillance Department by further induction of professional staff

Finance & Accounts

The revenues of the Exchange for the year ended June 30, 2004 were Rs. 547 million as compared to Rs. 310 million of the last year, thereby recording an increase by about 76% over the last year. This was mainly due to unprecedented increase in the market volumes and new listings due to governments privatisation program through the stock exchanges.

Similarly, operating expenses at Rs. 236 million as compared to Rs. 225 million, recorded an increase by only 5% over the last year. However, after writing-off of some tangible and intangible assets due to technological obsolescence during the year, the Exchange has recorded a pre-tax surplus of Rs. 311 million as against Rs. 85 million during the previous year.

It would be worth noting that after the lapse of 5 years, the Exchange s financial position positively changed in the year 2003 and recorded post-tax surplus of Rs. 57 million. This trend continued in 2004 as well, the post-tax surplus recorded at Rs. 189.5 million, i.e. surged by 332% from the previous year

Future Challenges

Nevertheless the coming year is not lesser challenging, as it is contemplated to initiate further projects/activities to ensure that Karachi Stock Exchange should remain one of the fastest growing National Institution of the country. The futures projects include:

1.  Commencement of live operations of Over The Counter Market

2.  Introduction of a new derivative product including Index Futures

3.  Cross Border Listings

4. Introduction of new indices, being more market reflective & representative

5. Strengthening the existing monitoring of compliance with the Code of Corporate Governance, by listed companies

6. Consolidation of the existing Exchange Rules & Regulations in a single Rule Book

7.  Strengthening of Market Monitoring and Surveillance Department

8.  Commencement of Internet Trading

9. Establishment of full-fledged Disaster Recovery & Business Resumption site

10.  Refurbishment of the Trading Hall with Electronic Display Boards

Compliance with the Code of Corporate Governance

The Exchange has applied the principles contained in the Code in the following manner:

1.         The Board of Directors of the Karachi Stock Exchange, being primary regulator of the major capital market of the country has always supported and re-confirm its commitment to continued support and implementation of the highest standards of Corporate Governance at all times

2.         The financial statements, prepared by the management, present fairly the sate of affairs of the Exchange, the result of its operations, cash flows and changes in funds.

3.        Proper books of accounts have been maintained by the Exchange.

4.         Appropriate accounting policies have been consistently applied in preparation of the financial statements and accounting estimates are based on reasonable and prudent judgment.

5.         International Accounting Standards, as applicable in Pakistan, have been followed in the preparation of financial statements.

6.        The system of control is sound in design and has been effectively implemented. The system is being monitored by Internal Audit Department and through other such procedures. The process of monitoring internal controls will continue as an ongoing process with objective to further strengthen the controls and bring improvements in the system.

7.        The Exchange has formed the Audit Committee, and its Chairman is the non-executive director. The terms of reference of the Committee have been framed, approved by the Board and advised to the Committee for compliance.

8.         There are no doubts upon the Exchange s ability to continue as going concern.

9.         There is no material departure from the best practices of corporate governance.

10.      Significant deviations from last years operating results have been disclosed as appropriate in the Directors Report.

11.       Subsequent to the year-end the company has been declared a collecting agency for the purposes of collection of taxes from Members of the Exchange on stock market transactions.

12.       The carry over market is being phased out and margin financing is being implemented. Further new products and markets like introduction of Over the Counter (OTC) Market, and Index Futures are at the various stages of implementation.

13.       All major Government levies in the normal course of business, payable as at June 30, 2004 have been cleared subsequent to the year end, unless otherwise specified in the notes to the accounts.

14.       The value of investments made by the staff retirement benefit funds based on their respective audited accounts as at June 30, 2004 is Rs. 32.18 million.