Pakistan's booming market no black and white matter

Published: April 10, 2013
The market took off last year just as a government decree was finalised allowing people to buy stocks with no questions asked about the source of the cash. DESIGN: ESSA MALIK

The market took off last year just as a government decree was finalised allowing people to buy stocks with no questions asked about the source of the cash. DESIGN: ESSA MALIK

The market took off last year just as a government decree was finalised allowing people to buy stocks with no questions asked about the source of the cash. DESIGN: ESSA MALIK Jahangir Siddiqui, Chairman of JS Bank Ltd, speaks during an interview with Reuters at his office in Karachi January 30, 2013. PHOTO: REUTERS "There's a lot of fraud, a lot of market manipulation ... but not enough action has been taken, especially not enough criminal action has been taken," says Tiwana. PHOTO: REUTERS "There is nothing there. The (SECP) report totally cleared us," says Dhedhi. PHOTO: REUTERS

KARACHI: Country’s chaotic financial heart – Karachi –  is home to 18 million people, Taliban bombers, contract killers and one of the world’s most successful stock markets.

With 49 percent returns in 2012, the Karachi Stock Exchange (KSE) was one of the five best performing markets in the world. Now it is seeking a foreign partner to buy a stake and take over management of a market that has risen three-fold over the past four years.

At least some of that performance came on the back of a government amnesty that allowed people holding undeclared assets or “black money” to invest it freely in the market. And the relatively illiquid market has also been vulnerable to manipulation.

But government officials say the market’s success highlights the economic potential of a country better known for spiraling sectarian violence, the war against al Qaeda and the Taliban, crippling power cuts and entrenched corruption.

The market’s benchmark index .KSE continues to soar to record highs – up 10.34 percent year to date – fuelled in part by expectations May elections will mark Pakistan’s first transfer of power from one democratic government to another. Previous civilian governments were all dismissed by Pakistan’s ultimate power: the military.

“Pakistan has a lot to offer investors and this is our chance to show it,” said Nadeem Naqvi, the KSE chairman. He plans to embark on a series of roadshows for potential foreign partners that will take him to London, Frankfurt and Hong Kong in the coming months.

Many of the companies listed on the KSE offer double-digit returns, low stock prices and resilient business models in this frontier market with a population of 180 million. The index still has an attractive price/earnings ratio of $8.50 despite the soaring returns of the past few years.

Pakistan now has a 4 percent weighting in the MSCI Frontiers Market Index and has become somewhat of a discovery for foreign investors chasing new markets and yields.

The seamier side

But the KSE’s spectacular rise last year can at least be partly attributed to another factor entirely – the cleansing of “black money”.

The market took off last year just as a government decree was finalised allowing people to buy stocks with no questions asked about the source of the cash. Average daily volume more than doubled last year to 173 million shares from 79 million in 2011.

Authorities say the measure will bring undocumented funds into the tax net in a country where few pay taxes. But some critics decried it as a gift to corrupt officials and criminals seeking to launder dirty cash.

“Politics and dirty money go hand in hand in Pakistan,” said Dr Ikramul Haq, a Supreme Court lawyer and a professor on tax law.

“People want to be outside the regulatory framework and outside the tax net.”

The black money amnesty also drew attention to the seamier side of the Karachi stock market. Interviews with regulators, brokers, market officials and analysts showed insider trading and other manipulations are routine. Regulators have been largely ineffectual in controlling the shady practices.

The Securities and Exchange Commission of Pakistan (SECP) said it found 23 violations of securities laws that merited fines in fiscal year 2011-12 (April/March). The market regulator sent warning letters in another 19 cases, it said in its annual report. (

That’s a drop in the bucket, says Ashraf Tiwana, dismissed as head of SECP’s legal department after years of clashes with his bosses over fraud in the market. He has petitioned the Supreme Court to replace the SECP chairman and commissioners.

“There’s a lot of fraud, a lot of market manipulation … but not enough action has been taken, especially not enough criminal action has been taken,” Tiwana told Reuters. “They’re just passing small fines and giving out warning letters.”

Regulators are too close to the market, Tiwana said. The head of the stock exchange is a former broker and the two top members of the SECP are former employees of Aqeel Karim Dhedhi, founder of one of the country’s biggest brokerage houses.

Big Dhedhi

Nicknamed “Big Dhedhi” for his ability to move markets, Aqeel Karim Dhedhi heads one of Pakistan’s largest domestic conglomerates, the AKD Group (AKDC.KA).

Lately, the well-known philanthropist and leading member of Pakistan’s business establishment has been trying to fend off arrest over allegations of insider trading.

An SECP investigator accused traders, including Dhedhi’s brokerage, of buying shares in a state-run Sui Southern Gas Co (SUIS.KA) before an official announcement allowing the company to raise its prices. In the weeks before Sui Southern’s announcement, the stock price jumped from 13.5 rupees to 20 rupees, its biggest hike in five years.

The National Accountability Bureau called it a case of insider trading. But the SECP said its own confidential investigation showed no evidence of fraud. The SECP whistleblower in the case has been suspended from her job for disclosing “confidential information”.

Dhedhi strongly denied any wrongdoing and said he purchased his gas stocks years before the announcement.

“There is nothing there. The (SECP) report totally cleared us,” said Dhedhi, a burly man wearing a traditional long cotton shirt and baggy pants. “I’m proud to say that in more than 40 years of operating, we’ve never paid a penny in fines.”

Dhedhi says he often offers advice to government officials on financial policy. His business empire includes two equity funds that were among the best performing in Asia in 2012.

“The SECP has really started listening to the market,” Dhedhi said, a suited executive acting as translator.

Revolving door

Dhedhi remains under investigation. But even if regulators were to find him guilty of insider trading, past practice shows he would likely get a slap on the wrist. The SECP’s fines are almost always a fraction above the amount of money made in the stock manipulation, and sometimes even less.

In December, a broker was fined half the amount he made from trades that manipulated the share price of tobacco giant Philip Morris (PHIM.KA). In February, the SECP fined Pakistani brokerage BMA Capital $500,000 – after it made $460,000 by misleading a foreign client. BMA Capital has appealed.

Imtiaz Haider, the SECP commissioner in charge of market regulation, acknowledged fines were largely symbolic. If they were too high, he said, brokers might not be willing to pay them. Contesting fines in the congested court system could take years.

“The purpose is more to name and shame,” Haider said in an interview. “It causes them reputational damage.”

Like KSE Chairman Nadeem Naqvi, Haider is a former employee of Dhedhi’s. Both men denied any conflict of interest.

“It’s important to have people in charge who know the way markets work,” Haider said. “I’ve had lots of other jobs than just working for Dhedhi.”

The SECP can revoke licenses, impose hefty fines, or open criminal cases against offenders. But it almost never does. It has launched only 10 criminal cases in the past five years – all still held up in the judicial backlog. It has issued dozens of small fines.

“We have great laws and regulations but they are not properly enforced,” said Khalid Mirza, a former SECP chief. “The SECP is just catching the small fish as far as I can see.”

Naqvi, the KSE head, acknowledged his priority has been to boost the market, not to crack down on it.

“My management style isn’t confrontational because I want to build confidence in the market,” he said.

Separating the commercial and the regulatory functions of the market is one of the main reasons the KSE is looking for a foreign partner. It has appointed Deutsche Bank as its advisor on its quest to demutualise – a process that will separate those two functions.

“Demutualisation is another step on the road to reform,” Naqvi said. “Right now we have a fairly robust system. But I’m not saying its foolproof.”

Black to white

The Karachi market’s small size and lack of liquidity make it vulnerable to manipulation. Market capitalisation is only $41.5 billion – the Bombay stock market’s .BSESN capitalisation is more than 10 times higher at $578 billion.

Only a quarter of the shares are freely floated – about 30 percent of that is held by foreign funds and investors, including Franklin Templeton, Invesco Ltd, Goldman Sachs Asset Management and Mackenzie Financial Corporation.

Since only 60 of KSE’s 600 listed companies trade regularly, small trades can rapidly make a big difference in a company’s share price.

Boosting volumes on the exchange was one of the intentions behind Pakistani President Asif Ali Zardari’s decree last April turning black money into white.

It said no questions could be asked by the Federal Board of Revenue about the source of funds invested in stocks till July 2014. The investments become legally legitimate.

The pool of such funds is potentially huge. A report by the United Nations Office on Drug and Crime projected the size of Pakistan’s informal or “black” economy at $34 billion in 2010-11, one-fifth of the formal economy.

The Paris-based Financial Action Task Force, which monitors money laundering, said the decree did not contravene Pakistan’s existing anti-money laundering legislation. But anecdotal evidence suggests controls are lax.

In one case shown to Reuters by a lawyer, a man invested $10 million buying stocks in a single transaction. His address: a Karachi slum notorious for Taliban infiltration.

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Reader Comments (21)

  • antanu
    Apr 10, 2013 - 2:35PM

    wonder why there is no comment. think it is due to the positive sides of the Pakistani economy which do not attracts trolls


  • Apr 10, 2013 - 3:18PM

    The Pakistani stock market is getting down day by day. There is no forcasting during the general elections.


  • khan
    Apr 10, 2013 - 4:15PM

    how on earth anyone having illegal money can invest in stock exchange without revealing the source


  • Apr 10, 2013 - 4:36PM

    I too do not believe Rs 20 trillion of reverse repo would make a ding in the equity markets. But then I also think Zardari is the greatest president Pakistan can ever have.


  • Apr 10, 2013 - 5:42PM


    Very good point brother, the Hindustanis are no doubt out there on the hunt for less positive articles, while the other Pakistanis seem to have no interest in passing comment about the success of the KSE – apart from those few others who have, of course, posted messages highlighting the negative aspects of the article. I’m surprised they haven’t reacted furiously to the author for daring to show some positivity and accused him of being a PPP stooge yet.


  • Rashid
    Apr 10, 2013 - 5:51PM


    lol.. +ve news attracts equal amount of trolls. It is just that they need to find a black spot in the white wall.


  • gp65
    Apr 10, 2013 - 6:56PM

    @antanu: “wonder why there is no comment. think it is due to the positive sides of the Pakistani economy which do not attracts trolls”

    Charges of internal trading and manipulation, having an illiquid market that can be easily manipulated, office bearers who have a conflict of interest, having only 60 countries that are regularly traded etc. are things that this article refers to.You may think those are good things and others may not.

    “Market capitalisation is only $41.5 billion – the Bombay stock market’s .BSESN capitalisation is more than 10 times higher at $578 billion.”

    Bombay Stock Exchange’s market cap was around $1.2 trillion in October 2012 and the Sensex is hovering around the same numbers at this time, so it is fair to assume that the current market cap is around the same – which is off its 2008 peak of 1,8 trillion when it had clearly overshot.


  • John the Baptist
    Apr 10, 2013 - 8:41PM

    The index still has an attractive price/earnings ratio of $8.50 despite the soaring returns of the past few years

    P/E is a ratio–it should be 8.5X, not $8.50! Thanks ET for more fluff.


  • just_someone
    Apr 10, 2013 - 8:59PM

    who cares what the Indian markets are doing dude?
    India is a much much bigger country with a much bigger population. Is it reasonable to compare India’s market with that of the US? No!
    So please take your trolling somewhere else.


  • just_someone
    Apr 10, 2013 - 9:01PM

    The fact that some of these big funds are in there is because they are doing a classic pump and dump. Since there are no rules about these kind of things in the KSE (its more difficult to do these things because there are rules against it in the US, like funds cant shares below 5 bucks)…
    There is nothing to be proud of in this market. The economy is struggling like crazy, anyone who can not see that in the data is beyond explanation!


  • John the Baptist
    Apr 10, 2013 - 9:12PM


    Sometimes, it is better to keep your mouth shut than to shamelessly promote “mother” india using white lies: Let me put some facts on the table (and don’t argue with me, I am an investment banker!)

    The market cap of free float SENSEX is ~$286 billion (Rs. 1572009 crore), not $1.2 trillion as you suggest (link 1).

    Furthermore, over the past three years, the Pakistani KSE has gone from roughly 10,500 to roughly 18,000, a cumulative return of 72% (link 2).

    And finally, over the past three years, the indian SENSEX has gone from roughly 17,500 to roughly 18,000, a cumulative return of only 3% (link 3). It cannot have been trading at $1.2 trillion in October 2012.

    But what do you expect from an indian american who vehemently believes that gandhi was secular and that the US social security is solvent. Sad example of jack of all trades, master of none!


  • gp65
    Apr 10, 2013 - 9:30PM

    ET: SOmeone has accused me of trolling unnecessarily. Pls. allow rebuttal.

    @just_someone: “@gp65:
    who cares what the Indian markets are doing dude?
    India is a much much bigger country with a much bigger population. Is it reasonable to compare India’s market with that of the US? No!
    So please take your trolling somewhere else.”

    I would not have brought up the Indian stock market at all. I only pointed out erroneous reporting in this report which indicated that Indian market cap was $578 bilion. I was in no way comparing Indian stock market with KSE.


  • Sandip
    Apr 10, 2013 - 9:45PM

    @John the Baptist: Please don’t go about professing yourself as an investment banker. The reputation of investment bankers nowadays is probably just a wee bit more than that of swindlers, especially after 2008.
    On the other hand, please don’t get confused between religiosity and secularism. Gandhi was both religious and secular at the same time. Might be a bit hard for you to get it, but that’s the fact. And it isn’t changing like any of the stock markets, KSE or BSE.
    As for these numbers, didn’t we hear one Pervez Musharraf tom-tomming the fact that the Kaskol was broken for ever? And we all know who was picking up the pieces of that bowl just a couple of years later, once the facts became know.
    All this is not to deny or begrudge the fact that KSE might have really performed well. It’s just that sometimes a couple of years is too short to pass a judgement. Same goes for the BSE performance or that of the Indian economy.


  • v
    Apr 10, 2013 - 10:39PM

    Talk about a bubble. If people think this is a positive story, then there is no hope.


  • gp65
    Apr 11, 2013 - 12:27AM

    ET Mod: Please allow me to rebut a personal attack with facts and logic.

    @John the Baptist: You should calm down and read what people have written and the context in which it is written before you start making personal attacks.

    The links you attached do not in any way invalidate what I was saying. The article talked about total market capitalization of India and said it was $578 billion. I simply pointed out that total market cap was was $1.2 trillion. Neither the article nor I were referring to the free float market cap. Thus the information you provided about free float market cap is not relevant to the point I was making.

    As mentioned earlier, I would not have brought India into the discussion at all if it were not mentioned in the original article with wrong data. I made no attempt to compare BSE with KSE. Each exchange has its cycle. BSE climbed rapidly between 2003 and 2008 (even overshot) and clearly it has been KSE that has been performing really well in last few years. Anyway India is an emerging market and Pakistan a frontier market so comparisons are inappropriate and I was not making any attempt to compare the 2 stock exchanges.

    The fact that a an avowed Hindu like Gandhiji can be secular maybe a new idea to you but it would not be strange at all in US where Obama goes to church weekly but also runs a secular government. It is a distinction between private belief and public governance.


  • minor
    Apr 11, 2013 - 12:29AM

    KSE performs well but still pak has the weakest economy…y??


  • Imran Ahmed
    Apr 11, 2013 - 1:11AM

    There are times when one is thankful when Pakistanis evade taxes and are active in the undocumented Black market. Governments like the last one and Ministers like our two recent PMs find it easier to rip off official funds and to manipulate stock markets. The value of middle class pension funds and bank deposits has shrivelled because of Rupee depreciation caused by corrupt mis-governance. In effect our elected Government had been picking middle class pockets in addition to robbing assets and perk grabbing on top of sanctioning itself obscene pay packages and residences.
    Even Black markets are however not immune to the thuggery of those running Karachi. One is left in a quandary whether to applaud one side or the other. The common citizenry, however, always loses cravenly and deserves no applause. Whether Big Dedhi or a Makhdoom or Nawab hits the jackpot little people like us always get crushed.


  • Raza
    Apr 11, 2013 - 2:12AM

    For those who consider the above to be good, wake up; this is simply state-legalized money laundering. For a country where the rich dont pay taxes and frequently make money illegally, the decree of not asking source of money is a way to cover their tracks. Passed of course by a corrupt government. Its simply a case of excess demand due to the money being available; it has nothing to do with our economy which is in doldrums. SECP is not fulfilling its regulatory/monitoring role; where the guilty walk free as usual.

    The last line is just depressing.


  • Gijesh
    Apr 11, 2013 - 10:05AM


    Stock markets are no indicators of health of a national economy.Time and again, all Indian Finance Ministers have said this. Most of the stock market rallies are liquidity driven. And it is only FII money that is pushing the markets in Indian Subcontinent. When they withdraw the money, market crashes. It is always too much money chasing two few stocks. Those who invest in stock must be knowing that in times of crisis/national calamities, index shoots up, because there are lots of expections for rebuilding activities. Also, part of credit should be given to democracy in Pakistan.


  • GIndian
    Apr 11, 2013 - 5:18PM

    Whether money is black or white, Pakistani stock market is still evolving. India also had to go through Harshad Mehtha phase. Economic progress will liberate Pakistan from the evil clutches of religious fanatics. I wish there were more economy related news in the Pakistani newspapers.
    With the right vision for the future, Pakistan, a country of 180 million young and vibrant population, can easily reach the level of Indonesian GDP in a generation.


  • Gulam Rasool "Kuldeep sharma"
    Apr 12, 2013 - 10:37AM

    At-least one good news from Pakistan these days. We appreciate it. Best of Luck for Pakistan.

    Gulam Rasool”Kuldeep sharma”
    New Delhi


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