Following the 2008 global financial crisis, Pakistan Stock Exchange former managing director Nadeem Naqvi was recruited to steer a course via consolidation and regulation of the regional exchanges, and regain emerging market status for the PSE and oversee its listing. Edward Russell-Walling reports. 

Nadeem Naqvi

In June, the Pakistan Stock Exchange (PSX) was due to become listed on its own market. This was the final leg of a journey that included the demutualisation and integration of three regional exchanges, international rehabilitation, and the search for an outside investor. The man at the helm was Nadeem Naqvi, PSX managing director until June 2017.

The financial meltdown of 2008 hit the Karachi Stock Exchange, then a constituent of the MSCI Emerging Markets index, as badly as any other market. International investors sold en masse and the market was closed for a few days. When it reopened, a ‘floor’ was imposed in an attempt to reimpose order.

The floor failed to stop foreign selling, however, and was eventually removed, but MSCI took a dim view and demoted Karachi to its Frontier Markets index – which simply accelerated outflows. In 2011, the exchange embarked on a government-initiated programme of reform and restructuring, and began looking for a new chief executive to lead it. 

Capital market plan

The successful candidate was Mr Naqvi, who joined the broker-owned exchange in May 2011. “The government had drawn up a roadmap for the evolution of the Pakistani capital market,” he says. Phase one was the corporatisation, by act of parliament, of the country's three regional mutual exchanges in Karachi, Lahore and Islamabad.

These were then integrated into the PSX, whose 10-member board is no longer dominated by brokers, but has six independent directors nominated by the Securities & Exchange Commission of Pakistan. While the managing director is responsible for commercial activities, the chief regulatory officer reports directly to the board’s regulatory affairs committee.

“Exchange operations and the front-line regulatory function are now completely separate, to avoid any conflict of interest with brokers,” says Mr Naqvi.

The final phase was to find an international stock exchange to buy a 40% stake in PSX and then to offer another 20% to general investors in a listing. This will leave 40% in the hands of the exchange's broking members. “We invited offers for a 40% stake from a single buyer or a consortium, and received 16 bids,” adds Mr Naqvi.

Taking bids

One of the two international consortium bids came from Nasdaq and several UK and US financial institutions. The highest bidder, however, was the China Financial Futures Exchange, together with the Shanghai and Shenzhen stock exchanges, who accounted for 30%. Also part of this consortium, taking another 5% each, were Pak-China Investment, an investment bank, and local lender Habib Bank Limited. The bid valued PSX at $216m.

One likely outcome, given the nature of the lead investor, is the accelerated development of PSX's very plain vanilla derivatives markets. The small debt capital market should also get a boost, starting with infrastructure bonds for the China-Pakistan Economic Corridor programme. 

“There is also the increased potential for Pakistani companies to raise long-term capital from abroad,” says Mr Naqvi, referring to the China connection. PSX is already about to launch a junior market segment for small and medium-sized enterprises.

The market itself has been growing robustly for the past five years. In 2016, it was the best performing market in Asia, up 42% in US dollar terms. That, coupled with reforms to ensure 2008 never recurs, has bolstered the PSX argument for a return to the MSCI Emerging Markets index.

“A fundamental part of the mission since I joined was to advocate to MSCI that we were ready to move back into the Emerging Markets index,” says Mr Naqvi. The PSX was promoted back into the index at the beginning of June.

Extended notice of this upgrade, an improving economy and hopes of better things to come drove the KSE 100 index above 52,000 at one point, compared with about 12,000 when Mr Naqvi signed on. Market capitalisation has risen from some $30bn to more than $90bn in the same period, while trading volumes have gone from about $50m per day to more than $200m.

With his contract due to end, Mr Naqvi is returning to Canada for personal reasons. “But I look at my tenure with a degree of satisfaction,” he says. “The shape of the exchange and the capital markets has changed significantly for the better, and Pakistan is now firmly on the global radar screen as an emerging market.”


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