Lahore Stock Exchange 2013

Project Lahore Stock Exchange

Submitted to: Program: Semester: Section: Submitted by:

Sir Rashid Ahmed. Masters of Business Administration 3rd fall 2012 B Fatima Zahra (Rmba/fal12/048)

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Abstract
This report discusses the role of Lahore Stock Exchange, its trends and scope in domestic and international market. Economic growth and development of any economy is interlinked with the performance of its financial institutions. Stock markets play a significant role in the stability of the economy. Stock exchanges cater to different financial services. All the reputed and known organizations list their shares on stock exchanges. This report discusses the role of stock market in the economy. This report has undergone different research analysis for Lahore Stock Exchange. The Background and significance of the study is explained in different sections. The study has a definite rational which is explained in research rationale. This report includes the detailed research on Lahore Stock Exchange; its formation and structure. Different trends shown by Lahore Stock Exchange are explained in this project. Local and international scope has different capacities. All the stock exchanges have the equal appeal. In the recent scenario of Pakistan, people want to invest in foreign stock exchanges. The reason is very clear,in Pakistan there is no relationship between macroeconomic indicators and stock exchange prices.

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Contents
Introduction ..................................................................................................................................................5 Background to the study ...............................................................................................................................5 Significance of study ....................................................................................................................................5 Research Rationale ....................................................................................................................................... 6 Background of Lahore Stock Exchange (LSE) ............................................................................................ 6 Members & Management at LSE: ............................................................................................................... 6 Key Features of Lahore Stock Exchange ..................................................................................................... 7 Overview .......................................................................................................................................................8 Trend over the Year ..................................................................................................................................... 8 Role of the Stock Exchange ....................................................................................................................... 10 Raising capital for businesses .................................................................................................................... 10 Mobilizing savings for investment .............................................................................................................11 Facilitate company growth .........................................................................................................................11 Indexation ...................................................................................................................................................12 LSE Indices ................................................................................................................................................ 13 LSE-25 ....................................................................................................................................................... 13 LSETRI .......................................................................................................................................................13 Trading and Settlement .............................................................................................................................. 13 T+3 Settlement Systems ............................................................................................................................ 14 Benefits of T+3 Settlement Systems .......................................................................................................... 14 Provisionally Listed Counter.................................................................................................. 14 Spot/T+1 Transaction.................................................................................................................................. 14 Futures Contract ......................................................................................................................................... 14

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Future Outlook ............................................................................................................................. 14 Conclusion.................................................................................................................................... 15 References .................................................................................................................................... 15

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Lahore Stock Exchange

Introduction
Financial institutions and economic growth are dependent on each other. We cannot find an economic stability in any country where financial institutions are not performing well. Research in this field argues that only the financial system is responsible for exerting corporate capital, increasing saving pattern and managing the risk in the economy. Stock exchange is the necessary element in this whole phenomenon. Stock exchange provides the facilities to sell and trade assets and its importance can be noted by the statement- Without stock exchange, the global economy would quickly grind to a halt. Globalization affect in all of the capital markets around the world has highlighted the need of a stabilized and large scales stock exchange markets in countries. This project aims to analyze the role of Lahore Stock Exchange and its scope on domestic and international level.

Background to the study

In Pakistan, there are three stock exchanges; Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (ISE). These are the markets located in three different cities of Pakistan. Karachi Stock Exchange is the first one among these three. As the research shows that stock markets and economic growth have the positive relation. Stability in stock exchange market will significantly stable the economic growth. Similarly boom in stock exchange can lead to the higher economic growth within the economy. Pakistan is going through a difficult stage. Financial and economic instability must have some reasons. This is the primary reason why we are conducting the research on Lahore Stock Exchange. It could be the one variable for studying stock markets.

Significance of study
The topic of Lahore Stock Exchange is rarely discussed in literature. This project is an effort to explain the role of Lahore Stock Exchange in Pakistan Economy. The trends and scope of LSE will help us to compare our economy with the international economies. Our knowledge related to stock exchange markets especially about Lahore Stock Exchange has very much improved by this study. This study will be a welcome addition to our further studies.

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Research Rationale
This project will help us to better understand the stock exchange market phenomenon and enhance our skills in this area. The study is not only restricted to local level, it is global in scope. Many of the views and trends discussed in the project are regional and global in nature.

Background of Lahore Stock Exchange (LSE)

Lahore Stock Exchange Limited was developed in October 1970, under the Securities and Exchange Ordinance, 1969, of the Government of Pakistan in response to the needs of the Provincial metropolis of the Punjab. Only 83 members had its memberships and it was housed in a rented building in the crowded area of Bank Square in exotic city of Lahore. The number of members has increased over years. Only a few of all the members were active, and they too had to work through Karachi Stock Exchange, or be limited to do business in Bonus, Vouchers and Bonds. LSE is the second largest stock exchange in the country with a market share of around 12-16% in terms of daily traded volumes. LSE has 519 companies, spanning 37 sectors of the economy that are listed on the Exchange with total listed capital of Rupees. 555.67 billion, having market capitalization of around Rupees 2.61 trillion. LSE was the first stock exchange in Pakistan to use the internet and currently 50% of its transactions are via the internet. The Lahore Stock Exchange has opened branches in the industrial cities of Faisalabad and Sialkot for trading. The Sialkot branch is referred to as the "Sialkot Trading Floor". Asia was identified as the future center of world growth. Lahore Stock Exchange is well prepared to contribute its full share in this growth.

Members & Management at LSE:

LSE has 152 members of whom 81 are corporate and 54 are individual members. The management of LSE is run by its president, who is directly elected by the members of the LSE, assisted by the Vice President, who is elected by the 14 directors, who in turn are elected by the members. Fourteen committees are formed out of directors and members of the LSE to look after all affairs of LSE. Conveyor is chosen by the members of each committee, who then becomes responsible to the Board of Directors for the smooth and efficient running of the committee, and the LSE affairs in that particular field. A permanent secretariat managed by a General Manager,

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and specialist professional assistance of legal, audit and accountants, is available to strengthen implementation of management decision.

LSE Indices:
In Pakistan, the main objective for the construction of an index is to track the performance of the various listed stocks according to their market capitalization. The two distinct indices the LSETRI and the LSE-25 are weighted by their listed capital and have identical company selection criteria. Both the indices are composed of 25 companies selected on the basis of the highest turnover at the Lahore Stock Exchange. However, they are distinguishable from each other by the treatment of corporate actions of component companies (i.e. dividends, bonus, rights, etc.). Of particular interest to analysts is the fact that the two indices are based on ordinary shares listed at the Lahore Stock Exchange, and the fact that the Exchange is making public the qualifying/disqualifying criteria as well as a negative list. On a very basic level, any stock

Key Features of Lahore Stock Exchange

Lahore Stock Services (LSS): Basic analysis on the historical data. Equities scroll: Monitors price/volume fluctuations LSE data. Performance of stocks: List of top 10 gainers and losers pricewise and volume wise Daily market statistics: Current market capitalization of equities, current market
capitalization of individual stocks, the overall and the individual paid up value of stocks, the stock turnover and its monetary value, the current and the previous day index and its monetary value in rupees. Personal portfolio management: Each end user can define its list of preferred companies in which he deals most of the time. He can then list his total sales, purchase, and status of only those companies defined in his portfolio. Share order/interest match system: The members are able to narrow down the prospective buyers and sellers in scrips of their interest. Clearing House System (CHS): Data entry and retrieval from any network, recent trading activity reports, comprehensive record of members, and check of members' credit limits.

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Additional features of LSS

Closing rates of all the companies on a particular date Daily status of all traded stocks and their turnover Current rate of any scrip Number of traded companies on a particular day Total number of deals in a particular scrip Best bid rate of a scrip on a given date Best offered rate of a scrip on given date Lowest rate of a scrip on a given date Average rate of a scrip on a given date Best volume deal on a specific date

Overview Trend over the Year

LSE was the first Exchange in the country to undertake automation of trading at the exchanges in 1994. LSE has made large investments in technology & automation to keep pace with globalization of securities trading. The Exchange is fully committed to providing a transparent, efficient, fair and investor friendly environment for the benefit of Investors and Issuers. The goal is to bring LSE up to international standards in operational, technical, regulatory and quality management areas and to ensure that not only domestic but also foreign investors are attracted. LSE has made direct investment in Pakistan Credit Rating Agency (Pvt) Ltd. (PACRA), Central Depository Company Ltd. (CDC), National Clearing Company of Pakistan Ltd. (NCCPL), and National Commodity Exchange Ltd. (NCEL), all of which play a central role in developing the infrastructure around the financial markets of Pakistan. In addition, LSE is an active member of the Federation of Euro-Asian Stock Exchanges (FEAS) and the South Asian Federation of Exchanges (SAFE), helping to expand its outreach, presence and profile beyond the boundaries of Pakistan. LSE was the first Exchange in Pakistan to offer Internet based trading to its members in the year 2001. It enables the brokers to reach out to the untapped retail markets. Currently, more than 50% of the total trading volume at the LSE originates from Internet trading terminals. The aim of this measure is to transform the LSE from a regional to a national player over a period of time.

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LSE has increased its geographical outreach by establishing its branches in other cities of the Province. Two such branch offices have become operational in Faisalabad and Sialkot. Similar Offices in other cities are also being contemplated. LSE's trading system has already been modified to connect branch offices in real-time fashion. There is a growing need for remote trading terminals reflecting the confidence of traders in the use of stable Internet Trading Systems. LSE has improved the quality of operations and upgraded them to modern international standards. This has included upgrading LSE's IT infrastructure, updating regulations and procedures to incorporate existing and expected technological changes, as well as reorganizing and restructuring the workforce. As a result, LSE's capabilities as both a front-line regulatory body and a service organization have been significantly enhanced. LSE has successfully launched Unique Identification Number (UIN) System with an objective to bring more efficiency and transparency to the stock business and to improve the surveillance and monitoring capacity of the Exchange. LSE has implemented a regular timetable for the Broker System Audit, in order to build investors' confidence. Also, LSE has taken effective risk and exposure management measures including the implementation of a fully automated in-house developed Trade Risk Filter (TRF) to efficiently monitor members' pre-trading exposures on a real time basis. This has been a quantum leap for LSE in improving its risk management systems. A visible trend at the LSE has been the increasing number of corporate members. It is heartening to note that part of this increase has been due to the entry of investment banks/financial institutions (or their subsidiaries) as members of the Exchange. This trend has led to record trading volumes as well as an improved product offering. The measures at LSE have attempted to create an atmosphere, which is more conducive and transparent for investment. The investing public has received the reforms very positively. LSE Training Institute specifically dedicated to the Capital Markets, is the first of its kind in Pakistan and was established in 2006. Formal courses have been introduced to provide trained human resources for the capital markets. It has also launched a series of Education Programs with a view to educate the brokers, agents and general public about the securities market and its laws. In an effort to promote the education sector, particularly in relation to financial markets, LSE is providing scholarships to deserving students of Lahore University of Management Sciences (LUMS). LSE encourages universities and colleges to come and visit LSE. In another trend-setting example, Lahore Stock Exchange and Islamabad Stock Exchange have joined hands to establish a Unified Trading Platform which will help to bring increased liquidity in the market, improve price discovery, maximize transparency, increase turnover, broaden investor base, curtail risks and distortions in trade, provide cost effective service to the investing public and enhance the image of both the Exchanges.

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As part of second generation capital market reforms being pursued by the Securities & Exchange Commission of Pakistan, demutualization is being seriously considered by the members of the exchanges and during the year 2007 a decision had been taken in the best interest of the capital markets of the country. Demutualization is in line with international standards, which had ensure that the exchange truly and fairly represents the interests of all stakeholders. In 2010, Clearing House and the Risk & Exposure Management Department, these two departments were merged to form the Risk and Clearing Department. Also IT division continued to service the automation and support of Ghana Stock Exchange Automated Trading System. Another work they did that Auto-Debit facility for payment of weekly charges & taxes levied on Brokers trading. Also Manual distribution of Market Access Fee (MAF) cheques to brokers regarding has been replaced with direct crediting of amounts to Brokers respective bank account. In 2011, MOU was signed between Lahore Stock Exchange and Tehran Stock Exchange fulfilling the purpose of increased co-operation, increased mutual understanding and assistance in various areas including technology. Also LSE introduced Marginal Trading System (MTS) in line with international leverage products. Lahore Stock Exchange (G) Limited (LSE) launched the Securities Borrowing and Lending Platform (SLB) developed for National Clearing Company of Pakistan Limited, the SLB provides a prior arrangement of borrowing securities to cover the short sale under the Ready Market scrip. As well as Member Relations Department (MRD) was setup to facilitate member related issues. The another milestone they have achieve that they took the initiative to setup an independent Media and Public Relations Department to enhance relations with public and media personnel. Also trainings and courses have been planned and carried out for the Capacity Building of Members. Lahore Stock Exchange has recently taken significant measures to facilitate trading through Internet. Latest figures show that the volume generated from Internet terminals have grown to 40 percent of total LSE volume. LSE was the first exchange in Pakistan to move Electronic Trading in 1996 and the first to offer Internet Trading in 2001. It has had the honor of Chairing the IT Committee of Federation of Euro Asian Stock Exchanges and South Asian Federation of Exchanges.

Role of the Stock Exchange

Raising capital for businesses
The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

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Mobilizing savings for investment When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and higher productivity levels. Facilitate company growth Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways to company growing by acquisition or fusion. Redistribution of wealth By giving a wide spectrum of people a chance to buy shares and therefore become partowners (shareholders) of profitable enterprises, the stock market helps to reduce large income inequalities. Both casual and professional stock investors through stock price increases and dividends get a chance to share in the profits of promising business that were set up by other people. Corporate governance By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some welldocumented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies (e.g. Enron Corporation, MCI WorldCom, Pets.com, Waban, or Parallax).

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Creates investment opportunities for small investors As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides an extra source of income to small savers. Government raises capital for development projects Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such municipal bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. Barometer of the economy At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy. Indexation In process of indexation, first thing is to choose the number of high performers (listed companies) in terms of volume and trade which is according to the size of the corresponding stock exchange. In case of LSE, its 25. Now each high performer is allocated weights according to the traded value of its stocks on the stock exchange. Say, for instance NBP has weight of 10%, PPL 15%; bank Alfalah 3% and so on. Now for each of these companies the total numbers of shares floated are multiplied by their respective market prices. But at the time of construction of index, face value of shares is multiplied by total numbers of shares floating. We get an index simply by dividing this total by a factor. Its done just to present the daily changes in terms of percentage compared to a base time period (or from the time index is last revised).

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What we hear daily about rise or fall in index is basically presenting the cumulative effect of rise or fall of each of these companies individual stock price and rise or fall of volume traded; this obviously depends on market conditions. And hence in this measure of performance of a bucket of high performers help stakeholders in understanding the overall direction of a stock exchange.

LSE Indices
LSE-25
The Lahore Stock Exchange Twenty Five company index also calculates the performance of stocks assuming that all rights issues and bonus share issues only increase the listed capital. In the case of bonuses or rights the prices of the shares are not adjusted as they are in the case of the LSETRI (Lahore Stock Exchange Total Return Index). However, the LSE-25 assumes that dividends paid out by a component company are not reinvested. In summary, in the LSE-25, no price adjustments are made when any component company issues cash dividends.

LSETRI
The Lahore Stock Exchange Total Return Index calculates the performance of stocks assuming that all payouts are reinvested in the index on the ex-date. The LSETRI assumes that if a component company issues bonus shares or announces a rights issue it will increase the listed capital. Additionally, the LSETRI also assumes that all payouts by a component company are 100% reinvested in the index. Therefore, the LSETRI is adjusted against such payouts announced by any of index constituents on its ex-date allowing the index value to remain comparable over time.

Trading and Settlement

The stock exchanges have introduced a computerized trading system to provide a fair, transparent, efficient and cost effective market mechanism to facilitate the investors. The trading system comprises of four distinct segments, which are: T+3 Settlement Systems; Provisionally Listed Counter; Spot Transactions; and Future Contracts

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T+3 Settlement Systems

In the T+3 settlement systems, purchase and sale of securities is netted and the balance is settled on the third day following the day of trade.

Benefits of T+3 Settlement Systems

It reduces the time between execution and settlement of trades, which in turn reduces the market risk. It reduces settlement risk, as the settlement cycle is shorter.

Provisionally Listed Counter

The shares of companies, which make a minimum public offering of Rs.100 million, are traded on this segment from the date of publication of offering documents When the company completes the process of dispatch/credit of allotted shares to subscribers, through CDC it is officially listed and placed on the T+3 counter. Trading on the provisionally listed counter then comes to an end and all the outstanding transactions are transferred to the T+3 counter with effect from the date of official listing.

Spot/T+1 Transaction
Spot transactions imply delivery upon payment. Normally in spot transactions the trade is settled within 24 hours.

Futures Contract
A Futures contract involves purchase and sale of a financial or tangible asset at some future date, at a price fixed today.

Future Outlook
The prime objective of the Exchange for the upcoming years shall be a 100% growth/value creation in the balance sheet size of the Exchange with a minimum of 20% increase in the EVA on year on year basis. LSE Board has already allocated some budget for the establishment of a nationwide association of stock brokers. The Exchange would initiate and successfully complete the process of corporatization in the near term (during one year). The process of full demutualization may be completed during the medium term (1- 3 years) due to tough global economic conditions.

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LSE is further striving to create a name for better investor's protection standards; to exercise effective supervision over the listed sector and the market participants, to continuously deliver value to its owners and stakeholders. The future strategic activities of the Exchange would be divided into three broad categories namely; the "Business Growth Strategy;" the 'Market Support Initiatives' and the 'Branding/Servicing Strategy.

Conclusion
Lahore Stock exchange is the second biggest Stock Exchange of Pakistan after Karachi Stock Exchange, so our study reveal that they are continuously moving towards the modern trading system as they launched a different services like one window operations as well as others. And as if we see their future plans they are looking forward to become one of the best Stock Exchange of the world. Also if we see that they are also indulging themselves as a corporate social responsible by offering internships for the students of different universities. So in short, Lahore Stock Exchange is doing their job very well.

References
Review about Karachi and Lahore stock exchange. (n.d). Retrieved from http://www.scribd.com/doc/48014807/Review-About-Karachi-and-Lahore-StockExchange Naeem. A. Khan, Nov 16, 1996, Lahore stock exchange through history..http://www.pakistaneconomist.com/database2/cover/c96-95.asp Lahore-stock-exchange.(n.d).Retrieved from http://www.scribd.com/doc/40306009/Lahore-Stock-Exchange Lahore-stock-exchange.(n.d).Retrieved from http://en.wikipedia.org/wiki/Lahore_Stock_Exchange http://download-reports.blogspot.com/2011/08/lahore-stock-exchange.html http://invest.pk/investorguide.htm http://www.lse.com.pk/#/LSE/History.aspx

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