Is 'black money' fuelling the rise of Karachi's stocks

As Pakistan’s economy struggles, its exchange soars.  But critics claim weak regulation has opened the door to insider trading

Karachi

Every weekday morning for the past 22 years, Yacoub Habib has arrived at the Karachi Stock Exchange (KSE). He doesn’t need to come here to trade, he says, he could do that online. Instead, he comes to pick up tips.

Recently, Mr Habib has been on hand to witness history. On 15 June, the KSE’s 100 index hit a record high of 23,097 points. In 2012, the exchange was ranked one of the top five performing in the world. In what may seem an irony, while Pakistan’s overall economy may be struggling and while the government of Nawaz Sharif recently had to accept a £4bn IMF loan, its main stock exchange is booming.

Over the past 12 months, KSE managing director Nadeem Naqvi has been heading roadshows in front of investors at the Shanghai Stock Exchange, the London Stock Exchange and the New York Stock Exchange as the Karachi bourse looks for a foreign partner. It last year changed from a member-owned not-for-profit organisation to being controlled by its shareholders. In his address to investors in New York, Mr Naqvi boasted that the benchmark KSE-100 index had risen by 25 per cent from January to May 2013 and that over the previous 11 months it had jumped 52 per cent.

Critics claim the well-performing stock market is partly the result of legislation passed last year that allowed a huge influx of “black money” to enter the system. But officials insist it rather reflects a booming undocumented sector and a growing middle-class hungry for retail products.

“If you look at the top companies of the KSE, their earnings since 2010 have grown at 22 per cent,” Mr Naqvi said in an interview in his office. “Sales were at 15 per cent and returns on equity were 20 per cent per annum.”

Over the previous 12 months Pakistan has emerged as one of a handful of booming frontier markets. Along with places such as the Ivory Coast, Bulgaria and the United Arab Emirates,Pakistan has remained an attractive destination for investors. A report by the Bank of America Merrill Lynch showed that £1.3bn exited emerging market funds from January to mid-August, while frontier funds saw inflows of £930m over the same period.

Critics claim the KSE, which remains modest in size and where only around 60 of its 569 list companies trade regularly, has benefited from legislation introduced at the beginning of 2012 which allowed people to buy stocks without questions being asked about the origination of money used to purchase those shares. There were even claims that some of the money could be coming from drugs or weapons dealing. Activity on the exchange shot up, with the volume of trades leaping to 173 million a day from 79 million, following the new law.

“We have the means to have black money in Pakistan legally,” claimed Syed Adil Gilani, an adviser to Transparency International, an anti-corruption group.

But Mr Naqvi said the new rules, which expire in June 2014, had been a response to its efforts to introduce capital gains tax. It was only eligible for funds that remained invested for six months and he said there was no evidence the market was being used to launder black money.

Some say the exchange could still do more to tighten regulations. In recent months some of the exchange’s top companies have faced allegations of insider dealing. Among those tycoons investigated was Aqeel Karim Dhedhi, who heads one of the country’s largest corporations, the AKD Group.

Reuters reported that a member of Pakistan’s Securities and Exchange Commission (SECP) accused a number of traders, including Mr Dhedhi’s brokerage, of buying shares in the state-run Sui Southern Gas Co before an official announcement, allowing the company to raise its prices.

The National Accountability Bureau, another federal investigative agency, concluded it was insider trading. But the SECP said its own investigation showed no evidence of fraud. The SECP whistleblower in the case has been suspended from her job.

Speaking in his office, Mr Dhedhi maintained his innocence. Asked about the problem of insider trading, he said: “It’s all over the world... If the regulators tighten the rules and they try to implement them, then we can get rid of it.”

One of Mr Dhedhi’s business colleagues, Ali Ansari, CEO of the Engro Corp conglomerate, said the fundamentals for companies to do well in Pakistan were already in place. He said the last 10 years had seen the growth of an expanding new middle class. Government policies, he added, favoured a number of major industries, including textiles and fertilisers. Such policies were reflected in the results posted by the KSE.

“There is no bubble here. We are firmly based,” he said, drawing a comparison with neighbouring India. Referring to Pakistan’s chronic shortage of electricity which is estimated to cost the economy up to 3 per cent a year in potential growth, he added: “The only issue we have here is with the power sector. We have to deal with it. I think in three to five years we will have come out of this problem.”

Nadeem Haque, an analyst based in Lahore, said it was not uncommon for stock exchanges to be “ahead” of a broader economy. Yet he also argued Pakistan had many positives – soaring remittances from Pakistanis working overseas had increased consumer spending, the informal economy was growing and sectors such as car manufacturers and textiles were benefiting from certain government policies.

“The government finances are not growing, but it is following outmoded policies,” he said. “That is why they are turning to the IMF. ”

Mr Habib, the small-time investor who visits the KSE every day, said he believes the exchange will continue to grow. Yet he also called for better enforcement. “Regulations are very weak,” he claimed. “But they need to be implemented.”

News
Alan Bennett has criticised the “repellent” reality shows which dominate our screens
tvBut he does like Stewart Lee
Life and Style
The Google Doodle celebrating the start of the first day of autumn, 2014.
tech
Arts and Entertainment
Sheridan Smith as Cilla Black and Ed Stoppard as her manager Brian Epstein
tvCilla Episode 2 review: Grit under the glamour in part two of biopic series starring Sheridan Smith
Sport
David Moyes and Louis van Gaal
football
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebooksAn unforgettable anthology of contemporary reportage
News
i100
Life and Style
Vote with your wallet: the app can help shoppers feel more informed about items on sale
lifeNew app reveals political leanings of food companies
News
Former Governor of Alaska Sarah Palin, left, with her daughter, Bristol
newsShe's 'proud' of eldest daughter, who 'punched host in the face'
Sport
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
rugby
Arts and Entertainment
Salmond told a Scottish television chat show in 2001that he would also sit in front of a mirror and say things like,
tvCelebrity Trekkies from Alex Salmond to Barack Obama
Life and Style
Carol O'Brien, whose son Rob suffered many years of depression
healthOne mother's story of how London charity Maytree helped her son with his depression
Arts and Entertainment
The cover of Dark Side of the Moon
musicCan 'The Endless River' carry on the tradition? See for yourself
Life and Style
food + drink
News
Rob Merrick's Lobby Journalists were playing Ed Balls' Labour Party MPs. The match is an annual event which takes place ahead of the opening of the party conference
newsRob Merrick insistes 'Ed will be hurting much more than me'
News
A cabin crew member photographed the devastation after one flight
news
Voices
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Pharmaceutical Computer System Validation Specialist

£300 - £350 Per Day: Clearwater People Solutions Ltd: Pharmaceutical Computer ...

High Level Teaching Assistant (HTLA)

£70 - £90 per day: Randstad Education Birmingham: Higher Level Teaching Assist...

Teaching Assistant

£50 - £80 per day: Randstad Education Birmingham: Randstad Education is the UK...

Senior Java Developer - API's / Webservices - XML, XSLT

£400 - £450 Per Day: Clearwater People Solutions Ltd: Our client is currently ...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits