INTERNSHIP REPORT ON

ISLAMABAD STOCK EXCHANGE (GUARANTEE)

LIMITED,
UNIVERSITY CAMPUS BRANCH, PESHAWAR

IQBAL MARWAT

INSTITUTE OF MANAGEMENT STUDIES

UNIVERSITY OF PESHAWAR
Session 2007-08
i

INTERNSHIP REPORT ON
ISLAMABAD STOCK EXCHANGE (GUARANTEE)
LIMITED,
UNIVERSITY CAMPUS BRANCH, PESHAWAR

Internship report submitted to the Institute of Management Studies in

Partial fulfillment of the requirements for the degree of Master of
Business Administration
December 2008

ii

INSTITUTE OF MANAGEMENT STUDIES

UNIVERSITY OF PESHAWAR
INTERNSHIP REPORT ON
ISLAMABAD STOCK EXCHANGE (GUARANTEE)
LIMITED,
UNIVERSITY CAMPUS BRANCH, PESHAWAR

Supervisor:
Signature

__________________________________

Name

__________________________________

Designation

__________________________________

Organization

__________________________________

iii

DEDICATION
This report is dedicated to my parents whose hard-work and prayers made me reach to
the place where I am today.

iv

ACKNOWLEDGEMENT
Say (O Prophet Sal Lallalla Ho Allayhi Wasallum) if you love Allah,
follow me, Allah will love you.

(AL-Quran)
First and foremost is the help of our Gracious, Benevolent and Merciful God and Holy
Prophet Muhammad (Sal Lallalla Ho Allayhi Wasallum) that enable me to complete the
report successfully.
With great reverence I ecstasy in expressing gracious thankfulness to my meritorious
supervisor, Mr. Abdul Wahid (Professor, Institute of Management Studies) couraging
guidance, expert advice, pain stocking efforts & his precious time. It was his cordant
motivation that has always elevated me to complete my research, whenever aggrieved
distressed during my research. His devoted love and support is worth appreciation.
Special thanks to Dr. Shahjhan Khan (Director, Institute of Management Studies), Dr.
Professor Abdul Qayum Khan (Dean, Institute of Management Studies), Professor Zia
Uddin Khan for their help and encouragement in my report.
I find no appropriate and suitable words for sincerity, genuineness, seriousness and
solemnity of Mr. Aftab Ahmad Ch. Managing Director Islamabad Stock Exchange and all
my office colleagues name by name.
I would also like to thank my friends who provided me with all the help I required during
the period spend on my dissertation.
I gladly acknowledge that the indispensable and indivisible love of my parents remained
assisted and encouraged me to complete the report.
This report is not an individuals efforts in fact it is teamwork. I hope that this report will
prove to be a milestone in equity market in Pakistan.
Finally I am again thankful to my Allah who gave me courage and supported me to
complete this report.

Muhammad Iqbal Marwat

LIST OF CONTENTS
CHAPTER 1: INTRODUCTION OF STUDY1
1.1 Brief History..1
1.2 Stakeholders of the Organization ..1
1.3 Regulatory of ISE..2
1.4 Functions to be Performed by ISE.3
1.5 Organizational Structure4
1.6 Employees of ISE..6
1.7 State of Communication.7
1.8 Organizational Climate...7
1.9 Physical Facilities to Employees8
1.10 Product Lines8
1.11 Business Volume..9
1.12 Stock Market Operations..9
1.13 Code of Corporate Governance..10
1.14 New Risk Management System..11
CHAPTER 2: ACCOUNTING AND FINANCIAL REVIEW OF ISE12
2.1 Structure of the Finance Department12
2.2 Number of Employees Working in the Finance Department...12
2.3 Finance and Accounting Operations.13
2.4 Accounting Review...13
2.5 Financial System Review..15
2.6 Mobilization of Funds...15
2.7 Audit..18
CHAPTER 3: ANALYSIS19
3.1 Critical Analysis of Theoretical Concepts.19
3.2 Financial Analysis..19
3.3 Comparison of ISE with KSE and LSE.33
CHAPTER 4: FINDINGS & RECOMMENDATIONS37
4.1 Future Prospects of the Organization37
4.2 Weaknesses of the Finance Department...37
4.3 SWOT Analysis.38
4.4 Recommendations for Improvement and Action Plan..44
LIST OF PERSONS INTERVIEWED..46
BIBLIOGRAPHY.46

vi

LIST OF TABLES
Business Volume..9
ISE Index10
Main codes for assets & liabilities...13
Rate of Depreciation14
Allocation of Funds.17
Key Figures & Ratios of KSE, LSE & ISE.35
Cross-Sectional Analysis of ISE..35

LIST OF CHARTS
Regulatory of ISE.2
Organizational Chart.5
Organizational Structure of Finance Department12

LIST OF GRAPHS
Allocation of Funds..18
Current Ratio.20
Cash Ratio.21
Debt Ratio.22
Debt to Equity Ratio.23
Return on Assets...24
Return on Equity...25
Comparison of ISE with KSE and LSE34

LIST OF ACRONYMS
CFS
COT
DCA
DIC
DIR
ISE
KSE
LSE
MD
NCCPL
NCSS
OTC
RBQ
RMS
SECP
TFC
VAR

Continuous Funding Settlement

Carry Over Transactions
Department of Companies Affairs
Department of Internal Control
Department of Investors relations
Islamabad Stock Exchange
Karachi Stock Exchange
Lahore Stock Exchange
Managing Director
National Clearing Company Pakistan Limited
National Clearing Settlement System
Over the Counter
Ready Board Quotation
Risk Management Structure
Securities Exchange Commission of Pakistan
Term Finance Certificate
Value at Risk

vii

EXECUTIVE SUMMARY
1. The Islamabad Stock Exchange is a company limited by guarantee incorporated
under Companies Ordinance, 1984 in Islamabad. The main objective for the
establishment of the Islamabad Stock Exchange is to provide a securities market
and trading infrastructure for the less developed northern part of Pakistan.
2. The purpose of this Internship report is to review the existing policies and
practices of Islamabad Stock Exchange and to give recommendations to improve
the existing system. For this purpose, general study of all operations keeping main
focus on finance and administration practices is made.
Report findings are as follows:
1. The future of the Islamabad Stock Exchange is quite bright and there is no serious
threat faced by it which could affect on its going concern status.
2. Although, this institution is faced with a number of challenges especially the
liquidity problems of the Exchange from trade turnover point of view and
rigorous competition yet I believe that this organization would come through all
such challenges and would emerge as a vibrant institution of the capital market of
the country.
3. The Risk Management System of the ISE has been revamped recently and now
the risk management system may be ranked with any developed countrys stock
exchange. This has increased the efficiency of the system thus increased the
confidence of the investors not from inland but also of foreign fund managers.
My recommendations are as follows:
1. ISE should induct more trained and qualified staff especially in Accounts and
Finance Department. ISE should give special consideration in developing HR
policies.
2. ISE should also develop better ways for more marketing of its products and
should develop a separate department for marketing and research and
development. There is a great need of proper marketing strategies by management
of ISE.

viii

BACKGROUND
AND
PURPOSE
ISLAMABAD STOCK EXCHANGE

OF

STUDYING

I joined Islamabad Stock Exchange (ISE) in April, 2004 as DIR Assistant. Dedicated hard
work paved my way for promotion in quicker successions and ultimately I reached to the
level of Manager (Operations). However, despite working at senior managerial level I
was lacking sufficient knowledge of management. This drawback persuaded me to
undertake instant business management course and now I am in the final stages of MBA
program, I feel inner confidence and satisfaction that at least I can now take up the
modern life challenges of the business world. I am also fully poised about the current
position is to grow in real terms and what strategic measures are imperative if this
institution is to grow in real terms and what roles are needed for in future.
Being a mandatory requirement for MBA, I made my focus for the internship job at the
new risk management regime introduced by Securities and Exchange Commission of
Pakistan, the regulator of capital market in Pakistan, as an integral part of capital market
development reforms organized at the behest of Asian Development Bank. This issue was
not only new one but also had a lot of challenges in it. The whole programme was
designed by the experts from International Securities Corporation (ISC) a Singapore
based firm.
The risk management is an integral part of Stock Exchanges functioning. The core of the
risk management system is to protect the interest of all traders at all tiers of trades. When
a trade is executed, the stock exchange is required to have certain risk management
system backing to ensure the smooth settlement until settlement date. The Stock
Exchanges in Pakistan viz Karachi Stock Exchange (KSE), Lahore Stock Exchange
(LSE) and Islamabad Stock Exchange (ISE) were having outdated risk management
regime whereby the trader had to deposit certain percentage of margin as a security.
However, internationally this system had been phased out since nineties and it was on the
top of the agenda of the foreign donors of Pakistan to get this system replaced as soon as
possible. This outdated system was also a great hindrance for the promotion of portfolio
investment in Pakistan. Therefore, I got a chance not only as my official job but also to
make a focus for my internship. While developing and implementing the new system I
got to know about international practices. Therefore I made this system as an integral part
of my internship report.

SCOPE OF STUDY
In this report, I have written about the organizational briefly, its functioning, its
departments and its organization etc. Besides, SWOT analysis of the organization, risk
management regime and some brief recommendations have been made in the said report
keeping in focus the finance and accounting review of ISE. I hope that my report would
be found quick informative and a comprehensive document about the ISE.

ix

METHODOLOGY OF RESEARCH
I have used many secondary data resources as mentioned in references to collect data
about ISE. For primary data collection, I have interviewed mostly the heads of all
departments of ISE. Being an employee of ISE, I also have direct hands-on experience
which gave me enough knowledge to contribute to my report.
The methodology of research consists of all methods, which were possible during the
internship in ISE. The following methods were adopted by me,

A. INTERVIEWS
The interviews were made on daily basis form the concerning departments in ISE. There
are number of personas covered in interviews both top and lower management. The
interviews were made in the form of prepared and unprepared. Before the interview
general discussion were made for creating feasible environment.

B. QUESTIONNAIRE
In prepared interviews the questions were asked consist on following nature,
i)

Open Ended Questions:

The open questions were asked more as compared to other types of questions. The open
ended questions asked in different directions. The questions were asked more in number
to top management when the response was given than an open discussion were made.
ii)

Closed Ended Questions:

Closed-ended questions were less in numbers as compared to other questions asked by

me. The questioner were first developed and then asked to the management in the form of
scaling.
iii)

Techniques in Questions:

The methods of questions in open-ended technique were change question to question. In

unprepared method the questions were asked according to information that I got from the
respondent. But in open-ended questions were asked usually positive provided if the
response was expected according to desire. If there was chance variation in questions
than the questions were asked positively and then negatively after time consecutively.

C. SOURCES OF WRITTEN DATA

The data were collected from various authentic sources includes the newspapers,
international books, national level books and literature as stated in bibliography.

D. OTHER METHODS
It includes the general observation, discussion with investors and consults the different
record of Islamabad Stock Exchange (ISE).

SCHEME OF REPORT
Scheme of report is as follows:

Chapter 1 gives general introduction of ISE, its history, stakeholders, regulatory,

organizational structure, functions, employees, state of communication,
organizational climate, physical facilities, product lines, business volume, stock
market operations code of corporate governance and new risk management
system.

Chapter 2 gives a complete review of accounting and financial system of ISE.

Chapter 3 consists of critical analysis of theory with practical study, financial

analysis, future prospects, SWOT analysis, conclusion and recommendations.

Chapter 4 tells my findings and my action plan for improvement of ISE.

xi

CHAPTER 1:
INTRODUCTION OF STUDY
1.1 BRIEF HISTORY
The Islamabad Stock Exchange was incorporated on October 25, 1989, under the
companys ordinance 1984 as a company limited by guarantee. The exchange first time
started trading in July, 1992. The main function of exchange is to conduct, regulate, trade
securities, government bonds, shares of companies and other related investment.

1.2 STAKEHOLDERS OF THE ORGANIZATION

The ISE has mainly three stakeholders which are as under:
1.2.1

Members/Brokers
At present there are 121 members of Islamabad Stock exchange. These
members have been elected by the Board of Directors of the Exchange. The
members may be individuals of high net worth or the bodies corporate. Out of
above mentioned 121 members, 86 members are companies whereas rests are
individual persons.

1.2.2

Listed Companies
This segment contains the companies whose shares can be traded at the
Exchange. At present there are 261 listed securities at ISE. The ISE has its
Listing Regulations to discipline and control the listed companies which inter
alia include sections relating to approval of listing and even delisting.
The management of Stock Exchange first observes the listing regulations for a
company with authorized regulations. When a company gets approval for
listing in Stock Exchange, it offers the shares for sale to the general public
through Initial Public Offering (IPO). This means that the shares are first
offered for sale to general public. When public accepts the offer they purchase
the shares from exchange and got ownership right in company. The future
value of share is depending on the performance and repute of company. If the
performance is good and demand is high, then the value of shares will be
appreciated. Conversely if performance is bad then the value of shares will go
down, it is because the insufficient demand for shares will occur in the market.
The investors can earn the profit on shares by two ways, first from the
appreciation of shares, which is also called capital gain, secondly when they
receive dividends on shares.

1.2.3

Investors
This is the most important segment of any stock exchange. Rather it would be
appropriate to say that investor is the backbone of the whole capital market to
which the stock exchange is a constituent. Therefore, all parameters, rules and
regulations encircle the protection of the interest of the investors.

1.3 REGULATORY OF ISE

Parliament

Ministry of Finance

SECP

Islamabad Stock
Exchange
National Clearing
Company (NCCPL)

1.3.1

Central Depository
Company (CDC)

SECP
SECP is the main regulatory of ISE which works under ministry of finance
which in turn also comes under the parliament. SECP was established on
January 1, 1999 by dissolving the Corporate Law Authority which was formed
in 1981 under a Special Law. It administers the compliance of the corporate
laws in the country and is run by the Commissioners under a Chairman. SECP
is primarily responsible for the protection of investors, regulation of markets
and dealings in listed securities.

1.3.2

Central Depository Company (CDC)

Islamabad Stock Exchange is linked to the Central Depository System (CDS)
of the Central Depository Company. The company was developed to remove
physical securities management. The current prevailing system helps in
transferring shares from one client account to another through an electronic

book entry system (CDS). The main aim of the CDC is to act as a central
depository of securities on behalf of all the financial institutions and investors.
1.3.3

NCCPL
In the capital market development program, Asian Development bank gave
recommendations to have a separate individual and centralized system for all
three Stock Exchanges of Pakistan. So in replacement of the old system, a
complete automated electronic settlement system was developed called the
National Clearing & Settlement System (NCSS) which is also linked to ISE.
Any security which becomes live in Central Depository System, on ready
status, is inducted accordingly into the National Clearing & Settlement
System (NCSS).
The main purpose of the NCSS system is to act as clearing house for all
capital market transactions. The system provides clearing and settlement
services for all markets including Ready, Future, CFS, IPO, etc. The system
caters and facilitates brokers, non brokers, and banks. This system is operated
by National Clearing Company of Pakistan Limited (NCCPL), which has been
registered as a separate legal entity.

1.4 FUNCTIONS TO BE PERFORMED BY ISE

The Stock Exchange acts on two levels - one as a primary market and the other as a
secondary market. As a primary market, the Stock Exchange will liaise with investment
banks and businesses that are looking to raise capital by selling shares. This process
involves the business being 'listed' on the Stock Exchange or 'floating'. In this case, the
business will effectively get its capital through the initial sale of its shares.
Much of the Stock Exchange's work, however, is as a secondary market. People buying
shares may wish to do so for a variety of reasons - to secure dividends or to see the price
of the shares rise, for example. If people wish to sell shares then it would be very
inconvenient for the business itself to take the shares back and then sell them on to
someone else. Such a process would be extremely disruptive and not help planning.
The Stock Exchange, therefore, acts as a market that puts those wanting to sell shares in
touch with those seeking to buy. ISE is performing its functions on both levels. Hence, it
is performing actual functions as the prescribed functions.
Other functions performed by ISE are as follows:
Companies Affairs Functions
Provide listings to Companies
Monitor listed companies
Provide quotations to media
Ensure listing requirements and code of corporate governance by companies

Internal Control Functions

Grant membership to brokers
Control members
Monitor computerized trading
Perform market surveillance
Manage Risk Management System
Investors Relations Functions
Provide Information to Investors
Deal with Complaints of Investors
Educate Investors
Handle Default & Legal Cases
Keep Media Relations

1.5 ORGANIZATIONAL STRUCTURE

The organizational structure of the ISE hierarchy is as under:1.5.1

Main Offices
The Board of Directors is the highest decision making body of the Exchange.
The Board of the ISE comprises 10 Directors. Five Directors are elected each
year from amongst the members/brokers by the general body of the Exchange
whereas Four Directors are nominated by SECP from amongst the private
sector professionals. The Managing Director is the tenth member of the Board
by virtue of his office. The current Board for the term 2008 is as under:-

1.
2.
3.
4.
5.

Broker/Member Directors

Non-Broker/Member Directors

Mr. Zahid Latif Khan

Sheikh Muhammad Shabbir
Mr. Raffaqat Ali Ch
Syed Nooh Adnan
Sheikh Riaz Ahmad

6.
7.
8.
9.
10.

Mr. Aftab Ahmad Ch. MD

Mr. Tariq Khamisani
Mr. Rafid ud Deen Ahmad
Mr. Aslam Khaliq
Mr. Zouhair A. Khaliq

All elected and nominated Directors retire in the AGM by October 31 each
year and new Board is elected accordingly.
1.5.2

Organizational Chart
The following is the organizational chart of the ISE:-

1.5.3

Departments of the ISE

i.

Department of Internal Control headed by Mr. Kamran Anwar

This department deals with the members affairs and trading matters and
mainly represents the operations.
ii.

Department of general Administration headed by Syed Nayyer Ashfaq

This department is responsible for the overall management of the

administrative and accounts affairs of the Exchange.
iii.

Department of Companies Affairs headed by Mr. Asghar Abbas Naqvi

Listed companies correspondence, listing applications and continuous listing
requirements are monitored by this department.

iv.

Department of Investors Relations headed by Mr. Waris Niazi

Investors facilitation desk and investors complaints, investors education etc

are organized by this department.
1.5.4

Comments on the Organizational Structure

The highest decision making body is the Board of Directors which have an
even blend of member and non-member directors. Therefore, the decision
making is quite neutral and impartial.
On the other hand the departments of the ISE are doing very well. All officers
are hardworking and professional in their relevant fields and they are trying to
equip themselves by imparting latest knowledge about the functioning of the
departments and stock exchanges around the globe.

1.6 EMPLOYEES OF ISE

1.6.1

Qualification, Experience and Training of Employees

ISE had 55 employees in year 2008. ISE usually hires fresh graduates. Those
graduates after being hired get their Masters (most prefer MBA degree)
through self-financing or at times finance provided by ISE. When graduates
are hired, they have to work for two months as trainees in ISE and after
successful completion of training period; they are hired for a permanent
position in ISE. After hiring, no further training to employees is given.
Employees of ISE mostly gains experience after working in ISE.

1.6.2 Duties of Employees

Employees perform the duties of their departments. There is a lack of proper
job description of every job and also there is lack of staff in ISE which
sometimes leads to confusion in performance of duties by employees. Due to
lack of workforce, all employees of ISE have extensive workload.
1.6.3 Salary and Packages
The level of salary is very low in ISE as compared to other business. On the
time of offering for first joining it start from Rs.9000. There is no other
reward for employees of ISE on excellent performance. However the
exchange pays fee of employees children who are not more than two in
numbers.
1.6.4 Performance Evaluation
The performance of an employee is evaluated on the basis of every six
months. The performance is evaluated with the help of performance
evaluation committee. The letters are sent to employee for purpose of
acknowledgement from secretary on the behalf of committee.

1.7 STATE OF COMMUNICATION

1.7.1 The filing system

For manual handling of filing system, ISE has established a separate subdepartment called Record Room. This department keeps the record of all the
listed companies. These records include annual reports, semiannual reports &
public notices issued by the companies time to time. This department is also
responsible for keeping the informations about the businesses of the
companies, type of the company, dates of subscription of their shares,
under/over subscription & prospectuses of new listed companies.
1.7.2 Correspondence and Updating of Data
Record Room also dispatches the letters, reports and notices to the companies.
It also keeps the record of all the ISE members. It keeps a proper contact with
LSE & KSE. This department is a vast department having the records of 283
companies, their files & annual reports. Billing sent to members is also
handled by this department. All the cheques and letters of member of ISE are
received by this department & then delivered to the concern departments and
members. This department is under the direct control of secretary of ISE who
is responsible for keeping all the records safe and update. Data in this
department is always kept updated by its Manager who updates the records as
soon as he gets any updates.
1.7.3

Inter-Communication between Staff of ISE

All management employees of ISE have good writing skills and they do
correspondence with other departments and members through written
communication. All these written communication is also done through record
room. Other than written correspondence, ISE has have the facility of
telephone to all its employees and computers have been provided to them
through which they can also send email to each other.

1.8 ORGANIZATIONAL CLIMATE

1.8.1 Behavior of Employees
The behavior of employees including top management vary from person to
person, at average it is good. The main problem in the way of employee is the
time availability from work. Despite this problem they coordinate with each
other.
1.8.2

Culture, Language and Dress

The employees belong to different areas of the country, so ISE is the
multicultural organization. Most of the communication is done in Urdu but the
official language, which is used in correspondence, is English. All officers are

bound to wear paint shirts with ties by secretary of exchange. As far as

concern with lower management they have option in dress.

1.9 PHYSICAL FACILITIES TO EMPLOYEES

1.9.1

Building of ISE
The building of exchange is situated at 101-E, Fazal-e-Haq Road, Blue Area,
Islamabad. This building has been acquired on rental basis; however, the ISE
management is also in process of construction of its own Tower at Blue Area,
in front of City Bank, Islamabad which will be completed in the end of 2009.
This would be a 22 storey twin tower which would fulfill the needs of work
space of all employees of ISE.

1.9.2

Furniture and Equipment

ISE provides working desk and computers to all its management employees.
Telephones are also provided to most of the employees. ISE provides
stationeries to all its employees who need them.

1.10 PRODUCT LINES

1.10.1 Ordinary Shares
The most common form of shares, other than preferred stock; entitles the
owner to a share of the corporations profits and a share of the voting power
in shareholder elections.
Holders receive dividends which vary in
accordance with the profitability of the company and the recommendations.
1.10.2 Preferences Shares
Preference shares are the shares have a preference over ordinary shares, carry
a fixed/specified rate of dividend which is paid before the dividend on
ordinary shares. There are many types of reference shares, such bas noncumulative, cumulative, and redeemable etc. preference shares some times do
not carry voting rights.
1.10.3 Future Contracts
A future contract is a standardized contract, trade on a futures exchange, to
buy or sell a certain underlying instrument at a certain date in the future, at a
specified price. The future date is called the delivery date or final settlement
date. The pre-set price is called the future price. The price of the underlying
asset on the delivery date is called the settlement price.
1.10.4 Term Finance certificates
8

A debt instrument issued for the purpose to raise fund in the form of
redeemable capital.
1.10.5 Mutual Fund Units (both open end and closed end)
A mutual fund is simply a financial intermediary that allows a group of
investors to pool their money together with a predetermined investment
objective. The mutual fund will have a fund manager who is responsible for
investing the pooled money into specific securities (usually stocks or bonds).
When you invest in a mutual fund, you are buying shares (or portions) of the
mutual fund and become a shareholder of the fund.

1.11 BUSINESS VOLUME

The average volume of shares in million from July 1, 2007 to June 30, 2008 is 2.31
million shares per day. Detail of the business volume is as follow:
For the Month of

Volume

July 2007
August 2007
September 2007
October 2007
November 2007
December 2007
January 2008
February 2008
March 2008
April 2008
May 2008
June 2008
Total

3.05
1.93
2.12
3.19
1.89
2.14
2.99
2.81
2.15
2.11
1.49
1.43
27.3

1.12 STOCK MARKET OPERATIONS

1.12.1

Market Days and Timings

The Exchange operates the market five days in a week starting from Monday
and ending on Friday.
The market remains open from 9:30 to 3:30 from Monday to Thursday and
an extra session is also held on Friday from 3:00 to 4:30 p.m.

1.12.2

Settlement System

The Exchange follows a T+2 settlement systems whereby each trade when
executed in settled after two days. For this purpose a schedule is announced
by the Exchange in advance.
1.12.3 ISE Index
Index in statistical terms is an indicator which at once glances shows the
position of the market. As compared to KSE-100 which is also an important
macro level economic indicator of Pakistan, the ISE has ISE-10 index which
has been constructed on similar pattern as of KSE-100. This index comprises
a basket of 10 most liquid companies listed at ISE. The base year is
December 31, 2004. The index behavior during 2007- 2008 was as under:For the Month of
July 2007
August 2007
September 2007
October 2007
November 2007
December 2007
January 2008
February 2008
March 2008
April 2008
May 2008
June 2008

ISE 10- Index

Average
3131.52
2910.14
2621.73
2439.93
2790.14
2344.27
3508.37
3046.19
3391.55
3800.63
3041.19
2734.56

1.13 CODE OF CORPORATE GOVERNANCE

The code of corporate governance was implemented in 2002. It was only applicable on
listed companies, however, the ISE even not being a listed company decided to observe
voluntarily this code to a great extent. As regards enforcement of this code, the
department of Companies affairs of the Exchange is mainly responsible. This department
ensures that the code must be abided by listed companies in letter and spirit. The main
provisions of code of corporate governance are following,
1.
2

All listed companies shall encourage effective participation of independent

director non executive directors, including that representing minority interest, on
their board of directors who represent the minority shareholders.
The director of listed company shall, at the time of filling their consent to act as
such, give a declaration in such consent that they are aware of their duties and
powers under the relevant laws and the listed companys memorandum and article
of association and the regulation of listing in the Stock Exchange.

10

3.
4.

1.
2.
3.
4.
5.
6.
7.

8.

No listed company shall have a director, a person who is serving as a director of

ten other listed companies.
No person shall be elected as a director of a listed company if:
I.
His name is not borne on the register of National tax paper except where
such person is non-resident and
II.
He has convicted by court of competent jurisdiction as a defaulter in
payment of any loan to banking company, a development institution, or
being member of Stock Exchange, he declare defaulter of such exchange.
A listed company shall endeavor that no person is elected or nominated as a
director if he or his spouse is engaged in the business of stock exchange.
The tenure of directors should be for three years.
The directors of listed companies shall exercise their powers and carry their duties
with the sense of objectivity judgment and independence in the best interest of the
company.
The chairman of listed company, if present shall preside over the meeting of board
of directors.
The board of directors shall meet at least once in the quarter of every financial
year.
All listed companies shall make carry appropriate arrangements for courses for
their directors, for making acquaint them with their duties and responsibilities.
the appointment, remuneration and term and conditions for employment of the
chief financial officer, the company secretary and the head of internal audit of
listed companies shall be determined by the CEO with approval of the board of
directors, the CFO or the company secretary of the listed companies shall not be
removed except by the CEO with the approval of the board of directors.
The quarterly un-audited financial statements of listed companies shall be
published and circulated along with directors review on the affairs of the listed
company for the company.

1.14 NEW RISK MANAGEMENT SYSTEM

The risk management system is known to be the backbone of every stock exchange. The
ISE had adopted a margin based risk management system whereby every trade initiator
had to deposit certain margin with the Exchange so that the Exchange must secure the
trade until settlement.
This system was not based upon any statistical or scientific manner. Therefore, the risk
management system of the Exchange was most criticized particularly by the foreign fund
managers. Besides during March 2005 crises, the system could not work effectively,
therefore, there was a great desire to change the system with globally tested system.
Therefore, the SECP decided in June 2006 to introduce VaR based system. The system
was fully implemented on December 04, 2006. The system was thoroughly studied
during the month of December 2006. Certain bugs were identified and discussed in
collaboration with stakeholders and accordingly rectified.

11

CHAPTER 2:
ACCOUNTING AND FINANCIAL REVIEW OF ISE

2.1 STRUCTURE OF THE FINANCE DEPARTMENT

The Finance Department is headed by a Deputy Manager namely Syed Nayyer Ashfaq
who is a chartered accountant by qualification and profession. He is overall head of
administration and finance. The main job of finance department is the investments of the
surplus revenues of the Exchange and book keeping etc.
Here it is worthwhile to mention that Islamabad Stock Exchange is a non-profit
organization. No part of its revenue can be distributed amongst its members. Any revenue
surplus can only be utilized for the growth oriented objects besides welfare of the
employees of the organization. As such the Finance department functions are quite
limited contrary to any other financial institution having the objective of the
maximization of shareholders wealth.

2.2 NUMBER OF EMPLOYEES WORKING IN THE FINANCE

DEPARTMENT
At present there are three employees in the Finance Department headed under the
dynamic leadership of Mr. Sagheer Mushtaq. Then under Syed Nayyer Ashfaq who is the
Deputy Manager of Department of Gerneral Administration, there come two Assistant
Accounts Officers and one Accounts Assistant.
Head Finance and
Accounts Department
(Sagheer Mushtaq)
Deputy Manager
(Syed Nayyer
Ashfaq)

Assistant
Account Officer
(M. Ashfaq)

Assistant
Account Officer
(Nasir)

Accounts Assistant
(M. Imran )

12

2.3 FINANCE AND ACCOUNTING OPERATIONS

As narrated above, the scope of function of Finance Department is quite limited. Mainly
that department has to carry out all book keeping related functions and ensure timely
audit of the Exchange. In all such functions this department is quite efficient and during
my tenure in that department I learned a lot about the accounting heads and funds
placement mechanisms.

2.4 ACCOUNTING REVIEW

2.4.1 Accounting system of the Organization
The Islamabad Stock Exchange follows historical cost convention principles.
The Finance Department has established a system of internal control, and
prepares and presents the above said statements in conformity with the
approved accounting standards and the requirements of the Companies
Ordinance, 1984.
In Finance Department there is no direct entry made about the good name.
The account title is established in software with code number chart by
department. When a code is entered in system the account name is written and
further process for entry is done in ledger and trial balance automatically.
The formation of code is made chronologically
Main code:
Sub code:

01
01-001
01-002
Main code is written for title name and sub code is written for further
explanation of accounts. The finance department uses the 30 main codes for
assets and for liabilities.
The some important main codes are,
Main Codes
Main codes for assets
Fixed assets
Accumulated depreciation
Long term investment
Capital work in progress
Security deposit
Advance against expenses
Advance against salaries
Advance against source
Advance against tax deduction
Advance prepaid

01
02
03
04
05
06
07
08
09
10

Main codes for liabilities

Accumulated deficit
Member fund
Clearing house taxes
Rent received in advance
Advance from companies
Accrued expenses
Payable audit fee
Security deposits from companies
Member default
Sundry creditors

30
31
32
33
34
35
36
37
38
39

13

2.4.2

Depreciation
The depreciation is charge at the different rate according to exchange policy.
The depreciation is charged with through straight line method. The important
rates of depreciation are as following,
Rate of Depreciation
Assets
Furniture
Office Equipments
Computers
Automation/Software/Intangibles
Motor Vehicle

Rate
10%
10%
33%
33%
20%

2.4.3 Vouchers
There are following four types of vouchers used in the finance department for
making payments, cheque received and deposit in the bank, journal entry and
cash payment vouchers.

Bank Receipt Vouchers.

Cheque Payments Vouchers.
Journal Vouchers.
Cash Payment Vouchers.
The voucher contains the following things:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Name of the Organization

Voucher type
Date of the voucher
Voucher number
Account title
Account code
Narration
14

(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
adjustment
(xiv)
(xv)
(xvi)

Reference
Amount debt
Amount credit
Amount in words
Amount in figures
Name of person who made the expense, give revenue or
Name of person who review the voucher
Authorization
Person who received the payment

2.5 FINANCIAL SYSTEM REVIEW

The Finance Department deals with all expenses and revenues for the Stock Exchange.
The department uses both methods manually and through computer for recording entries.
Sidat Haider prepares the software, which is used by department for accounting purpose.
The exchange pays the specific amount for such right using; beside this the software
maker also provides technical services about the software.
The finance department keeps all the financial data in electronic form. All financial
statements such as balance sheet, income statement, statement of cash flows are prepared
electronically through the software prepared by a renowned chartered account firm i.e.
M/s. Sidat Haider Murshad and Co. The main features of the said system are as follow:
General Ledger System with strong reporting features backed by a robust design, the
application is positioned to take care of all the accounting requirements and effectively
support in the management analysis and decision making process. It is offering features
like Budgeting, Cost Centers, User Defined System Configuration, Customized Reporting
and many more. The General Ledger makes the day to day accounting operations of any
business environment and easy job, thereby allowing the management more time to focus
on core business activities and get ahead of competition.
Sidat Hyder Financials General Ledger is a very comprehensive accounting tool which
helps to maintain the records very effectively and efficiently. It is developed in Power
Builder as a front end tool. Regarding Backend tools for data storage it can run with the
following tools:
1.
Oracle (9i and 10g)
2.
Sql Server
3.
Sybase
4.
DB2 of IBM
As for as Data storage is concerned, the data is stored in databases of the above
mentioned Databases management servers. The application can store all the data in the
database unless the space allocated for the database is full.

15

The reporting speed depends highly on the specifications of the Server Machine. Reports
will be generated more efficiently when the server machine has good specifications.
The management of the Exchange keeps close eyes on all these financial statements and
particularly the current, quick and cash ratios for all decision making and preparing the
future business plans.

2.6 MOBILIZATION OF FUNDS

2.6.1

Permission for Mobilization of Funds

The funds cannot be mobilized without the permission of Secretary and
Managing Director. Before expenses the list is made for expenses through a
minute sheet and approval is endorsed by the hierarchy before mobilizing the
fund. It is sent to associate manager, managing director and chairman for
approval. After the approval on sheet the voucher is made according to list and
payment is given in form of cheque or cash. If the expense is related to routine
matter and small, then payment is made in the form of cash. In case of high
payment, cheque is made. If the other departments want to do some expenses
for the purpose of business then they will sent Internal Office Memo (IOM) to
finance department. The internal office memo also contains the quotations
from different stores. After observing the best alternative the associate
manager of general administration asks accountant to prepare minute sheet for
approval, the remaining process will remain same for expenses.

2.6.2

Generation of Funds
The following are the major sources for the generation of funds:
A. Fee and Subscriptions
a. Listing Fee
i. Annual Listing Fee
ii. Additional Listing Fee
iii. Initial Listing Fee
iv. De-listing Fee
b. Inactive Membership Fee
c. Trading Fee LAGA
d. Membership Subscription
e. Partnership/Membership Transfer Fee
f. AGM Extension Fee
B. Profit on Investment and Bank Deposit
C. Other Income

16

a.
b.
c.
d.
e.
f.
2.6.3

Dividend Income
Rental Income
Gain on sale of fixed assets
From members against services
Old liabilities written back
Miscellaneous

Sources of Funds
The revenues are received from all above sources. Fee and subscription being
the largest source of revenue collects around 64% of total revenue. On the
other hand profits on investments get around 14% of revenue. The other
miscellaneous income head earns approximately 22% of the revenue. When
finance department receives the revenues, the vouchers are made with name of
sources and date at which it is received by department. The vouchers are made
with the help of carbon papers. The original copy is given to the person for his
record and carbon copies who contains the yellow and red color is maintained
in the record.
The revenue sources of the ISE are as under:1. Income from Service Charges on Trade @ Rs.2.60 per Rs. 100,000/valuing transaction.
2. Annual Listing Fee @ Rs. 25,000 per annum from each listed company.
3. Additional Listing Fee @ 0.1% on the increased magnitude of paid-up
capital.
4. Initial Listing Fee @ 0.1% of the paid-up capital being listed by the
Exchange from each of the new listing subject to a maximum of Rs. 1.0
million.
5. Profits from Bank Deposits
The above items are continuous/permanent sources of funds.

2.6.4 Allocation of Funds

For the purpose of allocation of funds, budgets are prepared annually. For the
purpose of preparation of budget, the finance department asks all other
departments to send the estimated expenses and revenue. The departments
send their reports accordingly. The finance department compares all estimated
budgets before closing of year; if the situation is not according to standard
then the finance department asks other departments to make efforts for
meeting the standards.
Department
Department of General
Administration

Allocation of Funds (Rs.)

Percentage

37,780,259.00

81.84%

17

Department of Internal
Control
Department of Company
affairs
Department of Investors
Relations

4,346,000.00

9.41%

1,308,000.00

2.83%

2,727,828.00

5.91%

2.7 AUDIT
The audit is made with strict measures; there are two types of audits which are used in
ISE:
2.7.1

Internal Audit
There is a separate internal audit department which overall sees the financial
controls. The qualification of Internal Audit is ACMA.

2.7.2

External Audit
The audit is done at the end of quarter in ISE by M/s. KPMG Taseer Hadi and
Company, Chartered Accountants.

18

CHAPTER 3:
ANALYSIS
3.1 CRITICAL ANALYSIS OF THEORETICAL CONCEPTS
During my internship, I critically examined the theoretical concepts what I studied as my
curriculum with those being practiced and applied by the Exchange.
As regards book keeping, we had studied the American systems whereas the ISE was
following the British system like all Pakistani companies. In this system the liabilities are
listed on the left hand side whereas the assets are ranked on the right hand side. This was
all together different from the theory what we studied. Besides, Assets are listed from
upward to downward according to their liquidity i.e. lesser liquid assets are listed first
like fixed assets whereas the other assets are listed in seriatim/series according to the
liquidation capacity. In this manner the cash is the last item of the current assets.
The ISE follows strict budgetary controls and all out efforts are made avoid any
deviations but this scheme of arrangements does not hold right in case of revenue. The
revenue side is highly unpredictable. However, I have observed that most of the items the
revenues have been collected in access of the budgets. I therefore, feel that budget
estimates should be more rationalized.
I also observed that the officers at the helm of affairs of finance department were least
concerned over the financial ratios. Although the Exchange was in profit but no body
bothers to examine the current, quick as well as cash ratios. The Exchange has
undertaken a big project in the form of construction of ISE Towers but such ratios are not
vigilantly monitored.
While my internship at finance department, I saw every officer was over burdened. There
was a great workload on each staff members; therefore, I earnestly feel that some more
qualified accountants/finance officers should be inducted in the said department.

3.2 FINANCIAL ANALYSIS

3.2.1

Financial Ratios
A. Liquidity Ratios
i) Current Ratio = Current Assets/Current Liabilities

19

03-04
3.00

04-05
4.10

05-06
4.29

06-07 07-08
2.93
3.09

Comments:
The ISE has a good current ratio and for the past three years, ISE has
maintained good ratio of about 3 which is much better than an ideal ratio
of 2. as compared to year 2005-2006, the said ratio has decreased 32%.
This decline is primarily due to heavy cash outflows for the building
project of the ISE.
ii) Quick Ratio = Current Assets Inventory/Current Liabilities
03-04
N/A

04-05
N/A

05-06
N/A

06-07
N/A

07-08
N/A

Comments:
The ISE is a service oriented industry. Contrary to any production unit, it
is not required to maintain any inventory; therefore, Quick Ratio in its true
sense is meaningless in the case of ISE and is equivalent to current ratio.
iii) Cash Ratio = Cash + Marketable Securities/Current Liabilities
03-04
2.61

04-05
2.05

05-06
3.15

06-07
0.92

07-08
1.48

Comments:
The ISE had been maintaining good cash ratio. For a service organization,
cash ratio of 1 is an ideal figure and it means that the company is just
maintaining cash according to its current liabilities and cash is not lying
idle rather it is used in business and operations. Decline in cash ratio in

20

2006-07 is again due to outflows regarding building project which is now

in middle stages.

B. Asset Turnover Ratios

i) Receivables Turnover = Annual Credit Sales/Accounts receivables
03-04
N/A

04-05
N/A

05-06
N/A

06-07
N/A

07-08
N/A

Comments:
The ISE has no sales revenue. Being a service related industry it derives
revenue from listing fees and operational levies from trade. Therefore,
this ratio is not practical in the ISEs case.
ii) Average Collection Period = Accounts Receivable/Annual Credit
Sales/365
03-04 04-05 05-06
06-07 07-08
N/A
N/A
N/A
N/A
N/A
Comments:
The ISE has no sales revenue. Being a service related industry it derives
revenue from listing fees and operational levies from trade. Therefore,
this ratio is not practical in the ISEs case.
iii) Inventory Turnover = Cost of Goods Sold/Average Inventory
03-04
N/A

04-05
N/A

05-06
N/A

06-07
N/A

07-08
N/A

Comments:

21

The ISE has no sales revenue. Being a service related industry it derives
revenue from listing fees and operational levies from trade. Therefore,
this ratio is not practical in the ISEs case.
iv) Inventory Period = Ave Inventory/Annual Cost of Goods Sold/365
03-04
N/A

04-05
N/A

05-06
N/A

06-07
N/A

07-08
N/A

Comments:
As explained above, this is also meaningless in ISEs case as this also
relates to the sales receivable.
C. Financial Leverage Ratios
i) Debt Ratio = Total Liabilities/Total Assets
03-04
0.27

04-05
0.48

05-06
0.58

06-07
0.71

07-08
0.78

Comments:
ISE had been maintaining good debt ratio in the past. The debt ratio
indicates the percentage of asset financed by creditors, and it helps to
determine how well creditors are protected in case of insolvency. If
creditors are not well protected, the company is not in a position to issue
additional long term debt. From the perspective of long term debt paying
ability, the lower this ratio, the better the companys position. In ISEs
case, this ratio would increase the assets base and this ratio has reached to
the level of 0.71, however, once the building project is complete, it would

22

increase the assets base and this ratio would certainly decrease once
income flow from rental income is streamlined.
ii) Debt to Equity Ratio = Total Debt/Total equity
03-04
0.36

04-05
0.91

05-06
1.37

06-07
2.49

07-08
0.54

Comments:
The Debt-Equity Ratio of ISE is increasing gradually. The debt of the ISE
mainly due to new building project and it has increased as compared to
equity. This computation compares the total debt with the total
shareholders equity. The debt/equity ratio also helps determine how well
creditors are protected in case of insolvency. From the perspective of
long-term debt-paying ability, the lower this ratio is, the better the
companys debt position.
iii) Interest Coverage = Earnings before Interest & Taxes/Interest
Charges
03-04
N/A

04-05
N/A

05-06
N/A

06-07
N/A

07-08
N/A

Comments:
Although, the ISE has obtained huge financing for its building project but
it is spending nothing on financial charges/interest at the moment. The
ISE has obtained bridge financing on long term basis which interest is
payable from the year 2011. The interest charges are also accumulated in
the capital work in progress. Therefore, the calculation of this ratio would

23

be meaningful once the income from the project in shape of rentals and
royalties are also included in the income and the interest charges are
recognized in the profit and loss account. The present P & L account does
into have any figures available for interest/financial charges.
D. Profitability Ratios
i) Gross Profit Margin = Sales Cost of Goods Sold/Sales
03-04
N/A

04-05
N/A

05-06
N/A

06-07
N/A

07-08
N/A

Comments:
This ratio gives a measure of net income generated by sales. While it is
desirable for his ratio to be high, competitive forces within an industry,
economic conditions, use of debt financing, and operating characteristics
such as high fixed costs will cause the net profit margin to vary between
and within industries.
As explained above, this ratio is also meaningless in ISEs case as there
is no sales revenue in the P & L statement of accounts of ISE.
ii) Return on Assets = Net Income/Total Assets
03-04
0.05

04-05
0.04

05-06
0.04

06-07
0.01

07-08
0.02

Comments:
Return on assets measures the firms ability to utilize its assets to create
profits by comparing profits with the assets that generate the profits
compute the return on assets. The decline in the ratio in ISEs case is
mainly due to the fact that there is no income from building project of

24

the ISE on the other hand, the assets base is increasing massively due to
increase in capital work in progress for the building project of ISE.
However, once substantial income which has been projected from the
new building in shape of rentals starts, this ratio will also start rising.
iii) Return on Equity = Net Income/Shareholder Equity
03-04
0.07

04-05
0.08

05-06
0.09

06-07
0.07

07-08
0.09

Comments:
The return on equity measures the return to both common and preferred
shareholders. Presently the equity in ISEs case is Assets minus
liabilities. The ISE being a guarantee limited company does not have any
share capital. The equity comprises of the general entrance fund of
members, Investors Protection Fund, Members Protection Fund and
accumulated profits. As such, this is not an appropriate representation of
equity. So, instead we can say that it is return on funds equity in
respective of stock exchange.

25

Please refer to Page # 26 30 for Vertical and Horizontal Analysis

3.2.3

Financial Statement Analysis

A. Balance Sheet (Vertical Analysis)
The vertical analysis reveals that significant portion of the Balance Sheet
comprise of Fixed Assets. Due to construction of the new building of the
ISE, the capital work in progress which is the major part of Fixed Assets is
mounting rapidly. During the year 2007-08, the Fixed Assets were 82.09%
as compared to last year share of 74.32%.
Short Term Investment comprises 6.78% of total assets which is a healthy
sign and mentions the financial health and liquidity position of the
company. The company has 3.26% cash equivalents which is a standard
figure.
From the liabilities side, current Liabilities comprise just 4.58% and it
means that the company is not gong to face any liquidity problem in near
future. The non current liability is not going to face any liquidity problem
in near future. The non-current liabilities out of which Deposits and
Receivables make a stake of 50.13% are notable as it has in total 73.38%
portion of Liabilities and Funds (Equity). These deposits relate to the
installments of the sale proceeds of the rooms and floors sold out by the
Exchange in the new building of the ISE.
The ISE is a non-share capital company. The sponsors equity is
represented by Funds that accumulate to the tune to 22.04% of the
Liabilities and Equity section of the balance sheet during the year 2007-08.
Till 2007 Members Protection Fee and Investors Protection Fee were
included in funds but accounting practices changed in 2008 and instead of
funds, they were included in non-current liabilities. This was the reason for
decrease in Funds of ISE in 2008.
In short, the financial health of the company from the balance sheet
perspective as on June 30, 2008 is good.
B. Balance Sheet (Horizontal Analysis)
Balance Sheets horizontal analysis from the perspective of time period
shows that the Fixed Assets have increased 1544.43% over last year. This is
again due to the increase in the work in progress ISE building project.
Long Term Investment has been increased by 302.08% due to the dividend
received from the associate companies, which contribute to strengthen the
balance sheet.

31

When we evaluate the current asset side of the balance sheet, overall it is
decreased by the 100.79% as compared to the last year which was
115.38%. The Bank Balance-Fund has been decreased to 35.22% and Cash
& Bank Balance has been dropped by 26.64%. The main increases are
occurred under the Current Assets are Accounts receivables by 149.87%
and Advances, Deposits, Prepayments by 444.27%.
Short Term Investment dropped to 943.94%. The Funds (equity) size
reduced 147.81% due to change in accounting practices. The accumulated
surplus also grew 1526.02% on account of carry out of retained earnings.
Non-current liabilities show enormous increase of 10680.38%. This
increase is due to significant rise in the deposits and receipts head on
account of sale/bookings of offices in new building. As such there is no
negative impact on the financial health of the company on this count.
Current liabilities also increased significantly. An increase of 1450.15% has
been witnessed this year. The major portion of the accrued liabilities relate
to a bill of the building contractor relating to monthly payments which was
paid in time on a date subsequent to the date of balance sheet.
In short the overall size of the balance sheet has increased to the tune of
492.93% which shows healthy performance on the part of the ISE.
C. Income Statement (Vertical Analysis)
The vertical analysis of Income Statement divulges that major segment of
the Income Statement consist of Fee & Subscriptions for the studied five
years period i.e. 2004-2008, which contributes almost 64% to 74% in the
gross revenues during the past five years. If we see the expenditure portion
for the above mentioned period, the ranges from 53% to 72% of the gross
revenue each year during last five years. According to the vertical analysis
of the income statement there is an increase in the amount of expenditure
62.66%.
The expenditures in comparison to the income have been curtailed.
Operating profit has decreased to 37.34%. Taxation was slightly increased
to 13.08%.
The income statement also reveals the entire amount has been carried
forward/retained and nothing has been distributed as the ISE is a not forprofit company and does not have a share capital as such no dividend is
payable to any stakeholder.
Although the size of the company is small but it is performing well and
there is no question about its going concern position in near future. The

32

overall result of the vertical analysis is the ISE is improving its profit
margin on yearly basis, which is the healthy sign for the company.
D. Income Statement (Horizontal Analysis)
Income statements horizontal analysis from perspective of time period
shows that the Fee & Subscription have increased by 194.63% over last
year. Gross revenue is showing modest sized increasing trend.
The expenses also show 202.19% increasing trend during 2007-08 which
were 170.59% for the penultimate year. The operating profit for the year
was 196.61% whereas last year it was 255.36%.The growth is of average
size over the preceding five years. Taxation has increased. The surplus for
the year has also increased to the tune to the 209.09% this year.
The overall performance from horizontal analysis point of view is good
but yet there is room for better performance.

3.3 COMPARISON OF ISE WITH KSE AND LSE

The ISE belongs to the securities market industry in Pakistan wherein services are
provided to members, listed companies and investors. The present securities market
industry comprises of three Stock Exchanges viz. Karachi Stock Exchange, Lahore Stock
Exchange and Islamabad Stock Exchange which provide facilities to the listed companies
to raise capital by enlistment of shares at stock exchanges, investors may sell and
purchase shares in the stock exchange and the members provide services to the investors
for consideration of their brokerage/commission.
The Karachi Stock Exchange was incorporated in 1949. The Lahore Stock Exchange was
established in 1970 whereas Islamabad Stock Exchange was established in 1992.
Although ISE is the youngest of three exchanges yet it has given splendid performance
both in terms of operations as well as finance. The ISE is not behind the other Exchanges
for offering the range of products to its members and investors. The operations are the
total simulation of other two Exchanges. The only difference comes from the level of
liquidity. The liquidity means the volume of the business that is available in a particular
stock exchange. The KSE which is situated at Karachi, the economic and financial hub of
Pakistan has the biggest pool of the liquidity. Most of the financial sector is based at
Karachi. The daily traded volumes of KSE have almost 95% of the institutional trade.
Besides, international portfolio investment also routes from KSE. The public trade chunk
is just around 5%. The average daily turnover of KSE is approximately 400 million
shares. On the other hand Lahore which is the host city of Lahore Stock Exchange is the
second largest city of Pakistan and also number two in economic and trade terms after
Karachi. However, there is not significant trade participation by the institutions yet it has
a significant potential for growth. The average trade volume of LSE is 50 million.

33

Then there comes the number of Islamabad Stock Exchange. The ISE does have great
potential but the problem is that, the Islamabad is mainly the city of government and
corporations employees who do not have good propensity to save and invest. Besides,
Islamabad does not have any considerable institutional base. The technological
advancements have also enabled the members of other exchanges to establish their roots
of business in Islamabad at the cost of trade volumes of the ISE. As a result the trade
volumes of the ISE remain at lowest level. The trade volume of the ISE is in the range of
2.5 million shares a day. As such the ISE is positioned at a very low profile as compared
to other Exchanges. The low trade volumes of the ISE are also resulting in the lesser
income of the Exchange. The trade transaction fee is the major source of income for a
stock exchange but due to the factors stated above, the ISE income being derived from
the trade transaction fee is quite below the desired level.

The listed companies also provide a big source of income. At KSE, there are more than
725 listed companies while at LSE, there are 635. However, at ISE, there are only 263
listed companies which are quite dynamic, progressive and vibrant. Therefore, low
number of listed companies provides less income from this sector to the ISE. As a result
thereof the ISE is earning quite lower than its potential. Even odds are not quite favorable
for future as the competition is likely to grow in securities market industry in Pakistan as
besides local exchanges, the globalization is also paving way for other exchanges
especially of the region as well as from US and western European countries. Therefore,
ISE needs vigorous strategic planning to meet the future requirements.
The ISE belongs to a services oriented industry. In a service oriented organization,
efficiency, transparency, vibrancy, innovation both in the product lines and delivery/
execution and dynamism are the keys to success. Every organization must allocate its
resources in a manner so that it must remain competitive in foreseeable future. The ISE
has also developed its mission and vision statements in a manner that it must perform
vibrantly in the years to come. The strategic planning of the ISE is also based on this core
parameter.
I have analyzed the investment pattern of all the exchanges particularly the comparison of
ISE with other two exchanges viz. LSE and KSE. In order to cater the futuristic needs of
the business directions, both these exchanges are investing major portion of their
resources in technology and advancement of the securities market outreach in the length

34

and breadth of the country as well as abroad. However, the ISE has not prioritized its
preferences to that direction.
The ISE is in process of construction of its own building at Jinnah Avenue, Blue Area,
Islamabad which would be in the shape of a twin towers to be known as ISE Towers. This
is a two billion worth project and once it would be completed, it would add to the grace
of the beautiful city of Islamabad. The ISE is utilizing its own resources as well as more
than one billion debt has been raised by the Exchange to finance this project which would
be repaid through sale of offices in the building. This project envisages providing
enormous funds to the ISE upon completion. Thereafter, abundant funds would be
available with the Exchange which would definitely be employed for the acquisition of
new technologies and collaboration with the world renowned institutions so as to bring a
turnaround for the ISE and bring it in competition with the other exchanges.
Key Figures & Ratios of KSE, LSE & ISE
KSE

LSE

ISE

Particular
(thousand
Rs.)
Current Assets
Non-current Assets
Total Assets

2,529,499
1,336,140
3,865,639

1,432,512
921,333
2,353,845

168,275
2,858,021
3,026,296

Current Liabilities
Non-current Liabilities
Total Liabilities
Total Funds

619,813
118,952
738,765
3,126,874

980,558
169,699
1,150,257
1,203,588

399,587
2,230,863
2,630,450
395,845

314,085

104,369

7,519

4.081
0.191
0.236
0.081
0.100

1.461
0.489
0.956
0.044
0.087

0.421
0.869
6.645
0.002
0.019

Net Income
Ratios
Current Ratio
Debt Ratio
Debt to Equity Ratio
Return on Assets
Return on Equity/Funds

Cross-Sectional Analysis of ISE

Ratios
Current Ratio
Debt Ratio
Debt to Equity Ratio
Return on Assets
Return on Equity/Funds

Avg
Ratio
1.987702
0.516327
2.612368
0.042692
0.068719

KSE
2.093
-0.325
-2.376
0.039
0.032

Deviations
LSE
-0.527
-0.028
-1.657
0.002
0.018

ISE
-1.567
0.353
4.033
-0.040
-0.050

ISE lacks current assets as compared to KSE and LSE causing a big deviation in Current
Ratio of ISE but its non-current assets are more than the other two. So, in terms of total
assets ISE isnt lagging behind. Also, ISE has more total assets than LSE. However, total
liabilities of ISE are more than KSE and LSE due to big figure of long-term loan in non35

current liabilities which leads to a big debt ratio and debt to equity ratio. Return on Assets
of ISE is also less than KSE & LSE as the net income of ISE is a lot less than LSE and
KSE owing to the reasons mentioned above. KSE and LSE have a lot more funds than
ISE due to big surplus earned every year. This is the reason which results in negative
deviation of Return on Equity/Funds ratio of ISE. ISE has capacity to earn same level of
income only if it had more companies listed and large volumes of trade.

CHAPTER 4:
36

FINDINGS & RECOMMENDATIONS

4.1 FUTURE PROSPECTS OF THE ORGANIZATION
The stock exchanges in Pakistan are mutualized entities. However, the pressure of
globalization of the world economies has also imposed changes and reforms on the
securities market of Pakistan so as to bring it at par with the rest of the exchanges of the
world and create attraction for the foreign investors. With this view, the stock exchanges
are soon to be converted into for profit companies instead of not for profit entities which
are the present legal stature of the exchanges in Pakistan. After demutualization, the stock
exchanges shall not be owned by its members rather these would be owned by the
shareholders.
The ISE has appointed IGI Investment Bank as its financial adviser to undergo the
process of demutualization. This process would bring innovations in the systems of the
ISE as the management of the Exchange would be run by the professional exchange
operators which would bring new technologies and procedures with them for adoption in
the Pakistani environment.
The ISE is likely to get billion of rupees through its building project in near future.
Besides, ISE would be getting a sizeable perpetual income from rental of the abundant
offices space that would be rented out to the commercial entities. The rental income
would be one of the biggest sources of fund for the ISE in near future.
The ISE upon having ample funds in hand would initiate the developmental activities
with more zeal in future. Besides, the ISE would also initiate the projects for the
promotion of investment knowledge in the length and breadth of the country.
Thus the future of the ISE looks bright in the days to come.

4.2

SHORTFALLS/WEAKNESSES
DEPARTMENT

OF

THE

FINANCE

The ISE presently has a small scaled finance department. However, the way the
operations and monetary size of the organization is increasing, this department would be
needing expansion. I have observed a few weaknesses of the Finance Department of the
ISE which have been narrated critically by me as under:
1. Presently only one chartered accountant is serving as a head of finance department
which I think is not sufficient. I therefore, foresee the induction of two or three
more persons from the field of finance like ICMAs and MBA (Finance) graduates
etc. are needed to be inducted in the said department.

37

2. I have also observed that the budget prepared by the organization from the
expenditure side is not very practical and it is prepared in isolation with relevant
departments. In certain circumstances the budget is often kept side while making
some corporate decisions.
3. The persons deputed for book keeping are not quite proficient and even they dont
know properly about different heads of accounts and all the time they have to
consult the head of the department for certain entries of the accounts.
4. The balance sheet as well as the other statements of accounts like income statement
and statement of cash flows are not automatically prepared and a lot of manual
processes are involved to generate these reports from the system. Therefore, the ISE
needs to revamp its computerized accounting software.
5. Payments through cheques are made through manual handwriting. No software is
installed for the purpose although several cheques are issued in a day.
6. The organization does not have fixed assets register. The Exchanges policy of
depreciation needs review and instead of straight-line method. Declining Balance
Method should be employed as the ISE is mostly using the IT equipment which
becomes obsolete in a period of at maximum three years. Therefore, more
depreciation is needed to be charged in the earlier years.
7. The investment policy is not run on principles of finance. I never saw any body
making capital budgeting and projecting its cash inflows/outflows and discounting
on the basis of opportunity costs. They only compare the existing rate of returns and
make huge investments.
8. Except for the above shortfalls/weaknesses the department is performing its
functions quite diligently.

4.3 SWOT ANALYSIS

The following are the SWOT factors with their brief analysis:
4.3.1

Strengths
The strength factors of the ISE are as under:
a. Most sophisticated trading system
The trading system of the ISE is fully automatic equipped with most modern
technology. This has boosted the overall efficiency of the system. Thus 3000
trades can now be conducted in a minutes time.

38

b. State of the Art Risk Management System

The Risk Management System of the ISE has been revamped recently and
now the risk management system may be ranked with any developed
countrys stock exchange. This has increased the efficiency of the system thus
increased the confidence of the investors not from inland but also of foreign
fund managers.
c. Close Liaison with SECP
The management of the Exchange maintains a close liaison with the apex
regulator of the capital market of the country i.e., Securities and Exchange
Commission of Pakistan unlike other exchanges in Pakistan. Thus both the
institutions are working closely for the development of stock market in
Pakistan.
d. Skillful Professional Employees
The employees of the ISE are highly skillful in their respective fields. They
are qualified enough to meet the future challenges.
e. Formation of CDC
The ISE is an equity partner of the Central Depository Company of Pakistan
(CDC). This company has phased out the physical handling of the shares
certificates and now shares are dealt with in book entry form in electronic
mode.
f. Formation of NCC
Earlier the three stock exchanges were having their own respective clearing
houses. Now a company named National Clearing Company of Pakistan
Limited has succeeded those clearing houses. The ISE is also a shareholder of
NCCPL. This company provides a central system for clearing and settlement
of trade executed at each exchange.
g. Equity Partner of National Commodity Exchange
The ISE is also an equity partner in the formation of National Commodity
Exchange. This exchange shall provide a venue for offering future prices in all
commodities. Thus a better pricing mechanism for commodities will be
introduced in the country. At the same time diversity of investments would
also be achieved.

39

e.

Monitoring and Surveillance

ISE has a good monitoring and surveillance team which is quite effective to
save the market from abuses by any quarters. Thus this aspect also caters as an
effective tool for risk management.
f. Self Regulatory Organization
The ISE is a Self Regulatory Organization (SRO) under Securities and
Exchange Ordinance, 1969. By virtue of SRO status, it can also frame rules
and regulations for any need that may rise for efficient market operations.
g.

Sharia Compliant Investment Forum

The normal trading at ISE in the scrips which are not generally involved on
interest based practices is sharia complaint. A lot of people opt stock market
investments for the sake of dividends and capital gains by investing within the
confines of Islam.
h.

Maximum Returns

The investments in stocks fetch more returns as compared to any other

ordinary contemporary investments. This fact is proven performer.
i.

Financial Health

The financial health of the ISE is quite strong. It is making profits for the last
many years. This sound financial health allows the company to undertake
diversified market operations and make investments in assets building.
4.6.2 Weakness
The following are the weaknesses of the ISE:a. Small Sized Organization
The ISE is a small sized company as compared to other two Stock Exchanges
in the country. At present there are 263 listed companies at the ISE whereas at
KSE this number is 725.
b. Shortage of Manpower
The ISE is in short of professional manpower. There being unique nature of its
business, the skillful human resource is not ordinarily available in the market.

40

The ISE has to appoint untrained qualified persons and then to groom them
for sophisticated jobs which is a time consuming job.
c. Outsourced Trading System
The trading system of the ISE is totally outsourced and it is operated by
outside people who dont have any affiliation with ISE, therefore, at items
there occurs problems regarding service level.
d. Mutualized structure
The Exchanges are presently mutualized entities and so is also the ISE being a
guarantee limited company. Often the members make influence on decision
making affairs therefore, interest factor cannot be eliminated and transparency
issues must be addressed accordingly.
e. Car Parking Problem
Being situated at Blue Area, investors face a lot of problems for parking their
cars. As a result, the climate of investment is suffering due to this sole
problem.
f. Illiquid Market
The buyers and sellers are not in huge number; therefore, the ISE market is
not very liquid. At times, investors face problems while disposing their
investments.
g. Lack of CFS Financing
Financing plays a great role for development of trade volume in an exchange.
At ISE, the investments in CFS are comparatively lower. Therefore,
sometimes, financing is either not available or it is available at much higher
cost.
h. Less Reliable Remote Trading
The remote trading based on internet is not highly reliable and at times
problems occur in it.
i. Less Adaptive to Automation
Many departments of the ISE are still operating manual practices and
automation has not been adopted as yet.

41

4.3.3

Opportunities
The following are the opportunities of ISE
a. Improving Economic Fundamentals of the Country
The economic fundamentals of Pakistan like GDP, per capita income etc are
improving with the result the stock markets investments are also giving better
results.
b. Pro-Stock Market Policies of the Government
The current regime of Pakistan is highly supportive of the stock market
reforms and its expanded role for the economic uplift of the economy.
c. Increasing Portfolio Investment
The portfolio investments in the country are gradually increasing and now it is
touching a figure of 4 billion US dollars. Therefore increasing interest of the
foreign fund managers would definitely increase investment level in the ISE.
d. Privatization of State Owned Enterprises by GOP
The privatization of the state owned units like OGDCL, PTCL, SNGPL, and
SSGPL etc are adding diversity and depth of the stock market. Issues offered
by the way of privatization would boost investments at ISE.
e. Mass Media Campaign
The ISE is spending a modest size budget for mass media campaign for
promoting stock market awareness. For this purpose several seminars across
the length and breadth of country has been conducted by the ISE. As a result
the number of investors is increasing rapidly.
f. Introduction of CFS Mk II
The SECP is introducing a CFS market irrespective of the Exchange
magnitude. This level playing field would provide tremendous boost to the
ISE.
g. Demutualization
The ISE would be demutualized during 2010 which would eliminate the
interest of the members of the exchange. Thus demutualization would pave a
way for the improvement of overall affairs of the Exchange.

42

h. Unified Trading Platform

The ISE in collaboration with LSE is making a unified trading platform which
would make a healthy campaign with KSE.
i. Merger of All Stock Exchanges
The SECP is mobilizing efforts to unify all the three stock exchanges. Once
demutualization is occurred, this objective would be pursued more
aggressively. The ISE would get great benefit out of this scheme.
j. Formation of South Asian Federation of Exchanges
The ISE has been very instrumental in forming federation of South Asian
Stock Exchanges. This would provide a forum or mutual cooperation. Thus
ISE would be benefiting by learning the experiences of bigger Indian Stock
Markets.
k. E-Commerce
The E-Commerce has provided great opportunities to the Exchange to trap the
uncovered market. The Exchange has swiftly moved towards the electronic
internet based trade.
l. New Building
The ISE is in process of construction its own building which would be a 22
storey tower. This building would make more visibility of the ISE and trade
volumes would certainly go up once it is completed.
4.3.4 Threats
The following are the significant threats of the institution
a. New Securities Legislation
The SECP is in process of introducing new legislation in lieu of Securities and
Exchange Ordinance, 1969. The draft legislation as circulated by the
Commission bears very strict conditions for continuing registration on annual
terms.
b. Transaction Taxes
Transaction taxes were introduced during year 2005 and the tax rate was
doubled during 2006. This has significantly increasing the business cost. It
would make long term impacts on business.

43

c. Geographical Location
The ISE is located in federal capital which does not have very big potential for
investments in stocks.
d. Liquidity Problems
The ISE market is facing liquidity crunch due to lesser availability of
investments orders. That causes routing the investment order to other
exchanges.
e. Technological Moderations
The other exchanges brokers by virtue of technological advancements are
intruding the ISE market. There being no code of ethics or legislation, the
competition is increasing with the result in shrinking profit margins.
f. Speculation Activities
The speculation activities not only pose threats to the risk management but
also to the brokers in shape of unsettled losses to be borne by members.
g. Drain of Skillful Human Resources
The institutions operating in securities and capital market are hiring the
services of skillful human resource working in the ISE. So far 163 trained
people have left the job in the wake of better prospects. Since its operation
ISE hired about 200 people and about 163 have been switched their jobs to the
other institutions.

4.4 RECOMMENDATIONS FOR IMPROVEMENT AND ACTION

PLAN
1. Based on my experiences, I suggest that the ISE should develop a team of
accounts and finance professionals at its own cost instead of outsourcing the job.
The following professionals are badly needed for this purpose:
a. Chief Financial Officer

One

b. Accounts Officer

Two

c. Database Administrator

One

Once, this team is developed after hands on training on the system, the Exchange
would be in a position to make swift developments regarding the finance
department, trade and allied system. This would also add to strength to the
system.
44

2. The ISE should acquire a state of the art system for accounting so that it must
have reports for ready reference and analysis.
3. The persons engaged in the finance department must be accordingly trained so
that they may not ask about petty issues pertaining to routine matters.
4. As they are using a comprehensive GLS accounting software which has the
facility of printing of cheques, but they are still writing the cheque manually,
through which the increase the chance of error.
The following are some recommendations for the organization relating to
operations and general affairs:
5. Exchange may conduct seminars for public awareness about new system. Once
the public would comprehend new system, they would be in a better position to
make investment decisions.
6. This system must also be propagated effectively, as this is a big achievement on
part of the management of the ISE and it would also attract foreign portfolio
investment through ISE members.
7. R & D section may be established by the Exchange so that continuous
developments may be suggested, evaluated and incorporated in the system.
8. Proper system audits from recognized IT solution providers may be made so that
system must be constantly checked at all tiers and it must be ensured that the
same is being followed in letter and spirit.

45

LIST OF PERSONS INTERVIEWED

1. Syed Nayyer Ashfaq, Deputy Manager, ISE.
2. Sagheer Mustaq, Finance Executive, ISE.
3. Waris Niazi, Deputy Secretary, ISE.
4. Saqib Jalil, Manager Internal Control, ISE.
5. Hafeez Pani, Risk Management Officer, ISE.

BIBLIOGRAPHY
1. Ashraf, Mehwish. (2007). Capital Market. Pakistan Economic Survey 2006-07.
2. Ashraf, Mehwish. (2009). Capital Market. Pakistan Economic Survey 2008-09.
3. Expert Committee on Demutualization and Integration/Transformation. (2004).
Report on Demutualization and Integration/Transformation of Stock Exchanges.
4. Hanif, Kamran (2009). SHMA (Information Solutions).
5. Islamabad Stock Exchange. (2008). Islamabad Stock Exchange (Annual Report
2008).
6. Islamabad Stock Exchange. (2007). Islamabad Stock Exchange (Annual Report
2007).
7. Islamabad Stock Exchange. (2008). About us, Regulation, FAQs, Technology.
Retrieved December 1, 2008, from http://www.ise.com.pk
8. JS Global Online. (2008). Regulatory Framework. Retrieved December 1, 2009
from http://jsglobalonline.com/3_regularotry_frame_work.php
9.

Karachi Stock Exchange Department of Investors Relations. (2004). Equity

Investments - A Guide to Investors, Vol 1.

10. Karachi Stock Exchange. (2008). Karachi Stock Exchange (Annual Report
2008).
11. Lahore Stock Exchange. (2008). Lahore Stock Exchange (Annual Report 2008).

46