Subject: International Business

Submitted to: Miss Qandeel Anjum

Submitted by: Shahzad Waheed (MC09124)Bilal Asmat (MC09120)Hamdan Aslam (MC09136) Muhammad Imran (MC09104)

Class: M.COM (2nd Semester)University of Punjab, Gujranwala Campus

PROJECT ONFOREIGN PORTFOLIO INVESTMENT

IN PAKISTAN

ACKNOWLEDGEMENT

First of all we are really thankful to almighty ALLAH, who gave us the strength to work on the project and complete it

in time without any hurdle.

And we are also highly grateful to our honorable teacher Miss Qandeel Anjum who provided us the opportunity to

work on this very interesting and knowledgeable topic which will help us in the subject of international business and also

in other disciplines.

ABOUT THIS PROJECT

Our respected teacher Miss Qandeel who has provided us thisProject to make a complete survey and review on the

Foreign Portfolio Investment in Pakistan

Our basic task in this project is to analyze that which countries have done portfolio investments in Pakistan

in last 5 years and what was the trend of these investments and what are the effects of these

investments on the economy of Pakistan.

What is Foreign Portfolio Investment?

The purchase of stocks, bonds, and money market instruments by foreigners for the purpose of realizing a

financial return, which does not result in foreign management, ownership, or legal control.

How FPI can Benefit the real sector of an economy:

Inflow of FPI can provide a developing non debt creating source of foreign investment.

FPI can induce financial resources to flow from capital abundant countries, where expected returns are low, to capital scarce countries where expected returns are high.

FPI affects the economy through its various linkage effects via the domestic capital market

How FPI can help an economy:

Foreign Portfolio Investment in Pakistan

Introduction & History: Like other developing countries, FPI is a relatively recent phenomenon in Pakistan. Initially Pakistan participated in external financial markets by offering instruments like foreign exchange bearer certificates issued by the Federal Government, Sovereign Bonds, and dollar bearer certificates. Later on, the government started opening up the domestic financial market to attract foreign investors. FPI increased significantly after the government opened the entry as well as the exit (expatriation) for foreign investment in the financial market in the early 1990s. The development of the securities market in the 1990s includes the establishment of the Central Depository Company, credit rating agencies, corporate brokerage houses, some of which were partially funded by the International Financial Corporation (IFC), coupled with the updated Company Law and Securities and Exchange Law.

Foreign portfolio investment inflows have jumped to a peak level of more than US$1000 million in 1994, more than double the inflow of FDI in the same year. This flow of capital however has proved to be highly volatile, especially after the Asian financial crisis. Some studies suggest that FPI is highly volatile in Pakistan. Since portfolio investment in Pakistan is directed mainly toward short-term and some medium-term public debt instruments and the stock exchanges, while access to capital markets through the use of external instruments has been limited. According to the mid-year review of the Ministry of Finance, FPI has witnessed an outflow of US$57.1 million during 2001 (Jul-Dec) as against an outflow of US$67.4 million in the same period of the preceding year.

FPI in the 1990s (million US$)

FPI IN PAKISTAN (2005-2010)

FPI Year Wise

Year FPI ( $ Million )

2005 1532006 351.52007 1820.42008 19.32009 -510.32010 (July-May) 539.4

FPI Country Wise

2005 2006 2007 2008 2009 2010$ million

$ million

$ million

$ million

$ million

$ million

Total World 153 351.5 1820.4 19.3 - 510.3 539.4

Developed countries 77.2 282.6 1710.1 238.8 - 562.7 515.7

Western Europe 33.4 -12.7 858.6 - 144.0 - 102.8 78.0

European Union 43.5 -24.3 986.0 - 46.2 - 78.0 64.1

Luxembourg 0.7 -1.0 - 0.4 39.3 - 4.1 38.8

Denmark 0.1 0.5 0.4 16.6 - 1.2 17.8

France 0.1 0.0 1.5 - 0.8 0.2 0.3

Germany 2.1 -3.5 7.0 - 0.5 0.1 0.3

Netherlands 23.2 -0.7 6.2 24.5 5.8 0.4

Sweden -0.3 0.0 11.2 - 0.3 - 1.0 0.4

U.K 17.6 -19.5 960.1 - 125.1 - 77.7 5.9

Other Western Europe -10.0 11.6 - 127.4 - 97.8 - 24.7 14.0

Norway 0.0 0.0 - - - -

Switzerland -10.0 11.6 - 127.4 - 97.8 - 24.7 14.0

North America 47.1 304.0 853.6 439.5 - 442.3 439.2

Canada 0.1 0.2 0.1 0.4 0.2 -

U.S.A 47.1 303.8 853.4 439.2 - 442.5 439.2

Other developed countries -3.4 -8.7 - 2.5 - 63.3 - 17.6 - 1.5

Australia 0.0 0.0 - 6.4 - 73.2 - 11.5 - 2.1

Japan -3.4 -8.7 3.9 9.9 - 6.1 0.6

Unspecified Developed Countries 0.0 0.0 0.4 6.6 - -

Developing economies 91.7 72.6 95.2 - 225.5 36.2 20.5

Caribbean Islands 4.3 -9.3 1.2 - 0.5 11.1 - 2.2

Cayman Island -0.1 0.0 - - - -

Bahamas 0.0 0.1 - 0.0 - 0.8 0.3 -

Other Caribbean Countries 4.5 -9.4 1.2 0.3 10.8 - 2.2

Africa 0.2 -5.0 12.9 13.0 - 2.2 0.1

Libya 0.0 0.0 - - - -

Egypt 0.0 -1.3 0.0 0.1 - -

Mauritius 0.2 -4.1 13.0 5.9 2.7 -

South Africa 0.0 0.0 - 0.0 - -

Other African Countries 0.1 0.4 - 0.1 7.0 - 4.9 0.1

Asia 82.1 85.7 82.1 - 188.2 27.2 21.9

West Asia 52.7 48.4 37.1 35.4 62.9 2.3

Oman 0.7 0.2 0.0 1.7 - - 2.1

Iran 0.0 0.0 - - - -

Kuwait 0.0 2.9 17.0 28.3 10.7 -

Bahrain 2.0 -19.4 4.9 2.7 - -

Qatar 0.4 0.1 0.0 0.0 0.2 -

Saudi Arabia -0.2 0.8 0.1 - 1.6 2.1 -

Turkey 0.0 1.0 0.2 0.0 - -

U.A.E 49.8 63.3 14.9 4.3 49.9 4.3

Unspecified West Asia 0.0 -0.5 0.0 - - -

South, East and South-East Asia 29.4 37.4 45.0 - 223.6 - 35.7 19.6

Bangladesh 0.0 0.0 - - - -

China 0.0 0.0 - 0.0 - -

Hong Kong 28.9 31.2 - 72.6 - 245.5 2.5 19.5

Malaysia 0.0 0.7 1.9 - - - 0.3

Singapore 2.7 5.6 118.2 19.6 - 35.1 1.3

India 0.0 0.0 - - - -

Korea (South) 0.0 0.0 - 1.7 - 2.8 2.9

Unspecified South, East and South-East Asia

-2.2 -0.1 - 2.5 0.6 - 0.4 - 3.8

Unspecified developing countries 5.0 1.2 - 1.0 - 49.7 0.3 0.7

Unspecified -16.3 -3.8 15.0 6.0 16.1 3.2

FPI Stocks

Stock as on 31-12-2005

Stock as on 31-12-2006

Stock as on 31-12-2007

Stock as on 31-12-2008

Portfolio investment

2173 4064 6767 6784

Equity securities 1064 1960 3859 3859 Debt securities 1109 2104 2908 2925

Trends of FPI in Pakistan

Trend and Reasons: The trend of inflows of FPI in Pakistan always remained increasing in normal economic and political conditions due to contains very investor friendly policies and conditions for foreign Investments.

Investors from all over the world do investment in physical instruments as well as financial instrument. Also Investments in Pakistan are protected under different laws like Foreign Private Investment (Promotion and Protection) Act, 1976 and the Furtherance and Protection of Economic Reforms Act, 1992.

FPI may entail negative consequences for the developing countries. Because FPI inflows are usually more unstable and volatile than FDI because the former does not involve long-term commitment by foreign investors and investors can easily pull out of the developing countries when their “animal spirits” are low.

So we can see in the statistics that from initial stage to present year, FPI inflows in Pakistan were affected by different political and economic issues. In end 90’s FPI inflows were affected by Asian Financial crises and then overcoming of Nawaz government by Musharaf. And again during 2008-2009 due to change in government and poor law and order situation FPI flew away from Pakistan. Millions of dollars were gone out during 2009.

Foreign portfolio investment in the stock market witnessed negative trend during November 2006 as compared to record inflow of $215.3 million in October 2006. Net foreign investment declined by 13 percent during the first seven months of the FY2009 mainly due to massive outflow from portfolio investment due to of poor law and order situation and political instability.

Central bank statistics showed net portfolio investment constantly on decline and net foreign investment registering a decline of some $324 million during the first seven months (July-January) of current fiscal year 2009. Portfolio investment stood in a negative position of 356 million dollars during the period as compared to an investment of 0.4 million dollars in same period of last fiscal year 2008.

In 2010, FPI inflow increased 235.9% in comparison of 2009. Net foreign portfolio investment into the stock market reached more than $530 million (362 million pounds) in the first 11 months of 2009/10, compared with a year-earlier outflow of $408 million.

If that holds to the end of the July-June fiscal year, it would mark the biggest net foreign investment in more than 10 years, apart from 2007.

The government has pulled back from the brink of a debt default thanks to International Monetary Fund emergency funding and is seeing some success in military operations against Taliban militants behind bomb attacks across the country.This trend shows that the confidence of international investors about Pakistan’s economy are reviving day-by-day, despite facing bad law and order situation in the country.

Stock market players attribute this development with the improvement in the macroeconomic indicators, strong liquidity position and witnessing a reversal trend in flight of capital from the country. In addition to that, the domestic financial market is performing well in terms of offering better profits and dividends to local and foreign companies (shareholders) on their reported earnings and profitability among emerging markets of Asia, Europe, Middle East, Africa and Latin America.

FPI inflows are also affected by some factors which are as follow:

Interest rate Tax on Interest on Dividend Exchange Rate

So if we review these factors during previous year then we come to know that interest rate was from 10 to 15%, which is an attractive rate for investors.

And the exchange Rate Trends of PKR against USD are:

We can see that the weakness of PKR against USD also affect the investment of USA in Pakistan during 2008 and 2009.

This is to be noted that Remittance of 100% of capital, profits, royalty, technical & franchise is allowed. That’s why investors invested hugely whenever other factors were in good conditions.

The investors are trying to make a good buck out of the presently prevailing situation of high yield and low priced stocks. The average dividend yield is six per cent, as the market is trading at price-equity multiple of 9x. The investors hope to gain the maximum benefit before the July 1, 2010 imposition of the Capital Gains Tax on shares.

Since the start of new financial year from July 01, 2010, foreign investors have adopted a cautious approach vis-à-vis investment in the stock market, which analysts attributed to host of factors related to stock trading.

Analysts said that the first major set back to foreign investment came in the shape of imposition of Capital Gains Tax (CGT), and the number of uncertainties attached to it dampened the spirit of foreign fund mangers to consider Pakistan for their investment.

Sharp depreciation in the value of rupee against dollar is another major factor, they said, this led to disappearance of offshore investors from the local stock market. Also, the low volumes are another frightening element for the foreign funds and they usually

hold themselves to invest in a market where volumes hit their lowest levels, which local bourse is currently witnessing

A Famous Stock Analyst Khurram said that “Whenever the currency related risks mount, the foreign investors immediately pack up and get out of the market to save their investment. And In a low volume situation, foreign investor finds very few exits to offload their holdings so they usually keep themselves aside in such situation”.

Impact of FPI on PakistanFPI inflows directly affect the credit side of capital account of BOP. The credit entry covers dividend accrued on equity securities (shares) and interest received from holding of foreign bonds, notes, and money market instruments and associated financial derivatives, and the debit entry includes the payments on account of the same instruments to the foreign investors. Similarly outflows of FPI affect the debit side of capital account BOP. SO inflows of FPI can help to reduce deficit BOP.

For example, when foreign portfolio investment and home remittances inflows in Pakistan saw a significant upswing in march 2010 and a good deal of activity during middle week was seen in the bourses with an inflow of $62.5 million in the portfolio investment, according to the National Clearing company of Pakistan Ltd. (NCCP), as the benchmark Karachi Stock Exchange KJSE-100 index crossed 10,000 points. These two inflows coupled with smaller imports and expanded exports helped narrow down the trade deficit by 19.45 per cent during the same eight months.

Some Figures related to are: portfolio investment account was credited by 47.3 million and 28.6 in 1997 and 1998. In 2001 Portfolio account was deficit with 192 million. And in 2005 BOP portfolio account was deficit with (-733,000,000) And in 2006, 2007 and 2008 account with 1,152,000,000, 1,276,000,000$ and (-270,000,000.00) respectively.

Foreign Portfolio Investment inflows play a very important role in the economic development of the country. First of all FPI’s increase the liquidity position of local economy and then FPI’s help to improve the Foreign Reserves that results in a stabilize exchange rate. Secondly FPI’s induce new invests in the economy hence the rate of investment increases and lastly, FPI’s are also helpful and encourages existing business firm to expand their businesses through raising their equities by issuance of new securities in the market.

In the economy of Pakistan FP’Is getting more and more importance since the market risk is very high due to geopolitical situation of the homeland and foreign investors are reluctant to inject FD’Is in Pakistan so foreign investments can be attracted towards Pakistan through FPI’s. Even though it’s a short time measure but this will be helpful to attract foreign investors in Pakistan.

Whether FPI contributes to the process of economic growth and development of a country depends on the configuration of the domestic financial system and the importance of different financial institutions in providing funds and reducing information asymmetries. In a monetary production economy, availability of money is vital for an entrepreneur when he/she decides to invest in capital goods for future production. This money could be generated either from previous profits (retained earnings) or could be raised from external sources by issuing debt/equity in the security market or borrowing from banks. The importance of the security market of a country in providing funds depends on the effectiveness of different types of the financial system, which, in turn, largely depends on its socio-economic structure.

It implies that if the stock market (and FPI) is vital for the US, then it does not necessarily mean that it is also vital for the Pakistani economy. It is argued here that FPI can only have significant positive impacts on the process of economic growth if the socio-economic structure of a country allows the security market to perform its functions effectively, i.e. to provide funds to entrepreneurs and reduce information asymmetries. In the case of Pakistan, where the security market is not very important and not well developed, FPI has not played, and is not expected to play a vital role in economic growth and development unless the overall socio-economic environment is adjusted appropriately.

The first stock exchange of Pakistan came into existence in September 1947. Although it was developed gradually afterwards, the security market has played a relatively minor role in the industrialization process in Pakistan. This could be attributed to the guided industrialization polices of the GOP, particularly during the 1950s and 1960s. The government did not pay much attention to developing the stock market because it was relatively difficult to influence this financial market and its development could undermine the industrialization policies of the authorities. Banks, by contrast, are much easier to influence and the GOP, with its interventionist policies, has utilized the bank-based system to pursue its guided industrialization policies.

The stock market in Pakistan has provided meager funds for capital formation. For example, “on average, between 1980-90, only 5 to 6 percent of private funds have been mobilized through the stock market, and even in the 1990s, the average amount raised through

new issues was only Rs7 to 9 billion, compared to Rs75 to 80 billion from deposit mobilization by the commercial banking system alone. During the 1990s, when the authorities started following liberalization policies, huge FPI entered Pakistani stock exchanges especially through the Commonwealth Equity Fund, the Pakistan Fund, and the Credit Lyonnais Pakistan Growth Fund. After reaching its peak level and making sufficient capital gains, foreign portfolio investors pulled out of the Pakistani stock market. Due to the underdevelopment of the overall financial system, the lack of liquidity in the security market, and the presence of enormous information asymmetries, the participation of the general public in the stock market is negligible as most of the people hold bank deposits or Government’s saving schemes as a preferred means of store of value.

For the last five decades, Pakistan has not had a stable democratic government. Even in the coming future, growing suspicions regarding Presidential Referendum and the shape of future governments, coupled with the American war against terrorism (possibly against Iran), has substantiated the uncertainties in the Pakistani market. This political instability has created huge uncertainties not only in the minds of foreign investors but also in the minds of the local public. The benefits of FPI depend on the economic and political environment of the host country.

In the case of Pakistan, the environment has been highly unstable and, therefore, it is unlikely to have benefits from the security market in general, and FPI in particular. Given the uncertainties in Pakistan’s economic environment and short-term commitment of portfolio investors, firms that seek stable sources of external funds rely on internal finance or borrow from banks. Also, due to a lack of public participation in the stock market, the benefits of FPI, if any, would go to a small group of individuals. This, however, does not imply that the stock market is completely unimportant for the development process of Pakistan. These markets are “compensating” institutions, to benefit from the stock market (especially from FPI), however the GOP needs to attract domestic investors to create depth and liquidity in the market, before it starts marketing the Pakistani security market to foreign investors. In other words, before attempting to attract foreign investors, GOP needs to promote the security market to the Pakistani public.

Conclusion

Pakistan economy and especially of stock markets is very gloomy. But unfortunately trends of FPI inflows and other investment

remained fluctuating due to different serious factors discussed above.

It is suggested that, like other developing countries, the volume of foreign aid to Pakistan has been decreasing. A comparison with other Asian countries suggests that Pakistan has been quite unsuccessful in attracting foreign investors.

The slow growth rate of foreign private investment, including FDI and FPI, could be attributed to the inconsistencies in successive government’s policies and poor socio-economic infrastructure.

The policies pursued by the GOP lay too much stress on financial and fiscal incentives, while the development of domestic infrastructure, human capital, and institutional structure has been undermined. The problem has been exacerbated due to high political instability in Pakistan.

The real question is that how our economic managers can boost the confidence of foreign investor so that foreign investor be ready to invest their funds in Pakistan?

For this purpose following steps are unavoidable to be taken:

First of all government should float Bailout Program to facilitate investor in divesting their investments. For this purpose Buy Back option would be very handy.

Secondly SECP (Securities and Exchange Commission of Pakistan) at least make it obligatory for those firms who have raised their capitals in KSE to buy back their shares. And finally federal government should provide relaxation on Capital Gain Tax for a definite period of time in order to boost the confidence of investors on stock markets.

To conclude, it is inevitable to uplift the stock markets so that Foreign Portfolio Investments can be attracted towards Pakistan because foreign investments are unavoidable for the development of Pakistan. For the country to be able to generate healthy long-term investment, clear policies along with assurances of security are needed.

A Little Guideline AboutHow TO Invest In Pakistan Stocks

The Pakistani stock market takes place in several cities throughout the South-Asian nation. The major exchange takes place in Karachi and involves over 600 publicly held companies available to investors throughout the world. You need to know the daily pacing of the Karachi Stock Exchange to make wise investment decisions.

Step 1: Create a contract with an established broker with authorized agents in Pakistan. Pakistani trade rules are strict about the registration of brokers on the Karachi Exchange floor. Request a prospectus on past client successes in Pakistan before you invest any money with a broker.

Step 2: Observe stock rules before you invest in Pakistani life-insurance companies or banks. Foreign investors cannot own a majority of shares in a domestic life-insurance firm in Pakistan. You are also prohibited from moving shares in a bank that exceed 5 percent of the bank's held shares.

Step 3: Utilize the T-3 settlement system used in the Karachi Stock Exchange. This system is used in many Asian markets and allows

share transactions to be fully completed by the third business day after a trade. This system allows quick transactions while maintaining financial audits by exchange authorities.

Step 4: Expand your securities trading experience in Pakistan by using the Odd Lots Market. This market features grouped securities in lots that do not meet the requirements for the regular market. You can invest in smaller lots or a package of diversified lots through the Odd Lots Market.

Step 5: Set aside some of your profits and dividends from Pakistani stocks for trade taxes. The capital value and withholding tax on individual shares can add up quickly if you have an extensive portfolio.

Step 6: Increase your temporary purchasing power by using a carry-over trade in Karachi. Carry-over trades allow you to purchase shares throughout the market on one day with funds repaid the next day. This method is appropriate for traders who are trading a particularly strong stock in the short term.

Step 7: Search a variety of local and regional stocks available to the public on the Lahore and Islamabad markets. These markets are smaller in terms of total-trade volume, but they provide a trove of potential investments for an experienced trader.

Tips and Warnings: Keep an eye on the KSE 100 Index daily to determine the strength of the Pakistani economy. This index is similar to the Standard and Poor's and NASDAQ indexes because it collects the nation's top-performing stocks as indicators of a robust economy. You should consider changing your investments only if there is significant movement by multiple members of the KSE.

References:

www.google.com www.sbp.org.pk www.fbr.gov.pk www.pakboi.gov.pk

Knowledge is Light, which enlighten our lives. And we believe that our honorable teacher is shining moon and we are little stars which absorb this light of the Moon.