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 ON
FOREIGN 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 this
Project 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$)

1200
1000
800
600
400
200
0
1991/2

1993/4

1995/6

1997/8

1999/0

-200
 FPI IN PAKISTAN (2005-2010)

FPI Year Wise

Year FPI
( $ Million )
2005 153
2006 351.5
2007 1820.4
2008 19.3
2009 -510.3
2010 (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 Stock Stock Stock

as on as on as on as on
31-12- 31-12- 31-12- 31-12-
2005 2006 2007 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 Pakistan

FPI 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 About

How 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.