KARACHI STOCK EXCHANGE

Assignment

NUST College of Electrical & Mechanical Engineering, Rawalpindi

 Karachi Stock Exchange

DEPARTMENT OF
ENGINEERING
MANAGEMENT

PROJECT MANAGEMENT
ASSIGNMENT 2

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 Karachi Stock Exchange

KARACHI STOCK EXCHANGE

The Karachi Stock Exchange (PSX-KSE) was a stock exchange located in Karachi, Sindh, Pakistan.
Since 1947, it has been located at the Stock Exchange Building on I. I. Chandigarh Road. It has
now been consolidated in the Pakistan Stock Exchange, along with the Lahore Stock Exchange
and Islamabad Stock Exchange. The KSE was Pakistan's largest and oldest stock exchange.
According to Bloomberg, the Pakistani benchmark stock market index is the third-best
performer in the world since 2009.In June 2015, Khaleej Times reported that since 2009,
Pakistani equities delivered 26% a year for US dollar investors, making Karachi the top-
performing stock exchange in the world.
The Karachi Stock Exchange was established on 18 September 1947 and was incorporated as
Karachi Stock Exchange Limited on 10 March 1949. The KSE began with 5 companies as KSE 50
with a total market capitalization of ₨37 million (US$260,000). For over 60 years, the KSE
facilitated capital formation, serving a wide spectrum of participants, including individual and
institutional investors. With a growing number of listed companies and trading activities by the
late 1980s, another index was proposed. On 1 November 1991, the KSE 100 Index was
introduced. By 1995, the need for a futures index was realized and on 18 September 1995, the
KSE All Shares Index was introduced. To address the needs of the investors community, two
other indexes were introduced in the late 1990s - the KSE-30 Index and KMI 30 Index. Work on
a fully automated trading system began in the late 1990s and in 2002, the Karachi Automated
Trading System or KATS was launched, which had the ability to handle over 1 million trades per
day. In the same year, the KSE was declared the "Best Performing Stock Market of the World".
In 2016, the Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange
were integrated under the Stock Exchanges (Corporatization, Demutualization and Integration)
Act, 2012 to form the Pakistan Stock Exchange.

KSE Computation Mechanism

1. OBJECTIVE & DESCRIPTION

The primary objective of the KSE100 index is to have a benchmark by which the stock price

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performance can be compared to over a period of time. In particular, the KSE 100 is designed to
provide investors with a sense of how the Pakistan equity market is performing. Thus, the
KSE100 is similar to other indicators that track various sector of the Pakistan economic activity
such as the gross national product, consumer price index, etc.
2. COMPOSITION OF THE KSE100 INDEX

The KSE100 contains a representative sample of common stock that trade on the Karachi Stock
Exchange. The KSE stocks that comprise the index have a total market value of around Rs. 1,197
Billion compared to total market value of Rs. 1,365 Billion for over 679 stocks listed on the
Karachi Stock Exchange. This means that the KSE100 Index represents 88 percent of the total
market capitalization of the Karachi Stock Exchange, as of 27th February, 2004.

LIST OF SECTORS

1.   Open-end Mutual Funds 19.   Oil & Gas Marketing Companies

2.   Close-end Mutual Funds 20.   Oil & Gas Exploration Companies

3.   Modarabas 21.   Engineering

4.   Leasing Companies 22.   Automobile Assembler

5.   Investment Banks/Investment 23.   Automobile Parts & Accessories

Cos./Securities Cos.

6.   Commercial Banks 24.   Cable & Electrical Goods

7.   Insurance 25.   Transport

8.   Textile Spinning 26.   Technology & Communication

9.   Textile Weaving 27.  &nbsp Fertilizer

10.   Textile Composite 28.   Pharmaceuticals

11.   Woolen 29.   Chemical

12.   Synthetic & Rayon 30.   Paper & Board

13.   Jute 31.   Vanaspati & Allied Industries

14.   Sugar & Allied Industries 32.   Leather & Tanneries

15.   Cement 33.   Food & Personal Care Products

16.   Tobacco 34.   Glass & Ceramics

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17.   Refinery 35.   Miscellaneous

18.   Power Generation & Distribution

 
3. STOCK SELECTION RULES
The selection criteria for stock inclusion in the recomposed KSE100 Index are:
Rule # 1: Largest market capitalization in each of the 34 Karachi Stock Exchange sectors
excluding open-end Mutual Fund Sector.
Rule # 2: The remaining index places (in this case 66) are taken up by the largest market
capitalization companies in descending order.
A number of the 34 top sector companies may also qualify for inclusion on the basis of
their market capitalization. In other words, companies may qualify solely under rule 1,
solely under rule 2, or under both.
The fact that the sector rule is identified as Rule 1 does not imply that it is more important,
only that the nature of the selection process is such that it is the screening that is done
first.
4. CALCULATION METHODOLOGY *
In the simplest form, the KSE100 index is a basket of price and the number of shares
outstanding. The value of the basket is regularly compared to a starting point or a base
period. In our case, the base period is 1st November, 1991. To make the computation
simple, the total market value of the base period has been adjusted to 1000 points. Thus,
the total market value of the base period has been assigned a value of 1000 points.
An example of how the KSE100 Index is calculated can be demonstrated by using a three-
stock sample. Table 1 illustrates the process. First, a starting point is selected and the initial
value of the three-stock index set equal to 1000.
Taking stock A's share price of Rs. 20 and multiplying it by its total common shares
outstanding of 50 million in the base period provides a market value of one billion Rupees.
This calculation is repeated for stocks B and C with the resulting market values of three and
six billion Rupees, respectively.
The three market values are added up, or aggregated, and set equal to 1000 to form the
base period value. All future market values will be compared to base period market value
in indexed form.
CALCULATING THE KSE100
Step 1: The Base Period Day 1 TABLE 1

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Stock Share Price (in Pak Rs.) Number of Shares (in Rs.) Market Value

A 20.00 50,000,000 1,000,000,000.00

B 30.00 100,000,000 3,000,000,000.00

C 40.00 150,000,000 6,000,000,000.00

Total Market Capitalisation 10,000,000,000.00

Note: Base Period Value/Base Divisor = Rs. 10,000,000,000.00 = 1000.00 Base Period
Value/Base Divisor = Rs. 10,000,000,000.00 = 1000.00 * All figures taken are only
hypothetical
Step 2: Index Value as on Day 2 TABLE 2

Stock Share Price (in Pak Rs.) Number of Shares (in Rs.) Market Value

A 22.00 50,000,000 1,100,000,000.00

B 33.00 100,000,000 3,300,000,000.00

C 44.00 150,000,000 6,600,000,000.00

Total Market Capitalisation 11,000,000,000.00

Index = (11,000,000,000.00/10,000,000,000.00)*1000= 1.10 * 1000 = 1100
Thus, the formula for calculating the KSE100 Index is :
{(Sum of Shares Outstanding * Current Price)/Base Period Value}*1000

OR

(Market Capitalization/Base Divisor) * 1000

Base Divisor
The KSE100 Index calculation at any time involves the same multiplication of share price
and shares outstanding for each of the KSE100 Index component stocks. The aggregate
market value is divided by the base value and multiplied by 1000 to arrive at the current
index number.

5. RECOMPOSITION OF THE KSE-100 INDEX

Maintenance of the index over time will require an on-going semi-annual recomposition
process, internal and external- buffer files of shares that exceed (shares outside the index)
or fall below (shares inside the index) the above criteria will be maintained under the

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jurisdiction of the recomposition committee.

Maintaining adequate representation of the under-lying stock market through all of its
future development and changes is dependent upon the establishment of an appropriate
recomposition process. Recomposition rules fall into two general categories: Sector rules
and market capitalization rules.
5.1 Sector Rules
Sector rules govern the selection (or deletion) of companies on the basis of being the top
capitalization stock in each of the 34 KSE sectors. Two rules are recommended to
undertake selection in this area-one, a time based rule and the other a value-based rule.
Application can be triggered by compliance with either rule.
5.1.1 Time-based rule:
A company (not in the index) which becomes the largest in its sector (by any amount of
value) will enter the index after maintaining its position as largest in the sector for two
consecutive recomposition periods (i.e., one year).
5.1.2 Value-based rule:
A company (not in the index) which becomes the largest in its sector by a minimum of 10%
greater in capitalization value than the present largest in the sector (in the index) will enter
the index after one recomposition period (i.e., 6 months).
5.2 Capitalisation Rule
Capitalization rules govern the selection (or deletion) of companies on the basis of being
among the largest capitalization companies in the stock market. Only one rule applies
here-time based rule.
5.2.1 Time-based rule:
A company (not in the index) may qualify for entry if it exceeds the market cap value of the
last stock in the index selected on the basis of market cap for two recomposition periods
(i.e. one year). A qualifying company automatically pushes out the lowest cap selected
stock in the index.
5.3 Rules for new issues:
A newly listed company or a privatized company shall qualify to be included in the existing
index (after one recomposition period) if the market capitalization of the new or privatized
company is at least 2% of the total market capitalization.
5.4 Recomposition Time table
The recomposition committee will meet semi-annually, with meetings scheduled to take

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place at least two weeks before the end of the last trading day of the month in which they
occur. This is to allow for a minimum announcement period of two weeks, commencing
the day following the recomposition meeting, when the results of the meeting are made
public, at the end of the last trading day of the month, when changes are implemented
into the index.
5.5 Recomposition Committee
The recomposition committee has two broad function:
1. Overseeing implementation of the index rules at the semi-annual recomposition
sessions.
2. Reviewing the index rules and altering them as necessary.
AN EXAMPLE OF THE RECOMPOSTION OF THE KSE100
The base divisor adjustment process can easily be understood by an example mentioned
below. It is important to understand that all divisor adjustment are made after the close of
trading.
DIVISOR CHANGES
KSE-100 Index as on Day 2 = 1100
Index Market Capitalization on Day 2 = 11,000,000,000.00
Divisor as on Day 2 = 10,000,000,000.00
Revised Market Capitalization due to addition and Delition of companies on the basis of
Sector Base
Rule and Market Capitalization Rule.- Say = Rs. 12,000,000,000.00
As mentioned earlier the Revised Market Capitalization are the market capitalization of
those companies which would constitute the KSE-100 Index on the next day (Day 3). The
Revised Market Capitalization calculated after the end of closing of trading session of Day 2
by using closing prices of the same day. 

The key to making this adjustment, as with any divisor adjustment, is that the index value
is temporarily 'frozen' at the close of trading, while the divisor is adjusted for the increase
or decrease in market value of the numerator in the formula.
As the Formula for KSE-100 Index is:
Market Capitalization
Index = —————————————— x 1000
Divisor

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Therefore, in order to get the new divisor than formula is reframed as:
Revised Market Cap.
New Divisor = ————————————— x 1000
Index (Day 2)
12,000,000,000
= ——————————— x 1000
1100
= 10,909,090,909

Note: The formula for Re-composition of the KSE100 Index is same as mentioned in Table
2, except that the treatment of Base Divisor changes from Base Period Value to an
arbitrary number, set such that there is no break in the index series. This will be adjusted
for any capital changes in indexed stocks.

COMPARISON OF GLOBAL STOCK MARKETS

This chart displays a table with actual values, consensus figures, forecasts, statistics and
historical data charts for - Stock Market. This table provides stock market indexes quotes for
several countries including the latest price, yesterday session close i.e. 22 November 2019, plus
weekly, monthly and yearly percentage changes.

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