From Mutualized Exchange to Investor-Owned Demutualized Entity: The Case of Pakistan Stock Exchange

Abstract

This case study provides an overview of the Pakistan’s stock exchange (PSX) journey from not-for-profit mutual company to for-profit demutualized self-listed entity. The wave of demutualization and public listing of stock markets around the globe is being witnessed for the last two decades. This study focus on three main areas. First, in 2012, the stock market stood corporatized and demutualized as a public company limited by shares. Prior to 2012, the PSX (formerly called Karachi stock exchange) was a member-owned company limited by Guarantee. The three national stock exchanges of Pakistan, i.e., Karachi, Lahore and Islamabad stock exchange merged together to form PSX in January 2016. Moreover, under enhanced cooperation between China and Pakistan in the form of CPEC, the 40% strategic ownership of PSX is transferred to the consortium of Chinese financial institutions following the competitive bidding process. However, the question arises: does this marriage between China and Pakistan makes the financial exchange of Pakistan as one of Asia’s most modern capital markets? After the acquisition of PSX by China, the Pakistan stock market is listed on its own exchange from June 29, 2017 (self-listing) following the book-building and public subscription process. Besides, the Chinese representatives have been inducted on the board of directors and a separate small & medium enterprises counter is established to facilitate SMEs raising funds from capital markets. Second, this study links the conceptual framework with real life event by discussing the reasons for demutualization, such as investment in technological advancement, global competition, changes in corporate governance structure, regulatory challenges, and efficiency of demutualized stock market. Lastly, selected market efficiency indicators are compared before and after integration to assess the benefit of demutualization. On a positive note, so far, the market witnessed higher liquidity, less excessive volatility, and better returns for investors in the post-merger period compared to pre-merger period.

Keywords: Pakistan Stock Exchange, Demutualization, Self-listing, Market efficiency, Regulation