26 April 2004	Monday	05 Rabi-ul-Awwal 1425

A large number of diverse individual and institutional shareowners is an essential condition for making the capital markets perform capital formation and provide liquidity and price discovery.

More so, a broad shareowners' base means the rewards and risks of the capital markets would be distributed throughout the economy. A large number of shareowners also acts as a constant pressure on capital markets to raise their standards, particularly in corporate governance.

Despite the importance of a broad base of shareowners, too few people in Pakistan own shares. The objective here is to provide an assessment of the shareowners' base in our capital markets and suggest measures to broaden it.

What is the number of shareowners in Pakistan? Despite the fundamental relevance of this number for policy making, no one knows for sure. There is no database and there has never been a survey done to measure the investor base. Therefore, what we have to rely on is an estimate.

If we simply gross up the number of shareholders in each listed entity at KSE for 2003, including closed end mutual funds but excluding new listings, the number is approximately 1.8 million.

Clearly, this number is subject to multiple counting, as the same person who owns shares in the Hubco could be a shareholder of the PSO, the PTC and so on. There are others who have invested in listed securities through open-end mutual funds.

NIT is the most broad-based mutual fund in Pakistan and it is said to have around 65,000 unit holders.(Open-end mutual funds do not report the number of unit holders) So including ownership through open-end funds would not raise the number of shareowners, direct or indirect, individuals or institutions, beyond two million.

From share ownership surveys done abroad, we know that on the average an individual owns five stocks. This number can be generalized to our capital markets where access to stock market is essentially limited to small areas in three cities.

However, lets be conservative and use a smaller number, 4, i.e. on the average a person is being counted three times in the gross total number of shareholders. This gives us the net number of shareowners, direct or indirect, as 500,000. The adult population in Pakistan is about 75 million. Therefore, not even one per cent of our adult population owns shares.

You may estimate the numbers in different ways but you are unlikely to get figure larger than one per cent. You may adjust this figure for the low levels of literacy and per capita income in the country but the ratio would be still painfully small. The degree of narrowness of our shareowners base cannot be exaggerated. Due to this extremely small number of shareowners, most of the Pakistanis consider our capital markets irrelevant.

Countries in which capital markets contribute to the economy more than a third of the adult population, can own shares. According to share ownership survey done by the Australian Stock Exchange (ASX), 50 per cent of the Australian adults, directly or indirectly, owned shares in 2002.

The number of direct and indirect adult shareowners for USA, Canada, UK, and Hong Kong, are 50, 46, 22 and 20 per cent respectively. (Due to unavailability of data, I could not compare the numbers within developing countries.)

There are a number of reasons behind the narrow investor base in our capital markets. The salient ones are:

(i) The access to stock market is essentially restricted to three cities, Karachi, Lahore, and Islamabad where there is a stock exchange and a branch of the Central Depository Company (CDC)

(ii) Due to a weak economy, very few equity public offers have been made and some of the largest companies are still predominantly government owned

(iii) Investor awareness of capital markets is very low even among the relatively educated and high income individuals

(iv) Investors are not offered adequate protection in capital markets. exchanges, despite being front line regulators, have a poor perception and are often called "Satta Exchange", "Rich Men's Club", and "Rigged Casino."

(v) Most of the listed companies are tightly held by owner families to ensure total control.

We have seen that shareowners base is extremely narrow. But is the number growing? In the wake of capital market reforms, soaring share prices, and macroeconomic achievements, one would expect that the number of shareholders in the secondary market would have risen substantially. The data shows that is not the case.