KARACHI: Karachi, one of Pakistan's chaotic financial heart, is home to 18 million people, Taliban bombers, contract killers - and one of the world's most successful stock markets.
With 49 per cent returns in 2012, the Karachi Stock Exchange (KSE) was one of the five best performing markets in the world. Now it is seeking a foreign partner to buy a stake and take over management of a market that has risen three-fold over the past four years.
At least some of that performance came on the back of a government amnesty that allowed people holding undeclared assets or "black money" to invest it freely in the market. And the relatively illiquid market has also been vulnerable to manipulation.
But government officials say the market's success highlights the economic potential of a country better known for spiraling sectarian violence, the war against Al Qaeda and the Taliban, crippling power cuts and entrenched corruption.
The market's benchmark index continues to soar to record highs — up 10.34 per cent year to date — fueled in part by expectations May elections will mark Pakistan's first transfer of power from one democratic government to another. Previous civilian governments were all dismissed by Pakistan's ultimate power: the military.
"Pakistan has a lot to offer investors and this is our chance to show it," said Nadeem Naqvi, the KSE chairman. He plans to embark on a series of roadshows for potential foreign partners that will take him to London, Frankfurt and Hong Kong in the coming months.
Many of the companies listed on the KSE offer double-digit returns, low stock prices and resilient business models in this frontier market with a population of 180 million. The index still has an attractive price/earnings ratio of $8.50 despite the soaring returns of the past few years.
Pakistan now has a 4 per cent weighting in the MSCI Frontiers Market Index and has become somewhat of a discovery for foreign investors chasing new markets and yields.
The Seamier Side
But the KSE's spectacular rise last year can at least be partly attributed to another factor entirely - the cleansing of "black money".
The market took off last year just as a government decree was finalised allowing people to buy stocks with no questions asked about the source of the cash.
Average daily volume more than doubled last year to 173 million shares from 79 million in 2011.
Authorities say the measure will bring undocumented funds into the tax net in a country where few pay taxes. But some critics decried it as a gift to corrupt officials and criminals seeking to launder dirty cash.
"Politics and dirty money go hand in hand in Pakistan," said Dr. Ikramul Haq, a Supreme Court lawyer and a professor on tax law.
"People want to be outside the regulatory framework and outside the tax net."
The black money amnesty also drew attention to the seamier side of the Karachi stock market. Interviews with regulators, brokers, market officials and analysts showed insider trading and other manipulations are routine. Regulators have been largely ineffectual in controlling the shady practices.
The Securities and Exchange Commission of Pakistan (SECP) said it found 23 violations of securities laws that merited fines in fiscal year 2011-12 (April/March). The market regulator sent warning letters in another 19 cases, it said in its annual report.
That's a drop in the bucket, says Ashraf Tiwana, dismissed as head of SECP's legal department after years of clashes with his bosses over fraud in the market. He has petitioned the Supreme Court to replace the SECP chairman and commissioners.
"There's a lot of fraud, a lot of market manipulation ... but not enough action has been taken, especially not enough criminal action has been taken," Tiwana told Reuters. "They're just passing small fines and giving out warning letters."
Regulators are too close to the market, Tiwana said. The head of the stock exchange is a former broker and the two top members of the SECP are former employees of Aqeel Karim Dhedhi, founder of one of the country's biggest brokerage houses.
Nicknamed "Big Dhedhi" for his ability to move markets, Aqeel Karim Dhedhi heads one of Pakistan's largest domestic conglomerates, the AKD Group.
Lately, the well-known philanthropist and leading member of Pakistan's business establishment has been trying to fend off arrest over allegations of insider trading.
An SECP investigator accused traders, including Dhedhi's brokerage, of buying shares in a state-run Sui Southern Gas Co before an official announcement allowing the company to raise its prices. In the weeks before Sui Southern's announcement, the stock price jumped from 13.5 rupees to 20 rupees, its biggest hike in five years.
The National Accountability Bureau, the state-run anti-corruption agency, called it a case of insider trading. But the SECP said its own confidential investigation showed no evidence of fraud. The SECP whistleblower in the case has been suspended from her job for disclosing "confidential information".
Dhedhi strongly denied any wrongdoing and said he purchased his gas stocks years before the announcement.
"There is nothing there. The (SECP) report totally cleared us," said Dhedhi, a burly man wearing a traditional long cotton shirt and baggy pants. "I'm proud to say that in more than 40 years of operating, we've never paid a penny in fines."