THE very fact that just one out of every five investors registered with the Central Depository Company ‘actively’ participates in shares trading underlines the reason why we have a very thin stock market in Pakistan. That only a fraction of such investors are actually involved in selling and buying stocks, driving share volumes and values up and down, on most days of the week, means that the government and regulators need to do a lot more to attract private savings into capital markets. According to CDC data, nearly 278,000 investors are registered with the depository in a country of over 200m people. The number has not grown much in spite of extensive market reforms implemented in the last two decades to attract private savings into stocks. It shows that savers still prefer to invest their money in government schemes that they see as more secure, or keep their surplus income with banks. This is notwithstanding an average rate of return of 27pc earned by investors on their stock market investments in the last 10 to15 years. Why is that so? PSX managing director Farrukh Khan tried to explain this the other day, saying that the massive fiscal and regulatory incentives, worth hundreds of billions of rupees, the government has extended to the real estate and construction industry is driving investors away from the shares market to immovable property.

This is true. Indeed, the disproportionately heavier tax incidence in capital markets and the excessive FATF-related regulatory burden, which exposes stock investors to detailed scrutiny by different government departments and makes entry into the shares market more difficult than in real estate, are major reasons for the flow of savings into property. But that is only one factor behind the low public interest in the stock market. People still don’t have confidence in the stock market and consider PSX a ‘manipulated marketplace’, despite improved regulations and transparency. Little has been done to educate middle class savers about the benefits of investing in shares, as opposed to investment in government debt or keeping their savings in banks. Besides, a large number of listed firms have a poor governance and dividend payment history, a major disincentive that keeps smaller investors at bay. While tax and other incentives are crucial to woo investors, the PSX management should increase its supervision of the listed companies and ensure that investors get a reasonable share of their profits.

Published in Dawn, March 17th, 2022