Internship Report on Islamabad Stock Exchange 2009-2

M Idrees Raja.

My internship proposal was accepted in May 2003 on the request of our department of Admin Sciences Quaid-I-Azam University, Islamabad. My internship was remained with the management of Stock exchange. I joined Islamabad Stock Exchange on July 2, 2003. During my internship I worked in following departments,

The internship report comprises a brief study on Islamabad Stock Exchange (ISE) during two months internship. The report is distributed in many parts according to nature and requirement of organization.

The purpose of study to develop skills through learning various aspects of organization. The study enables to get command on bookish knowledge through practical approach and to understand the difference in both approaches. This thing increases the knowledge and brings betterment in working within organizational environment.

The working in stock exchange is different from other institutions. The ISE own internship schedule bound me to fallow it. (Annexature)

It is difficult to study all aspects of organization in a limited time. The functioning in ISE is mostly related to finance departments in ISE except investor relation and upto some extent companies affairs are related to finance. The study focuses on field of finance including finance department.

The methodology of research consists all methods, which were possible during the internship in ISE. The following method were adopted by me,

Interviews:

The interviews were made on daily basis form the concerning departments in ISE. There are number of personas covered in interviews both top and lower management. The interviews were made in the form of prepared and unprepared. Before the interview general discussion were made for creating feasible environment.

In prepared interviews the questions were asked consist on following nature,

Open Ended Questions:

The open questions were asked more as compared to other types of questions. The open ended questions asked in different directions. The questions were asked more in number to top management when the response was given than an open discussion were made.

Closed Ended Questions:

Closed-ended questions were less in numbers as compared to other questions asked by me. the questioner were first developed and than asked to the management. in the form of scaling.

Techniques in Questions:
The methods of questions in open-ended technique were change question to question. In unprepared method the questions were asked according to information that I got from the respondent. But in open-ended questions were asked usually positive provided if the response was expected according to desire. If there was chance variation in questions than the questions were asked positively and than negatively after time consecutively.

The data were collected from various authentic sources includes the newspapers, international books, national level books and literature.

It includes the general observation, discussion with investors and consults the different record of Islamabad Stock Exchange (ISE).

The internship report, which I want to present, will consist on following department and related fragments,

This chapter includes about the location, establishment and background of Islamabad

Stock Exchange (ISE).

Important statistics.

Annextures.

The Islamabad stock exchange (Guarantee) Limited was incorporated on October 25,1989, under the companies ordinance 1984 as a company limited by guarantee. The exchange first times start trading in July, 1992. The main function of exchange to conduct, regulate, trade securities, government bonds, shares of companies and other related investment. There are 103 members of Islamabad stock exchange, But out of them 38 active only.

The building of exchange is located in Blue Area, Fazal –ul- Haq Road Islamabad. The building is called Nafees Plaza, which has four stories, the building is acquired on rent basis under a contract and rent is paid on advance basis. The new building is under process near the Saudi Tower building, Islamabad. The building will consist 15 stories, including all facilities in it.

The Islamabad stock exchange which was established in 1989 work under the company ordinance 1984. Securities exchange commission ordinance (SECP) 1969, securities exchange rules 1971. The exchange also has a memorandum and article of association, which was approved by SECP. The amendment cannot be made without prior approval of Securities and Exchange Commission of Pakistan (SECP).

There are three regulating bodies of Islamabad stock exchange (ISE). First is the Securities and Exchange Commission of Pakistan (SECP) which is responsible for maintain regulations for securities and other matters related to companies. The other regulating body is coporate law authority, which has been merged in SECP, is responsible for law and order, which is implemented for stock exchange. The third body, which is the supreme, is the Ministry of Finance who sent instruction from time to time three exchanges including coporate law authority and SECP.

There are 260 companies listed in Islamabad Stock Exchange and the strength of employees are 33 in number. There are 8 officers including M.D. and secretary of exchange in secretariat of ISE.

The employees have different background of education with different qualification from various fields. Most numbers of employees are inter, graduate and masters. The master degree holders are less in numbers.

The timing of trading in Islamabad Stock Exchange Friday is 9.30 A.M. to12.00 P.M. and 2.30 P.M. to 4.00 P.M.. For normal day it is 9.30 A.M. to 2.30 P.M, where the management timings are 9.30A.M to 6.00 P.M. The exchange remained closed on Saturday and Sunday in a week.

In these days there are 260 companies are listed in ISE. There are no TFC’s registered in ISE. The preferred stock is only in one company name which is called Net Over Leasing Limited.

The development of human resources is done by on the job training, seminars and workshops. The check and balance is maintained for each employee. The top management use management by walking around method (MBWA) for check and observe every employee. The promotion is based on performance and qualification of employee. The other things are seen are the mental approach, experience and qualification of the employee.

The companies vary from time to time in ISE due to delisting and in some companies the merger case were existed.

(Source: Annual Report of ISE and Economic Survey of Pakistan.)

(Source: Annual report and Economic Survey of Pakistan.)

(Source: Annual report and Economic Survey of Pakistan.)

(Source: Annual report of ISE.)

The stock exchange performs various functions simultaneously for the growth and development of economy. It also depicts the economy as an instrument and help to analyze the economic condition of the country. Without strong position of stock exchanges the economy cannot be predicted that it will be healthy in future.

The Securities and Exchange ordinance 1969 state that “ Stock exchanges means any person who maintains or provides a market place or facilities for bringing together buyers and sellers of securities or for otherwise performing with respect to securities the functions commonly preformed by a Stock Exchanges, as that term is generally understood, and includes such market places and facilities.”

In Stock exchange the members meet to buy and sale stock. The principal of demand and supply is followed for price determination The exchange is managed by the board of directors consisting of certain members who may be broker, odd lot dealers and specialists. [Irshad Muhammad, 1998: 300]

There are three stock exchanges working in our country for the prosperity of country. In ISE there are 260 companies are listed, where in KSE there are 701 and LSE has 582 companies.

The past history of ISE for companies listings vary from time to time. The stock exchange is a place where the buying and selling of shares are done. The management of stock exchange first observes the listing regulation for a company with authorized regulation. When a company got approval for listing in stock exchange. Then it offers the shares for sale to general public through initial public offering (IPO). This means that the shares are first offered for sale to general public. When public accepts the offer they purchase the shares from exchange and got ownership right in company. The future value of share is depending on the performance and repute of company. If the performance is good and demand is high than the value of shares will be appreciated. Conversely if performance is bad than the value of shares will go down, it is because the insufficient demand for share will occur in the market. The investors can earn the profit on shares by two ways, first from the appreciation of shares, which is also called capital gain, secondly when they receive dividends on shares.

The investment in stock exchange is different from other sectors of economy. When an individual commits for the investment. He first opens the account to the member of stock exchange. The are three types of members in stock exchange, individual members, at partnership and corporate members. It is not necessary that all members should be active. It will be best decision for the investor for the choice best member on the basis of his repute, where he wants to open the account, is holding the office in stock exchange. In case of office is holding in other place instead of exchange building by member, investor should confirm from the stock exchange management or Securities and Exchange Commission (SECP) about the existence of office. After opening the account, a investor become the member of the brokerage house, in which he opens his account. In these days the limit to open account in a brokerage house on the behalf of member is the Rs. 10,000 at least. When the process of account is completed, the investor can acquire the shares from exchange by giving order. The shares are usually offer in lots, which varies from company to company.

It is better strategy for investment that the investor should aware of company, which he wants to purchase the shares. In stock exchange most of the investors prefer to invest in blue chips. It is because they considered that through trading in blue chips, their investment will be secured and they can protect them from big losses. There are some strategies to invest for maximum gain,

There are some precautions for the investor before making the investment in stock market and during the trading process. These are,

Most of the investors in Islamabad Stock Exchange (ISE) do not aware the statistical tools for maximum gain. They prefer market trend and the situation of the market of Karachi Stock Exchange (KSE). After taking interviews they were unable to tell about the use of Statistics. There are some instruments given below to get maximum gain from the market.

Mean is simple to use as a statistical instrument for investment in market. The mean can be got from sum of values of shares divided by number of years. For analyze the trend of a company shares for the purpose of investment in stock, it can be got sum of total market shares value for different periods divided by number of time period in which the investor is interested.

Mean = Total values of share during different years

Total numbers of years.

It is defined as “the nth root of the product resulting from multiplying a series of return relatives together.”

Geometric Mean (G.M.) is the other measure of the central tendency. It measures the compound rate of growth over different periods of time. It is often used in investments and finance to reflect the steady growth rate of invested funds over some past period; that is the uniform rate at which money actually grew over multiple periods.

Formula: 1/n

Geometric Mean = G.M.= [ (1+TR)(1+TR)-----------------(1+TR)] - 1

Where TR is abortive of total return which can be find

TR = I+(P1-P)/P

I= Interest received during the period.

P= Beginning price.

P1= Ending price.

In the case of shares TR will be

TR= D+( Pe-Po) / Po

D= Dividend.

Po= Begging price.

P1= Ending price.

The standard deviation is used to measure the data change with each price or it is a tool to measure the deviation of data. The shareholder can check the variation of prices in shares through it.

2 2

S.D. = Ö åX - [(åX)]

n n

It is the measure the relationship in the data between two variables. In stock exchange it is applicable when the shareholder hold the shares of two companies or more and he want to check the relationship of prices or return on two different types of shares. After calculating the correlation the followings situation came in existence.

Perfect positive correlation:

Perfect positive correlation exists when the relationships in securities move in same direction. This means when the return of one share or security increases then the other shares or security will also increase. It is shown by +0.1.

In perfect negative correlation the returns move in reverse direction. It means when the return of one type of shares is increase the other share return does not follow it and decrease in same way. It is denoted by –0.1.

In this type of correlation there is no relationship between the two variables. On the base of return one security we cannot predict the other security. It is denoted by the O.

Correlation defines the relationships of two variables. Through the use of correlation the investor can analyze the whet the portfolio is profitable or not.

The positive correlation provides no risk security. It is because when return of one share is gone down the other share returns also fallow it. So both shares return goes down and the investor will suffer loss. The investor can protect himself from such losses by applying the result from correlation, which is positive. He can avoid him before the investment from future losses.

The negative correlation is a good sign before making investment. When the return of one share decrease the other share return protect it with increase return, combining the securities with perfect negative correlation with each other eliminate risk altogether.

In this condition the risk cannot be eliminated totally but the practically it can be controlled upto some extent. Because it show no relationship.

Perfect negative correlation with each other share can reduce the risk. In the case of perfect negative correlation the returns related to one security compensate the other

security.

Correlation = åXY – (åX)(åY)

2 2 2 2

Ö å X – (åX) Ö åY – (åY)

It is certificate of ownership in a company in which the investor made the investment. The shares are issued to the owner who purchases the shares from the stock market. Shares are issued usually by the companies in lots of different sizes. The common lot in the market is 500.

Bull is a trend when the prices of most of the companies shares rise up. Market usually goes to bull when demand of shares is more than the supply of shares.

Bear is reciprocal of bull in which the market falls down and the prices of majority of companies go down. In bear the supply of share is more than the demand of shares.

It is the situation when the prices of shares are gone to up than the value at which the investor buys the shares. There are many reasons for such higher in market. These include reasons may be political, economical, the performance of the company or any other in the market.

It the form of trade in which the individual or any institution provides the loan on short term usually for one day. The Badla rate is high than the market rate. The variation in badla rates can negatively or positively effect in market situation.

Blue chips are those companies in which the maximum trade is done in a day. The investors done maximum trade in these companies with the expectation of maximum profit. The volume of these companies is high than other companies in the market. The other thing is that blue chips companies are the best performer in the market. The shares of such companies is easily available. In these days PTCL, HUBCO ,PSO, FFCC Jordan are the blue chips.

It the part of profit which is given to the owner of share. A part of profit is distributed among the shareholders.

The most common from of shares and these shares are issued by maximum companies. The dividends depending on profitability of the company and recommendation of directors.

In this type of share the profit is given to the shareholder at fixed rate. If the company earn more profit than the shareholder cannot contribute in profit, in the case of loss he feels comfort because the earning of share is remained secure. In Pakistan the preferred share

When a company first time launches its shares in the market to general public for sale is called initial public offering (IPO).

In the type of trading the purchase or sale is made by a person who has inside information about the company which is not generally available in the market. In Pakistan such deal is illegal.

The share is purchased with intention that in future the price of shares will go up. After observing their suitable position he sale these shares in the market and earn profit.

Short Position:

In this type of trading the investor purchase the share s of the company with intention that he sale after some time when the price of shares will go up. When the sale is made than after he purchase again when the price go down. The earning is made time to time from such sale. This type of trading is called short position.

When the investor purchases the shares of different companies to reduce the risk from the market the whole collection is called portfolio.

This is the appreciation on the price of shares, which exist in future. When the shares are bought by the investors after a some period the price of such share rise up due to excellent performance of company or any other reason, the investor can earn profit by selling it in the market this is called capital gain.

Capital gain = Market prices of shares - Price at which the shares purchased

The Investment Corporation of Pakistan is a body, which invest in different companies and make portfolio of it. On the behalf of such investment it issue units, which are called ICP units. Through purchase of such units the investor relaxes due to less tension, it is because he is not involved in trading process.

When a company want to issue more shares in the market, it is a choice for the company that it offer shares first to existing shareholders. By using this option of right issue ownership will remain to existing shareholder and do not divided to other people. If the existing shareholder do not take interest in buying new shares than after some days the right is transferred to general public.

There are two type of settlements

Under T+1 system the transaction is made on spot within day.

In this system the transaction is made first day and clearance is made on third day.

The term finance certificates are resembles to bonds, which are issued by companies for aim to generate the funds from general public. When the investor purchase TFC’s the receive interest from the companies.

The stock exchange has different departments. The departments perform various functions according to their responsibilities. There are five main deferent departments in ISE, which are following,

The board of director comprises the 10 directors, 1 chairman of stock exchange. The 6 directors in ISE board are belonging to SECP and five are elected from the exchange in annual general meeting.

There are number of standing committees for efficient functions of management in ISE,

The committees above mentioned perform a important role in different matters existing in exchange. Each committee contains various members including one Chairman of committee. The article of association decide the following provisions regarding to the committees,

The director may from time to time and at any time constitute a committee consisting of two or more persons, whether director or members, as they think fit, to undertake any function and responsibilities entrusted to it/them by the directors. Any committee so formed shall, in the exercise of the power so delegated, conform to any restriction that may be imposed on it by the directors.

A committee may elect a convener of its meetings, but, if no such convener is elected, or if at meeting the convener is not present within fifteen (15) minutes after the time appointed for holding the same or is unwilling or unwilling to act as converner, the members present may choose one of their members to be convener of the meeting.

Proceeding of Committee Members:

“A committee may meet and adjourn, as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of the members present. In case of an equality of votes, the convener shall have and exercise a second or casting vote.” (Memorandum and Article of association, Page98).

There are different hierarchy levels in ISE. For officer the levels start from associate manager to M.D. and chairman of the exchange. The tier of hierarchy is following,

Responsibilities:

The responsibilities of different positions are assessed on the bases of qualification, authority and experience.

The chairman is elected in the meeting of directors with subjects to limit for one year. In case of other person is not ready to elect as a chairman he will eligible to reelection. The chairman can hold this position for consecutive three years under this condition. For next time he will eligible after a year for election. The chairman hold office and observe that all function are going according will on the behalf of directors. The chairman is liable to perform the following main functions,

The managing director is responsible for the whole function of exchange. He liable for the functions of staff to the Chairman. The board does the appointment of M.D. for the period of three years. The person who is elected as a M.D. is restricted to hold any other business or activity of trading in stock exchange. He is an independent person in exchange and full time paid employee of exchange. He is liable for following right and duties,

The director is elected in election trough the election. The board of directors has power to give the approval for any borrowing for the purpose of future growth of exchange. The director has right to inspect the accounts of exchange at any time. The directors has following rights and liabilities,

The secretary is senior officer of stock exchange. He is head of secretariat and responsible to general management. He is also obligated for work, which is assigned to him from Chairman and Managing director. The main functions of secretary are,

The general manager is responsible for all functions for all matters regarding to different departments, which are working under him. He performs the following functions,

Senior executive secretary performs her part of duties for Chairman and Managing director. She perform the following main functions,

Associate manager head of his department. He works according to instructions of general manager and secretary. The associate manager sent summary on different matter regarding his department to above management.

The staff performs various functions, which are assigned to him. The staff is not directly responsible to all functions but on behalf of associate mangers.

The performance of an employee is evaluated on the basis of every six months. The performance is evaluated with the help of performance evaluation committee. The letters are sent to employee for purpose of acknowledgement from secretary on the behalf of committee.

The level of salary is very low in ISE as compared to other business. On the time of offering for first joining it start from Rs.9000. There is no other reward for employees of ISE on excellent performance. However the exchange pays fee of employees children who are not more than two in numbers.

The behavior of employees including top management vary from person to person, at

average it is good. The main problem in the way of employee is the time availability from work, despite the problems they coordinate to each other.

The employees belong to different areas of the country, so ISE is the multiculter organization.

Most of the communication is done in Urdu but the official language, which is used in correspondence, is English

All officers are bound to wear paint shirts with ties by secretary of exchange. As far as concern with lower management they have option in dress.

Within organization all employees are considered like a part of family.

The index used by Karachi Stock Exchange (KSE) is called 100 index, where the Lahore Stock Exchange (LSE) uses the 101 index. The index is maintained in KSE by sector wise. The index, which is used by Islamabad Stock Exchange (ISE) the different from KSE and LSE.

The index of ISE is the composite index. It was developed by Vital Information Services (Pvt.) Limited, a financial and data base company,

How contract?

It is constructed in following way,

Suppose,

Base Date = 30^{th November 1996.}

Date of Publication = 1st March, 1996

Total companies 260

Multiple or Base figure 10,000

Let the are three prices or scrips A,B,C

A= 10

B=15

C=20

By calculating the G.M.

G.M. = Antilog{ log(10)+log(15)+log(20)}/3

= Antilog(1.15)

= 13.48

let t which is time changed than,

A=12

B=17

C=25

Than

G.M. = Atilog{log(12)+ log(17)+log(25)}/3

= Antilog(1.233) = 17.10

Index =17.10/13.48(10,000)

= 12,685.45

It can be calculated also,

=Ö log(10).log(15).log(20)

=13.48

1/3

= Ö log(12).log(17).log(25)

=17.10

Index = 17.10/13.48(10,000)

= 12,685.45

The department of company affairs is responsible for all functions and matters related to companies which are listed in stock exchange or the companies who want to be listed in stock exchange. This department sent reports to G.M, sectary and M.D. for final approval on decision. The department receives instructions from SECP from time to time. They have authority to list or delist any company if the company does not meet the requirement of law. They have also authority to impose the penalties for late submission of quarterly or annually report or in case of not submission according to code of corporate governance and other related regulation.

In these days the department is establishing web site in which the sales, profit before tax. Book value, listing date and other related information is given for investor facility. On launch this facility the investors can take decision about the investment in various companies.

The main function of department deal with companies affairs on behalf of Islamabad stock exchange (ISE) according to instructions of Securities and Exchange Commission of Pakistan. (SECP) and Ministry of Finance. In routine matters the department perform the followings functions,

The department receives reports from companies and maintains it. If the reports are sufficient than the department sent it in the brokerage houses for investors.

The department can impose penalties on the companies according to code of corporate governance on companies for violation of rules belongs to ISE.

If the shares are lost from shareholders due to any reason, after receiving the complaints from shareholders the department verify about the existence of shares in stock exchange. The department sent the requests to companies for issue of duplicate shares and arrange such.

The department of Companies affairs can take actions against the companies, which are failed to pay dividend to shareholders during five with the help above management.

The main document, which comes under consideration of department of companies’ affairs, is the code of coporate governance, which is implemented on three exchanges with the effect 2002. There are some important provisions of code of corporate governance are following,

De-listing and suspension:
A listed company shall be de list d or suspended for the following reasons,

Provided that if the shares of the company quoted at 50% or above of their face value then such a rate is maintained for a continuos period of thirty working days.

This department although is sub department. This department is responsible for maintain the record for all matter related to stock exchange. They have different folders, for individuals, for general nature and for companies affairs. This record is maintained manually, they maintain the shelves according to nature of companies e.g. the companies related to petroleum are maintained in one part of shelves, chemical sector is also mainted in one area of shelves. For external and internal correspondence, the department maintains two types of record registers separately. The register contain the following columns,

The dispatch register contain following columns,

In ISE most communication is done through letters, when a letter comes from outside they maintained a record in shelves according to nature of letter whether it is related to companies affairs or general in nature. On arrive first the letter is stamped on which date, the day name and serial number is given to letter. In recording register the letter is registered. After recording they sent the letter to concerning department for further process. If the department is not mentioned on letter in which the letter will go. The recording department observes the place of letter. The general letters are sent to department of general administration. When the process is complete from the concerning department letter is sent to sectary and M.D. for final approval. After returning the letter from concerning department the recording department maintains the copy of record in related file. For faxes and telegraph same procedure is adopted.

External correspondence is done after the process of documentation is complete. The different departments sent reply or instructions to companies or government departments. Every department sent letters to companies or different external departments according to their responsibility. The record section maintains a copy of document with entry on register. The record on dispatch the register is maintained with date wise and name of company or correspondence name where the letter will go. After preparing the envelops according to instructions of departments where the correspondence will go, a copy of document is disclosed in company or department files which is maintained separately.

For faxes and telegraph the same method is applied.

The brokerage house in which I worked is run by a member, whose name is Syed Masood Shaukat. There are three types of brokerage houses in Islamabad Stock Exchange. These are following,

The corporate brokerage houses have a private limited status. The right of ownership for member is transferable to other person. There are 103 members in Islamabad Stock Exchange (ISE). But the members who transact the business in stock exchange are 38 in number, in which individual members run 16 houses, 2 work at partnership bases and 20 exist in coporate form. There is no such fixation some about the transfer of membership to other person, it can be transferred at any time. The exchange charge fee for transfer of membership.

The brokerage house is in the basement of Islamabad stock exchange. It is owned by individual. The houses comprise three big rooms including one hall in which the trade is done.

There is two systems work in hall, the two screens work at a time. In upper screen the activities of trade in Karachi Stock Market (KSE) with the prices of shares and sign of trend is shown. The screen moves swiftly within seconds with trading activities. The lower screen shows the prices of Islamabad stock Exchange (ISE) which is maintained by the brokerage house.

The central depositary is introduced some time ago for the purpose of on line trading. The stock exchange management has given ultimatum all companies that they should become member of central depositary company (CDC) before of July 31,2003. The central Depositary Company has a public limited status and its share is floating in market. Due to introduction of CDC now the duplication in shares in not possible in market. This system with rapid service also provides accuracy.

There are 103 members in stock Islamabad Stock Exchange (ISE). The active members are 38, in which 16 are individual, 2 at parterres and 20 are corporate. In Islamabad Stock Exchange (ISE) the individual brokerage houses are less in number as compared to coporate brokerage houses.

The trading process is done on line but there is fiscal share trading also occur for some companies which is not become the member of CDC system upto know. After July 31, 2003 there is hope that the fiscal trading will be abolished.

When an investor want to sale the share he first from the screen observe the price of shares of company which he is holding the shares. When he saw the he is in the position to make the profit in the market by making the comparison of the price of purchase and at which he want to sale he ask the broker to sale. In selling order he tells the company name, number of shares and the price at which he want to sale. The broker writes the instruction on computer for sale and place.

For open the brokerage house the permission from Securities and Exchange Commission (SECP). The fee and other criteria vary according to instruction of SECP. There are following criteria,

iii) He should be at least graduate.

iv) He should pay fee according to latest information Rs.7500, 000.

The membership is transferable to other person, who is able to meet the criteria, which is mentioned above. All three exchanges in the country are restricted by Securities and Exchange Commission of Pakistan (SECP) that they cannot involve in any trading activity regarding to buying and selling of shares. The following activities, which a brokerage house or individual can perform with the permission of SECP, these are,

ISE. KSE. Future.