FINANCIAL MARKET DEVELOPMENT ACTIVITY Launch

FINANCIAL MARKET DEVELOPMENT ACTIVITY

Launch of an SME Board by the Pakistan Stock Exchange

11 February 2017 This publication was produced for review by the United States Agency for International Development by Financial Market Development (FMD) Activity, Pakistan

LAUNCH OF AN SME BOARD BY THE PAKISTAN STOCK EXCHANGE (PSX) – FEBRUARY 11, 2017

REPORT COVERING 2 DEC 2016 – 11 FEB 2017

USAID FINANCIAL MARKET DEVELOPMENT ACTIVITY, PAKISTAN 11 FEBRUARY 2017 PREPARED BY: CHRISTIAN C. JOHNSON, CONSULTANT

CONTENTS

1. EXECUTIVE SUMMARY ...... 4

2. BACKGROUND & OVERVIEW ...... 5

3. TOR DELIVERABLES - DECEMBER 31, 2016 ...... 10

4. TOR DELIVERABLES - FEBRUARY 11, 2017 ...... 10

5. SHORT LIST OF SME LAUNCH CANDIDATES ...... 13

6. SUMMARY RECOMMENDATIONS & NEXT STEPS ...... 16

APPENDIX 1 – FMD REPORT ON PSX SME BOARD – 2017- 2020 BUSINESS PLAN ...... 20

APPENDIX 2 – STAKEHOLDER MEETINGS & FEEDBACK SESSIONS ...... 21

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1. EXECUTIVE SUMMARY

FMD was engaged by SECP/PSX to provide its technical/expert recommendations to accelerate the establishment of an SME Platform at PSX. Specific assistance to increase the pace and number of SME listings was a primary need. Based on FMD’s market assessment, and the study of developments related to the launch of SME Market in Pakistan, the following recommendations are being hereby provided:

Rebrand the SME Platform: In line with the global trend of global stock exchanges to brand their second-tier markets with distinct names, FMD recommends that PSX should also rebrand its proposed SME Board to focus on growth enterprises vs. SME enterprises. For example, the SME Board could be rebranded as “GEM” (which would (referring to “Growth Enterprise Market”). Additionally, a tag line could be added such as “Fueling Pakistan’s Fast Growing Firms.”

Establish an SME Listing Support Fund: The cost of fund raising from the equity market is considered as the number one barrier for the entry of the SMEs into the capital market. The high cost of fund raising has been addressed in different ways. FMD recommends the establishment of a Listing Support Fund to decrease the perceived and actual cost of raising equity capital on the GEM Market. Another example is to have the Government or Stock Exchange pay a portion of the underwriting cost of an IPO. For example, in Turkey the KOSGEB (Korean Small & Medium Enterprises Development Organization) pays 75% of the market advisor fee, 75% of Independent Auditing Fees, 75% of brokerage fees, and 100% of the listing fees for SMEs intending to list on the Emerging Companies Market (ECM).

Create a common platform for SMEs and Private Growth Companies: Side by side the plan of launching an SME platform, PSX also plans to launch a platform for the Private companies to enable them to enter into match-making arrangements with the enlisted financiers. Such third tier markets exist in several countries including India. The Bombay Stock Exchange created the Institutional Trading Platform as a 3rd tier exchange in 2014.

FMD recommends that PSX/SECP should first successfully launch and grow the GEM Market prior to taking any actions about creating a 3rd tier exchange. In fact, the current Chapter 5A regulations may be sufficient to regulate the GEM Market as a venue for both types of the fund-raising activities.

Improved Marketing Strategy/Focus: In this area, FMD recommends the adoption and development of a focused listing-acquisition approach as outlined below:

a. Focused Target Market: FMD recommends focusing its listing acquisition strategy on enterprises seeking to raise at least PKS 100m (> US$1m), which correlates to firms with annual revenues between PKR 100m and PKR 750m and

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double digit growth rates. This recommendation is in line with the World Federation of Exchanges’ on the SME Exchanges.

b. FMD recommends that the PSX should invest its resources in the capacity building of mid-sized market brokers/advisors that can provide the required financial advisory services to the potential listing candidates at a relatively reduced cost. While doing so, PSX should ensure that the standing of the newly trained advisors is such that these newly trained advisors can provide enough comfort to investors about the quality of their services and the accuracy of the SME financials being advised and brought to the market.

Raise Awareness of Tax Advantages: The SECP and PSX should clarify the applicability of current tax incentives for main-board companies also apply to those firms listing on the GEM Market. From the current legislation, the applicability of tax incentives is unclear.

The above recommendations had been verbally presented to both SECP and PSX during the out-brief meetings of FMD’s SME market expert. During these meetings, both the stakeholders have expressed their desire for the continued engagement of FMD for the following work related to the implementation of the above recommendations:

a. Assisting PSX in the drafting of scope of operations/activities of the proposed SME Listing Support Fund; b. Development and conduct of training/capacity building programs for the potential SME Market Advisors; c. Conducting knowledge enhancement/awareness/training workshops for the potential SME candidates; d. Providing detailed assessment/prospectus development related technical support to at least 2 potential listing candidates.

2. BACKGROUND & OVERVIEW

The USAID-financed Financial Market Development (FMD) Project is a five-year technical and training collaboration program, designed to promote the development of competitive, deepened and diversified debt capital markets in Pakistan. Pragma Corporation began implementing the USAID FMD Project in March 2016.

The Securities and Exchange Commission of Pakistan (“SECP”) regulates the capital markets in Pakistan including guidelines, rules, and regulations related to equity, derivative, debt, Sukuk, asset backed securitization, and infrastructure bonds. Given that the capital market competes with the banking sector for the provision of long-term financing (especially in the context of SMEs and so-called “startup” companies), the SECP requested that FMD to assist with the establishment of a modern SME platform in Pakistan. 5 USAID’s Financial Market Development Activity, Pakistan 11 February 2017

On December 3, 2016 Christian C. Johnson, an SME Platform Specialist (“SMEPS”) arrived in Karachi, Pakistan to lead FMD’s efforts to perform the tasks and produce deliverables listed in the Terms of Reference (TOR). During the last week of December 2016, USAID approved additional scope and extended the SME Platform Specialist through February 11, 2017.

The SMEPS has been assisted or supervised by and assisted by FMD’s team of experts under the overall supervision of the Chief of Party (COP), including FMD’s senior regulatory/legal development expert, senior policy advisor and head of communications for the delivery of the assigned tasks. The SMEPS also worked closely with all relevant stakeholders of PSX SME platform, including the SECP, leadership of the Pakistan Stock Exchange (PSX), Pakistan’s stock brokerage firms, institutional investors, and corporations (both listed and unlisted).

Specific responsibilities listed for the initial TOR includes, but is not limited to the following:

• To develop an enhanced regulatory framework for promoting capital market funding for SMEs and launching a private/growth companies trading platform • To prepare a comprehensive business development plan for PSX for the efficient launching of SME and private/growth companies trading platforms • To prepare a detailed, effective and ingenious marketing/informational material for the promotion of SME and Private/Growth companies platform like brochures, presentations, web-site material, tutorials etc. • To prepare plans for the conduct of 6 SME platform promotional industry roundtables, and acting as FMD’s resource person in the same

Three deliverables were listed in the TOR ending 31 Dec 2016:

a. A full-text set of regulations for establishing/effectively operationalizing a transparent and functional SME listing platform, and establishing qualifications for listing purposes. SECP has already made substantial progress towards this goal. The consultant will be providing final review and edits.

b. A comprehensive SME and Private/growth companies listing business development plan for PSX.

c. A comprehensive PowerPoint presentation that sets forth a “road map” for development of a robust segmented SME listing board.

FMD issued an interim report on December 31, 2016 that highlighted the operations, interactions, regulatory review, recommendations, and initial findings. Although FMD's field team completed the initial review of the SME regulations, there was still a need to further seek industry feedback on the findings from a host of stakeholders such as; the SME

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enterprises, the financial advisors, underwriting industry, the PSX brokers as well as the regulators.

The 2nd TOR ending February 11, 2017 lists four additional deliverables:

a. Development of draft regulatory and operational framework for the trading of privately held companies on PSX.

b. Holding feedback sessions/stakeholders’ meetings for the finalization of regulations for the launch of platforms for the SME and privately held companies.

c. Conducting awareness sessions for the SME and Privately held companies in the following city clusters of Pakistan: (Note: These awareness/briefing sessions shall be held with the respective cities’ Chambers of Commerce; • Bahawalpur, Multan and Sahiwal (2days travel) • Lahore, Sheikhupura and Faisalabad (2 days travel) • Gujranwala, Sialkot and Wazirabad (2 days travel) • Karachi and Hyderabad (One day travel to Hydrabad) • Islamabad and Rawalpindi (Two days) • Peshawar and rest of KPK (Two days-one day in Peshawar, one day in another city on the suggestion of Sarhad Chamber of Commerce)

d. Organizing the launch of SME platform (expected by third week of March 2016).

Pakistan Stock Exchange (PSX) Overview and History

The Karachi Stock Exchange (KSE) was incorporated on March 10, 1949. The exchange serves to a wide spectrum of participants, such as companies, individual and institutional investors, the trading community and listed companies.

In 2012, the KSE, along with Pakistan’s two other stock exchanges (the Islamabad Stock Exchange and Lahore Stock Exchange) were demutualized into a public companies limited by shares. In 2016, Pakistan’s three stock exchanges namely, Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE) & Islamabad Stock Exchange (ISE), were combined into a public company named Pakistan Stock Exchange Limited (PSX).

The PSX currently has 556 companies listed on the exchange with a market capitalization of US$ 77.7 billion.1 The PSX lists an increasing number of financial instruments, including equity, corporate bonds, government bonds, mutual funds, and real estate investment trusts.

The investors on the exchanges include 1,886 foreign institutional investors and 883 domestic institutional investors along with about 220,000 retail investors. There are also about 400 brokerage houses which are members of the PSX as well as 21 asset management companies that manage more than 200 mutual fund and pension assets.

1 October 30, 2016 7 USAID’s Financial Market Development Activity, Pakistan 11 February 2017

PSX is the among the world's best performing stock market's, for the 10 years ending December 31, 2016. For the year ended December 31, 2016 the KSE-100 rose 46% (45% in USD terms) and was the 5th best performing stock exchange in the world.

For the 10 years ending December 31, 2016, the PSX raised an average of 21.3% per year and was the best performing stock market in the world.

Several important developments that have contributed to PSX’s exceptional performance this year:

a. Reduced Country Risk Premium b. China’s engagement with Pakistan to create CPEC c. Upgrade of PSX from MSCI Frontier to Emerging Market status d. Stable exchange rates e. Improvement in Pakistan’s security situation f. Increased confidence of IMF, USAID, World Bank and ADB.

The SECP’s capital market development (CMD) plan 2016-18 highlights the importance of setting up an SME counter on PSX. The concept is to attract quality listings from potential SMEs to provide them a major source for capital formation. Market makers will be introduced for generating activity on the SME counter. Also, CMD suggests that incentive plans may be introduced for the SME counter to waive exchange related costs, tax benefits, volume based incentives, no requirement of minimum inventory.

SME Board at the PSX

The idea to setup the SME counter relates back to the existing over-the-counter (OTC) market which facilitates listing of SMEs. This OTC market remains inactive due to gaps in the operational and regulatory framework. To address this issue, the idea to launch a SME Board has been introduced. Qualified Institutional Buyers (QIBs) are allowed to trade on this board. Regulations have been formulated for the SME Board and the PSX and broker community are making efforts to attract SMEs for listing.

Developments at the PSX in 2016 & 2017

The Securities and Exchange Commission of Pakistan (SECP) in January 2016 directed the creation of a single Stock Exchange in the country called Pakistan Stock Exchange (PSX). It also required the PSX to:

a. Divest forty percent 40% of shares to a strategic investor b. Sell another 20% of shares to the public for a total divestment of 60% of shares c. That PSX establish an SME counter with a view to facilitate the listing of SMEs d. Require that more than fifty percent of the directors on the board of the PSX to be independent and nominated/approved by the SECP.

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On December 22, 2016 the Divestment Committee of the PSX announced a consortium of 6 entities won the auction for 30% ownership of the PSX. The consortium included three exchanges in of China: (a) China Financial Futures Exchange: 17%, (b) Shanghai Stock Exchange: 7%, (c) Shenzhen Stock Exchange 5%. Two local Pakistani firms were sold 5% of shares each for a total divestment of 40% of the PSX. The 40% share ownership attracted a price of US$85.5 million.

The current and future composition of the PSX’s Board of Directors is summarized below: Type of Directors Current Composition Future Composition • SECP nominees: 6 2 • Broker Directors: 4 4 • Consortium Directors: - 4 • CEO/MD: 1 1 In addition to the above, the SECP will continue to designate one of its appointed directors as the Chairman of the Board of the stock exchange. A ceremonial Share Purchase Agreement (SPA) is scheduled to be signed on January 20th in Karachi.

The above facts demonstrate that control and governance of the PSX will not accrue to the 30% consortium of Chinese investors. Moreover, the Chairman of the PSX Board of Directors will continue to be appointed by the SECP.

On January 20, 2017 the PSX and the Chinese consortium conducted a “Signing Ceremony” commemorating the signing of an equity purchase agreement. The agreement was subject to several terms, conditions, and payments.

It was announced by several newspaper articles and corroborated by PSX staff the on February 11, 2017 the 4 new Chinese members of the anticipated Board of Directors (described above) would arrive for the first time in Karachi, Pakistan. Discussions with PSX staff members reveal that numerous uncertainties exist but that progress continues to be made to consummate the Chinese consortium’s purchase of 30% of equity in the PSX and 10% purchase by 2 local Pakistani organizations.

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3. TOR DELIVERABLES - DECEMBER 31, 2016

The TOR ending December 31, 2016 contains 3 deliverables listed below.

This deliverable is included in the December 31, 2016 report delivered in January 2017.

b. A comprehensive SME and Private/growth companies listing business development plan for PSX.

This deliverable is attached as APPENDIX 1.

c. A comprehensive PowerPoint presentation that sets forth a “road map” for development of a robust segmented SME listing board.

This deliverable was included in the December 31, 2016 report.

4. TOR DELIVERABLES - FEBRUARY 11, 2017

The TOR ending February 11, 2017 contains 4 deliverables listed below. (1) Development of draft regulatory and operational framework for the trading of privately held companies on PSX.

It was originally conceived that the PSX would launch the SME Board immediately followed by the launch of a “venture exchange.” The rationale for this sequencing is not clear.

An alternate plan is recommended to allow the GEM Market to serve the wider universe of both SME and “start-up” companies. These two types of companies have 2 different options to raise capital: (a) GEM firms, and (b) Private Placement.

If the benefits of listing on the GEM Market exceed the cost of listing on the SME Board, then companies will list on the GEM Market. Alternatively, SMEs and start-ups continue to have the option of executing a private placement with a qualified investor.

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After a handful of SME’s successfully list on the GEM Market, the concept of a “venture exchange” may be revisited. At that time, the PSX will possess more information about the costs and benefits of listing on the GEM Market. This information may be intelligently factored into the decision making for the launch of a “venture exchange.”

(2) Holding feedback sessions/stakeholders’ meetings for the finalization of regulations for the launch of platforms for the SME and privately held companies.

A list of the meetings conducted during this mission are included as APPENDIX 2.

(3) Conducting awareness sessions for the SME and Privately held companies in the following city clusters of Pakistan: (Note: These awareness/briefing sessions shall be held with the respective cities’ Chambers of Commerce; • Bahawalpur, Multan and Sahiwal (2days travel) • Lahore, Sheikhupura and Faisalabad (2 days travel) • Gujranwala, Sialkot and Wazirabad (2 days travel) • Karachi and Hyderabad (One day travel to Hydrabad) • Islamabad and Rawalpindi (Two days) • Peshawar and rest of KPK (Two days-one day in Peshawar, one day in another city on the suggestion of Sarhad Chamber of Commerce)

Attachment 1 contains a “business plan” for the SME Board (GEM Market). That plan explains that the first firms to list on the GEM Market ought to larger scale enterprises rather than startups. The target market for an IPO on the SME Board has been defined as firms with PKR100m+ annual revenues and double digit growth rates. Because of this finding, it did not make sense for awareness sessions to be held in smaller cities in alignment with various city Chambers of Commerce.

Instead, the SECP requested the FMD project to conduct several SME Board awareness sessions as listed below...

• December 29, 2016 at the SME Financing Conference with o develop an enhanced regulatory framework for promoting capital market funding for SMEs and launching a private/growth for 400 attendees

• January 4, 2017 presentation at Rotary Club providing an overview of the FMD Project and the SME Board of the PSX.

• Conducted a day-long training at IBA for its incubation center on January 19, 2017

• Lectured, interacted, and answered questions form student at the Lahore University School of Management & Science on behalf of

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SECP on January 24, 2017. (Planet N and Karandaaz, together with our venue LUMS Center for Entrepreneurship, sponsored a workshop focused on providing insights about the startups eco-system in Pakistan.)

• January 25, 2017 presentation highlighting FMD and the support provided to the SME Board at the PSX for State Life Insurance executives and stakeholders.

• On February 1, 2017 conducted training at Karachi-based Tech Incubator “Investors Lounge.” . Web: www.investorslounge.com

• On February 6, 2017 conducted on behalf of SECP training at the Lahore Higher Education Commission that received exemplary feedback. The training and FMD’s support were noted in a Pakistan Business Recorder article the next day.

(4) Organizing the launch of SME platform (expected by third week of March 2016).

The launch of the SME Platform is to be scheduled concurrently with the listing of the first SME firm. FMD met with the PSX, brokers, and several SMEs to discuss the possibility of listing on the SME Board.

Section 5. of this report contains a listing of 12 SMEs that are in discussions with brokers and the PSX to possibly list shares on the SME Board.

Eleven of these SMEs were identified by the PSX and Pakistani brokers. One SME was identified independently by FMD. This firm is a 10 year sold digital media company as an attractive listing candidate. This firm’s audited financial statement show revenue growth of 62% from 2013 to 2015. Importantly the firm generated a profit in 2015. Analysis is underway to determine an optimal listing strategy and timing. Additional details about the firm are available from the FMD Project if desired and if needed.

This SME (listed as #1 on the list) is the most attractive and fits the definition of a “target SME” for the SME Board. Specifically, this firm has both revenue and sales growth of 20%+ over the past few years and 100m+ in annual revenue.

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5. SHORT LIST OF SME LAUNCH CANDIDATES Short List of SMEs with the highest likely to list within the next 6 months The project conducted numerous discussions with broker dealer firms in Karachi. A handful of broker dealers shared that each had one or two unique pre-IPO candidates for the SME Board. The project has identified a potential listing candidate that is preparing to list on the SME Board. Also, the PSX has consolidated a listing of 12 SME candidate companies listed below. Details of these 12 firms are provided below.

SMEs Interested in listing Legal Form Paid-up Capital / Equity Turnover Industry … Rs. … (Annual) … Rs. …

1. Digital Media Company Private Limited 2.8m 165m Hi Tech

2. KTC Private Limited Private Limited 50 m FMCG

3. SME Business Solutions Limited Private Limited 5 m 30 m Services

4. Crescent Star Technologies Private Limited 20 m Technology

5. Exact Services Pakistan Pvt Ltd Private Limited 5 m Construction Services

6. Crescent Star Luxuries Private Limited Fashion Industry

7. Qaswa Enterprises Pvt Ltd Private Limited Lubricant oil industry

8. Ailaan Advertising Pvt Ltd Private Limited Media Advertising

9. Sukkon Private Limited Technology / Services

10. Engineering Group Pvt Ltd Private Limited Engineering

11. ENB Pvt Ltd Private Limited

12. Watan Online Pvt Ltd Private Limited

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The 12 firms above are listed in order from “most promising” listing candidate to “lease promising” candidate based on the information that the PSX and FMD has been able to collect. SMEs often lack sharing financial information due to their fear and reticence of attracting attention from tax authorities. Also, some SMEs may not have solid accounting and financial information systems in place. Without such systems, collecting and analyzing corporate financial information is difficult and sometimes not possible.

FMD has shared with the PSX a useful “triage” strategy to quickly identify solid listing candidates. In short, the strategy is to invite corporations with between PKR 500m and PKR 750m annual revenues with double digit growth rates to investigate listing on the GEM Market.

Using this strategy, it is possible to invite firms to inquire on the GEM website to obtain more information. This internet engagement would allow the GEM Marketing department to quickly identify listing candidates. It will also allow the PSX to separate firms considered “too small” to list as well as firms “too large” to list. This strategy2 involves collecting only a few pieces of information:

1. Estimate of prior year revenues:

a. <10 m PKS per year b. > PKS 10m but <100m PKS per year c. >PKS 100m per year but <750m per year d. > PKS 750m per year

Firms answering C. or D. may be target candidates. It is very doubtful (virtually not possible) that firms with less than PKS 1m or more than PKS 100m would list on the GEM Market. A firm answering yes to D above ought to be considered for listing on the PSX main board as well.

2. Estimate of the highest revenue or profit growth rate (over past 1, 2 or 3 years):

a. < 0% or negative growth b. > 0% but <10% growth c. > 10% but <20% growth d. >20% but <40% growth e. > 40% growth

Firms answering C, D or E may be target candidates. (If the firm answered C or D in question 1) It is very doubtful (virtually not possible) those firms with less 10% growth rate would list on the GEM Market.

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3. Do you estimate that your firm’s total assets exceed the firm’s total liabilities (total debt)?

YES – this is a candidate company

NO – this may or may not be a candidate company

Firms answering YES are candidate companies to list on the GEM Market. (If the firm qualifies with questions 1 and 2.) Firms answering NO to this question (but qualify via questions 1 & 2) may be a candidate to list if the IPO brings in sufficient equity capital.

4. Is your firm registered as an unlisted open company in Pakistan?

YES – this is a candidate company

NO – this may or may not be a candidate company

Firm #1 (Digital Media Company) is the only firm with sufficient disclosure of past financial information to answer all 4 questions above. Firm #1 qualified under the above 4 questions as follows:

1. C (PKR 165m per year) in revenue 2. D (2-year revenue growth rate of 38%) 3. YES 4. NO

Firm #1 has expressed strong interest in working with the PSX and FMD to structure and launch an IPO over the next few months.

The 4 questions above need to be answered by the remaining 11 companies listed as “interested candidates.”

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6. SUMMARY RECOMMENDATIONS & NEXT STEPS

FMD recommends the following 5 actions to accelerate listing of SME growth companies on the SME Board:

1. Establishment of an SME Listing Support Fund: The cost of fund raising from the equity market is considered as the number one barrier for the entry of the SMEs into the capital market. The high cost of fund raising has been addressed in different ways. For example, in Turkey the KOSGEB (Korean Small & Medium Enterprises Development Organization) pays 75% of the market advisor fee, 75% of Independent Auditing Fees, 75% of brokerage fees, and 100% of the listing fees for SMEs intending to list on the Emerging Companies Market (ECM).

Fundraising costs for SMEs range from 5-15% of the funds raised. Moreover, because SMEs often raise smaller absolutes of capital than man board new listings, the underwriting fee percentage is often closer to 15% than 5%. In order to encourage more SMEs to turn to capital market for fund raising, FMD recommends that PSX should establish an SME Listing Support Fund to provide with the fund-raising support during an IPO. This fund is intended to be reimbursable in nature from the SMEs out of the proceeds of the IPO. FMD recommends that the SMEs intending to use this fund may enter into a tri-partite agreement with their appointed financial advisor and PSX. The Exchange may directly pay the IPO related fees to outside advisors so that the potential IPOs companies may not need to worry about the upfront costs of listing. It is recommended that PSX should establish this support fund with an initial capitalization of US $500,000 or PKR 50m. Subsequently, the PSX, SECP, SBP and GOP may approach the multilateral donor agencies to provide funding for the establishment of a permanent fund for up to US $5m or PKR 500m. This fund would then be funded with sufficient capital for up to 10 growth firms to undergo the listing process simultaneously.

2. Rebranding of SME Platform: As of now, the paid up capital requirement for listing on the Main Board of PSX is about US $2m or PKR 200m. For the SMEs, the eligibility criteria in terms of paid up capital is quite relaxed. However, there are many growth companies which have a capital base between US$ 500,000/- to US $1m or PKR 50m to PKR 100m. These companies may not seem to be interested in placing themselves in the category of SMEs because of the seemingly inferior status of the SME market. In line with the global trend of the Exchanges to brand their second-tier markets with distinct names (as shown below), FMD recommends that PSX should also rebrand its proposed SME market to focus on growth enterprises vs. SME enterprises. For example, the SME Board could be rebranded as “GEM” (which would (referring to “Growth Enterprises Market”). Additionally, a tag line could be added such as “Fueling Pakistan’s Fast Growing Firms.”

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Rebranding of the proposed SME Board by PSX would enable the Exchange to achieve its objectives of attracting high growth firms that may be hesitant to be named or branded as an SME. And, as explained in the business plan, the paid-up capital requirement is not a practical limiting factor for growing firms to list. The limiting factor is that the candidate firm must have a capitalization of greater than PKR 500m (~$5 million for an IPO to be economically viable). To achieve this level of capitalization, a firm will likely need to have earned revenues in excess of $1m and possess double digit growth rates.

Moreover, virtually all second tier exchanges have avoided the use of the “SME” label. The following are names of 2nd Tier platforms for comparison.

Exchange Name of 2nd Tier (SME) Platform Athens Stock Exchange Alternative Market Borsa Istanbul Second National Market BSE India SME Exchange Bursa Malaysia ACE Market Cyprus Stock Exchange Emerging Companies Market Euronext Alternext Hong Kong Exchange Growth Enterprise Market Japan Exchange-Osaka Mothers Jamaica Stock Exchange Junior Stock Market Korea Exchange Kosdaq London Stock Exchange AIM Moscow Stock Exchange Innovations and Investments Market NSE India Emerge Philippine Stock Exchange SME Board Shenzhen Stock Exchange ChiNext TMX group TSX Venture Warsaw Stock Exchange NewConnect Weiner Stock Exchange Second Regulated Market Source: World Bank/World Federation of Exchanges

3. Raising Awareness of and Expanding Tax Advantages: FMD recommends that in order to encourage SMEs as well as the investors to enlist and invest in the proposed GEM Market, it is important to effectively delineate to the potential IPO candidates and investors the attractive tax provisions already in place in the country. In this regard, many tax advantages are now in place for the listing of equity shares in the market, as well for the investments made by the listed companies through equity offerings for the balancing, modernizing and replacement/rebalancing of their plant and machinery. It may be mentioned that Section 65C of the Income Tax Ordinance, 2001, as amended through the Finance Bill 2016, provides a 20% tax concession for two years to such companies which opt to enlist on a registered stock exchange in the country. Furthermore, Section 65D of the Income Tax Ordinance also allows 100% tax credit to new industrial undertakings, including corporate dairy farming, for a period of five years, in proportion to the equity

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raised through issuance of new shares for cash consideration. In yet another incentive offered for new equity raising activity through the issuance of new shares, a 100% tax credit condition can be realized if the new undertaking is financed through a 70% new equity share offering. It should be made clear to SME’s and investors that these advantages will hold as well for SME the equity listings.

4. Common platforms for the SME and Private Growth Companies: Side by side the plan of launching an SME platform, PSX also plans to launch a platform for the Private companies to enable them to enter into match-making arrangements with the enlisted financiers. Such third tier markets exist in many countries which are providing fund raising opportunities through the Exchange platforms to early stage services, technology start-up and manufacturing enterprises. These third-tier markets are used by private equity, venture capital, angel or early day investors as such market enable these type of financiers to readily tap and connect with their potential investment targets without having to locate deals through individual or separate deal sourcing efforts. Considering that both the SME and the Private Companies platform are essentially the two sides of the same coin, FMD recommends that PSX/SECP should bring some flexibility into the existing SME Market regulations so that the proposed GEM Platform could serve as a venue for both types of the fund-raising activities. Furthermore, as the funding life cycle for high- growth companies in the innovative or technological sectors is quite compressed, therefore they need capital or visibility at earlier stages.

Therefore, combining the proposed SME and the Private Growth Companies Platforms into a single proposed GEM Platform, would serve the economic purpose of PSX to transform itself into an attractive alternate funding venue of choice for all kind of companies representing the changing economic and entrepreneurial landscape of the country. This recommendation also supports the mushrooming growth of startup incubators and accelerators in Pakistan as witnessed by the FMD experts during their market assessment mission.3

5. Improved Marketing Strategy/Focus: In this area, FMD recommends the development and adoption of a well-rounded marketing strategy with a focused listing- acquisition approach as outlined below:

a. Focused Target Market: While many companies list to obtain financing, many others list to increase their visibility, advertise their products, gain credibility often associated with good governance and accounts. Therefore, the level of new financing does not always have to be the barometer of success for an SME Platform. Pakistan has about 70,000 formally registered corporations of various capital structures. Focusing on marketing the proposed GEM Platform to all such companies would be a

3 Two such organizations are the LUMS Center for Entrepreneurship and “Panet N” incubator in Lahore as well as the “Venture Lounge” incubator in Karachi. 18 USAID’s Financial Market Development Activity, Pakistan 11 February 2017

waste of efforts. After a detailed assessment of these registered corporates, FMD is of the view that PSX should engage with only such corporates which have a high degree of probability of listing on the proposed GEM Platform. FMD recommends focusing on enterprises seeking to raise at least PKS 100m (> US$1m) in annual revenue and double digit growth rates. This recommendation is in line with the World Federation of Exchanges’ on the SME Exchanges.

b. In Pakistan, despite the existence of a large brokerage industry, the fund raising advisory services have remained concentrated in the hands of few large brokers. These institutional brokers have high fixed costs for their advisory services. In order to reduce the overall costs of listings for the SMEs, FMD recommends that the PSX should invest its resources in the capacity building of mid-sized market brokers/advisors that can provide the required financial advisory services to the potential listing candidates at a relatively reduced cost. While doing so, PSX should ensure that the standing of the newly trained advisors is such that these newly trained advisors can provide enough comfort to investors about the quality of their services and the accuracy of the SME financials being advised and brought to the market.

1. Assisting PSX in the drafting of scope of operations/activities of the proposed SME Listing Support Fund; 2. Development and conduct of training/capacity building programs for the potential SME Market Advisors; 3. Conducting knowledge enhancement/awareness/training workshops for the potential SME candidates; 4. Providing detailed assessment/prospectus development related technical support to at least 2 potential listing candidates.

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APPENDIX 1 – FMD REPORT ON PSX SME BOARD – 2017-2020 BUSINESS PLAN

(See separate attachment)

20 USAID’s Financial Market Development Activity, Pakistan 11 February 2017

APPENDIX 2 – STAKEHOLDER MEETINGS & FEEDBACK SESSIONS

Date Time Company Person met Designation Ali Janjua Principal 5-Dec 11:30 AM Karandaaz Hammad Umer Senior Associate

5-Dec 1:00 PM USAID Sarah Pervez Economic Growth Advisor 6-Dec 9:30 AM PSX Nadeem Naqvi Managing Director 7-Dec 10:30 AM Shafqat Ali Chief Regulatory Officer PSX Mohammad Abdullah Head of Special Projects 11:00 AM Muhammad Imran Lakhani Officer Special Projects Kamran Nasir CEO 7-Dec Khurram Schehzad Chief Commercial Officer 4:00 PM JS Global Rizwan Khan Head of E-Trading Ovais Ahsan Head of International Equity Sales Nadir Rehman CEO 9:30 AM BMA Umair Aijaz Head of Investment Banking 8-Dec Mohammad Abdullah Head of Special Projects 11:00 AM PSX Muhammad Imran Lakhani Officer Special Projects 9:30 AM Haroon Askari Deputy Managing Director 10:00 AM Nadeem Naqvi Managing Director 9-Dec 11:00 AM PSX Abbas Mirza Chief Compliance Officer Mohammad Abdullah Head of Special Projects 12:00 PM Muhammad Imran Lakhani Officer Special Projects 14-Dec 10:30 AM USAID Greg Leon Deputy Office Director, EGA

21 USAID’s Financial Market Development Activity, Pakistan 11 February 2017

Nadia Dawood Senior Economic Growth Advisor Sarah Pervez Economic Growth Advisor 3:00 PM Abbas Mirza Chief Compliance Officer PSX 3:30 PM Sani-e-Mehmood Khan GM - Market Development 10:00 AM SBP Basit Aly Director SME Finance Muhammad Lukman CEO 12:00 PM NCCPL Rehan Saif Head of PD and Marketing 15-Dec Muhammad Asif Head of Operations Ajit Kumar Manager Regulatory Affairs 2:00 PM PSX Mohammad Abdullah Head of Special Projects Muhammad Imran Lakhani Officer Special Projects Akif Saeed Comissioner Securities Market Amir Khan Afridi Executive Director Securities Market 16-Dec 10:00 AM SECP Musarat Jabeen Executive Director Securities Market Mateenullah Khan Joint Director Securities Market Asif Iqbal Joint Director Securities Market Saeed Ahmad Deputy Governor SBP 19-Dec 9:30 AM SBP Basit Aly Director SME Finance 11:00 AM MUFAP Mashmooma Zehra Majeed CEO Sohail Khan CEO 12:30 PM Topline Securities Omar Ahmed Head Corporate Finance 20-Dec Asad Shafqat Partner 3:00 PM JS Pvt Equity Asad Nasir Director Faisal Ismail CFO Shamim Ahmed Firpo President Karachi Chamber of Muhammad Younus 21-Dec 11:30 AM Commerce Soomro Vice President Tanveer Ahmed Barry Member Manageing Committee

22 USAID’s Financial Market Development Activity, Pakistan 11 February 2017

Uzma Taslim Director Research Aamir Hassan Director Public Relation Abdul Sattar Assistant Public Relations Officer USAID Sarah Pervez Economic Growth Advisor 10:30 AM Frank Talluto Economic Officer 22-Dec US Consulate Fahd Zaidi Economic Specialist 3:00 PM AKD Farid Alam CEO Ateeq-ur-Rehman Advisor Karachi Chamber of Zohaib Kaka Reporter 28-Dec 10:30 AM Commerce Farooq A. Choudry Executive USAID Sarah Pervez Economic Growth Advisor Nadeem Naqvi Managing Director 29-Dec 10:00 AM PSX Mohammad Abdullah Head of Special Projects Asmaa Saleem Malik Manager Companies Affair Pakistan Business 30-Dec 11:30 AM Council Fuad A. Hashimi Executive Director USAID Sarah Pervez Economic Growth Advisor 2-Jan 10:30 AM PSX Mohammad Abdullah Head of Special Projects Ali Sultan Head of Treasury 20-Jan 3:00 PM Bank Al-Falah Zeeshan Shalwani Senior Dealer - Fixed Income 27-Jan 11:30 AM PSX Nadeem Naqvi Managing Director 1-Feb 4:00 PM Arif Habib Nasim Beg Group Executive Director 2-Feb 3:00 PM Elixer Fawaz Valiaani CEO Nadia Dawood Senior Economic Growth Advisor 9-Feb 3:00 PM USAID Sarah Pervez Economic Growth Advisor 10-Feb 10:00 AM SECP Amir Khan Afridi Executive Director Securities Market 10-Feb 11:00 AM PSX Nadeem Naqvi Managing Director

23 USAID’s Financial Market Development Activity, Pakistan 11 February 2017

24 USAID’s Financial Market Development Activity, Pakistan 11 February 2017