How does the stock market grow when participants exit and defy fundamental economic principles? In essence, the stock market operates similarly to a casino — individuals cannot guarantee a win but continue to place their hopes on it, holding out for that one elusive jackpot.

News headlines frequently announce that the KSE 100 index has crossed thresholds with significant increases. While, over the past decade, 170 companies have delisted from the Pakistan Stock Exchange (PSX), only 67 new companies have joined.

The sectors most affected by delisting include textile spinning (17 firms), textile composite (10 firms), exchange-traded funds (eight firms), and investment banks (seven firms).

In financial literature, firms list their shares as a strategic measure to enhance their bargaining power with financial institutions, reduce reliance on debt financing, and increase their visibility and reputation.

This enhancement in bargaining power can be achieved by improving the market-to-book value ratio. However, when a firm’s market value declines below its book value, the listing can become a liability, reducing its bargaining power with banks.

According to a study by the Research for Social Transformation and Advancement (Rasta) at the Pakistan Institute of Development Economics (Pide), critical financial performance indicators such as earnings per share (EPS), price-earnings ratio, dividend payout ratio, and profit margin, along with governance indicators, are robust determinants of delisting.

Approximately 32 families dominate public listed companies, often with board structures composed of family members and close relatives, according to Pide research

Firms with lower dividend payouts and lacking strong market visibility are particularly affected. The stock market offers substantial opportunities for individuals to achieve higher returns but does not provide a level playing field for all participants.

In the KSE 100 index, the top six companies collectively represent 25 per cent of the index weight, seven companies account for the next 25pc and 19 companies comprising the 50pc-75pc range follow this. Consequently, the remaining 68 companies contribute to the final 25pc of the index weight.

The top five sectors, contributing 54pc of the KSE100 Index weight, reveal significant insights. The banking sector leads with 19pc of the index weight, boasting a 29pc dividend payout ratio and 39.6pc EPS growth over three years.

The second most prominent sector is oil and gas exploration, holding 10.56pc of the index weight. These predominantly state-owned companies report 36.75pc payout ratio. The third sector is fertiliser, benefiting from electricity and gas subsidies, displaying 43.5pc payout ratio.

According to Nadeem ul Haque, Vice Chancellor of Pide, these sectors possess strong monopolies in their operational fields, making the entry of new ventures nearly impossible. This monopolistic control highlights the concentrated influence and rent-seeking behaviour within these domains.

The entry of new financial institutions is rare and owned by individuals who have significant investments in the PSX and their own brokerage houses. Consequently, this high policy rate makes loans unaffordable for the corporate sector, as the real rate of return is less than 10pc. Operationally, these sectors dominate the market. Medium-sized firms, with minimal political rent-seeking influence, are vulnerable and exhibit the least growth on both fronts.

These companies have established an oligopoly in the stock market by creating their own brokerage houses, forming boards composed of family members or friends, and generating revenue through rent-seeking by maintaining monopolies and favourable policies.

To create a robust ecosystem, the government enacted the SOEs (Governance & Operations) Act in January 2023, aiming to enhance SOE governance standards. This act mandates the inclusion of independent non-executive directors on SOE boards.

However, in practice, these positions often go to bureaucrats with conflicting roles, such as the finance secretary serving on multiple boards while also being a member of the Securities and Exchange Commission of Pakistan (SECP) policy board. This overlap raises questions about the effectiveness of regulatory oversight.

In the private sector, companies are not truly public limited but are family-owned. According to a Pide report, approximately 32 families dominate these publicly listed companies, often with board structures composed of family members and close relatives. Interlinked directorships are common, where an independent non-executive director (NED) in one company might be an executive in another.

Similarly, many stock market participants have established their own brokerage houses, often owned by their families or friends. This allows them to generate word-of-mouth support for their affiliated listed firms by advising investors to buy shares, increasing their visibility and trading activity.

In this scenario, those who can win and survive are those with influential members on their boards or shares owned by market-dominating families and affiliated brokerage houses, undermining a fair and participatory ecosystem and creating a casino-like environment.

The writer is an Assistant Professor (PhD Financial Economics) at the National University of Modern Languages, Islamabad. Email:

Published in Dawn, The Business and Finance Weekly, July 29th, 2024