Share prices have declined considerably over the last five years. The State Bank General Index of Share Prices (1990-91=100) fell from 186.8 in June 1995 to 98.8 in 1998 but recovered to 128.8 in 2000. The KSE 100 Index (1991=1000) dropped from 2, 330.9 in 1994 to 879.6 in 1998 but was 1,520.7 in 2000. The indices are held up by a few so-called "pivotal shares" and do not depict the true picture of capital losses suffered by most investors. The lowest State Bank Sub-Index was 51.02 in case of jute. For textiles, which account for the bulk of industrial shares, it was 56.2. 

        In June 2000, of the 12 sub-indices, 4 were below the base, with Textiles at 93.62. Currently many scrips are well below par, some at ridiculously low levels that some scrips whose face value is Rs 10 are quoted at a price which can not even meet the postal charges of a letter. A case in point is the 23rd ICP Mutual Funds standing at Rs1.40. On any typical day, only a fraction of the scrips are traded and the bulk is just listless evoking no investor interest even at their very low prices. On Feb 6, 2001, the number of listed companies was 762, of which active scrips were 223, or 29.3 per cent. Of the actives, 115 posted plus whereas 64 were in minus and the balance 49 remained unchanged. 

          Aggregate market capitalization of ordinary shares first rose from Rs293.3 billion in 1991 to Rs469.6 billion in 1997 but declined to Rs259.3 billion in 1998, a loss of Rs210 billion, or 45 per cent in one year. It closed at Rs391.8 billion in 2000. 

          The behaviour of the Exchange has been a reaction to the unusual developments in the preceding period, particularly during 1993-94 when there was an unprecedented boom triggered by inflow of foreign funds. In consequence, the State Bank index shot up by 79.5 per cent to touch 290 while the KSE index rose by 84.6 per cent to 2,333 while market capitalization improved by 88.7 per cent to Rs405 billion. The turnover of shares doubled from 0.9 billion to 1.8 billion. The boom was very shorted-lived and was bust in the very next year with a decline of 36.5 per cent in the State Bank index and 30.9 per cent in the KSE Index. Market capitalization fell by 27.5 per cent. The turnover, however, increased by 25.3 per cent. Thereafter, the nadir was touched in 1998 when the State Bank Index was down at 99.47 and the KSE Index at 679.6, a colossal loss to those who had entered the market as buyers in 1994. 

          The overall rate of decline does not indicate how some individual scrips were ruthlessly battered. Foreign funds had a role in the whole drama and continue to be an important factor, as small investors, seriously mauled, have been mercilessly pushed out of the market and are simply licking their wounds. 

         The boom conditions encouraged listing of new companies and flotation of new shares. The number of listed companies rose from 652 in 1993 to 783 in 1996, while the amount of funds mobilized through new issues jumped from Rs35 billion in 1993-94 to Rs18 billion in the following year. With the onset of the bearish market sentiments, the trend was soon reversed. The number of listed companies declined gradually to 762, while nothing worth the name was mobilized through new shares. This was only Rs450 million in 1997-98 and Rs865 million in 1999-2000, as against the peak of Rs18,439 million in 1994-95. For the entire period after 1995, new flotation were Rs8.9 billion up to 2000 as compared with Rs35.6 billion raised in the preceding corresponding period. 

         Traditionally, only half of the listed companies used to give any return but this was reduced to one-third. Some companies have not declared any dividend for years, in some cases even decades, at a stretch. This is dramatized by the fact that even ICP has not paid any dividend on its 24th and 25th Mutual Funds, despite the most diversified portfolio, ever since they were introduced in 1994 and 1995 respectively. Following the tax on the reserves beyond a certain level to encourage dividend payment, there has been some improvement during 1999-2000, the ratio improving from 34 to 43 per cent. During 1997-98, only 189 companies had declared dividend. This improved to 321 in the following year and 470 in 1999-2000. Of these, 398 paid cash dividend, 48 issued bonus shares and 24 offered right shares. In terms of rate of return, 310 companies paid upto 20 per cent and 151 above that. 

         According to the State Bank, as of June 1993, the earning yield was 8.02 per cent, while the equity yield was 1.93 per cent. These Yields touched their lowest level at 5.14 per cent (Feb. 1997) and 1.07 per cent (March, 1994) As of end-June, 1998, the two Yields were 13.1 and 7.0 per cent. 

         It is interesting that the total turnover of shares has seen a phenomenal increase which is totally unjustified, rather simply unbelievable, on economic grounds. In just three years, The State Bank index of share turnover (1990-91=100) has skyrocketed from 6,512 in 1997-98 to 20,878 in 1999-2000. The value of the turnover has gone up from Rs233 billion to Rs1,878 billion. The ratio of total paid-up capital of the listed companies to the value of turnover has shot up from 1:1.13 to 1:8.2. In one year alone that is during 1999-2000. this has jumped from 1:2.8. If related to nominal GDP (FC), the ratio has risen from 10.5 to 64.2 per cent. 

         A closer analysis reveals that the sharp increase in turnover is confined to only a few shares. The companies whose shares are the centre of interest are just 4, claiming 73.3 per cent of the total turnover during 1999-2000. Their individual share in the total turnover of 48.1 billion during the year was PTCL 14.7 billion (30.6 per cent), HUBCO Power 11.1 billion (23.1 per cent), ICI 4.8 billion (10.0 per cent), and PSO 4.6 billion (9.6 per cent). In terms of the value of turnover, out of the total value of Rs1,878 billion, the share of PTCL was Rs102 billion (5.4 per cent), PSO Rs23 billion (1.2 per cent), ICI Rs19 billion (1.0 per cent), and HUBCO Power Rs17 billion (0.9 per cent). 

        The volume of turnover related to the number of shares and the working days gives the average period of holding of a scrip. All scrips are never traded at a time. Assuming 10 per cent shares put on the market, the average period of holding in terms of days for the pivotal shares during 1999-2000 comes to; PSO 1.3, PTCL 0.04, HUBCO 0.4, and ICI 0.2. 
    
        On Feb. 6, 2001, the KSE index stood at 1,485.93 with a turnover of 135 million. The share, in percentage, of HUBCO was 22.8, PTCL 20.8, ICI 9.1, and Fauji Fertilizer 7.9, all adding upto 74.7 per cent of the total turnover. The share in terms of own number of shares was; HUBCO 2.6, PTCL 20.8, PSO 13.3, ICI 1.0, and Fauji Fertiliser 3.3. 

        It would be stating the obvious that the Karachi Stock Exchange, for that matter all stock exchanges in the country, no longer performs the basic function of serving as a source of capital for new investment, an avenue for new savings and a market for the existing investment. In fact, those small savers who turned to stock exchange for investment are ruining the day for the tremendous capital loss that they have suffered and they see no prospects of recovering even a part of it in the foreseeable future. 

        Speculation is an essential feature of stock market all over the world but this must reflect the actual or expected changes in the fundamentals of the business concern, such as price/earning ratio, and remains within limits not causing damage to the market and the economy at large. It would be no exaggeration to state that massive speculation, not even remotely related to the fundamentals, has reduced stock exchange in Pakistan to a casino to the detriment of the whole process of saving, financial intermediation and economic growth. 

         Foreign investment has been assigned a crucial role in the New World Economic Order. Portfolio investment is an important part of that investment. The initial inflow of these funds helped the country to acquire much needed foreign exchange and provide stimulus to the stock exchange but their subsequent use for speculation, rather than steady genuine investment, has made them suspect. This is quite evident from the movement of these funds into and out of stock exchange in recent years. Their total market turnover, inflow plus outflow, at the Karachi Stock Exchange, suddenly rose from Rs17 billion in 1996-97 to Rs58.9 billion in 1997-98 but came down to Rs19.9 billion in the following year and Rs16.0 billion thereafter. 

        The net outcome of these transactions in 1996-97 was an outflow of Rs0.2 billion. This was converted into a net inflow of Rs3.3 billion in 1997-98, This, however, proved temporary, as there was an outflow of Rs1.1 billion in each of the two subsequent years ending 2000. The involvement of foreign funds in sheer speculation, apart from playing havoc with the market, has serious balance of payments implications because of the firm obligation to allow unhindered remittance of profit. 

        Taking cognizance of the serious deleterious effect of speculation, the SECP has banned blank transfer of leading scrips. This, though belated, is a welcome move and should be extended to all scrips. In this context, guidance by the Holy Prophet (PBUH) is quite relevant. Among the Islamic business ethics, is the strict prohibition of bargaining for a thing which is not in the sellers possession, (Abu Daud). Moreover, this could not be sold on the spot where the purchase was made (market), but was required to be removed to the normal place of business (shop), and then sold. According to Ibn Umar (RA), traders were beaten for non-compliance during the time of the Holy Prophet (PBUH), (Bukhari). In essence, for the purpose at hand, a scrip can change hand only if it is already fully paid and registered in the name of the seller, This would knock out blank transfers, margin trading, badly and all such devices which not only facilitate but actively promote speculation.