In this paper, the impact of stock market reforms is analyzed on foreign portfolio investment. Time series data is collected on these variables and correlation and regression test is applied on this data. E-views version 7 is used to analyze the data. Correlation shows positive relationship between variable which suggest that reforms are deriving factors of foreign investment. Results show the positive relationship between SMR and FPI.

1. WORLD ACADEMIC JOURNAL OF BUSINESS & APPLIED SCIENCES-MARCH-SEPTEMBER 2013 EDITION
Journal of Economics & Finance (JEF)
AUGUST 2013 VOL.1, No.1
Stock Market Reforms and Its Impact on FPI in Pakistan
Dr. Rashid Saeed, Muhammad Arshad, Rab Nawaz Lodhi, Zeeshan Fareed (Corresponding author)
COMSATS Institute of Information Technology, Sahiwal, Pakistan
Accepted 19 August 2013
Abstract
In this paper, the impact of stock market reforms is analyzed on foreign portfolio investment. Time series data is
collected on these variables and correlation and regression test is applied on this data. E-views version 7 is used
to analyze the data. Correlation shows positive relationship between variable which suggest that reforms are
deriving factors of foreign investment. Results show the positive relationship between SMR and FPI.
Key Words: Foreign Portfolio Investment, Correlation, Stock Market Reforms
1. Introduction
Stock exchange is a physical location where buying and selling of share takes place. Stock exchange is a
place where different companies list their stock and provide the facility to liquidate investments (Pankow, 2005).
Stock markets make available the mechanism where people who want to purchase stock can buy stock from
other people who already possessed them. Stock market is not only a place to match sellers and buyers but also
to agree them at one price. Stock market is not place to buy stock direct from the company but from the investors
who already owned them. That’s why stock market is a place where investors liquidate their investment by
selling them to other at stock market. (J.Angel, 2002)
In past role of stock exchanges was only limited to rules issues and clarification of existing framework
aspects. But with the passage of time regulatory functions were shared between stock exchanges and supervisory
agencies of capital markets. In addition to these improvements in corporate governance and obedience of
different legislations is also monitored by stock exchanges. (Koldertsova & Alissa, 2009)
In this paper study is made to observe the impact of stock market reforms on foreign portfolio investment in
Pakistan. Reforms that were implemented in different periods are considered to attract foreign investors .whether
these reforms brought desired results depends upon two situations. First when these reforms implemented then to
what extent these reforms where followed up and monitored to achieve expected results. Second there also some
other factors which have also direct effect on FPI. These factors effect positively and negatively to FPI. So it may
happen that reforms have not so distinct influence on FPI but the factors like GDP and Government stability
are attractive indicators for foreign investors to invest in stock market. But in opposite context it may also
happen that stock market reforms have played an important role to incline for investment but the factors like
exchange rate and government instability are hurdle for investor to make investments. But from past studies it is
cleared that stock market reforms ever had vital role to bring foreign investment. Particularly in the era of
globalization and competition it is not only compulsory for developing countries to make attention of investors to
their stock markets but also have same importance for developed countries to introduce various reforms
217

2. WORLD ACADEMIC JOURNAL OF BUSINESS & APPLIED SCIENCES-MARCH-SEPTEMBER 2013 EDITION
regarding capital markets to retain and attract more investors.
1.1 Problem Statement
Stock market reforms are very important source of motivation for investors. Study regarding the stock market
reforms and its impact on foreign portfolio investment is not conducted yet in Pakistan. So there is need to
explore the relationship between stock market reforms and FPI.
1.2 Objectives of the Study
• To check the relationship between stock market reforms and foreign portfolio investment
• To examine the role of stock market for foreign investment
2. Literature Review
The Securities and Exchange Commission of Pakistan (SECP) issued a fresh directive for reducing a
number of directors of stock exchanges which was a vital step towards demutualization. It is worldwide
realization that for efficiency and transparency of operations of bourses stock exchange demutualization is of
basic importance. According to SECP directive 13th August 2002 all stock exchanges must possess eight directors
who will be elected four from the members by stock exchange general body other fours will be placed from
amongst professionals by the Commission. A director will be the MD of stock exchange. Chairman of the board
of directors will be elected from non- member directors by the board were a major change.
Prior the directive an exchange was consisted of 17 directors, seven nominated by SECP and remaining by
the members. MD was in addition to these who were allocated by the board. The dominancy of brokers with
vested interests decline to much extent and most welcomed by small brokers who had little share in previous
brokers’ dominancy role. These were the measures which attract independent institutional investors and Asian
Development Bank toward Pakistani’s capital market. Along with the protection of interests of members
Regulator also protects the interests of capital issuers and investors that’s why Code of Corporate Governance
was made a part of listing by Regulator. (Rizvi, 2002)
Stock market that is well-managed attracts the investment from foreign in country. Investigations have
shown that there is positive relation between FDI and stock market reforms. (Raza, Iqbal, & Ahmad, 2012)
What would be done to attract investment in developing countries there was need to take major steps. In 1980’s
and 1990’s steps regarding stock market liberalization were taken by developing countries. Due to this in
emerging markets market capitalization was increased by 1007% as compared to developed markets 253%.
(Qayyum & Husain, 2005)
Dual listing means listing of securities on more than on stock exchange. Dual listing play prominent role in
stock investment. If dual listing happened before market segmentation and there is unique security that is dually
listed would lessen the market segmentation with the improvement in risk sharing. (Serra, 1999)
Cross listing means that listing of securities on stock exchange in foreign country along with domestic country.
Cross listing is more important than dual listing as it generate more foreign n investment than dual listing.
Investors’ awareness and liquidity both can be improved by listing on foreign stock exchange. Firms can obtain
incentive of cross listing by lowering capital cost. (Serra, 1999)
Cross listing has lot of benefits for any country. Advantages like development needs, diversification of
wealth, greater efficiency, low cost capital cost, enhance market access for small size stock markets and lessen
the effect of outflows of foreign investment in the shallow markets. (Adelegan, 2008)
Pakistan’s stock market indicated a reasonable spirit in the background of stout economic growth. However
political instability resulted in low. A floating stock market can be recognized in the continuity of
macroeconomic policies by government and apex regulator the Securities and Exchange Commission of Pakistan
implement stock market reforms. A record maker Karachi Stock Exchange became 6th best performer among the
emerging stock exchanges in year 2007. 652 companies with paid up capital of amount Rs.690.1 billion were
218

3. WORLD ACADEMIC JOURNAL OF BUSINESS & APPLIED SCIENCES-MARCH-SEPTEMBER 2013 EDITION
listed on 30th March 2008. During May-July 2007-08 political and economic events played a significant role in
settlement of investors’ sentiments positively and negatively in local bourses. (Servey, 2008)
Market friendly actions were taken in 1990’s that include privatization on state owned enterprises and
commercial banks, industrial sanctions deregulations, permission for private sector to establish commercial &
investment banks and allowing foreign investors to trade shares openly at stock market with facility of
repatriation, foreigners have equal access for borrowing from local banks and permission to have ownership up
to 100% shares in a venture, disinvestment proceed and to remit dividend. These all steps act as catalyst in
stimulating the confidence of foreign investors in country’s stock market. Within in interim of four years
(1990-91 to 1993-94) price index of Karachi raised by 48.3% along with aggregate market capitalization
uplift from 68.4 to 404.6 billion rupees, increase in number of listed companies from on Karachi Stock Exchange
from 542 to 724 and total turnover in shares from 0.4 to 2.2 billion . In next four years 1994 to 1998 several
international and domestic adverse factors dominated stock markets in Pakistan. (Statistics, 2002) To resolve
these adverse factors a number of structural initiatives were taken to make improvement of workings and depth
regarding Pakistan’s stock market.
Furthermore infrastructural facilities were strengthened by restructuring the Corporate Law Authority
(presently Security and Exchange Commission of Pakistan) and promoting free market environment. Overseas
Pakistanis and foreigners were permitted to bring new investments with no any prior approval by exemption of
some specified industries. For the encouragement of small savers to participate in stock market they were given
fiscal incentives. In 1995-1996 out dated Capital Issue Act 1947 was abolished for improvement in
self-regulatory character of stock exchange in Pakistan. Other steps that were taken included tax exemption on
capital gains, on bonus shares and on fixed income securities for foreigners’ investments. As per expectation
however all these incentives could not be helpful to restore the confidence of investors in response to all positive
measures that were taken. The salient developments of Pakistan’s capital markets were a) establishment of
Central Depository System b) trade automation in all three stock exchanges c) establishment of Credit Rating
Agencies. To bring transparency in stock market, a proper system was introduced for the inspection of records
and books of brokers. Failure to compliance with regulations one had to face penal action. (Statistics, 2002)
3. Theoretical Framework
3.1 Model of the study
Figure 1
3.2 Measurement of dependent and independent variables
In this study stock market reforms (SMR) is our independent variable and foreign portfolio investment (FPI) is
dependent variable.
3.3 Hypothesis
Ho=There is no positive relationship between SMR and FPI
H1= There is positive relationship between SMR and FPI
4. Methodology
This study is conducted for a country of Pakistan. Series data is collected that covers the period of twenty
seven years from 1985 to 2011 that enable to evaluate the impact of stock market reforms on foreign portfolio
investment. The data source is International monetary fund (IMF) supplemented with International Financial
Statistic and World Development Indicator. The study is conducted by using tables, graphs and statistical
techniques specially using correlation analysis and regression test with the help of software (E-views version 7).
FPI = 𝛃 𝐨+ 𝛃1SMR + 𝛆
SMR=Stock Market Reforms
FPI=Foreign Portfolio Investment
219

4. WORLD ACADEMIC JOURNAL OF BUSINESS & APPLIED SCIENCES-MARCH-SEPTEMBER 2013 EDITION
𝛃 𝐨=Represents the Intercept
𝛃1=Coefficient of Stock Market Reforms
𝛆=Error term
Table 1
Figure 2
Table 2
5. Results
Table 3 shows the P value .07 which is less than .1 so, our null hypothesis is rejected and our alternative
hypothesis is accepted. The beta co-efficient is 39.72 which explained the dependent variable 39.72%. The
R-squared value is .12 which shows the goodness of fit of our model and this value shows that our model is not
good enough and also Durbin-Watson has less value than 2 which is not consider statistically good and this is
due to less number of observation.Table 3
6. Conclusion
The time series data that is collected about stock market reforms and foreign portfolio investment is tested
by applying analysis of regression and correlation. Results show that there is positive correlation between
variables which indicates that stock market reforms derive foreign portfolio investment in Pakistan. So it means
that reforms implemented by Security and Exchange Commission of Pakistan (SECP) and government of
Pakistan induced investments in all three stock exchanges namely; Karachi Stock Exchange (KSE), Lahore Stock
Exchange (LSE) and Islamabad Stock Exchange(ISE).
7. Recommendations
This study suggests that stock markets reforms play vital role in attracting foreign investment in any country.
So when any stock market in is introduced then there must be proper check and balance on it and its post
evaluation results be carefully monitored. Reforms should be flexible so that these can be restructured by
considering the feedback and responses of investors. Management of stock exchanges and government are key
player that can not only introduce different reforms in stock market but also can monitor these reforms.
8. Limitation of the study
Due to less number of observations the results are not more significant that can be improved by increasing the
number of observations. The above model may be influenced by some other control variables like GDP
and exchange rate so; model can also be improved with the help of control variables.
9. References
Pankow, D. (2005). Understanding stocks and stock markets. FE-605 -4.
J.Angel, J. (2002). Market Mechanics. 24.
Koldertsova, & Alissa, H. C. (2009). The Role of Stock Exchanges in Corporate Goveranve.
Rizvi, S. A. (2002). STOCK MARKET REFORMS. Islamabad: Pakistan Economist.
Raza, A., Iqbal, N., & Ahmad, Z. (2012). The Role of FDI on Stock Market Development: 4. No.1, pp.26-33.
Qayyum, A., & Husain, F. (2005, March). Stock Market Liberalizations:.
Serra, A. P. (1999). Dual-listing on international Exchanges. 5, No.2, 165-202.
Adelegan, O. (2008). Can Regional Cross-listings Accelerate Stock Market Development. WP/08/281.
Servey, E. (2008). CAPITAL MARKETS. Islamabad.
Statistics, G. (2002). Capital Market. Islamabad.
Stock Market Reforms
Foreign Portfolio Investment
Figure 1: Model of Study
220

5. WORLD ACADEMIC JOURNAL OF BUSINESS & APPLIED SCIENCES-MARCH-SEPTEMBER 2013 EDITION
Sr.
No.
Year
Stock Market Reforms
Symbols
FPI $ millions
1
1985
Stock market liberalization
Lib
110.35
2
1991-94
Repatriation,100% ownership in venture and
disinvestment
Rep
3
1992
Cross listing & Dual listing
4
1994
Trade automation
5
1994
Establishment of Credit Rating Agency
CRA
6
1995-96
Abolishment of outdated Capital Issue Act
1947
CIA
7
1997
Establishment Central Depository System
CDS
279.00
8
1998
No prior approval for investment
AI
19.00
9
1998
Promotion of free market environment
10
1998
Restructuring of corporate law authority
CLA
19.00
11
2001
Online internet based trading
IBT
192.00
12
2002
Demutualization of stock exchanges
13
2007
Floating stock market
CL
DL
92.49 to 1,471.36
&
371.94
1,471.36
TA
1,471.36
3.68 to 260.86
19.00
FME
722.00
Dem
2,086.00
FSM
Table 1: Stock Market Reform Summary
Sr. No.
Year
SMR
FPI
Sr. No.
Year
SMR
FPI
1
1985
1
110.35
15
1999
10
120.00
2
1986
1
83.42
16
2000
10
9.00
3
1987
1
132.35
17
2001
11
192.00
4
1988
1
126.90
18
2002
12
722.00
221

6. WORLD ACADEMIC JOURNAL OF BUSINESS & APPLIED SCIENCES-MARCH-SEPTEMBER 2013 EDITION
5
1989
1
15.50
19
2003
12
276.00
6
1990
1
87.35
20
2004
12
246.03
7
1991
2
92.49
21
2005
12
770.00
8
1992
3
371.94
22
2006
12
1969.00
9
1993
3
293.05
23
2007
13
2086.00
10
1994
5
1471.36
24
2008
13
269.00
11
1995
6
3.68
25
2009
13
608.00
12
1996
6
260.86
26
2010
13
108.00
13
1997
7
279.00
27
2011
13
118.00
14
1998
10
19.00
Source: International Monetary Fund
Table 2: Time Series Data on SMR and FPI
Dependent Variable: FPI
Method: Least Squares
Date: 05/27/13 Time: 07:52
Sample: 1985 2011
Included observations: 27
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
SMR
101.3798
39.72071
0.522645
1.831543
0.6058
0.0790
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.118307
0.083040
539.4216
7274392.
-207.1158
3.354549
0.078962
193.9746
21.68702
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
222
401.4919
563.3172
15.49006
15.58605
15.51860
1.325694