By Shahid Shah From The News International

KARACHI: While several market pundits predicted a pre-election rally, few expected the KSE-100 index to cross the 21,000-point mark. The fundamentals hadn’t changed, they argued, so hefty inflows were unlikely. But the ‘foreign investors’ leading the pack at the KSE didn’t get the memo.

According to data with the National Clearing Company, Pakistan Limited–the organization responsible for monitoring data regarding securities in Pakistan – between April 1, 2013 and May 22, the KSE received some $212.44 million from investors abroad.

The figure for the same period in 2012 was a meagre $54 million, a stunning increase of more than 293 percent. For a bourse with market capitalization of Rs5.15 trillion, foreign investment now accounts for 7.75 percent of the total – a dramatic increase, compared to the 1.6 percent of 2008.But who are these foreigners bullish on Pakistan?

According to the majority of brokers interviewed for this story, the ‘foreign investor’ doesn’t exist. And the meteoric rise of the market has nothing to do with investor optimism and everything to do with money laundering.

“In the last 10 years, approximately $100 billion has been routed to Pakistan through the stock exchange and other means by Pakistanis who want to whiten their black money,” says Yaseen Lakhani.

He should know; he used to be the chairman of the Karachi Stock Exchange and stillfeatures among its directors. However, even Lakhani is unwilling to stab a guess at the actual quantum of tax evaded monies laundered through the stock market. “The Musharraf government said Pakistanis abroad held $500 billion, but the consensus [in the market] was that around $200 billion were held by Pakistanis abroad,” he recounts. “Half of that money [$100 billion] was earned illegally, and the owners hadn’t paid the taxes due on those monies.”

In 2010, the PPP-led government introduced the controversial Capital Gains Tax but, to appease the powerful brokers’ lobby, kept delaying implementation. In 2012, the law was amended to say that investors who held shares for a minimum of three months and promised to file tax returns in June 2014 would not be asked questions regarding their source of funds.

The money started trickling in thereafter. According to the State Bank of Pakistan, a total of $707.54 million were injected into the stock market between July 1, 2012 and May 22, 2013. (The figure for the same period in FY12 stands at just $413.12 million.) Interestingly enough, while several of the countries investing in Pakistan are expats havens – UK, UAE, Canada, US, Australia, for example – many are not. And this list features traditional money laundering hotspots such as the Bahamas, Cayman Islands, Luxembourg and Mauritius as well as global financial centres such as Singapore and Hong Kong.

“The ‘investment’ from Mauritius, the Cayman Islands and the Bahamas is actually money sent from Pakistan through hawala to Dubai and onwards to these countries,” says Yaqoob Habib, a small investor who has been dabbling in stocks for a few decades now. “From there, it’s routed back to Pakistan through banking channels, which automatically renders black money white.”

Many leading brokers corroborate Habib’s account although they insist the practice is not illegal. “Investors from Pakistan operate this cycle because they worry about the security of their investment here and the uncertainty on the political and economic fronts,” says one broker. “These investors set up offshore companies, which purchase shares in the Pakistan market as well as in Hong Kong, the UK, the US and others.”

Investing at home makes sense because the Karachi bourse has been a poster child for financial markets for the last five years: average returns for the year 2012, for example, went up to 49 percent. The average return on investment from January 2013 to date is 27 percent, which renders Pakistan much more attractive than the US (the average return on investment for 2012 – based on the two main indices – stood at 11.6 percent) and even India (the average return on investment for 2012 – based on the two main indices – stood at 27.85 percent).

Home is also safer, argue others who live in fear of global conspiracies. “The US withheld $15 billion of private Iranian citizens after the Khomeini revolution, and they could do the same with Pakistanis as well,” says Lakhani. “Pakistan is actually the safest place on earth for the money of Pakistanis.”

However, KSE Managing Director Nadeem Naqvi refuses to be drawn into a discussion about the identity of the ‘foreign investors’. “As far as I know, international financial fund managers are investing in the stock market here; we can’t verify if there are any Pakistanis behind the scenes,” he says. “International fund managers command a fund of $40 billion and some flows are coming to Pakistan as well. Everybody seems to have conspiracy theories – and we were also told about these – but we cannot verify [the theories] and see only global flows.”

But the securities regulator – the Securities and Exchange Commission of Pakistan – is no adherent of the see-no-evil policy. “The re-routing of money is continuing but this does not come under our jurisdiction; we just look at manipulation in the market,” shrugs an SECP official. “It’s the State Bank of Pakistan that has the authority to verify the legality or otherwise of investment coming from abroad and to determine whether taxes on that money – if of Pakistani origin – have been paid.”

For more on this story go to:

http://www.thenews.com.pk/Todays-News-13-23091-The-myth-of-foreign-investment