June 28 (Bloomberg) -- The Karachi Stock Exchange, Asia's second-best performing market last year, will set up branches in New York, London and Dubai in the next four years to tap demand from expatriate Pakistani and overseas investors.

``There are a large number of expatriate Pakistanis who want to have links with this market and are rich enough to do so,'' Maudood Ahmad Lodhi, managing director of the Karachi exchange, said in an interview on June 23.

Pakistan is wooing investment to fuel a $118 billion economy that Prime Minister Shaukat Aziz predicts will expand at an annual pace of as much as 8 percent over the next five years.

Overseas investment in Pakistan's stock market more than doubled to $313 million in the 11 months to May, from $141 million a year earlier, according to the central bank. More than 90 percent of that money came from U.S.-based investors. Remittances from Pakistanis working abroad reached $4.1 billion in the first 11 months of the year that started July 1, more than 13 times the total overseas investment in shares.

Some exchange members say the measures aren't necessary, and will increase costs.

``Setting up branches and adding to your overheads is not wise,'' said Nadeem Naqvi, chief executive officer of AKD Securities, a member of the Karachi Stock Exchange. ``If Pakistan's economy is doing well and the corporate sector is doing well, money will come.''

The Karachi Stock Exchange 100 index, down 5.4 percent this year, has slumped 26 percent from a record of 12,273.82 points on April 17. The benchmark climbed 54 percent in 2005, making it Asia's best performer after South Korea's KOSPI index.

Public Company

To help increase investor confidence, the Karachi exchange will be converted into a public company by the end of 2007, and may list its shares overseas, Lodhi said.

The conversion ``will put us on the international map,'' he said. ``It will also make more resources available to us and give investors additional confidence in us because we will have to meet their listing criteria.''

The exchange plans to hire an international investment bank by July to help value the bourse before a share sale, he said. Six international banks, including Citigroup Inc., Merrill Lynch & Co., and JPMorgan Chase & Co., have been invited to apply.

A stockbroker membership on the 200-member Karachi exchange is valued at 90 million rupees ($1.5 million), giving the bourse a total valuation of about 18 billion rupees.

``Development and growth of the stock exchange rests on an unbiased board,'' Naqvi said. Unless ownership is separated from management, reform won't mean much, he said.

New Products

Lodhi said the exchange plans to improve its image through better marketing, new investment products and improved governance, which also may help combat overseas investors' negative perceptions of Pakistan, he said.

``Pakistan has an unfortunate perception as a terrorist country,'' he said. ``And at $50 billion, our market capitalization is still just nothing for international fund managers.''

The exchange will introduce a free-float index of 30 shares on a trial basis on Aug. 1 to address a ``general complaint'' about the weighting of the existing index of 100 shares, Lodhi said.

The exchange also plans to introduce index futures in early 2007 to give investors alternative products and help bring the market in line with international bourses. Prior to that change, cash-settled futures contracts for 30, 60 and 90 days will be introduced within the next two months, once the Securities & Exchange Commission of Pakistan gives its approval, Lodhi said.

Cash-settled futures contracts will initially be introduced in a single stock of Pakistan Telecommunication Co., the nation's biggest telephone-service provider, and later will be extended to 30 stocks, he said.

``We want to introduce new products one by one because people may not be aware of the pitfalls and could trade beyond their means,'' Lodhi said. ``We have to be prudent and ensure we don't land in a mess.''

Work on setting up the overseas branches will begin once the exchange's board approves the plan, he said.