May 05, 2008	Monday	Rabi-us-Sani 28, 1429

Another delay is expected in the demutualisation process of the Karachi, Lahore and Islamabad stock exchanges as the draft ordinance earlier forwarded to the President for signature has now been referred back to the National Assembly where it will be tabled, debated and turned into law by an act of the parliament.

The Securities and Exchange Commission of Pakistan (SECP) had been facing criticism ever since the finance ministry rushed the draft ordinance on demutualisation and corporatisation of stock exchanges through the caretaker cabinet to the President in January. The parliament was ignored.

President Pervez Musharraf has refused to sign the draft in order to avoid any fresh controversy.

Insiders told Dawn another tiresome delay is expected in the approval of the demutualisation law from a parliament which is too much pre-occupied in dealing with the urgent and pressing issues of energy, food prices, fiscal and current account deficit, restoration of judges and its equation with the president.

Officials of the finance ministry and the SECP also expect some changes to the draft law, which, many critics say, has bypassed some of the recommendations of the Expert Committee on Demutualisation formed in 2004, allegedly to protect the interests of the brokers.

The committee headed by Shamim Ahmad Khan, a former chairman of the SECP, included Justice (Retd) Aamer Raza A. Khan, a retired Judge of the Lahore High Court, Ebrahim Sidat, Country Managing Partner/CEO, Ford Rhodes Sidat Hyder & Co. Rashid Zahir, CEO, Saudi Pak Industrial and Agricultural Investment Company (Pvt) Ltd, Alan Cameron, Former Chairman, Australian Securities and Investments Commission (ASIC), Dr Philip N. Pillai, Non-Executive Director, Monetary Authority of Singapore, and Ashley Alder, Member and Executive Director, Securities and Futures Commission, Hong Kong.

The committee had studied the demutualisation process taking place in India and Hong Kong and had come up with a number of recommendations.

The former SECP Chairman, Dr Tariq Hassan, who had constituted the committee, told Dawn that some of the recommendations of the experts committee had been sidelined when the draft law was rushed through the caretaker cabinet. He said the parliament’s job was legislation and it was not a wise decision to introduce such an important law in the shape of an ordinance.

Now, he said, the SECP should explain to the parliament the reasons which might have compelled it to change the recommendations of the committee. He said a comparative study of the draft law and the recommendations of the committee could reveal how many changes had been made in the draft law. He said it was the responsibility of the SECP to explain to the parliament each and every change it had made in the draft.

He said the economic team of the ministry of finance must pursue the case of demutualisation so that the parliament could pass it without any further delay. The process had already been delayed but it did not mean that the role of the parliament should have been bypassed as it was also vital to safeguard the interests of the small investors.

Under the demutualisation law, the powerful brokers have to share the trading rights of stocks with the general public, strategic investors and financial institutions. Now,the brokers are in virtual control of the equities markets.

It was in November 2002 that the demutualisation law-drafting process started. Since then,the two former heads of the Securities and Exchange Commission of Pakistan (SECP) — Khalid Mirza and Dr Tariq Hassan — had faced stiff resistance from the brokers that delayed the move for more than five years.

The SECP officials are of the view that it did not matter whether the demutualisation law was debated in the parliament or not so far as it strived to make the affairs of the burses transparent and improve their international image and attract foreign investment.

They said the stock markets, from Dubai, Korea, Norway and London, have already shown interests in buying stakes in the Pakistani bourses once the demutualisation mechanisms are in place.

So far about 20 stock exchanges have been demutualised worldwide including Bombay Stock Exchange and the National Stock Exchange of India. According to the present draft of demutualisation law, brokers will have the right to hold 40 per cent shares against 20 per cent of the general public, while the remaining 40 per cent go to strategic investors and financial institutions. The demutualisation process would be initiated within four months after it approval from the parliament and the completion of the whole process may take another year or so. The three stock exchanges are expected to be ready for implementation of the law within 119 days of its approval by the parliament.

The SECP has already asked the 225 dormant brokerage firms at the stock exchanges (KSE 45, LSE 80 and ISE 100) to become active or else sell their trading rights by 2010. After that, the trading licenses of dormant firms will be withdrawn.

The demutualisation is expected to enhance the confidence of the international and local markets in the Pakistani equity markets. There is a growing trend in the Asian markets towards demutualisation and integration.

Demutualisation is vital for the Pakistani bourses as in spite of the economic growth, companies are currently not seeking listing at the exchanges and little capital formation is taking place through bourses. Issuers lack confidence in the equities markets and sense little value addition in listing.

Investor base is small as less than one per cent of the adult population owns shares. Growth in mutual funds has not led to increase in the number of investors. The number of shareholders in listed companies has remained almost stagnant over the last several years. Though a number of governance related reforms were initiated recently, professional management is still much of a dream for the exchanges. The role of non-member directors in improving governance is rather mixed while bourses are being run literally by brokers.

Liquidity and price discovery are fragmented and costs escalate for all stakeholders across the KSE, LSE, and ISE. While the number of issuers and investors is very small, the number of intermediaries is disproportionately large. Investors are vulnerable to different forms of market abuse. Market remains rife with allegations of price manipulation, front running, insiders trading and blank selling.

Stock exchanges are also unable to attract and retain professionals. Many of the members of the staff are non-professional. The structure of the stock markets is a cause for many of the market failures. It is now hoped the demutualization law to be approved by the parliament can provide a remedy to these problems.