It is almost three years since the stock exchanges in Pakistan were demutualised — ostensibly to separate the ownership from management. However, the work was only half done. Most investors can still feel the lingering power of the stockbrokers, who are thought to hold the strings that control the movement of price and turnover at the market.

As the first step towards demutualised exchange, 40pc of shares of the exchange were passed on to the members’ own accounts, while the remaining 60pc are parked in the ‘restricted’ account of the members with the Central Depository Company (CDC). The strategic investor has to be offered 40pc of those shares. Originally, the stock exchanges had to find a strategic buyer within 119 days. That period expired in Aug 2014; the Securities and Exchange Commission of Pakistan (SECP) extended the date till August 2015. That date also quietly passed by with nothing concrete coming into view.

It is difficult to say if the reason that no potential strategic buyer went beyond Expression of Interest (EoI), was a deliberate move by the powerful vested interest to scuttle any serious attempt at the sale, yet the fact remains that the strategic shares remain in cold storage waiting for a buyer. But the apex regulator seems to have decided now to press for the process to be completed within the next six months.

Following the integration of the country’s three bourses into Pakistan Stock Exchange (PSX), the bourse needs now to find just one strategic investor in place of three. The Commission has taken the initiative to get things moving on the sale of strategic portion of bourse’s equity.

Yet the most difficult part of the proposed regulation is its implementation which is likely to face strong resistance from vested interests

The regulator intends to make amendments in the Stock Exchanges (Corporatisation, demutualisation and integration) Act 2012 to constitute a ‘divestment committee’, which market participants said would replace the current ‘demutualisation committee’. The divestment committee (DC) would take steps for the sale of 40pc of total issued share capital out of the shares of the Exchange lying in the blocked account. In this respect, fresh valuation of the Exchange for its core and non-core operations based on internationally accepted method of valuation would be done. The valuation would be furnished to the Commission in a sealed envelope.

The ‘anchor investor’ could be a financial institution (FI) or strategic investor- who acquires at least 25pc shares of the Exchange and, in case of a consortium, the leading FI that holds at all times at least 60pct of shares acquired or held by the consortium and acts an anchor investor.

In case the DC fails to sell the shares, the Commission would open the envelope and the divestment committee would invite EoI from strategic investors and financial institutions for the purpose of acquiring core or consolidated operations of the Exchange. The DC would be permitted to proceed with invitation of bids from the interested strategic investor, financial institution or the anchor investor and those eligible would be facilitated to carry out due diligence of the Exchange for placing bids. The contestants would then submit bids, which would be provided to the Commission in a sea0led envelope. In case the DC is unable to sell shares to the bidders, the Commission would open the envelope. The DC would negotiate price with the strategic investor, financial institutions (FI) or anchor investor. Where the highest bid is less than the valuation, the DC would seek approval of the general body of shareholders of the Exchange for the decision to sell the shares to the bidder.

The entire process has to be be completed by the DC within six months from the date of its constitution by the Commission. The time frame could be extended for another three months after which the sealed envelope of valuation would be opened by the Commission who would match it with the bids. The Commission may order sale of strategic shares to the bidder who has made bid equal to or more than the valuation of the shares or order fresh auction of shares and sell shares to the highest bidder.

The shares may be sold against the transfer of technology. A single eligible FI shall not acquire or hold more than 5pc of the total issued share capital out of the shares of the Exchange lying in blocked account unless it also opts to act as an anchor investor.

After three years of acquiring shares, the anchor investor (AI) may acquire further shares from the market by making a public offer to increase its holdings up to 50pc of the capital of the Exchange. The anchor investor would be required to hold shares of the Exchange for at least five years after which AI can sell those shares; to qualify as FI, any of its sponsors or directors would not be connected persons of a TREC holder.

The proposed regulations are bringing in the concept of ‘anchor’ investor. A person in the know of things said that such an investor with a major portion of equity was essential so that the Exchange is not left rudderless. To be an anchor investor a FI has to meet conditions of eligibility. It must not be a group comprising major industrial companies or part of a conglomerate and it should not be a group which has significant investment in non-financial sector businesses or companies listed on the Exchange.

A foreign global ‘anchor’ investor, if one can still be found, is expected to add value and help in index trading, new product and possibly cross border listings. “The foreign ’anchor’ investor will be expected to bring in investment, experience, technological assistance and new products”, says an official at the stock exchange.

A senior analyst concurred. He pointed out that at the moment, the local bourse was depending almost entirely on just the one product — ready cash market. There were no ‘options’ trading and futures were almost non-active. “All that could change giving the market a new international look with the entry of such an offshore ‘anchor’ investor”, he said.

Yet the most difficult part of the proposed regulation is its implementation which is likely to face resistance from vested interests.

Published in Dawn, Business & Finance weekly, February 29th, 2016