ISLAMABAD: The Policy Board of the Securities and Exchange Commission of Pakistan (SECP) has approved a new broker custody regime on Friday dividing stock ­brokers into three categories.

The regime, approved under the chairmanship of SECP Policy Board Chairman Khalid Mirza at the SECP headquarters, is expected to be placed for public consultation next week.

Under the new regime, top tier brokers with more than Rs500 million in their brokerage accounts will be allowed to trade shares for themselves and investors along with completing the formalities of clearing and holding shares.

However, brokers in the second category with Rs250-500m in their account will have limited rights relating to trading on behalf of investors while brokers under the third category will only trade shares for themselves but would not provide any service to clients.

Mirza said that there was a need to reduce custody default risk, “All defaults are related to custody services, as some brokers get overstretched leading to the collapse,” he explained.

He added that the new regime will lead to enhanced investor confidence and support an improved compliance regime — particularly anti-money laundering.

The policy board, in order to facilitate companies and simplify brokerage business also suggested measures to remove impediments in the buy-back of shares by companies after noticing that these transactions were almost negligible.

“Last 3-4 years were the worst period of capital in Pakistan compared to anywhere in the world due to overregulation,” he added while illustrating that growth was due to positive sentiments but overregulation did not allow players to create depth.

“We need to clear all the issues and develop the capacity of both brokers and regulators,” he added. The policy board suggested amendments in Listed Companies (Buy-Back of shares) Regulations, 2019 including relaxed condition with respect to the company considering buyback to be enlisted as margin-eligible securities.

Moreover, the board also suggested relaxing condition with respect to maintaining paid-up capital of Rs200m after buyback, removing restriction with respect to the sale price of treasury shares to be within 10 per cent variance to closing price of a scrip on the day preceding the approval date of special resolution and allowing sale of treasury shares through negotiated market deals.

The board also recommended to the SECP that Listed Companies (Code of Corporate Governance) Regulations, 2017 be based on a ‘Comply or Explain’ approach and only the requirements pertaining to the auditors, appointment of independent/executive/female directors and audit committee should be mandatory.

The purpose of this approach is to facilitate listed companies to decide for themselves whether a certain requirement is appropriate for its operations and leave it to the shareholders and regulators to consider whether the company has given a cogent explanation for not fulfilling the given requirement.

It was also suggested that the SECP reduce the fee charged on mutual funds from 8bps to 2bps and allow mutual funds to charge sales load on subsequent investments in voluntary pension schemes.

The board also approved the removal of the condition which mandates retaining 15pc of the enhanced paid-up capital as free reserves after issuance of ‘bonus shares’ which were an impediment and putting the distribution of a stock dividend at par with a cash dividend.

Published in Dawn, April 13th, 2019