The reform measures summed up by the Securities and Exchange Commission of Pakistan (SECP) early last week for the country’s stock market have been met with a mixture of warm investor response and some disdain.

The apex regulator claimed that the steps taken were aimed at bringing stability, attract liquidity, facilitate ease of doing business, revitalise development of the market and restore investor confidence “without compromising on the principles of sound risk management and investor protection.”

The Regulator’s decision to consider shifting from a rule-based corporate governance framework towards a combination of mandatory and recommended practices i.e. the “comply or explain” approach has been widely appreciated.

The draft Listed Companies (Code of Corporate Governance) Regulations, 2019 driven from the Organisation for Economic Cooperation and Development (OECD) principles are in the process of issuance of final notification. The code of corporate governance, much of it borrowed from what is followed in the developed market, hangs like the sword of Damocles over the head of corporates.

“It involves tons of paperwork and the filing of a plethora of necessary and unnecessary timely statements that phenomenally increase the cost of doing business”, said a corporate secretary of a struggling cement company. “We have set a separate section to keep abreast with the fast-changing rules and comply with filing of answers to various notices and timely statements on a daily to yearly basis — all at considerable costs,” he added.

The greedy at the regulator’s office were always looking for an opportunity to trap companies for the late filing of a useless document to strike a deal for freedom

Some others corroborated that the greedy at the apex regulator’s office in Islamabad were always on the lookout for an opportunity to trap any company that was slightly late in the filing of a useless document, summon the corporate heads to the Islamabad and strike a deal to set them free.

The market reforms are introduced to ensure better coordination and encourage the involvement of the stakeholders in the process, the SECP said in a statement. Three days after taking charge, the Chairman SECP held back-to-back meetings with key market participants, practitioners, heads of leading corporate and financial institutions and managements of the market infrastructure institutions before rolling out its reform package.

The rules for the introduction of Murabaha Share Financing Regulations were in the making for a long time. The SECP approved leverage financing in Shariah-compliant securities. A fund manager said that the new product would help pump liquidity in the market since the prevalent Margin Trading System (MTS) that is applicable for leveraged trading was recognised universally as non-compliant with the Shariah.

Some other methods to introduce liquidity in the market met with divergent views by the leaders of faith. Under the new system, the lender will have the comfort of receiving a fixed return while the borrower will bear all the risk.

Shares held by brokers as shareholders of Pakistan Stock Exchange (PSX), which were previously blocked have been unblocked. Stockbrokers held a 20 per cent stake in the total issued capital of the PSX while 10pc shares rest with the general public.

It was in the winter of 2016 that the PSX sold 40pc strategic ‘anchor’ shares to a Chinese consortium at Rs28 apiece, which paid Rs8.96bn for 320m shares. Until last Friday, the PSX stock price had drifted down to Rs9.14 per share showing a mind-boggling discount of 68pc.

It meant that Rs6.09bn paid by the Chinese consortium has been wiped off in less than three years. But when have the Chinese stakeholders not known to fret over the loss? One stockbroker argued that strategic investors have entered with a vision of 20 years. They are not fixated on the daily change in stock prices.

But there are conspiracy theorists who believe that there is more to it than meets the eye. A disgruntled fund manager complained that the foreign investors were expected to bring in investment, experience, technological assistance and new products like options and futures. Three years on, all that remains a dream.

One detractor also said that the SECP had allowed an increase in the limit on foreign persons or institutions to acquire PXS shares up to 20pc of share capital from 10pc applicable under the Stock Exchange (Corporatisation, Demu­tualisation and Integration) Regulations 2012, following which the Chinese holding was raised by 5pc and later by another 10pc, making an aggregate of 55pc.

Why must the strategic holders add to their loss-making portfolio? The answers range from as simple as to ‘’average’’ their holding value to as bizarre as accumulating market float surreptitiously through front men to make enormous profits by their complete command on the float when the bear cycle is eventually over.

The SECP has allowed stock investors to take loans for up to six months from financial institutions to buy shares in a bid to boost liquidity in the capital market. In addition to borrowing allowed for meeting redemption requirements, mutual funds have been permitted to borrow from financial institutions for investment purposes for 180 days from the date of notification.

“All such borrowing shall be repaid within the period allowed under the notification,” the regulator had affirmed. There are several other regulatory measures which need a deeper understanding including the resolution of issues with Blank Selling in Deliverable Futures Contract Market andbrokers complying with certain conditions now allowed to pay interest on subordinated loans taken from their directors, sponsors or substantial shareholders.

Published in Dawn, The Business and Finance Weekly, September 9th, 2019