Last week, the Securities and Exchange Commission of Pakistan (SECP) puffed out its chest and declared that it registered 1,187 new companies in August, taking the aggregate number of registered companies to 104,030.

Compare that with an abysmally small number of companies — 558 to be precise — that have offered shares to the public for trading. In a country of 207 million people, the number of stock investors is just about 236,000, including high-net-worth individuals. By all means, that is pathetic.

Compare with that the number of equity investors in neighbouring Iran or China that have 40m and over 100m people investing in stocks. In Turkey, every person who opens a bank account is automatically linked to the equity market.

The perception exists that stockbrokers are still ruling the roost

Contrary to the claims by apex and front-line regulators over the years, no serious effort seems to have been made to attract larger public participation in stock trading. The bourse must have spent plentifully in oft-initiated drives under its ‘nationwide investor education programme’.

The bourse has frequently held ‘Investor Awareness Seminars’ in big cities, like Karachi, Lahore, Hyderabad and Faisalabad, as well as rural areas and small cities like Badin and Mithi. Besides the two major regulators, the Central Depository Company of Pakistan (CDC), National Clearing Company of Pakistan (NCCPL) and Pakistan Mercantile Exchange (PMEX), leading brokerage houses and asset management companies (AMCs) have also been supporting and sponsoring similar awareness campaigns. But for all that blood, sweat and tears, why has the number of stock investors failed to swell?

SECP Chairman Aamir Khan says institutional investors, mainly mutual funds, have been provided with various incentives. The issues impeding their growth have been addressed, he said, adding that professional portfolio managers can attract new investors to equity investment.

He highlighted the need to grow the outreach through proper education and distribution channels. Mr Khan believes that the old model of customer sales ought to be replaced by technology to attract the young generation of investors that forms the larger part of the population.

But on the trading floor, an ordinary investor’s perception that brokers are still ruling the roost persists even after the separation between ownership and management of the stock exchange following its demutualisation and the induction of a Chinese consortium that holds 40 per cent shares in the Pakistan Stock Exchange (PSX).

It did create a bit of commotion when the Chinese-nominated chief executive of the PSX levelled allegations against ‘legacy brokers’. Before he flew back to Canada, now ousted Richard Morin claimed in a newspaper article that the legacy brokers had long held a stranglehold on the market, had a powerful ally at the SECP and effectively controlled the PSX board. He also referred to “a single broker who now calls the shots from his living room”. That was a while back, and the top jobs at the SECP and the PSX have undergone a change.

Many smaller market players grumble that a handful of big brokers who command nearly 90pc of the day’s trade have no inclination to expand the investor base. On the face of it, this assertion does not seem to make sense because any increase in the number of investors would invariably improve the volumes and brokers’ income.

SECP Policy Board Chairman Khalid Mirza told Dawn that the market could not be developed without competition. “As long as there remains a single stock exchange in Pakistan, there will be no development in the capital market,” he said, adding that most countries developed several markets in order to avoid the exploitation of investors.

He referred to Dalal Street where the performance of the Bombay Stock Exchange improved vastly after it faced competition from the National Stock Exchange. Mr Mirza said things were going the other way in Pakistan. He alleged that the erstwhile Karachi Stock Exchange had deliberately got the other two exchanges in Lahore and Islamabad de-licensed to create a monopoly. “A few brokers make money — both when the market is going down as well as up,” he said.

He affirmed that the policy board had dismantled the old, useless structure and rules were being simplified and made less onerous. Secondly, he said the cost of doing business was being reduced. To encourage the growth of the mutual fund industry, which has the propensity to attract investors, the board had suggested a host of incentives and removal of roadblocks.

A former director of the PSX conceded that the mutual fund industry with its scintillating growth in the past 15 years had come to dictate the direction of the market while diluting the foreign investors’ influence.

But it would be unfair to say the entire broker fraternity is raking in riches. An old-timer said that nearly half of the 400 stockbrokers who operated at the time of the exchange’s demutualisation had now surrendered their Trading Right Entitlement Certificates (TREC). They closed down their businesses as their incomes continuously dwindled over the three-year stock meltdown.

A lot that needs to be done to create confidence among investors goes beyond the presentation of returns over the 15-year period. Investors need to be protected from any wrongdoing by market participants. They deserve a voice at annual general meetings, a seat on the PSX board and reduction in transaction fees and taxes.

Under a statutory requirement, investors should receive a note of caution from brokers and mutual funds when they see trouble ahead. Investors should also be provided with an easier and well-regulated means of leverage financing and a larger float from new issues, including the privatisation of government-owned companies through the market.

Published in Dawn, The Business and Finance Weekly, September 16th, 2019