There is good news and there is bad news. First the good news. The State Bank of Pakistan (SBP) affirms that the opening of investor accounts under the Roshan Digital Accounts from mainly the Non-Resident Pakistanis (NRPs) has been very satisfying. The NRPs accounts have grown by around 70 per cent from just under 10,000 in 2020 to over 18,000.

It has as much to do with the confidence in the Pakistan stock exchange (PSX) which has devised with the SBP a one-step simple procedure earmarked for the opening of accounts. Yet the market has attracted just 0.2pc of overseas Pakistanis to invest in the country’s equity market.

Market participants say that the ease in the opening of accounts is not enough; faith needs to be created in the hearts of NRPs who hold billions of dollars outside the country, to invest in the local market. Confidence in regard to the safety of investment and comparably higher returns can result in heavier inflows. The time seems to be just right. Already in 2020-21, companies were able to mobilise record Rs56 billion through public offerings and Rs45bn through the right issues; both the number of offers and the amount raised was reported to be the highest in five years.

The National Clearing Company of Pakistan (NCCPL) had disclosed that on April 30, 2021, active Unique Identification Numbers (UINs) — allotted to each investor stood at 252,322 — and increased to 2,56,954 UIN by the end of June. These included, until April, individuals accounts at 232,799, corporate company accounts at 1,722, others at 1,436, foreign individuals 12,356 and accounts opened through the Roshan Digital Accounts 3,778.

‘Extreme volatility, too much documentation and fear of becoming a qualified money launderer or an accomplice to terror financing are the reasons that are forcing investors to flee’

But all this is insignificant when compared with regional juniors such as Bangladesh. In November 2020, as many as 150,000 new accounts were opened at the Dhaka Stock Exchange. An initial public offering of the telecom company, Robi Axiata Limited received a total of 1.3 million applications for shares.

Most veterans at the market and those with knowledge of the affairs at the PSX over the years admit that there must be something immensely wrong that the growth has been so stunted over 70 years. To make matters worse, nearly 2,000 accounts with brokerages are being closed every month.

Sani-e-Mehmood Khan, the CEO of Securities Exchange Management Suite says: “extreme volatility, too much documentation and fear of becoming a qualified money launderer or an accomplice to terror financing are the reasons that are forcing investors to flee”.

A major participant believed that there were two main reasons for the investor to close down their accounts. He said, first of all, a person wishing to open or maintain a brokerage account has to read, sign and understand heaps of papers and documents. Uncomfortable questions such as the source of income to sniff money trail, akin to suspecting money laundering, and scrutiny of minute details has to be done by the broker to fulfil his responsibility of know-your-client — KYC. The bewildered prospective investor meanwhile decides that he would be much safe outside the market.

Secondly, he said that the investor has to pay charges of Rs400 to Rs600 on his account to the Central Depository Company Limited (CDC) and the National Clearing Company Limited (NCCL) as a token payment for services they provide to the investor. However, this market man observed that where the accounts are inactive and no transactions have taken place, the investor is loath to pay any charges and after reminders, the broker has no option but to suspend/close the account for he was not likely to pay the CDC/NCCPL fees and charges from his own pocket.

Mr Khan stated: “There are regular stern warnings day in and day out that spook the investors of National Accountability Bureau (NAB) setting up Anti-Money Laundering/Combating the Financing of Terrorism wing (AML/CFT) and Federal Investigative Agency/NAB cells working overtime to check financial frauds and illegal transfer of money”. He said that besides these notices, one or two pages are handed over as KYC documents or notice for suspension of account as the CNIC expiry date of the investor is near at hand.

“When such petty issues can be resolved through automatic connect facility, why can not a bank seek the updated CNIC data from the National Database & Registration Authority instead of harassing an investor,” he said mirroring the general investor sentiments.

The Securities and Exchange Commission of Pakistan takes pride in announcing the increase in the number of registered companies (corporatisation) and provides fresh figures every month. In June the regulator said it had registered 2,504 new companies, taking the total registered companies to 145,913. But with only 513 listed companies and with a full-time Securities Market Division, the regulator needs to ponder on ways to increase the number of listed companies as well.

A major market strategist believes that the framing of AML/CFT regulations has been imposed without proper thought. “For example, the SRO 921 (1)/2020 on Anti Money Laundering and Counter Financing of Terrorism uses a term PEP (Politically Exposed Person) more than 20 times and takes the liberty to include anybody and everybody under its definition by stating that ‘an individual who is reasonably known to be closely connected with the PEP for any other reason, including social or personal is under the glare’.

As a solution, this strategist recommends that the Policy Board of the SECP must look into the Volatility Centric Products of the Capital Market Products. Finally, it has to be realised that already tiny in number, if the UIN holders continue to quit the market, only a few thousand participants would remain in control of the market with a capitalisation of Rs8 trillion.

Published in Dawn, The Business and Finance Weekly, July 26th, 2021