It was in the winter of 2016 that 40 per cent strategic shares in the Pakistan Stock Exchange (PSX) were sold to a Chinese consortium comprising three exchanges — China Financial Futures Exchange Company Ltd (lead bidder), Shanghai Stock Exchange and Shenzhen Stock Exchange — at Rs28 per share. They were sold a total of 320 million shares at Rs8.96bn.

In a grand ceremony with all the fanfare, the then finance minister, Ishaq Dar, had declared that the foreign ‘anchor’ investors would bring in investment, experience, technological assistance and new products like options and futures. There was also talk of cross-border listings of securities.

Ask an ordinary investor in the market and they would lament that all their expectations have turned into a sordid dream. Four years later, four directors of the foreign consortium continue to be on the board, though their presence is scarcely felt outside the boardroom.

Even when the price of the PSX stock crashed close to the par value of Rs10 and wiped off over Rs5 billion of Chinese investment, there was not a whimper from the strategic shareholders. For many, it was surprising. But a major market participant said the reason that the Chinese stakeholders do not fret over the loss is that they have acquired strategic shares with a vision for 20 years. “They are not fixated on the daily change in stock prices,” he said.

The Securities and Exchange Commission of Pakistan (SECP) allowed an increase in the limit on foreign persons or institutions holding PXS shares. It raised the limit from 10pc applicable under the Stock Exchange (Corporatisation, Demutualisation and Integration) Regulations 2012 to 20pc of share capital. The regulations contained a provision that allowed the anchor investors to raise their equity stake to 51pc after three years of the first offer.

Even when the PSX stock crashed close to Rs10 a share and wiped off over Rs5bn of Chinese investment, there was not a whimper from the strategic shareholders

A Chinese director does not hold either of the two important posts of chairman or CEO. After the induction of the foreign director, the CEO was appointed on the Chinese recommendation as a condition of the deal. Richard Morin, a Canadian national, took office as the first foreign CEO of the PSX on Jan 11, 2018. A year and a half later, Mr Morin was chased away in May 2020 on the alleged breach of employment contract. He was working simultaneously with the PSX and Archer Wealth Management, a Montreal-based financial advisory firm.

He was, somewhat rightly, blamed for being a lousy performer for he did nothing to launch new products or bring in investments and technological advancements. Before setting off for his homeland, however, Mr Morin blamed what he called the ‘legacy of brokers’ having a powerful ally at the SECP that controlled the market.

But Shehzad Chamdia, a shareholder director of the PSX and former chairman of the Divestment Committee that spearheaded the transaction of the sale of shares to Chinese investors, says it was never meant to be a ‘takeover’ deal; it was “economic cooperation between Pakistan and China”.

He said the sitting managing director was also nominated by the Chinese investors as provided in the contract. The foreigners have the right to nominate persons for three offices: CEO, CFO and chief regulatory officer (CRO), which may be approved by the board of directors and endorsed by the SECP.

“The role of the Chinese directors is limited to the percentage holding in equity though they do participate in the meetings and provide assistance to the board and management where needed. That is of value since the Shanghai Stock Exchange has now emerged as the biggest stock exchange in the world after Wall Street,” he said.

Mr Chamdia said initiatives for new products, investment and technological assistance have to be taken by the bourse’s management. He said the PSX was in the throes of securing a giant new IT project worth $4 million from the Shenzhen Stock Exchange.

The last annual report of the exchange (2018-19) lists 16 directors, including four Chinese consortium nominees: Zhiping Rong, Que Bo, You Hang (alternate director for Zhiping Rong and Yu Huali. A few or all of them may have changed since the release of the report. But for an ordinary investor in the stock market, it is all the same. The chairman’s review provides insight into the upcoming products and services. It is stated that the Exchange Traded Funds (ETF) along with mutual funds are well suited for “unsophisticated” investors looking for long-term capital growth. ETFs combined with advice are by far the fastest-growing investment solution worldwide. “The launch of ETFs would open the possibility of new retail investment model in Pakistan and contribute to the penetration of the middle-class market.”

The report maintains the PSX is in the process of procuring a trading and surveillance platform to support index and stock options. In addition to equity ETFs, the PSX is actively working with market participants to launch bond/fixed income ETFs.

To broaden the investor base, the PSX also plans to set up a mutual fund platform in collaboration with NCCPL, CDC and MUFAP. The deliverable futures market is being revamped and a number of changes have been proposed to bring the product on a par with international standards. Work on the revival of cash-settled futures has also been initiated and in this respect the market-making activity is being looked into.

The PSX has also initiated a project to provide liquidity in the secondary fixed income market. The trading of various fixed income securities such as PIBs, sukuk and treasury bills will also be introduced on the PSX platform. In relevance to this, major improvements are being made in the existing functionalities of the Bond Automated Trading System (BATS) apart from creating linkages to the assigned market maker’s treasury system and the Central Depository System. The project was in the testing phase and is expected to be launched by the end of the year.

Published in Dawn, The Business and Finance Weekly, September 14th, 2020