ISLAMABAD, Aug 8: The Asian Development Bank (ADB) has linked the release of $400 million loan for the Pakistan’s second generation market reforms to institutional independence and capacity-building of the Securities and Exchange Commission of Pakistan (SECP), changes in some of its laws and the commission’s conversion into the Financial Services Commission of Pakistan (FSCP).

The bank has asked the government to draft and submit to the parliament a law codifying the FSCP. This law would establish FSCP based on SECP and strengthen its enforcement powers by enhancing its independence, governance and accountability.

The law should be a framework law that incorporates by reference to sector-specific laws such as those governing securities markets and intermediaries, insurance, private pension funds, and non-banking financial companies. The FSCP will have the powers to administer these laws.

Under the ADB conditions, the government will have to continue with the exemption from capital gains tax on income earned from individual investment in shares to facilitate long-term capital formation. However, a turnover tax on such investment will be introduced to reduce the high volume of speculative short-term investment by individuals.

The second generation reforms also seek the FSCP to be in charge of regulation and supervision of non-banking financial institutions (NBFIs) by clearly codifying its powers, functions, governance and accountability in line with international best practices.

In recent years, financial sector regulatory bodies have been granted greater independence in many countries to ensure that they can professionally perform their statutory functions in the public interest and be largely free from political interference. “An agency responsible for regulation and supervision of NBFIs and markets should, in general, have authority and capacity comparable to that of the agency in charge of banking and for similar reasons,” the board of directors of ADB said in its recommendations for the release of the loan.

The SECP has to introduce competitive remuneration for senior officers to fill all existing vacant positions. The commission has been asked to designate specific positions for commissioners responsible for law, accounting and auditing given the importance of these areas for effective financial sector regulation and supervision.

Another commissioner should be charged with assessing the economic impact of regulatory initiatives.

By June 2009, FSCP will undertake a self-assessment of compliance with international best practices in the regulation and supervision of securities markets and private pension funds.

“This assessment could provide the basis for formulating another round of policy reforms to address remaining weaknesses, if any,” the bank said.

The government will have to address tax policies that impede the formation of holding companies. This is likely to encourage the establishment of holding companies, including financial institutions to facilitate sound risk management practices and supervision.

The FSCP will adopt regulations on the reporting requirements of holding companies that own or control NBFIs. The reporting should comprise ownership structure and relationship of companies within the holding company group, disclosure of inter-company and related party transactions and public disclosure of audited financial reports in accordance with international accounting standards.

To facilitate investor protection and capital formation, ADB seeks replacement of the Securities Ordinance of 1969 with a new substantive law that provides a legal framework for modern securities markets. The FSCP has to be mandated with adequate legal powers and responsibilities for the regulation and supervision of the securities markets and intermediaries, private placements, public offers of listed and unlisted securities, corporate governance practices and related matters in line with international best practices.

For this, the government will have to grant FSCP the power to approve or disapprove audit firms authorised to audit NBFCs, listed companies and publicly tradable companies. This will strengthen SECP’s (FSCP) capability to ensure quality and consistency in the financial information available to investors and the regulator.

The FSCP is to enhance market transparency and best execution of customer orders by requiring the stock exchanges to establish an inter-market surveillance committee. The committee would meet regularly to coordinate stock market surveillance and oversight of securities that are traded on more than one stock exchange.

The ADB also seeks the stock exchanges to prepare plans for self-regulation for SECP (FSCP) approval. These plans would identify the functions to be performed by the exchanges in their capacity as self-regulatory organisations under the Securities Law and clearly define sub-plans for areas such as listed companies, market surveillance and on-and-off-site inspections of professional market participants.

These sub-plans should lead to the adherence to sound business practices and applicable laws and regulations including financial responsibility requirements and quality of execution of trade on behalf of customers.

The government is to clarify SECP’s legal mandate for its powers, functions and responsibilities over NBFCs and services.

As an intermediate solution, amendments will be made in the Company Ordinance to empower SECP to regulate mutual funds and strengthen SECP’s powers to establish prudential requirements for NBFCs, the ADB demands.