KARACHI, Jan 26: When the idea of demutualisation of stock exchanges in Pakistan was first floated as far back as in December 2002, the stockbrokers instantly went up in arms. The all-pervading thought was: “The apex regulator (then the flamboyant Khalid Mirza, who now heads the Competition Commission) wants to strip us of our powers over the bourses”.

The sticking point was perhaps the valuations. The KSE broker’s membership card costs Rs120 million or more; four years ago it would change hands at Rs35 million. In comparison, the price of members’ card in Lahore and Islamabad are all but peanuts.

But over the time, things have changed. Assisted by the (more) educated new generation, the members are now well-informed and greatly enlightened. A senior stock broker, who could be remembered as a vociferous opponent of demutualisation, has changed his views.

“Why should we be against demutualisation”, says he and adds: “When that happens, we would be both brokers as well as owners at the stock exchanges”. The members have started to count blessings that would shower over them (and investors) as the process comes to conclusion.

Several dates for completion of demutualisation (March 31, 2004; August 12, 2005 and lately December 31, 2007) came and went without an abundantly visibly progress on that front.

In his budget speech in June last year, Mr Omar Ayub Khan, the then minister of state for finance, uttered the word ‘demutualisation’ and said: “In order to bring our capital market up to international standards the demutualisation of stock exchange is being implemented. Under this, assets of stock exchange transferred to demutualised exchanges will be given special tax treatment”.

The Asian Development Bank (ADB), which finances capital market reforms, had earlier urged other countries such as India and Philippines to accelerate economic reforms. The ADB did the same to Pakistan last month.

Since money matters, the government has come quickly out of hibernation. The caretaker cabinet, on January 22 approved the draft of Stock Exchanges (Corporatisation, Demutualisation and Integration) Ordinance, 2007. The Ordinance is expected to be signed by the President Musharraf in the next 10 days.If the regulators were going slow on the reforms front it was not so much out of lethargy as the lack of personnel. But ‘demutualisation’ is now the buzz word.

The Karachi Stock Exchange on Friday stated that the approval of the draft of Demutualisation Ordinance was a significant milestone for the country’s three stock exchanges, in particular, for the KSE being the largest with 652 listed companies and market capital of Rs4,234 billion.

BENEFITS: Demutualisation refers to the transformation of the KSE from a not-for-profit concern limited by guarantee (i.e. owned by 200 members) to a shareholder owned for-profit entity where members, investors and the general public would be able to buy and sell shares of the bourse.

The Demutualisation Ordinance stipulates that 40pc of the shares would be retained by existing members, 20pc issued to the general public through an IPO and the remaining 40pc would be sold to a set of strategic international investors (such as global stock exchanges and/or financial institutions).

“There are a number of benefits of demutualisation and corporatisation,” stated the KSE.

First, demutualisation allows the exchange to partner with a strategic international investor who is recognised as a market leader in offering a fair, transparent and efficient securities market. That would allow the exchange to benefit from a transfer of technology and products that were yet to be introduced in Pakistan’s “nascent” capital markets.

Second, the involvement of a global strategic investor would help raise credibility to the Pakistani capital market thereby facilitating the entrance of new participants into the market.

Third, advanced technology, access to improved training, funds and staff would allow the KSE to be more competitive in the financial services market by introducing innovative new products and services that already are in existence in the developed markets – where the strategic investor would be based.

The fourth blessing of demutualisation being facilitation of certain market activities, such as mergers and acquisitions. The KSE itself may be acquired or be involved in foreign acquisitions in order to diversify its revenues.

Fifth, by demutualising and converting to a listed company, an ethical dilemma no longer would exist whereby the brokers are also owners of the exchange and responsible for approving regulations that govern their trading.

A demutualised exchange would ensure that the exchange would not work in the interest of members only, but for all market participants and remove any doubts amongst critics. Sixth, allowing the exchange to demutualise would enable the exchange to raise capital that would allow the exchange to expand and improve its operations.

Its conversion from a not-for-profit concern to a for-profit concern creates an incentive for the exchange to employ more cost-effective and efficient ways to operate. Seventh, a public exchange would increase transparency and improve the image of the exchange thereby becoming a magnet for experienced and well qualified professionals to monitor and regulate the market.

There are approximately 20 demutualised exchanges in the world representing advanced capital markets. Karachi Stock Exchange would hopefully be the 21st to operate in a demutualised structure: “An achievement that the entire country can take pride in”, stated the KSE.