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SECP unveils rules to allow non-member act as KSE chief

KARACHI (December 29 2005): The Securities and Exchange Commission of Pakistan (SECP) has announced rules to allow the Karachi Stock Exchange (KSE) to appoint non-member as its chairman aimed at limiting the possibility of conflict of interest.

According to a statement issued on Wednesday, the SECP, in exercise of its powers under Section 34(5) of the Securities and Exchange Ordinance, 1969, has made regulations for the election of a non-member director as the chairman of Karachi and Lahore bourses. The regulations so made by the SECP are deemed to have been made by the stock exchanges and take effect accordingly.

On December 9, 2005, the SECP issued a directive (under Section 34(4) of the Securities and Exchange Ordinance, 1969) to all three stock exchanges requiring them to make the necessary amendments to their regulations or articles of association for this purpose. However, only the Islamabad Stock Exchange (ISE) adopted these amendments.

The SECP had provided another opportunity to Karachi and Lahore stock exchanges to make the appropriate amendments by issuing a further directive under ssection 34(4) on December 16, 2005, asking them to comply within 10 days thereof. After the lapse of the stipulated period, the SECP was constrained to issue the aforesaid directive whereby the regulations made by the SECP are deemed to have been made by the stock exchanges.

The election of a non-member director as the chairman of the Board of the stock exchanges is aimed at limiting the possibility of conflict of interest in the Board of the exchanges and is an important reform measure for the protection of investors.

The conflict of interest created by a member chairman has significantly delayed the implementation of important reform measures recommended by the Commission in the public interest for the protection of investors, strengthening risk management, enhancing transparency and good governance.

An independent non-member chairman is likely to provide the desirable leadership to the Board of the stock exchange in matters relating to the effective execution of all the Board's responsibilities vis-a-vis investors' protection.

The necessity of an independent non-member chairman has also been recommended in a number of expert studies of the capital markets eg the Report of the Expert Committee on Demutualization and Integration (comprising national and international experts) and the Report of the Task Force established by the Commission to 'review the stock market situation of March 2005.'

The measure has already been adopted internationally: numerous stock exchanges around the world have adopted the international best practice of requiring the chairman of the Board of the stock exchange to be an independent non-member director to safeguard the interest of investors.

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