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Competition Commission asks SECP to withdraw Circular on Valuation of Securities by Mutual Funds

ISLAMABAD (January 03 2009): The Competition Commission of Pakistan (CCP) has asked the Securities and Exchange Commission of Pakistan (SECP) to withdraw a circular pertaining to valuation of debt securities by mutual funds.

It is learnt here on Friday that the CCP has issued a policy advice to the SECP to withdraw circular 26/2008 of November 5, 2008.

The circular seemed to be against the competition laws. As SECP is the major corporate regulator, the CCP cannot direct the SECP, but, it can issue an advice relating to competition violations and promotion of competition norms through advocacy. If someone acts against competition, it is CCP obligation to promptly take action under the competition law.

Sources said that it is not for the first time that the CCP has issued a policy advice to the government department or regulators. The CCP had issued policy advice to the Ministry of Industries regarding fixation of cement prices by the cement manufacturers. The CCP had also asked the Ministry of Finance on sugar related issues.

The CCP has seriously examined the issue on complaints received from certain Karachi-based companies and taken up the matter with the SECP for withdrawal of the circular. The CCP has analysed the circular 26/2008 wherein SECP has directed all asset management companies to value debt securities held by the collective investment schemes (mutual funds), after applying the percentage discount rates specified by SECP.

The CCP was of the view that when the mutual funds value the assets, it is not being done on the basis of market price value. However, they would simply give discount factor from whatever is the face value of the debt security. The market value of securities is not being taken, but it is being determined on the basis of discount factor.

Resultantly, price at which mutual funds are either sold or redeemed, are based on some thing like artificial rather than actual market value. Instead of disclosure based regulation, this is merit based regulation which is now no longer applicable globally, sources opined.

Sources said that the CCP has been approached by various stakeholders who feel aggrieved by the action taken by SECP. They have complained that they have incurred heavy losses as a result of this circular and faced difficulties in redeeming their securities.

Stakeholders have also complained that SECP has acted beyond the powers given to it under the Companies Ordinance 1984, the Securities and Exchange Ordinance 1969, the Securities and Exchange Commission of Pakistan Act, 1997 (or any other law) and that, in exceeding its powers, it has violated the law, CCP stated.

It is not for the Competition Commission to delve into the questions raised above. As to whether or not SECP is empowered under any law to issue such a directive is for SECP to consider and take an appropriate decision.

Sources said that the CCP has been established inter alia to provide for free competition in all spheres of commercial and economic activity to enhance economic efficiency and to protect consumers from anti competitive behaviour.

Its duties include but are not limited to investigating into the conduct of undertakings and to penalise competition offenders and to promote competition norms through advocacy and persuade all economic agents, government agencies and regulators to act in accordance with the Competition Ordinance 2007.

According to the policy note issued by the CCP to the SECP, circular appears to be in contravention of Chapter-II of the Competition Ordinance, 2007. It is obvious that by specifying the exact percentage of discount rates whereby debt securities are to be valued by mutual funds the Circular has substantively fixed the prices which money market mutual fund certificates are sold and redeemed.

The Circular is adverse to competition. Markets function in a better way, if competition prevails and prices are determined by market forces of demand and supply. By dictating the arbitrary valuation of underlying debt securities, SECP has distorted the operation of the market and adversely affected the process of price discovery of mutual fund certificates.

CCoP opined that no securities regulatory agency has arrogated to itself the right to dictate the basis on which the price of debt securities is to be determined or intervened in price discovery in this manner, as has been done by SECP, through this circular, CCP policy stated. Keeping in view the above, it is strongly recommended that the circular may please be withdrawn by the SECP, CCP policy advice added.

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