Investment companies, adviser rules to be amended

KARACHI (December 04 2002) : The Adviser to the Prime Minister on Finance and Economic Affairs, Shaukat Aziz, said here on Tuesday that the government would soon amend the Investment Companies and Investment Advisors Rules which may accelerate the floatation of closed-end Funds, and companies should raise funds through stock market to deepen the bourses and investor base.

Shaukat met the management and members of the Karachi Stock Exchange (KSE) and said that over the past two years, the government had taken several bold initiatives to put the economy on track. Both the stock exchanges and the Securities and Exchange Commission of Pakistan (SECP) played a significant role in successfully implementing broad-based market reforms in the fields of management, governance, transparency and investors protection.

Aziz said that over the past few years, the stock exchanges had failed in mobilising capital and had been ineffective in marketing their ability to raise capital for companies. Now that the stock market is doing well, the cost of capital is low and effectively lower than before; interest rates are far lower and National Saving Schemes (NSS) are no longer offering high returns. there is no reason why the stock exchanges should not be able to attract companies to raise money through the stock exchanges.

“Given the current scenario, it seems to me to be a good time for companies to tap capital from the stock exchanges. It is doubtful whether any real effort has been made by the exchanges through genuine listings,” Aziz said.

The stock exchanges must therefore accelerate their marketing efforts and as a result, companies would be encouraged to offer new issues, which would consequently enhance market depth and provide greater variety for investors.

The Advisor said that the government is considering the changes proposed in the Investment Companies and Investment Advisors Rules. These will allow floatation of closed-end Funds in trust form.

The Investment Advisors Rules and Asset Management have been made a part of the proposed 'Non-Banking Financial Companies Rules”. Several new players have recently emerged in this field and the development of the mutual funds industry in Pakistan will undoubtedly have a favourable effect on the investment climate of the country and will further deepen the capital market by serving as an effective vehicle for mobilising and channelling savings towards productive sectors.

The stock exchanges have successfully implemented a comprehensive reform agenda addressing risk management issues of the stock market. It is incumbent upon the stock exchanges to continuously review and improve their risk management measures in line with international best practices.

Aziz said that banks should be encouraged and main thrust of the exchanges should be to convince these institutions that 'they can make money through putting their money in the badla financing'.

“I am happy that the stock exchanges are working on a roadmap for the gradual phasing out of badla/COT (carry over trade) and its eventual replacement with margin financing and the futures market, in line with international best practices. This will eliminate the systemic risk inherent in the badla system and is being actively addressed by a committee set-up under the capital market consultative group.

''I would like to assure you that the government fully supports this endeavour and will do its utmost in ensuring the full co-operation by banks and other financial institutions to achieve this end,” Aziz said.

In order to encourage the development of the futures market, efforts should be made to rationalise margins in a pragmatic manner so that the margin requirements for COT are identical to that for the futures market.

It must be emphasised that the stock exchange, being the front line regulators, must perform their regulatory role with greater focus and vigilance. It has often been observed that the SECP has had to step in with regulatory interventions which should have in fact been dealt with by the stock exchanges, particularly in cases relating to investor complaints, enforcement and insider trading.

For these significant reforms to take full effect, the stock exchanges must ensure that all risk management measures are in place and that there is no threat posed to clearing and settlement of trades. This will boost investor confidence as well as provide stimulus to the capital market.

Aziz said that the exchanges are maintaining their advances, but a healthy and vibrant capital market is a continuous and often challenging task. The bourses reforms in the fields of risk management, government and transparency have proved successful in creating a level playing field for all stakeholders.

Aziz pointed out that the market is vibrant at present; it has been characterised by a thin investor base, which is dominated by institutions and big market players while the presence of the small, retail investors is glaringly absent.

One of the main reasons for this narrow investor base is the lack of infrastructure facilities to cater to small investors.

Trading activity is concentrated in three cities–Karachi, Lahore and Islamabad. It is heartening that most of the trading takes place in Karachi.

''It is the job of the brokers to attract investors and to have offices in different cities/locations. Unfortunately, most of our brokers have their offices in the premises of the Exchanges and are not in a position to cater the vast majority of the retail investors,” Aziz said.

Internationally, there has been integration of stock exchanges, and stock markets world-wide are becoming geographically neutral. As a result of automation and the setting up of Electronic Communication Network (ECNs) and Automated Trading Systems (ATS), investors now have 24-hour trading facilities at their disposal. The market here is automated; online trading and ECNs (Electronic Communication Networks) have yet to emerge.

The stock exchanges must therefore encourage internet trading such as AKD Securities recent initiative of providing an electronic on-line trading platform for investors. These initiatives will go a long way in attracting and promoting much-needed retail investment in the stock market and will provide retail investors with an opportunity to participate in the economic development of the country.

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