Stocks trading: SECP chairman suggests margin financing facility

KARACHI (February 05 2003) : Khalid A Mirza, Chairman, Securities and Exchange Commission of Pakistan (SECP), has said that the regulatory measures carried out by the SECP have received international acclaim “as we have very nearly fully complied with the 30 principles and securities regulations that constitute the International Standard adopted by the Financial Stability Forum”.

He was speaking on the subject of 'Capital Market and Corporate Sector Regulatory Reforms' as chief guest at a largely attended 21st Century Business Club dinner here on Monday night.

He said that effectiveness of the regulatory system was evident from the fact that Pakistan's stock market had been termed as one of the best performing markets in the world.

The SECP chief said, “I recently addressed some of the remaining governance issues at the stock exchanges so that in this respect, at least, our market is second to none and investor confidence gets the necessary boost.

I am glad to note that my sincere intentions were recognised by a large section of the brokerage community, the silent majority empathised with this effort, and the opposition from a few entrenched interests was not as strong as on previous occasions.”

Mirza said that now the Commission is focusing on its development role. “Clearly, there are some specific matters that need to be dealt with soon, and there are also broader questions which may need to remain on the agenda and be progressed over a considerably longer period of time.”

He said, “If I may say so, as a matter of historical precedent, from a fundamental standpoint, the three 'drivers' of capital market development, which constitute the drip-feed into the market, have been venture capital, securitisation, and corporate debt securities, in particular, convertible debt.

In Pakistan, all three areas have been mired with problems, essentially relating to tax and Islamisation, I am glad to note that progress has been made with respect to two of these drivers, viz securitisation and corporate debt securities, as a result of satisfactory resolution of tax issues and some softening with respect to Islamisation.

However, venture capital remains a problem, since the tax aspect has not been appropriately addressed so far, and the sooner the tax authorities take care of it, the better it would be for the economy and the capital market.”

At an operational level, Mirza said, modern markets are a function of technology and a sound system of credit delivery for market participants. “While our market is automated, online trading and ECNs (Electronic Communication Networks) have yet to emerge.

This will, of course, be facilitated when the Electronic Transactions Ordinance, 2002, gets fully enforced and digital signatures get legal cover.

“As regards availability of credit for transactions in shares is concerned, I feel It is very important that margin financing be made available to market players by banks and through other channels.

It would be ideal if margin financing, together with the futures market, were to essentially replace Badla, which carries systemic risks. With the help of a Committee set up under the Capital Markets Consultative Group we have announced a phased programme for progressive replacement of Badla by margin financing and futures contracts,” he said.

Mirza further said that at a structural level, the stock exchanges would have to demutualise, in line with international trends.

“This should effectively sort out governance issues, some of which were addressed in our recent directive to the stock exchanges regarding their board compositions. Demutualisation will also enable stock exchanges to develop their business without any consideration to conflicting member interests.

In order to provide the capital market institutional underpinning, we need to develop, and strengthen, mutual funds, pension funds, and the insurance industry. So far as mutual funds are concerned, we have basically proposed changes in rules that will upgrade the regulatory framework for fund management.”

Expressing his views on the state of insurance industry, Mirza said that insurance presents a much more intractable problem since the legal framework governing insurance is really defective.

“While in some respects the Insurance Ordinance 2000, is a marked improvement over the Act of 1938, the essential regulatory scheme embedded in the law is fragmented, dissipated, and ineffectual. Instead of suitably empowering the regulatory authority to effectively enforce compliance with the law, it actually serves to cripple the regulatory authority, rendering it incapable of carrying out its regulatory duties.

To make matters worse, even under this addled law, the rules except those pertaining to the Ministry of Commerce's raft of responsibilities which were drafted by the Securities Commission as early as in December 2000, were not notified till December 2002, and we were operating in a vacuum for two years.”

He said: “Another law that needs major revamping is the recently enacted 'Take-over Law'.

The law does very little to ensure that all shareholders get fair treatment and benefit rateably from the built-in price premium whenever a 'take-over' or 'substantial acquisition' bid is mounted. It also does not make any provision for a mandatory offer to all shareholders after a certain trigger point of control is crossed or for a mandatory sale to the acquirer after an overwhelming ownership percentage has been acquired.

And, the biggest problem of the law is that it prevents the subject take-overs from being regulated under the listing rules, which is how take-overs should be regulated in the first place take-overs need a flexible regulatory regime that can be amended or adjusted, from time to time, in response to evolving commercial realities.”

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