Capital markets play an important role in the development of economies as these mobilize savings and divert them into productive investment. These markets provide a platform for capital formation and pave the way for sustainable economic growth, job creation and poverty reduction. It was in this backdrop that reforming Pakistan’s capital market always remained on top of Pakistan Muslim League Nawaz’s (PML-N) economic agenda and a very important legislation, namely the Securities and Exchange Commission of Pakistan Act, was enacted to set up an independent Commission (SECP) on January 1, 1999, to replace the Corporate Law Authority of Pakistan (CLA) which was an arm of the Finance Ministry, with the primary objective to develop a transparent and sound capital market to be regulated by an autonomous regulator, Securities and Exchange Commission of Pakistan (SECP).
Having successfully overcome economic challenges like imminent sovereign default and macroeconomic instability within first 18 months of forming government in June 2013, the PML-N chalked out a detailed plan to transform Pakistan’s capital market. The roadmap included overhauling of the out-dated laws governing capital markets, integration of three stock exchanges, improved compliance with standards of International Organization of Securities Commissions, launching of a comprehensive investors education programme and inclusion of Pakistan Stock Exchange in Morgan Stanley Capital International Emerging Market Index.
Pakistan’s capital market was regulated under decades old the Securities and Exchange Ordinance 1969. There was a dire need to replace it with a robust, comprehensive and modern legislation which would enable development of the capital market as well as empower its regulator. Therefore, as the first step, the Securities Act 2015 was promulgated on May 13, 2015, replacing a 46 years old legal framework under the Securities and Exchange Ordinance 1969, followed by promulgation of the Futures Market Act 2016 on April 13, 2016 to serve as dedicated legislation for futures market and finally the Securities and Exchange Commission of Pakistan (Amendment) Act 2016 was passed in August 2016. All these legislations were enacted after extensive consultations with the stakeholders and thorough deliberations of the standing committees of both the Houses of the Parliament. These laws exhaustively focused on promoting public confidence in the capital market by timely and adequate disclosures by listed companies, establishing standards of competence and conduct for persons in positions of fiduciary responsibility, stringent penalties for market abuses such as insider-trading and market manipulative practices and enabling framework of centralized customer protection compensation fund for protection of the investors. Furthermore, a very comprehensive educational program for the investors, ‘JamaPunji’, was also launched in June 2015 to equip domestic investors to make informed decisions about their investments in the capital market.
In order to achieve economies of scale, enhance market efficiency, reduce fragmentation and cost of doing business, instil adequate governance and allow firm supervision by the regulator, the Stock Exchanges (Corporatization, Demutualization and Integration) Act 2012 was promulgated which provided for integration of the three stock exchanges (Karachi, Lahore and Islamabad) in Pakistan to enable true competition between the brokers in terms of best price and order execution while improving market outreach and enhancing service delivery to investors across the country. It was hoped that the integration would facilitate to attract strategic investment in the new stock exchange. Since no progress had been made after promulgation of the said law, this scribe felt that without any further waste of time, the trading and listing services across the country must be consolidated at the earliest. Vested interests remained highly active to defeat this progressive objective. Vigorous persuasion through the SECP and numerous meetings on the subject resulted in a Memorandum of Understanding (MOU) on August 25, 2015 among Karachi, Lahore and Islamabad Stock Exchanges for their integration into one single trading platform under the name of ‘Pakistan Stock Exchange Limited’ (PSX) and after extensive stakeholders’ consultation and finalization of operational modalities, the three stock exchanges finally integrated and merged as PSX on January 11, 2016.
To ensure organized development of the capital markets, a process of divestment of PSX’s shares was initiated in the year 2016. The primary objective of the divestment was to enable securities market to emerge as a well governed, financially and technically sound and competitive, that would be geared to become a major regional investment hub and would play its role in the development of Pakistan’s economy. At the same time, it was scribe’s prime concern that standards of transparency and efficiency must be met at all cost. Therefore, the divestment process was carried out under a comprehensive set of framework, involving all stakeholders to invite investors of international repute to invest in PSX and contribute their role in the development of Pakistan’s capital market. In December 2016, forty percent (40 percent) shares of PSX, valuing around $90 million, were divested to a consortium comprising of three leading exchanges in China (Shanghai Stock, Shenzhen Stock and China Futures) and two Pakistani financial institutions, namely Habib Bank Ltd and Pak-China Investment Company Ltd. In June 2017, PSX became first self-listed stock exchange in the South Asian Region after its 20 percent shares were offered to the general public.
International Organization of Securities Commissions (IOSCO) is a global standard setter for securities sector. When PMLN took office in 2013, Pakistan was only 32 percent compliant with the IOSCO’s principles. Vigorous measures were taken to address the shortcomings through a comprehensive time-bound action plan. As a result of hectic efforts, IOSCO enhanced Pakistan’s compliance of its principles to 83% in its review in November 2017. It played a substantial role in boosting the confidence of international investors in Pakistan’s capital market.
These capital market reforms and efforts were critical in enhancing the image of Pakistan’s capital market as a vibrant investment destination and were well received by stakeholders including local, foreign and institutional investors. This was reflected in the KSE100 index which rose from 22,324 in June 2013 to 52,876 in May 2017 and the market capitalisation increased by 100 percent from Rs5.15 trillion to Rs10.30 trillion in the same period. PSX became fifth best in the global stock markets and ranked top in the South Asian markets. Unfortunately, political instability driven by Dawn and Panama dramas in 2016/17 followed by economic meltdown by the current government in the last two years, shook the PSX and resultantly the KSE100 index has lost around 20,000 points with erosion of Rs3.5 trillion from market capitalisation.
Unfortunately, like strange reversal of many “corporate reforms” through Presidential Ordinance on April 30, 2020, and currently working to re-reverse some core changes after scribe’s and public’s criticism, PTI government has already made some undesirable changes in “capital markets reforms,” mentioned below.
The limit on percentage of shareholding in PSX by foreigners, which was capped at 30 percent, has been removed. Presently, Chinese consortium holds 40 percent (30 percent Chinese exchanges and 10 percent Pakistani financial institutions) while remaining 60 percent is held by general public. There is a great risk that as a result of this removal of cap, the control of PSX may go directly or indirectly into wrong hands in future.
The Initial Public Offer rules have been watered down to the detriment of the general public investors and persons with clear conflict of interest have been appointed on policy board of SECP who have compromised on the financial autonomy of SECP by waiving/reducing fees which were chargeable under the law, in the garb of ease of doing business, particularly of the Assets Management Companies (AMCs). The unjustified reduction of regulatory fee has not benefitted the general investors in any manner whatsoever and has been done to appease certain vested interests and lobbies. As a result, not only revenue of SECP has dropped drastically putting it into financial distress but also deprived the federal government of the surplus which under the law used to be transferred to it on annual basis. The motive behind this malicious attempt to financially destabilize SECP requires a thorough probe.
Effort had started to separate core and non-core business of Central Depository Company (CDC) and National Clearing Company Pakistan Ltd (NCCPL), particularly transfer of Capital Gains Tax (CGT) functions to a subsidiary of NCCPL. This has been put on hold.
“Jamapunji” investors education and awareness program is being rolled back on the ground that this not responsibility of the regulator, something against the legal provision of the SECP Act and the international best practice as all securities’ regulators perform such function.
Free float requirement of 25 percent of paid up capital or 5 million shares was introduced for all listed companies after elaborate consultation process to improve quality of listing and bring in liquidity but same has been done away with.
To provide independent investment advice and help expand market outreach, the concept of securities advisors (both individual and in corporate structure) was introduced under Securities Act but it has been modified to exclude individuals which is against international best practice and our need to expand market outreach and bring in new investors.
Pakistan had been downgraded in 2008 from the Morgan Stanley Capital International (MSCI) Emerging Markets Index to Frontier Markets as a result of stock market crisis and inadequate consequential actions. As a result of PML-N government’s capital market and other legislative reforms, macro-economic stability, investment friendly and liberal policies, Pakistan was upgraded again as an Emerging Market (EM) from Frontier Market by MSCI in May 2016. We must make all efforts to retain Pakistan’s EM status in MSCI index as currently we are in a risk zone due to volatility experienced in PSX in the last couple of years.
The author is former finance minister of Pakistan and fellow member of the Institute of Chartered Accountants in England and Wales. He can be reached on Twitter: @MIshaqDar50