Integration of capital markets in South Asia

The theme of is "Integration of Capital Markets in South Asia", an issue of great concern for the financial sector of the region.
Some of the issues that I'll be addressing today are:
-- Why we should integrate?
-- How should we integrate?
-- And what are the pre-requisites for effective integration?
Mindful of the present forum, I'd also like to take the opportunity to point out the role that the accountancy profession can play in this.
However, before considering these issues in detail let us look at the economic landscape today to determine the factual position in this regard.
THE PRESENT LANDSCAPE: Today, the unbridled forces of competition, technology, and globalisation have converged to spur greater innovation, unleash new discoveries, and rekindle the belief that our potential is without confines.
Every day we are seeing new ideas, new inventions, and new imperatives that are dramatically reshaping our world.
The move to decimals, increasing domestic interest in foreign investments, and the proliferation of on-line trading all establish an undeniable inevitability - the convergence of regional securities markets into a global financial center.
Countries once shut out from the sunlight of opportunity - from the free flow of capital, goods, and services - now bask in the illumination of grand possibilities.
Through rapid technological advancements, the notion of geography as a barrier has been all but archived.
Across the globe, a broad movement towards an equity culture has taken root as traditional bank financing takes a back seat to the emergence of globally interconnected capital markets.
Capital seekers around the world are looking beyond their home country's borders for financial resources.
Under the circumstances, what should countries in South Asia do with the approaching globalisation, which appears to be inevitable for all countries of the world?
In the face of increasing interdependence among nations on account of globalisation, capital markets in South Asia can no longer afford to remain insulated from each other or from the rest of the world.
The state of development of capital markets in South Asian countries is an area of concern.
Most of the economies have a long way to go towards the development and modernisation of capital markets and institutions.
Countries in South Asia today are at different stages of integration with the global economy as regards trade, investment and finance.
The capital markets have yet to align themselves with the banking sector for holistic development of the financial sector in this region.
Therefore, an effective strategy needs to be designed to achieve the desired integration. For seeking capital market integration, synergies would, therefore, have to be developed with not only the banking sector but with trade and investment sectors as well.
South Asia must consider the trade-off between the risks and opportunities offered by globalisation, which would clearly result in deepening mutual co-operation between developing countries and focus them on economic partnerships.
The new forms of competition that have emerged through globalisation call for regional harmonisation at the macroeconomic level.
Capital market integration has to be viewed as part of a larger process of regional economic adjustment, which is going on in all parts of the world in response to the challenges posed by globalisation.
Stock market capitalisation of the South Asian Region was $144,085 million in 2002 compared to $702,049 million for the East Asia and Pacific Region.
As you know, the status of markets is disparate in different jurisdictions. Therefore, we have to, at the very outset, recognise the enormous challenge that lies ahead.
The vision, and perhaps even the will, may be there but practical problems on account of dissimilarities would have to be surmounted by carefully choosing the right modality.
Hence, the strategy of realising the vision and achieving the goal of integration has to be worked out with a lot of empathy and understanding.
This would, of course, depend on the development of a common understanding and appreciation of the different interests of all parties.
WHY INTEGRATE? Integration is necessary to meet the challenge of globalisation. Global economic integration facilitates the importation of capital and intermediate goods that may not be available in a country's home market at comparable cost.
Similarly, global markets improve the efficient allocation of resources. In addition, countries gain better access to financing, and the suppliers of capital - institutional investors and/or individual savers - receive better returns on their investments.
World-wide integration also allows for the rapid transfer of ideas and technology, which are critical ingredients of today's knowledge-based economies.
Hence, regional integration would provide significant advantages in the form of: (i) lower prices for financial services; (ii) a more efficient, liquid and broader securities market; (iii) innovative financial products and services; (iv) industrial transformation of markets; (v) cheaper corporate financing; (vi) more efficient allocation of capital; and (vii) enhanced risk return frontiers.
Various measures like cross-ownership of markets, mergers and acquisitions, alliances and partnerships between exchanges, co-operation between regulators, and demutalization of exchanges are all considered part of the globalisation strategy.
These measures are more important for emerging capital markets, as they must identify strategies to not only survive but also compete in the global marketplace and ultimately contribute to the economic development of the country and the region.
Integration at the regional level would also lead to more effective representation in international standard setting bodies like the International Organisation of Securities Commissions (IOSCO) and the International Federation of Accountants (IFAC).
This would preclude the imposition of standards, eg the provisions of the IFAC Code of ethics pertaining to the rotation of partners - which are not implementable in the context of developing countries where there are few firms with a limited number of partners.
Financial markets are swiftly moving targets whose supervision and regulation require streamlined decision making and tremendous amount of technical expertise.
The reduction of barriers to financial services has been one of the main drivers of the globalisation of capital markets.
In order to integrate into the global system, we need to work together as a region, as an alliance.
As recent corporate collapses have demonstrated, the risks of financial failure will not be borne by one country alone.
They will, at the very least, affect an entire region. Therefore, as a region, we must develop a system for mutual assistance and facilitate the exchange of information to avoid regulatory gaps.
In this regard, the Securities and Exchange Commission of Pakistan recently signed a Memorandum of Understanding with the Securities and Exchange Commission of Sri Lanka, which sets forth a statement of intent of the two regulators to establish a framework for mutual assistance and to facilitate the exchange of information between them in order to enforce/ensure compliance with their respective securities and futures laws and regulatory requirements.
We hope to enter into similar MoUs with the Securities and Exchange Board of India (SEBI) and other securities regulators in the SAARC Region.
We are also encouraging the stock exchanges in Pakistan to enter into MoUs with their counterparts in the region.
The three stock exchanges in Pakistan have recently, jointly, signed MoUs with the Colombo and Chittagong stock exchanges to establish a system for mutual assistance and information sharing.
Cross-border capital market flows should be allowed gradually and must be regulated. The WTO's General Agreement on Trade in Services also defines trade in services, which include financial services, across four modes of supply, which entail regulation of cross-border services.
The IOSCO has also laid out principles for co-operation which state that "Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts"; and that "The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers".
HOW TO INTEGRATE? Integration should be an evolutionary process.
Starting with the development of common understanding through information sharing and co-operation between the governments, regulators, market players, and professional service providers, it should proceed towards (i) the promotion of policy discussion for the development of capital markets in the region, (ii) harmonisation of legal and regulatory regimes leading to eventual unification, and (iii) development of synergies among the capital market and banking sector on the one hand and the entire financial sector and the trade and investment sectors on the other hand.
PREREQUISITES FOR EFFECTIVE INTEGRATION: Effective integration cannot be achieved without the presence of certain fundamentals. These include:
-- Convergence of market forces;
-- An enabling environment, which includes political will transformed into common understanding;
-- Socio-economic compatibility and cultural acceptability;
-- Initial harmonisation and eventual unification of the legal and regulatory regimes;
-- An effective institutional framework for implementation;
-- Judicial recognition and support; and
-- Professional co-operation and support, eg through bodies like SAFA and the South Asian Federation of Exchanges (SAFE), a forum launched by the bourses in South Asia to promote the development of securities markets in region, which establish and maintain common values and standards and provide critical services to the corporate sector and capital market.
The inception of SAFE certainly marks an important milestone in the march of South Asian capital markets towards regional and global integration.
To realise the full benefits of globalisation, a common set of regulations need to be developed and adopted.
This, however, is an entailing process, which requires dedication and extreme consideration of the effects on all nations represented at this forum.
The securities regulators of Bangladesh, Pakistan and Sri Lanka have fully endorsed Chairman SEBI's informal initiative regarding the formation of a South Asian Association of Securities Regulators.
Last month it was decided in Wellington that Chairman Bajpai and myself shall prepare the concept paper and institutional framework for the establishment of such an association.
This forum will be used for (i) periodic policy dialogue on capital market development and exploring possibilities of cross-border listings; and (ii) harmonisation of legal and regulatory regimes.
While we must all deliberate on the establishment of such a regional forum, some principles must be followed if all nations are to benefit from this:
-- The process of harmonisation should be based on just and equitable principles.
-- National regulators and standard setters from each country should have an equal say in the harmonisation process.
-- Harmonisation should take place with mutual adjustment, not unilateral imposition of decisions by the dominant nations.
THE ROLE OF THE STOCK EXCHANGE: No discussion of globalisation and harmonisation of capital markets would be complete without discussing the future of the stock exchange.
What we are experiencing today and will do so more in the future, is that issuers will raise capital wherever it is cheapest and investors will invest their money wherever it is most profitable and transactions costs are low. This trend poses interesting challenges for stock exchanges world-wide.
The geographical location of stock exchanges is fast losing relevance in the new market place. The ensuing trend is towards enhanced regional and global integration of capital markets.
On the international front, trends show that as a minimum, common trading platforms become a regional necessity where multiple markets can share the use of the same technological infrastructure/base.
This would lead to harmonised listing requirements, standardised trading and settlement procedures, and rationalised common qualifications for membership.
The outcome of the increasingly integrated markets is cross-border listings and cross-border flows.
While traditionally companies wishing to list their securities on a stock exchange opted for the stock exchange of their country, certain factors - particularly technological advancements - have allowed companies to contemplate secondary and multiple listings in other countries.
The cross-border flows of capital are accompanied with a host of regulatory issues.
One such aspect - the regulation of cross-border financial intermediaries - is being looked into by IOSCO through its Working Group of the Emerging Markets Committee, which is headed by the SEC Pakistan.
Business is moving at a fast pace and stock exchanges do not have the luxury of obtaining the approval of their members for every change.
They need to be flexible and quick in making decisions and should also be well financed to compete globally and invest in both technology and human capital.
Many traditionally structured exchanges around the world have questioned the appropriateness of their membership ownership and governance structure.
These factors are motivating exchanges to demutualize and restructure into for-profit organisations where access to trading will be separated from the ownership of the market.
THE ROLE OF THE ACCOUNTANCY PROFESSION: Accountancy is a profession that plays a significant role in all societies. High quality information is the lifeblood of markets. But unless investors trust this information, investor confidence dies, liquidity disappears, capital dries up and fair and orderly markets become myths.
As the world moves towards global market economies, professional accountants need a broad global outlook to understand the context in which businesses and other organisations operate.
The expanding globalisation of business and investments is generating not only demand but also pressure to enhance the quality of financial reporting throughout the world.
The profession must respond appropriately to this demand to maintain public trust that is essential to our capital markets and to the profession.
Further, international diversity in national accounting standards has the potential to diminish the international flow of investment capital and thereby hinder economic development and the efficient allocation of resources.
Given the growth of international business activity, and especially international investment, comparability of accounting standards has a high priority.
One set of high-quality accounting standards is preferred in preparing the financial results of an enterprise, as well as promoting fair and full disclosure, and consistent and comparable information for all capital market participants.
A common set of standards is needed because enterprises are increasingly comprised of multinational operations and activities requiring capital funding within and outside these national financial markets.
As a result, more cross-border issues of financial instruments will become available in primary and secondary capital markets.
While we have, within the accountancy profession in South Asia, a large number of very competent accountants and auditors-perhaps world class, there are a few that may well have succumbed to the growing apathy and erosion in moral values we have been afflicted with in recent years.
The potential loss of confidence in our accounting firms and the audit process is a burden our capital markets cannot and should not bear much longer. I sincerely believe that if the accountancy profession plays its due role, we would experience a remarkable change in the unethical financial landscape.
CONCLUSION: We are destined for a marketplace unfettered by boundaries. As globalisation is affecting everyone - be it nations, societies, markets, businesses, or individuals - the winners will be those who are prepared to benefit from it, not disregard it.
Therefore, in order to integrate into the global system and reap the benefits of globalisation we need to work together as a region.
We must develop standards and best practices conducive to the development of emerging markets.
In addition, the accountancy profession must rise to the new challenges thrown up by the global market economies.
It is pertinent to note the following observations in the South Asia Human Development Report 2001 regarding globalisation and regional integration in South Asia: (i) the globalisation process in South Asia has focused on integrating markets for capital goods and services without enhancing the quality of people's lives; (ii) though South Asia's integration with trade and capital markets has expanded considerably the region still remains amongst the least integrated regions in the world; (iii) globalisation has not been accompanied by the reduction of poverty - income inequalities have widened in South Asia; (iv) the globalisation process in South Asia has been initiated and facilitated by a series of economic reform programmes but the record of reforms to date has not been an unqualified success; (v) trade among South Asian countries is very low (5% of region's total exports) compared to ASEAN (22%) and NAFTA (55%); and (vi) while a global economy has emerged the institutions of global governance are not performing either efficiently or equitably.
Mindful of this, we should endeavour to ensure that integration is used as a progressive tool for poverty alleviation and human development in South Asia, and not only as a defence mechanism against globalisation.
It is of essence that the corporate sector absorbs this sense of social responsibility, where social and environmental ethics are incorporated into business activities and into interaction with stakeholders on a voluntary basis.
Companies can contribute to sustainable economic development by running their businesses to achieve economic growth, but at the same time, ensure environmental protection and protect consumer and other stakeholder interests.
Adopting social responsibility practices will not only benefit the firms themselves, but also strengthen the economies within which they operate.
(The above is the text of the speech of Dr Tariq Hassan. Chairman, Securities and Exchange Commission of Pakistan, delivered at the International Conference on "Redefining the Accountancy Profession: A Measured Response to Global Challenge" in Jaipur, India.)