The following statement was made before the National Assembly Standing Committee on Finance and Revenue on Monday last by Dr Tariq Hassan, Chairman, Securities and Exchange Commission of Pakistan:
"I appreciate the opportunity to present before this august Committee, the perspective of the Securities and Exchange Commission of Pakistan (SECP) on the March events and the issues arising out of these events.
In our meeting earlier this month, I had the privilege of apprising this Honourable Committee of the actions taken by the SECP in respect of the recommendations made by the Task Force constituted to review the stock market situation.
Today, I would like to give you a brief overview of the workings of the SECP and the progress of the reform process that it has actively pursued over the years. My talk will be supplemented by detailed presentations on the technical terminology and the background of the March events which will be made subsequently.
The SECP, as you are aware, is an autonomous body with the mandate to regulate the entire corporate and non-banking financial sector in Pakistan. This means that industries as diverse as the capital markets, the non-banking financial institutions, insurance, pensions, all fall within its purview. In all its regulatory activities, irrespective of the sector to which these pertain, the SECP is guided by a single principle: investor protection.
I am sure you appreciate that the SECP is the apex regulator and under law must be assisted in achieving its regulatory objectives by the stock exchanges, which are the front line regulators. Whereas it is the responsibility of the SECP to provide the framework for the market, it is the stock exchanges, in their capacity as self-regulatory organisations ("SROs"), which are primarily responsible for ensuring regulatory compliance on the part of the financial intermediaries.
The SECP is committed to promoting investor confidence and enhancing the integrity of the market because it is of the firm view that a fair, efficient and transparent capital market is the only sure way of safeguarding the rights and interests of investors.
In the last few years, the SECP has introduced wide-ranging capital market reforms in the fields of risk management, governance, transparency and investor protection which have significantly contributed towards the growth and development of the market and improvement of risk management at all three stock exchanges.
SECP's first phase of capital market reforms were largely aimed at the operational level and have significantly contributed towards improvement in the price discovery and trade settlement process which in turn have boosted development of the capital market and investor confidence.
The second phase of SECP's reform process, is currently underway and is geared towards introducing structural changes in the exchanges which would help minimise market abuse and thereby afford greater protection to the investor.
These reforms include an agenda for demutualization of the exchanges which would ensure a separation of ownership and trading rights at the exchanges, the phasing out of Carry over Trade/badla (COT), and the closure of group accounts. I am pleased to state that the SECP successfully achieved the closure of group accounts in April this year.
In addition to the above the SECP has made considerable efforts towards enhancing the regulatory framework within which it operates. In order to ensure that the necessary legal and regulatory framework in line with international best practices is in place, the SECP is currently working on the development of new laws such as the Securities Act, the Futures Act and the Financial Services Act.
I must emphasise that the fundamental aim of all reform measures is to enhance investor protection. Each of the reforms referred to earlier, is designed to improve transparency and good governance at the exchanges, to minimise the impact of manipulative elements in the market and thereby to establish systems for the protection of genuine market investors. I assure you that these major capital market reforms, when completed, would substantially eliminate the problems that plague our capital market today.
I must however state, with some disappointment that the SECP has not always been assisted by the stock exchanges in matters requiring front line regulation. The exchanges have either been unable or unwilling to effectively perform their function particularly with regard to monitoring the market and ensuring compliance with rules and regulations on the part of the financial intermediaries.
The reluctance of the exchanges to perform tasks falling within their purview has placed an onerous burden on the SECP when its capacity and resources may be better channeled elsewhere. Here, I would like to draw your attention to the Asian Development Bank's Program Performance Audit Report on the Capital Market Development Program which states: "while the various rules required to be adopted by the stock exchanges under CMDP were introduced, SECP issued most of them."
This observation clearly illustrates the inability and unwillingness of the stock exchanges to perform their functions, which has forced the SECP to perform these functions in their stead. You will therefore agree with me that contrary to the perception that the SECP has not done enough, the SECP has been forced to step into the shoes of the exchanges to ensure that capital market development remains on track.
The March events arose in the midst of this on-going reform process. Indeed, it is interesting to note that the market volatility gained momentum at a time when several of the major structural reform measures of the SECP were coming to fruition.
Group Account facility, which was a haven for anonymous accounts and a major source of market abuse, was to be closed on 31st March 2005; the deadline for submission of demutualization plan by the exchanges had also been fixed for 31st March 2005 and the phase out of COT financing was in its final stages.
The occurrence of these events at such a critical juncture leads one to wonder if these might not have been staged by certain vested interests to frustrate and derail the reform process. Indeed the aftermath of the March events lends greater credence to this view.
The process of capital market reform, which the SECP has gradually implemented through perseverance and dedication, is now facing intense opposition and monumental efforts are underway to prevent the SECP from achieving its objective of market reform.
The roots of the opposition presently faced by the SECP in the reform process may be found in the mutilated structure of the exchanges which means that members of the exchanges are also brokers. There is, therefore, a built-in conflict of interest in all their decisions.
In the present market scenario, certain major market players enjoy a powerful position in the market as a result of which they are able to influence the market to their advantage and to the detriment of the small investors.
Urgent steps have to be taken in order to level the playing field and redress the present power imbalance. Otherwise, the immense control wielded by a small number of market players will not only result in the subversion of capital market reforms but will keep the market hostage to excessive volatility and manipulation.
This will not only destabilise the market but will also have its ripple effect felt throughout the economy. If the opposition to the reform process is allowed to continue, Pakistan's chances of emerging as a leading capital market which can compete with other international markets would be lost forever.
We require the support of this August house, to ensure that the capital market reforms are not derailed or sabotaged by those who have a stranglehold over the market. Introducing reforms in a running market is an uphill battle, but the SECP is committed to it and is confident that with the necessary support it will succeed in achieving its objective.
The Task Force Report has merely confirmed the suspicions of the SECP in highlighting the root causes of the problems currently faced by the capital markets in Pakistan. As you have been apprised earlier, the SECP has taken stock of the recommendations made in the Task Force Report and has stepped up its actions against forces identified by the Task Force.
The major criticism levelled against the SECP in the Task Force Report is that "the SECP has not been forceful enough in taking action". This criticism is not only belied by the ADB Report referred to earlier but also ignores the fact that the SECP has deliberately adopted a consultative and measured approach in order to build and strengthen the institution of the exchange and to administer through consensus rather than decree.
The further criticism made in the Task Force Report is that the legal framework is weak and needs to be strengthened. The SECP not only fully agrees with this observation but had initiated the process of strengthening the regulatory framework by amending existing laws and promulgating new ones long before the publication of this Report.
Laws pertaining to the demutualization of the exchanges and providing a stronger regulatory framework for the SROs, as well as a new law for Futures trading are likely to be tabled before this August house in the near future.
I would merely like to make the further point at this stage that in certain quarters, the SECP's setting up of the Task Force has been misconstrued as a sign of weakness. I am of the view that it was in fact a bold and decisive move on the part of the SECP.
The SECP is fully cognisant of the fact that it is accountable to this August house and it was in the same spirit of accountability that the SECP, for the first time in its history, not only constituted an external Task Force of its own volition but also presented itself for scrutiny. This speaks for its strength and confidence and reaffirms its commitment towards greater transparency and good governance in public institutions.
In all its efforts, including those underway before the March situation arose, and those that have now been commenced on the recommendations of the Task Force, the SECP is dependent on the legislature for law-making and the Government for laying down the necessary regulatory framework.
It is further dependent on the judiciary for swift and timely enforcement action. The SECP looks for support from all these areas in the achievement of its reforms.
I would like to assure all of you and the investing public that the SECP is making all possible efforts to bring the wrongdoers to justice in accordance with the due process of law. I am sure you appreciate that this process is time consuming and at times full of obstacles. However, with our regulatory will and determination we are certain that this matter will reach its logical conclusion.
A strong, transparent and viable capital market is the need of the hour, not merely for the local investor but also for the international arena. Capital markets have now become geographically neutral and those that do not conform to international best practices will become irrelevant in today's highly competitive global environment.
In order to remain competitive and to attract local and foreign investment it is of utmost importance that our capital market conforms to international best practices."
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