Eighteen hours before the discussion with the representatives of bourses on demutualisation, the Securities and Exchange Commission of Pakistan on Tuesday issued a directive to the stock exchanges to amend their Articles of Association, giving exclusivity to non-member directors for eligibility to become chairmen of the exchanges.
Hitherto this office was restricted to elected member directors under an amendment in the Articles passed in late 2002. Prior to this members of the exchange used to elect the chairman directly. The amendment in Articles in 2002, also reduced the seats of elected Directors to five from nine - giving four seats on the board to the nominees of SECP.
The new directive is part of the ongoing demutualisation process in the exchanges and its issuance, prior to Wednesday's discussions, is meant to signal to the exchanges that the item is non-negotiable.
The question is: why was SECP sleeping until November 29 to issue this directive when it knew that elections are being held at the Karachi Stock Exchange on December 15, 2005? Amendment in Articles is not possible through a board resolution. Company laws require 21 days notice for an extra-ordinary general body meeting to amend the Articles through a special resolution passed by 75 percent majority.
Adverse reaction on this directive was expected from the rank and file of the exchange. They want all the issues relating to trading rights, new members induction in the exchange and shareholding formula in a demutualised company finalised under a negotiated plan. Senior members of the KSE have gone to Islamabad and one hopes that they can act as a bridge to maintain normalcy and continue the dialogue.
The general investor must not suffer, as he did in March, when the regulator and the Board of Directors locked horns. It was only after governmental intervention at the level of the Prime Minister, that too after weeks of negotiations, did the tension between the two subside.
Nominated directors and demutualisation of exchanges are an essential part of the reform process and positive progress needs to be achieved in order to bring transparency and improve the governance in the exchanges. The influence of the 'big boys' in the election of directors is very much in evidence. While one can frown at the way the Board of KSE presently functions and the manner in which the management's hands are restricted, there is also not much happiness over the contribution of SECP nominated directors on the Board.
The reform process lays heavy responsibility on the management to improve risk systems and technology but it is the Board which has to approve the policy and provide the resources to the management, for induction of high quality professionals and purchase of requisite software and hardware.
Demutualisation does not imply having directors who have no vested interest in improving the working of the exchange.
This requires placing of stakeholders on the Board. SECP must receive nominations from bodies representing the Mutual Funds industry, insurance companies, and others in the financial sector as well as the heavy-weight listed companies.
These bodies through a selection process should send professionals having knowledge at par with the brokers. They must also dedicate time to the exchange for Board meetings and also for its sub-committees. So far this has not happened. The prevailing practice of sending three names by a representative body to SECP to pick from, needs to be dispensed with. Instead high calibre professionals duly committed to the task at hand - remunerated by the representative body and duly approved by SECP, should come on the Board with elected broker representatives.
After all, the chairman of any body has the casting vote only in case of a tie. A five-four split in favour of elected directors still persists. What appears to be upsetting the members of the exchange is not giving up the chairman's office but the way it has come about. The mould for the reform process has been cast. The quality of metal poured will ultimately determine the strength.
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