Finance Minister Naveed Qamar on Wednesday introduced Stock Exchange Corporatisation, Demutualisation and Integration Bill 2008 in the National Assembly to attract strategic investors and improve governance structure of capital market with more cost-efficient decision making structure of stock exchanges.
The bill moved in the National Assembly envisages a Demutualization Committee that would be ratified by the members of stock exchange within thirty days from the commencement of this Act. The Parliament would refer the bill to the concerned standing committees to discuss the proposed Stock Exchanges, (Corporatisation, Demutualisation and Integration) Act 2008 before its enactment through passage of Bill instead of a Presidential Ordinance.
The previous government also wanted to introduce demutualisation law through an Ordinance, but the President Musharraf has returned the ordinance for discussion by the National Assembly in the form of an Act. However, the Gilani-led government approved the bill in the cabinet meeting on June 4 2008.
Market experts were of the view that delay in the promulgation of ordinance might shift potential strategic investors towards other regional demutualised stock exchanges. The process involves not only Corporatisation, which was conversion of a stock exchange limited by guarantee into the one limited by shares but also it segregates ownership and trading rights.
Hence demutualisation brings balance among interest of different stakeholders in the corporate and governance structure of a stock exchange. In order to compete, stock exchanges required efficient decision making structures and large amounts of funds for investment in technological infrastructure. The mutual structure of the exchanges has been an obstacle in both decision making and access to capital, thus causing a wave of demutualisation the world over, sources said.
The demutualisation of exchanges would help in improving governance structure as the process separates management from ownership, ownership from trading rights and sets out clear roles and responsibilities of owners, management, and users (such as brokers, agents, and issuers etc) Once the stock exchange is converted into for-profit organisation, a stock exchange becomes more cost-efficient.
The SECP is interacting with best global stock exchanges, including Stockholm Stock Exchange (OMEX), to attract investors for acquiring shares in Pakistan's stock exchanges after promulgation of the de-mutualisation law. The strategic investor and local financial institutions would have 40 percent shares; general public 20 percent; and existing brokers would have 40 percent shares.
The draft law includes enabling provisions for conversion of company limited by guarantee to a company limited by shares and the mechanism and process of Corporatisation and demutualisation of a stock exchange. Sources said that the process of Corporatisation and Demutualisation would be completed within the period of 119 days following promulgation of the Ordinance.
The stock exchanges will be required to submit necessary information within 45 days of the promulgation. Subsequently, the Registrar will issue a certificate of re-registration after the stock exchanges meet all requirements of law. The stock exchange shall stand corporatised and demutualised from the date of issuance of certificate of re-registration, he said.
Sources said that the strategic investor and local financial institutions would have 40 percent shares; general public 20 percent; and existing brokers would have 40 percent shares. The Ordinance further restricts any initial shareholder, a member of general public or Trading Right Entitlement (TRE) certificate-holders to hold more than one percent of the shares of stock exchange and financial institutions to hold more than five percent of shareholding.
After Demutualisation, 60 percent of the board members of the demutualised stock exchange will comprise independent directors. Moreover, as per draft Ordinance, TRE certificate-holders can not hold majority on Board of a stock exchange. The Act also restricts any TRE certificate-holder to become the Chairman of a Demutualised stock exchange.
Under the proposed bill, the committee would be empowered to approve the valuation of the stock exchange to be undertaken by the investment bank pursuant to clause (a), sub-section (1) of section 4, enter into negotiations and finalise the sale of not more than forty percent of the total issued share capital out of the shares lying in the blocked account with any one or more strategic investors or financial institutions, determine the offer price for offer for sale of shares to general public.
The envisage committee shall be fully empowered and bound to accept any price offered for the sale of shares by the strategic investor that is equal to or greater than the valuation carried out under section 4, and finalise and enter into an agreement for the sale of such shares to the strategic investor, and the members, the shareholders including the initial shareholders and the stock exchange shall be bound by such agreement.
SALE AND PURCHASE OF SHARES BY A STRATEGIC INVESTOR AND A FINANCIAL INSTITUTION:
(1) A strategic investor or a financial institution who acquires shares under section 12 may sell its shareholding in a stock exchange only to another strategic investor or a financial institution as the case may be, with the prior written approval of the commission.
(2) A strategic investment may acquire such further shares of a stock exchange in which it is strategic investor to enable it to increase its shareholding up to fifty one percent of the total paid up capital, subject to the following conditions, namely:
(a) the prior approval of the Commission is obtained for such further acquisition of shares;
(b) the further acquisition is made not less than three years after it acquires shares under section 12; and
(c) the shares are purchased from the market by making a public offer in a transparent manner.
(3) No financial institutions who has acquired shares under section 12 may acquire any further shares from the general public, provided that a financial institution may acquire shares from another financial institution with prior approval of the Commission.
LISTING OF SHARES The shares of a stock exchange shall be listed, on any such stock exchange and within any such time as the Commission may prescribe in consultation with the board of directors of the stock exchange, which is to be listed.
(2) Where the shares of a stock exchange are listed on itself, the Commission shall not as the front line regulator of such stock exchange for such listing, and notwithstanding anything contained in any other law, shall have the necessary regulations prescribed for such matter.
(3) The self-listing of the stock exchanges under this section shall be administered and managed by the Commission in such manner as may be prescribed.
(4) A stock exchange shall make an application for the listing of its shares on itself in the manner and form, and subject to such conditions, as the commission may prescribe.
(5) Upon receipt of an application under sub-section (4), the Commission may if it is satisfied, after making such inquiry and receiving such further information as it may consider necessary, that the application fulfils the prescribed conditions for listing, order the listing of the shares.
TRADING RIGHTS: An initial shareholder who is issued a TRE certificates under section 5 shall, if not already registered as a broker with the commission, be entitled to be so registered on or before 31st December, 2011 provided that he meets the fit and proper criteria:
Provided further that such. TRE certificate holder shall commence business not later than six months from the date of registration as a broker.
(2) A TRE certificate issued under section 5, may only be transferred once in a manner as may be prescribed: Provided that transfer of the TRE certificate by a registered broker shall result in the cancellation of his registration as broker.
(3) Any fit and proper person who acquires a TRE certificate from an initial shareholder in accordance with sub-section (2), shall get himself registered as a broker not later than six months from the date of acquiring the TRE certificate, and shall commence business not later than twelve months from the date of acquiring the TRE certificate.
(4) A stock exchange shall not issue new TRE certificates to any person until 30th June, 2010 unless two-third majority of TRE certificate holders of a stock exchange decide otherwise.
(5) After 1st July, 2010 till 31st December 2019, a stock exchange shall offer for issuance fifteen TRE certificates each year in the manner prescribed by the Commission.
(6) After 2019, no restriction shall be placed on the issuance of TRE certificates by the stock exchange, and any person who meets the fit and proper criteria for registration as a broker shall be eligible to be issued a TRE certificate.
(7) Any person who is issued a new TRE certificate shall get himself registered as a broker not later than three years from the date of issuance of such TRE certificate and shall commence business not later than six months from the date of registration as a broker.
(8) After the date of demutualisation, only corporate brokerage houses shall be eligible to obtain registration as a broker on a stock exchange: Provided that any TRE certificate holder who is registered as a broker on a stock exchange on the date of commencement of this Act shall not be required to convert into corporate brokerage house till 31st December, 2009.
(9) All corporate brokerage houses registered as brokers on a stock exchange shall comply with the provisions of the Code of Corporate Governance issued by the Commission as amended from time to time.
(10) Except as provided in sub-section (2), all TRE certificates shall be non-transferable.
(11) Failure of person, holding a TRE certificate including an initial shareholder, to get himself registered as a broker or commence business within the different periods specified in this section, or in the case of an initial shareholder, to lapse of such TRE certificate.
(12) The Commission shall prescribe the manner, form and procedure for the transfer and issuance of any TRE certificate in any stock exchange.
INTEGRATION WITHOUT APPLICATION TO THE COURT: Any two or more stock exchanges may, upon filing of a scheme of integration, and after compliance with such procedures as may be prescribed, be integrated by an order of the Commission, so as to transfer and vest on the successor stock exchange ("the successor stock exchange") all the assets, undertakings and liabilities of any stock-exchange which, upon such integration, is proposed to cease to exist ("the transferor stock exchange"). Stock exchanges desirous of integrating may also do so by creating a new legal entity to which the assets, undertakings liabilities of each of the stock exchanges may be transferred.
POWER OF THE COMMISSION: The Commission shall have the power to give such directions to a stock exchange, either jointly or severally, or to shareholder, or a committee member, or a TRE certificate holder as the Commission deems necessary for achieving the purposes of this Act.
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