Demutualization of stock exchanges

The joint session of Parliament has finally approved the Stock Exchanges (Corporatization, Demutualization and Integration) Bill and would, as usual, be implemented after the Presidential assent. Explaining the salient features of the Bill on 28th March, 2012, the SECP Chairman, Muhammad Ali said that the Demutualization of stock exchanges would end the reign of the stock market brokers by segregating the ownership and trading rights at the bourses.
After demutualization, brokers would not have 100 percent ownership because the general public and strategic investors would also now be able to obtain major shareholding of the stock exchanges, which would be turned into companies. The status of the stock exchanges would thus be changed from limited by guarantee to the public limited company that will be listed on the stock exchanges.
Composition of the board of directors will also be changed, bringing a balance among the interests of different stakeholders in the corporate and governance structure of a stock exchange. Conflict of interest will also end in demutualized exchanges as the management, board and shareholders will become independent and out of 10 directors, six directors will be nominated by the SECP from the private sector whereas the remaining four directors would be elected.
An investment bank of international repute would be appointed for the evaluation of the stock exchanges and after Demutualization, the only way to increase the value of shares would be increasing profitability of the stock exchanges. The SECP Chairman also informed that new membership at the stock markets would not open for at least another three years after the Demutualization law was enforced and it was planned to launch various categories of memberships after this period to increase participation of investors.
Although the salient features of the Demutualization Bill have not been adequately highlighted by the media due probably to a number of other pressing, attention grabbing events, yet we feel that the provisions of the Bill are so important that they could play almost a revolutionary role in changing the present complexion of the country's stock exchanges and contributing handsomely to the development effort by channelling a much higher level of household savings to the productive sectors of the economy.
There is no secret about the present perception among the general public that the shares market is a kind of casino, manipulated largely by a body of powerful brokers to enrich themselves and their kith and kin at the cost of ordinary investors who often find themselves at a loss to understand the intricacies involved in the fluctuations of a shares market.
Such a perception has grown to an extent that most of the savers are now totally averse to invest their savings in the equity market and prefer to place their surplus funds in NSS and bank accounts which may yield lower dividends but are at least safe so far as the principal amount is concerned.
The Demutualization Bill has the potential to change the equation in favour of the capital market if its provisions are implemented faithfully. For instance, the hold of the brokers on the working of the stock exchanges would be drastically reduced and conflict of interest would be eliminated, while private investors and other stakeholders would have a much greater say in running the affairs of the equity markets efficiently and transparently. It would also be difficult to indulge in insider trading which is a bane of the shares markets all over the world.
Hopefully, after the latest measures are in place, the confidence of investors will improve due to equal opportunities for the relevant information for all the stakeholders and the outreach of the capital market would increase, attracting investors also from smaller cities of the country. In our view, such a step was direly needed to improve the investment climate because at present, domestic investors were avoiding investment due to the challenging economic, political and security environment in the country and portfolio investment was also declining due to the same reasons.
However, a word of caution may be in order. Better and transparent investment policies could facilitate and at best reinvigorate productive processes but cannot be a substitute for changing the fundamental realities of an economy. For instance, until and unless factors like acute energy shortages, poor law and order situation, rampant corruption are not addressed and deficits in the fiscal and current accounts are not brought down to manageable levels in the country in order to provide a good ground for sustainable development, initiatives like the Demutualization Bill would not be able to make a significant impact on the overall health of the economy.