Pakistan's capital market is experiencing a revolutionary era of tremendous growth, stability and positive results. New standards and milestones are piling on, just as the index at the stock exchange continues to set new records.
Over the past several years, the capital market of Pakistan has witnessed significant development in terms of introduction of high-tech infrastructure, efficient trading mechanisms, proficient processes and comprehensive regulatory improvements. Such progress is the result of a vision foreseen by the apex regulator, the SECP.
More recently, a number of regulatory reforms have been taken by the SECP which have had a highly transformative and progressive impact on the capital market. The most important of which is the Securities Act 2015. With the regulatory support extended by SECP, now the Self-Regulatory Organisations (SROs) like Central Depository Company (CDC) will have more room to play an instrumental and pivotal role in this drive for the triumph of Pakistan's capital market.
To start with, there are a number of market shaping infrastructural developments that have taken place in the last 15 - 20 years.
Central Depository Company of Pakistan Limited In the early 1990s, thecapital market witnessed phenomenal escalation in trading volumes which resulted in excessive handling of physical securities. The manual handling (physical shares handling and transfer) was becoming time consuming and arduous. To manage these increasing volumes in a manner that was not only efficient but also time effective, the Central Depository Company of Pakistan Limited was established. The objective was to operate as the central securities depository and to maintain an electronic book entry system.
Under a well-defined legal framework, CDC operates and manages the Central Depository System (CDS) for equity, debt and other financial instruments. The system records, maintains and registers the transfer of securities. It facilitates transferof ownership of securities without any physical movement or endorsement of certificates or execution of transfer instruments. It also serves to link up the issuers ofsecurities for the purpose of executing corporate actions like disbursement of corporate benefits and carrying out mergers and issuance of rights etc. Similarly, it enables the investors to obtain financing against securities conveniently. With the passage of time, the company has grown tremendously where it has carved its role in various other services such as Trustee services for mutual funds, Share registrar services and BPO services.
National Clearing & Settlement System
As part of efforts to further improve the settlement mechanism in terms of security and efficiency, National Clearing & Settlement System (NCSS) was established to replace the separate and individual clearing houses of the exchanges with a centralized entity.
NCCPL became fully operational in 2003-04 and started catering to settlement of all book-entry securities through NCSS which has brought tremendous efficiency in the settlement mechanism and has reduced settlement risk significantly.
Introduction of BATS & GDS
Realizing the importance of debt market for helping businesses and the economy to grow, the stock exchange introduced Bonds Automated Trading System (BATS) to provide issuers with the convenience of liquidity generation through alternative means of raising debt capital. Similarly, another milestone achievement was the implementation of "Government Debt Market" at the stock exchange where retail investors can directly invest in Government papers like T-Bills, PIBs and Sukuks. However, more serious efforts are required to make both these platforms a true success.
Issuance of GDR's, Increase in Market Valuation
The last 15-20 years have also witnessed the issuance of Global Depository Receipts (GDR) as well as large-scale mergers and acquisitions.The Oil & Gas Development Company Limited (OGDCL) and MCB Bank have issued successful GDR offerings amounting to $888 million. These GDR's are listed at the London Stock Exchange (FTSE) and have received strong interest from investors.
Similarly, several key takeovers have also taken place in Pakistan's corporate world in the last fifteen years. These include acquisition of Union Bank by Standard Chartered Bank, Citibank Consumer division by Habib Bank Limited, Royal Bank of Scotland (RBS) by Faysal Bank Limited, PICIC Bank by Temasek Singapore, Crescent Commercial Bank by SAMBA, Pak Tel by China Mobile and acquisition of further stake in Lakson Tobacco by Phillip Morris.
Emergence of Mutual Funds Industry
In the last 10-15 years our mutual fund industry has grown substantially. Today, these mutual funds have assets of more than PKR 600 billion and are not only attracting new investors but also escalating the settlement volumes, thus benefiting the capital market.
CDC has tremendously complemented the Mutual Funds by providing the most important infrastructural support through its Trustee and Custodial Services. This service has garnered a great degree of success with CDC currently serving more than 95% of the industry.
CDC has also become the trustee of Pakistan's first ever Real Estate Investment Trust (REIT). The said REIT is also the only REIT to be listed in South Asia. SECP greatly contributed to this endeavor through its reforms and paved the way for the introduction of the initiative. CDC's role as trustee of this groundbreaking scheme is reflective of the faith and trust placed on CDC by SECP and other stakeholders.
The last 3 years in particular have seen phenomenal growth and prosperity as several reforms and operational changes have occurred which have proven to be quite instrumental in carving the road of success for the capital market.
Launch of Assets under Custody Regime
CDC successfully implemented the Assets under Custody Regime whereby brokers were required to maintain a certain level of Capital Adequacy proportionate to the securities under their custody. This greatly mitigates the risk of default on part of the broker. SECP also extended its support for the implementation of this initiative.
Capital Market Business Hubs and Abbottabad SarmayakariMarkaz
SECP envisioned a number of avenues for the development of the capital market, particularly for enhancing the level of outreach and accessibility of the market especially in 2nd and 3rdtier cities. With this guiding principle, a committee was formed and under the auspices of this committee, steps were taken to establish Capital Market Business Hubs - a central location where all major entities maintain a presence providing investors with a gateway to the entire capital market. The first such hub has been successfully established in the city of Abbottabad as the Abbottabad SarmayakariMarkaz. Cities like Abbottabad have untapped savings potential which can be channeled towards the capital market through the Hub as result of greater accessibility and convenience to the investors.
Legal and Regulatory Reforms
Substantialdevelopment has been achieved on the regulatory front. Implementation of laws such as the Securities Act, 2015 and Futures Market Act, 2016 has allowed for enhancement of the credibility ofcapital market and has enabled it to be on par with other jurisdictions.Another major development underway is the Companies Act which will replace the existing Companies Ordinance.
Introduction of Broker Regime
SECP has implemented a new set of regulations which are aimed at enhancing the risk management and investor protection measures undertaken by brokers. A salient and pertinent feature of these new regulations is the segregation of brokers into categories based on their capacity to undertake trading, clearing and custodial functions. The purpose of this segregation is to ensure that the clearing function is maintained by those brokers which have a degree of financial soundness and can comply with greater reporting and control requirements. By the same token, brokers who are categorized as trading brokers will be subject to fewer compliance requirements in order to keep business costs at a minimum.For the support of "Trading Only members", a novel concept of "Professional Clearing Member (PCM)" is being introduced, which will provide settlement and custodial services to such brokers.
Introduction of the SRO concept
Through the new SECP Amendment Act, the concept of self-regulatory organisations (SROs) is being introduced. These organisations or associations will be given statutory powers for direct regulation and oversight of the regulated persons and market intermediaries affiliated with them. These associations will bear responsibility for prescribing and enforcing minimum performance standards, integrity, reputation and professional development of its members. By setting industry standards and monitoring compliance with industry regulation, these SROs will facilitate the apex and frontline regulators in their compliance, enforcement and regulatory functions.
THE WAY FORWARD
The country'scapital market is going in the right direction yet in order to ensure that the fruits of these efforts can truly be realized, a concentrated and collaborative approach is needed by all stakeholders.
SECP in its capacity as the apex regulator has undoubtedly proved to be a guiding force. The SECP has chalked out a number of reforms for all stakeholders which are currently in the pipeline. The regulator also seeks to enhance co-ordination amongst SROs through improved governance and initiatives such as benchmarking as per IOSCO principles. Alongside, greater efforts towards investor awareness and education with a full-spectrum approach are also a major component of SECP's future activities.With the monumental steps taken bythe regulators and collaborativespirit shown by relevant stakeholders, Pakistan is sure to reap the rewards of excellence!
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