‘Mirza envisions a new stock exchange in four years’

An interview with Khalid Mirza, Chairman SECP Policy Board

Khalid Mirza does not need long introductions. With more than five decades of experience including Chairman Securities and Exchange Commission of Pakistan (SECP), and founding chairman of Competition Commission Pakistan, he is no stranger to Pakistan’s financial market and governance landscape. Following his recent appointment as the Chairman of the SECP Policy Board, BR Research decided to pick his brains on the kind of changes that we can expect to see in the SECP and in Pakistan’s capital markets. Below are selected excerpts, edited for clarity.

BR Research: It’s a refreshing change to see that the SECP finally has a policy board. But its composition is mostly tilted towards the securities market whereas the SECP has other areas to look after too.

Khalid Mirza: The government has done well by re-setting up the board and giving it a majority private sector representation. And instead of a government secretary chairing the board, they gave the chair to the private sector. This is something governments have not done very well in the past, and they should continue with this practice.

In terms of the composition of the board, I think we have a. good mix; we have a senior chartered accountant who has grasp on companies’ affairs, we have people with foreign and local investment banking experience, brokerage and fund management as well as running of the bourse. It’s not that the board is bereft of other aspects of what the commission does but yes, the emphasis is on the securities market. And frankly speaking the SECP’s main public face relates to the securities market, so I think the emphasis is right.

BRR: We will come back to this later but for now, let’s start talking about the agenda you have on the table as the chair of the policy board?

KM: Let me first give you my understanding of the problem at hand. The financial system consists of two parts. There is a risk averse side; the banking system which of a fashion is managed well. It is not as inclusive in terms of reach it should be, but it is reasonably well regulated by the SBP.

Non-banking is the other leg of the financial system, which is the risk-taking part. However, it is infiltrated by people from the other side – from the banking side – from the risk adverse side. Necessarily, the non-banking sector in Pakistan is not playing its full role because it doesn’t have the necessary risk-taking capacity, which it should have. We have a capital market that is small and not really functional; it lacks penetration and has limited capability to mobilise and allocate resources.

BRR: Speaking of capital market you were not happy with the whole demutualisation of exchange in Pakistan!

KM: Yes! Because it is a botched-up demutualisation accompanied by mindless forced de-licensing of the other two exchanges.

Let me tell you something, back in 1992, when I was in the IFC, the head of UTI AMC in India had reached out to me to help fix their capital market. Back then the Indian stock exchange was hopeless; nothing was working over there. The Indian authorities wanted to have a modern exchange to give competition to Bombay stock exchange so at least they have a service-oriented capital market.

The division I headed in the IFC helped them set up the National Stock Exchange – a modern, fully-automated stock exchange. It was demutualised at that time in 1992, and it started giving real competition to Bombay. Bombay used to settle in 28 days; and there was a market in unsettled trades as well. Bombay per force had to change and become modern and efficient because of competition of the National Stock Exchange.

The result: The Indian market in 1992 was 7 times our market; its trades were about 5 or 6 times of our trades. Now the Indian market is about 100 times our market. And its trades are about 50-60 times our trades. They have a plethora of institutions that cover almost every aspect of financial markets. They have a better capital market than even East Asia. The kind of products and institutions they have developed is remarkable; it is perhaps only second to the US. Here in Pakistan we appear to have regressed.

BRR: Would the creation of a new bourse be on your agenda? And what other agenda items are on your table for your ongoing term?

KM: The last five years were a nightmare for Pakistan’s capital market. We had a regulatory apparatus in Islamabad that almost seemed to have done everything to strangulate the capital market. There was so much onerous over-regulation. They closed down two stock exchanges instead of developing those exchanges. They literally killed competition. This couldn’t have been a more unwise decision, particularly when next door you had the example of a market that went places because it had competition.

Whichever way you look at our capital market you will see a wretched monopoly; the exchange, the CDC, the clearing system are all monopolies. They seem to love monopoly. They believe in this untenable notion that if you have a monopoly it will save costs. The commission itself has deteriorated in terms of the quality of people they have hired in the last few years. It takes months to take a new issue approved. It should take no more than two days.

I have my agenda cut out and there is nothing complicated about it. Fix the commission; and bring in a regulatory framework for the market that facilitates growth of the non-banking sector. We have got to remove this big cloud of over-regulation – this strangulation by useless regulations are by the way selectively enforced.

My aim is that within a year and a half we should fix the commission; lighten regulations within the capital market; and put in place the basics that will allow the market to grow. And then in the next two and half years, we would bear the fruits of that and do whatever else is needed to take it forward. I would also like there to be at least one more stock exchange set up before the expiry of my term even though I know many people in the market will not like it.

BRR: Under the law, the policy board you head has to give policy directives. To what extent the board can really influence a change?

KM: The basic meaning of policy is how things are done. How should the commission undertake its activities? Regulation has, nearly always, policy content embedded in it, and therefore, when it comes to regulation, the commission has to make all regulation in consultation with the policy board. If the board gives a policy directive to change a regulation, then the commission has to bring that revised regulation to the board for approval. So one way or other, the policy board is involved in the making of the regulation.

The board also has the oversight of the working of the commission to see how they are enforcing and implementing things. We also try to do some mystery shopping and talk to market players on random sample basis. The commission being monitored and overseen by the board was never done before. The budgets of the commission are approved by the board, and any fees or charges that the commission levies as a regulator cannot be levied without the board’s approval. In fact, the policy board is a conceived to be separate institution, but it should necessarily work in tandem with the commission.

BRR: Can you give us an example of over regulation and how you would like it to be changed?

KM: Take the case of the kind of corporate governance framework that has been introduced for instance; anyone who wants to list his company would be wary of that framework. You cannot enforce corporate governance compliance, such as having so many independent directors, by stick alone.

We plan to adopt the UK model, where we will have the code of corporate governance but instead of forcing compliance, we will have the policy of “comply or explain”. That you have to follow all this but if you can’t then explain – that’s the kind of framework you have in many countries. Here in Pakistan, whenever we do something it becomes a peremptory order that causes people to run from the market whereas at the moment we have to develop our market.

Also, we should study the model in Brazil where their stock market has two counters: Bovespa and the rest of them. The Bovespa counter lists all those companies that fully comply with corporate governance and environmental regulations; both foreign and local institutions prefer to invest in such companies because such companies offer investors better safeguards. We should introduce such incentive structure in the stock market for firms to follow the corporate governance framework.

BRR: Going back to our first question, what about other areas that lie under SECP’s domain - insurance and companies’ law for instance. If the SECP remains focused on securities, then how to develop and regulate other areas?

KM: I believe the government has taken a decision that they will take away the responsibility for the insurance sector from SECP and give it to separate insurance regulatory authority to be created altogether new. I think this would be a very good step. I believe the government has set up a task force under Shamshad Akhtar to look at the whole question of insurance and come up with recommendations about what needs to be done and which model of separate insurance regulatory authority would be suitable for Pakistan. Pakistan is perhaps the only country in the world in which the insurance sector is being regulated by a securities regulator.

There is also a thought process within the government – I certainly would recommend it – that company law administration should also be entrusted to a separate company law board/authority/commission. Except for Australia and the Philippines, I can’t recall any other country where the company law and securities regulator are joined as is in Pakistan. The government is in principle agreement with this concept, but I imagine this will be done further down the road. We can have the same policy board for both company law commission and for securities regulator, but the two institutions need to be separate.