The Securities and Exchange Commission of Pakistan (SECP) and the Karachi Stock Exchange (KSE) have agreed on a procedure to handle the payment of bonus shares, right allotment letters, and cash dividends after collecting the same from the financiers against the funding of shares arranged through the KSE's Continuous Fund System (CFS) - the nomenclature now used for the traditional 'badla' system.
The current practice of forced release of CFS contracts in the trading of a particular scrip on book closure will be replaced with the new electronic procedure. Computerised trading, settlement of transactions and the Central Depository Company (CDC) have been in place for over a decade. Also the arranging of 'badla' (now CFS) through the KSE's computerised system is also a routine affair.
Unfortunately, listed company payouts to its shareholders are still being settled outside the exchange even though the funding was arranged under the watchful eye of KSE. In-house 'badla' and client level netting was thus far an internal function of a brokerage house and the exchange made no assessment of the total risk prevailing and could not devise a proper margin based risk system.
Now it has become possible because of the introduction of Unique Identification System (UIN). The identity of 10,000 or so investors as well as 50 odd financiers is now available. Through a circuitous route the KSE will receive the cash dividend, bonus shares and right allotment letters from the financiers for onward delivery to the financees.
What was not logistically possible before has now become mathematically possible because KSE has been made a counter party and CDC has been ordered to release the shares lying in a blocked account with them.
SECP has been asking the KSE to replace the 'Parchi' exchange system in vogue between the financiers and financees with a settlement mechanism at the exchange. The members of the exchange have been pointing out that electronic settlement of right allotment letters through the National Clearing System has not been possible and it is not practicable in the case of bonus shares and dividends as well.
The KSE management's viewpoint was not approved by its Board of Directors comprising four nominee directors and five-elected member directors. On technical issues, the member directors happen to be more knowledgeable. But, unfortunately, their decisions on a number of occasions have been found coloured by their own vested interest.
The objective of bringing in nominee directors on the Board, in the interim period prior to demutualisation, was to create a governance structure that reflected higher standards of independence, transparency and oversight. This has certainly not happened.
We have repeatedly witnessed the SECP chairman directly intervening at each and every stage of the reform process. Besides debating with the member directors and other senior brokers, the chairman seems to be involved in the nitty-gritty. With bourse reform claiming so much time of the SECP, a host of issues regarding the corporate sector have been kept pending.
KSE needs a fully empowered management that can best serve not just its members but also listed companies, industry participants and the investing public. Under the Managing Director, the operational and regulatory functions must be entrusted to two deputies with full authority.
The surveillance and monitoring arm at the exchange should be strengthened. After all, as the KSE is the front line regulator, involvement of the apex regulator, ie SECP in micromanagement is neither desirable nor an efficient way of governance.
The KSE Board of Directors must consist of nominees who are not associated with any listed companies on the exchange. Besides enjoying an independent status, they need to have a deep knowledge of the transparency issues faced by the bourse and also of the products that need to be introduced such as cash settled futures, options, index trading etc. Handholding by SECP was needed when KSE was in its infancy and not in midlife problems.