The Securities and Exchange Commission of Pakistan (SECP) was set up under the Securities and Exchange Commission of Pakistan Act, 1997 as the apex regulator of the capital market and corporate sector in Pakistan. Over time its mandate has been expanded to include supervision and regulation of the insurance sector, non-banking financial companies, private pensions and real estate investment trusts.
As the securities markets in Pakistan are still evolving, the SECP has been actively pursuing its mandate for developing a progressive, equitable, transparent and efficient capital market and corporate sector that employs best practices, safeguards interests of the investors/ shareholders and promotes good corporate governance. Substantive reforms in the areas of risk management; governance and transparency; market development; and investor protection have been implemented. However, despite all of these reforms it is felt that there is a lot more that needs to be done to ensure that capital markets in Pakistan are integrated with the rest of the economy and provide much easier access for issuers and investors both for equity and debt and serve as true venues of capital formation. With this focused approach in mind, the apex regulator is in the process of framing a three year strategic plan and set annual targets for the year 2011-12 which will be discussed after a quick overview of the major reforms implemented in the recent past.
REFORMS IMPLEMENTED The SECP has always tried to maintain a delicate balance between the twin objectives of effective regulation and market development; and comprehensive supervision and enforcement. Over the past few years, the SECP has used a consolidated approach for regulating the capital market and the corporate and financial sector, while at the same time trying to protect the interests of shareholders and facilitating companies through innovative projects such as e-services and introduction of new products like REITs, private equity and venture capital, holding company concept etc.
Following major reforms have been undertaken by the SECP during the past few years for the development of the capital market and the CORPORATE SECTOR:
In consultation with the relevant stakeholders SECP draft Stock Exchanges (Corporatization, Demutualization and Integration) Act, 2009 which was approved by the National Assembly in October 2009 and is awaiting approval by the Senate. The Act provides for the conversion of the existing non-profit, mutually owned stock exchanges to for-profit entities owned by the shareholders.
In order to develop quality human capital and create standards amongst market professionals SECP established Institute of Capital Markets.
To improve risk management and for the protection of investors various measures were introduced this include Unique Identification Number, ban on in-house badla, VaR based margining regime, position limits, daily collection of mark-to market losses, collection of MtM losses for all derivative markets in cash, implementation of liquidity and concentration margins and client level margining.
Book Building Process' for IPOs has been introduced to aid price and demand discovery. The product portfolio at the Pakistan Mercantile Exchange has been expanded to cater for the hedging and speculative needs of various target groups by providing a range of alternative commodity contracts with varying contract specifications/ denominations. In order to bring the capital markets of the country at par with international derivative markets, a comprehensive regulatory infrastructure in shape of draft Futures Trading Act has been submitted to the government for promulgation.
The Private Equity and Venture Capital Fund Regulations have been introduced after a comprehensive consultative process with domestic as well as international stakeholders. The SECP taking cognisance of the dire need to take measures for consolidation of the core businesses in the corporate sector promulgated the Group Companies Registration Regulations. The consolidation of corporate sector for emergence of financially and technically strong groups compatible with international corporations is the need of the time so as to effectively play in the competitive environment of attracting FDI flows.
In January 2009, owing to growing closures in industrial sector and increasing NPLs in the banking sector, a Committee was constituted by the Ministry of Finance, to review and finalise the draft Corporate Rehabilitation Act (CRA). This Committee led by Chairman, SECP completed its task and the draft CRA has been submitted to the Ministry of Finance for necessary processing/approval.
During the past few years SECP has taken a number of measures for the development of the corporate debt market such as reduction in the rate of stamp duty on the issuance of corporate bonds, and on the transfer of assets in case of securitization. The Bond Automated Trading (BATS) System and necessary Regulations have been introduced. The new debt market platform allows electronic order entry and matching facility, which will provide a more efficient and transparent way to trade debt market securities initially listed Term Finance Certificates. More recently BATS has been revamped with various system enhancements in line with international standards to facilitate market participants.
The SECP has also drafted the Draft Securities Act, 2005 intended to replace the Securities and Exchange Ordinance, 1969. The draft Act ensures healthy growth and regulation of the securities market.
REVIEW OF REGULATORY FRAMEWORK FOR MODARABAS IS UNDERWAY Securities (Leveraged Markets and Pledging) Rules, 2011 have been promulgated to meet the growing liquidity and financing needs of the Pakistani capital market.
The automation of securities settlement project at the Central Depository Company (CDC) has been introduced which is aimed at increasing transparency and efficiency in the procedures governing transfer of book-entry securities at the CDC.
A fit and proper criteria for directors on the Boards of the stock and commodity exchanges, CDC and national Clearing Company has been introduced. In an effort to promote liquidity in the capital market and in line with international best practices, the concept of market making has been introduced and regulations have been approved for the stock exchanges for the same.
WAY FORWARD The apex regulator is committed towards development of the corporate sector and capital market in Pakistan. The roadmap for future envisaged by the SECP lays great emphasis on growth and development of the debt capital market, commodities exchange, insurance sector, mutual fund industry, REITS and non banking finance companies considering that all these sectors carry immense untapped potential within themselves.
Measures have been planned to amend existing, and frame new legislations for strengthening the capital base of market intermediaries and bring in a consolidated regime that caters for the registration, licensing and capital adequacy requirements and ensures more effective ongoing supervision and enforcement. Work is underway on the introduction of new derivative products which will add depth to the market and provide investors with viable investment alternatives to better mange their risk and meet liquidity needs. While the SECP is striving towards introducing measures which will lead to better outreach for market participants it will put in place processes and policies to inculcate improved compliance culture and effective enforcement.
Being fully cognisant of the importance of listing of new companies at the exchanges which contribute towards capital formation, the SECP in collaboration with the stakeholders is working towards incentivizing the corporate sector and encouraging companies with large capital base and expansion needs to list through various debt and equity instruments. Also, part of the plan is to undertake structural realignment of market infrastructure institutions in line with international best practices. This will also require expediting the Corporatization and Demutualization process of the stock exchanges and striving towards early promulgation of the Demutualization law. Demutualization is a well established global trend, the benefits of which are manifold. A demutualized/corporatized entity would result in improvement in the governance structure, segregation of regulatory functions from commercial functions and separation of trading rights and ownership rights.
Keeping in view the fast changing economic environment in Pakistan and the increasing complexity of financial markets, the strategic plan goes beyond routine day to day operations to a longer-term development plan for sustainable growth of the capital market. The SECP will introduce various measures planned in close consultation with the stakeholders concerned, to ensure effective implementation.