Securities and Exchange Commission of Pakistan (SECP) Chairman Muhammad Ali on Tuesday said the approval of the Stock Exchanges (Corporatization, Demutualization and Integration) Bill by the joint session of the Parliament would lead to investor's protection, better supervision, effective enforcement and wider outreach in the stock exchanges.
Talking to Business Recorder, Chairman SECP said the conflict of interest of the brokerage community which was present due to ownership and trading by the same members will not be there any more following approval of the Stock Exchanges (Corporatization, Demutualization and Integration) Bill. Muhammad Ali added that the SECP has achieved the major milestone in the history of the country by getting approval of the Stock Exchanges (Corporatization, Demutualization and Integration) Bill by the joint session of the Parliament.
When contacted, sources explained that the brokers control over the stock exchanges would be ended following approval of the new Demutualization law. The brokers' influence in the affairs of the stock market would be reduced under the new law. After demutualization of exchanges, the trading rights will be given irrespective whether a person is a member of stock exchange or not.
The brokers control will also be ended because they have to be required to fulfil the stringent fit and proper criteria and cannot have automatic trading rights by virtue of being member of the exchange. The management of the stock exchanges would be able to work independently without being influenced by brokers which is good omen for investors as well as general public. This would bring new investors from far flung areas of the country as they would have confidence due to fair and transparency in the operations of the and stock exchanges, sources added.
According to the SECP, the Stock Exchanges (Corporatization, Demutualization and Integration) Law has been approved in a joint session of the Parliament today. This landmark achievement was long awaited since the passing of the bill by the National Assembly in October 2009.This law is part of the SECP's efforts to bring about structural and regulatory changes through legal reforms in the non bank financial market and the capital market. Other draft laws awaiting approval include Securities Law, Futures Trading Law, SECP Law and Corporate Rehabilitation Law.
The Demutualization law provides a framework for the corporatization, demutualization and integration of the stock exchanges and had been drafted after consensus with all the stakeholders. The law requires the stock exchanges to be demutualised within 119 days of its promulgation in line with pre-defined timelines specified for completion of various milestones involved in the demutualization exercise, SECP said.
Presently the Pakistani stock exchanges are operating as non-profit companies with a mutualized structure wherein the members have the ownership as well as trading rights. This structure inherently creates conflict of interest as members predominantly control the affairs of the stock exchange which results in lack of transparency in the operations of the stock exchange and compromises investors' interest. Also, due to lack of resources our exchanges have not been able to grow to the expectations of investors as trading activity is mostly concentrated in three buildings of these exchanges with the dominant share going to the Karachi Stock Exchange, SECP stated.
The Corporatization and demutualisation of stock exchanges would entail converting the stock exchanges' structure from non-profit, mutually owned organisations to for-profit entities owned by shareholders. Demutualization would result in enhanced governance and transparency at the stock exchanges and greater balance between interests of various stakeholders by clear segregation of commercial and regulatory functions and separation of trading rights and ownership rights, SECP stated.
Demutualization will assist in expansion of market outreach, resulting in larger number of investors, improved liquidity and better price discovery. A demutualised stock exchange will be in a better position to attract international strategic partners and good quality issuers.
Demutualization will also facilitate consolidation of brokers leading to financially strong entities, SECP said. Demutualization is a well-established global trend and almost all stock exchanges world-wide operate in a demutualised set up. The passing of this law is a momentous accomplishment which will bring the Pakistani capital market on par with other international jurisdictions like India, Malaysia, Singapore, USA, UK, Australia, Hong Kong, Turkey etc, SECP added.