Khalid Mirza, Chairman Securities and Exchange Commission of Pakistan (SECP) Policy Board has proposed a comprehensive roadmap and policy initiatives for the development of the capital market.
In an exclusive talk with Business Recorder here on Tuesday, Khalid Mirza stated the policy measures revamping the SECP that is greatly rationalizing and simplifying the regulatory framework, establishing special tribunals for adjudicating cases arising from securities regulation and company law enforcement, eliminating monopolies and introducing real competition in all facets of the market, establishing an autonomous Company Law Board for the administration of company law, and a definitive programme to promote vibrant investment banking in Pakistan.
Mirza stated that the SECP was facing critical issues, which needed to be addressed.
The restructuring and revamping of the SECP should be given top priority.
This is a major challenge for the recently appointed new chairman of the commission who he felt was a decent, well-intentioned and capable professional.
In the recent past, the SECP has suffered from recruitment of unsuitable staff, including those that appeared to be politically orientated.
Instead of staff with the motto of being "firm, helpful and fair", as was the case in the early days of the SECP, we now have several officials that are basically unhelpful with a ruler-like mind set, rather than a facilitative approach, and their attitude is exploitative deploying in full whatever nuisance value they possess.
He also stated that the apparent inconsistencies observed in the SECP's judicial pronouncements and the penalties imposed has adversely affected the sentiments of market participants, and is a major cause for concern.
The SECP clearly needs to be thoroughly revamped and reconstituted, so as to comprise competent professionals, whose commitment to public service and integrity is beyond reproach.
However, he was of the view that efforts to build the SECP's capacity through training as well as endeavors to instill staff with a truly service orientation would only make sense, if this is preceded by the required staff changes (primarily removal of unsuitable staff).
Otherwise, it would be a waste of time and resources.
Also, the SECP's scope needs to be redefined appropriately.
Mirza highlighted that both Company Law administration and regulation of the insurance sector get shortchanged when these tasks are carried out alongside enforcement of securities legislation, the nature of which is such that it almost invariably demands first priority with Company Law administration and Insurance being relegated to second and third place respectively.
Moreover, there is always a lurking danger of sensitive corporate information supplied to the SECP being misused when both company law enforcement and securities regulation are under the same roof.
He felt it was necessary that Company Law administration as well as insurance regulation should be carved out of the SECP and placed under separate, independent, and duly empowered authorities.
When asked about the performance of the SECP Appellate Benches, Chairman Policy Board explained that while he had discerned improvement since the setting up of the Adjudication Department, the problem of inconsistent, and perhaps, even contradictory decisions, had yet to be fully resolved.
He was sanguine that the recently- established Adjudication Department, which was the brain child of the current SECP chairman, should significantly improve the situation.
For speedy disposal of cases pending at the level of judicial fora, Mirza has recommended constitution of two special courts or tribunals i.e. a "Securities Tribunal" to deal with "securities/NBFI" cases and a "Corporate Law Tribunal" for all Company Law matters.
For both these tribunals to serve a useful purpose and to have half-a-chance to be a success, he felt it is essential, firstly, that these special courts should operate at the level of the High Courts, and should be primarily manned by serving or retired High Court judges nominated in consultation with the Chief Justice of Pakistan.
Secondly, appeals against the decisions taken by these tribunals should lie direct to the Supreme Court thus expediting final adjudication, while the time-honored principle of 'one efficacious right to appeal' is retained.
When asked about needed stock market reforms, Mirza stated the Pakistan Stock Exchange was a monopoly without any substantive commercial incentive to promote new issues or develop the outreach of the market.
It is functionally a "mutual" club, not a real de-mutualized corporate, with its "actual" owners or those in de-facto control seem more interested in keeping it that way as it suits them for a variety of reasons, including the fact that it remains a happy hunting ground for exploitation and also that it is fodder for their gambling instincts.
He said wherever one looked in the capital market of Pakistan, a monopoly could be seen. The stock exchange, the securities depositary and the clearing house are all monopolies. The present monopolistic structure of the capital market must be made to give way to real competition at all levels.
In the absence of tough competition inter se between securities issuance and trading platforms, market intermediaries, market service utilities, and securities issuance entities, capital markets do not exhibit growth and remain stunted, or worse, which is often the case, actually shrink, as is happening in Pakistan today.
As regards investment banking, in a genuine sense this function does not really exist in Pakistan.
It is, however, badly needed.
The few investment banks that were set up were mostly surrogates for commercial banking and were headed by risk-averse commercial bankers (approved as "fit" and "proper" by the SECP) as opposed to hard-nosed, risk taking, capital market professionals, whether local or imported, who have whatever it takes to promote issuance of securities by unlisted companies albeit as currently constructed it is unlikely that the SECP would approve of such people as fit and proper.
To a query on ease of doing business and rationalization of the Companies Act, 2017, and the Securities Act, 2016, he stated that the SECP and the Policy Board were actively considering substantive and wide-ranging amendments to the laws.
This includes the consolidation of the Futures Act and the securities - both onerous and somewhat flawed pieces of legislation - into a simple, short and rational law for securities instruments.
Mirza said he believed that in the recent past, the SECP seemed to have suffered from the "mania" of issuing "unnecessary and heavy" regulations that had smothered its regulated sectors and blocked market development. These regulations need to be rationalized and simplified, a task the Policy Board has already taken up with the pro-active co-operation and support of the current SECP chairman.
When queried regarding the paucity of new listings in the stock market, he expressed the view that in most jurisdictions it had been observed that the two institutions that promoted the issuance of securities and increased supply thereof were stock exchanges and investment banks.
"Investment banks have a key role in the development of the capital market in any country through promotion and placement of new issues. However, Pakistan does not have genuine risk-taking investment banks. There is a need for a focused professional study for fostering the function of investment banking in Pakistan within our local context," he suggested.
About investors' education, Policy Board chairman stated that the whole question of investor education had to be seen in perspective and not over-emphasized.
It really has a rather limited role in promoting market growth and to his knowledge there was no empirical evidence to demonstrate that investor education has a substantive or over-arching role in market growth, which really occurs through the adept operations of competing stock exchanges and market players, like investment banks.
He stated that there was sufficient empirical evidence to support the view that markets grow through the supply of securities and not demand.
In any case, the operations of adept investments banks increase the supply of securities, and also play a role on the demand side through selling or placement of securities through professional salesmanship.
When asked about the three main areas that need to be addressed for the capital market to develop, Mirza indicated revamping the regulatory apparatus, introducing credible competition in all aspects of the capital market, so that the market really functions as such, and instituting robust investment banking.
He emphasized that, while these three areas were significant, there were other related aspects that could not be ignored, namely, putting in place effective arrangements for the financing of stock market transactions as well as for borrowing and lending of securities, taking effective steps to eliminate the intervention of law enforcement agencies in the affairs of the Commission, and strengthening the role of the Policy Board as the second leg of the regulatory apparatus providing the much-needed check and balance.