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Chairman SECP Muhammad Ali – reforms and better governance

Chairman SECP Muhammad Ali – reforms and better governance

The sweeping reform programme introduced by the Securities and Exchange Commission of Pakistan (SECP) over the last two years has invigorated Pakistan’s once lacklustre capital market. In recognition of its efforts, the World Economic Forum’s Global Competitiveness Report (2012-2013) has upgraded SECP’s ranking to 55, as compared to 70 last year.  Chairman Muhammad Ali talks to Blue Chip about the milestones achieved for Pakistan’s capital market, the challenges faced and his vision for developing a vibrant, diverse and innovative capital market, corporate sector and insurance sector.


You recently suggested the idea of merging the bourses to attract foreign investment. Could you elaborate on the benefits of this proposal?

 Muhammad Ali:  “At present, we have three stock exchanges in Pakistan which have evolved over the last few decades. Ninety per cent of the turnover comes from Karachi. The majority of the trades, which take place in Lahore and Islamabad are subsequently executed on the KSE because clients in Lahore and Islamabad want to execute trades on KSE’s trading terminal due to market liquidity and efficient pricing.

In the past, the three exchanges were mutualized, meaning that they were owned mutually by brokers. Now that they are demutualized, they need to get the strategic investor which will preferably be an international stock exchange. If each of the three exchanges tries to find a separate strategic investor, they will be competing in the global exchanges’ scenario which is not healthy as very few exchanges globally are interested in investing in other exchanges. Of these, there would be fewer still which the Pakistani stock exchanges would be willing to partner with. With limited options to begin with, this situation will not be favourable to the investing exchanges either because two large exchanges from the international market would not be keen on entering Pakistan and competing in an existing small sized market. The global stock exchanges landscape is not structured this way.

The second consideration behind merging the three exchanges is availability of one price for all investors across Pakistan, no matter where they are geographically located. If there is one exchange and one trading terminal, a uniform price will be offered to all investors throughout Pakistan.

Third, the size of our capital market is tiny and within that small size we have three exchanges in operation, each with its own infrastructure, its own CEOs, management and back offices. We have split our energies, which we need to combine and not distribute. If we merge them, we will have three premises in Pakistan with one management focusing in one direction. They can have a stock exchange, a derivatives exchange, a small and medium exchange, and they can work on the development of the debt market. Only when the energies are combined will we truly be able to develop the capital market.

If the three exchanges decide to merge, we can give this national exchange approximately four to five years to establish itself. Ideally, since in the long run one exchange is not a good idea as it would stifle competition and reduce efficiency, after a gap of a few years we should look at the possibility of issuing one more license for another exchange.  Alternatively, to begin with Karachi could become an exchange in isolation and Lahore and Islamabad could merge so that we would have two exchanges which would ensure continuation of competition.”


In the wake of various capital market reforms, trade has increased to 200 million shares per day from previous levels of 30 million to 50 million shares per day. How was this achieved?

MA: “Over the last four years, Pakistan’s capital market has had to face two major shocks. The first came with the 2008 global financial crisis when the market was closed for 109 days. When the market subsequently reopened, brokers and investors lost a lot of money because the market opened at a much lower level as compared to when it was shut. Due to these losses  there was a severe liquidity crunch in the market.

The second shock came in 2010 when the capital gains tax (CGT) was introduced without adequate homework. Although I support the introduction of the CGT, I also believe that the way it was implemented should have been better thought through. We did not take into account that before 2010, for 36 years there was no CGT levied on the Pakistani capital market. During these years, billions of rupees of wealth was accumulated by investors, which, although legal, was never reported, nor was it required to be reported by the Federal Board of Revenue (FBR). Therefore, naturally, when the CGT was imposed in 2010, the FBR asked about the source of funds that the shares were purchased with; which, in most cases, was the previously undocumented profit which investors had no way of proving.  The investors did not want the hassle of possible trouble with tax authorities, so a large number closed their accounts and left the capital market.

Globally, the CGT is imposed on all asset classes because investors should not be able to exit one asset class and go to another. In Pakistan, since the CGT was not imposed on commodities, real estate, etc., people started taking money out of the capital market and going into the commodities, trading, real estate, construction, etc. When the number of investors goes down in a market which is already small, volumes will naturally shrink. As a result, the average daily trading volume was only around 40 to 50 million shares last year.

If you look at the 2008 global financial crisis in retrospect, you’ll realise that most of the countries took two major steps to counter its effects. First, liquidity was provided and funds were pumped into the system. On the contrary, in Pakistan instead of providing liquidity we squeezed it when the State Bank restricting the lending available to the capital market. Second, conscious and serious efforts were made internationally to keep interest rates low, but in Pakistan no such efforts were even initiated.

In order to improve volumes in the capital market, we worked on two fronts. First to resolve the CGT issue and second to improve liquidity. Although the stock market was not in favour of the CGT regime, we convinced them that bringing all asset classes under the tax net would serve the national interest and the reversal of the CGT is not an option. We worked with the FBR and proposed a system in which investors’ tax could be deducted via a completely automated system in a hassle-free manner.

We also proposed a solution to the issue of documentation by allowing  investors a two-year window for documenting their genuine gains earned in the past 36 years. Once wealth comes into the market and is documented, it will be taxed for all times to come.

Some concerns were raised about why investors should be allowed a two-year window for documentation. The criticism against this two-year window was that illegal money could come into the market. This was not a valid criticism. The probability of illegal money coming into the market is very low as we have strict implementation on capital market participants of Know Your Customer policy, Customer Due Diligence requirements and all aspects of anti-money laundering laws. Any payment over  Rs25,000 has to be routed through the banking system, and transactions are routed via the National Clearing Company of Pakistan Limited (NCCPL) which is a completely centralized and automated system.

Also, to safeguard against tax avoidance or tax evasion, and widen the tax net, the system ensures that whenever an investor buys and sells stocks, at the time of the sale the NCCPL, clears all transactions of the stock exchanges, calculates the gain and deducts the applicable tax. The NCCPL also issues a certificate at the end of the year to the investor and gives the data to the FBR. All investors are required to file returns and declare the CGT deducted by the FBR. This has led to complete automation and transparency of the tax system in capital markets and has ensured a zero tax evasion.

In order to avoid anyone trying to use capital markets to whiten their wealth, we set a condition that an investor wanting to take advantage of the exemption from declaring the source of his or her funds within the two year window will have to remain invested for a minimum period of 120 days. Anyone who invests in the capital market for 120 days is taking a major risk. If one holds shares for 120 days, one can easily lose 10% to 20% as a result of share price fluctuation. Why would anyone come to the capital market to whiten their wealth, taking risk on their investments when there are other means available in the country to document wealth and incur a cost of only 2% to 3%? It would be illogical for someone to come to the stock market only for whitening their wealth.

On the liquidity front, we worked on improving the leveraging in the market.  We introduced and improved the Margin Trading System. Although it has not taken off the way we would like it to, it has provided some liquidity to the investors.  We have also been trying to improve the capacity of the brokers to do more business.

All these measures have led to the return of confidence in the market. It is very easy to lose confidence and it is extremely difficult to win it back. Our objective is a daily volume of around 400-500 million shares, which I think will take some time, but so far, we seem to be going in the right direction.”



The much-awaited demutualization of the stock exchanges has finally been realized. How has this milestone been received by the capital market?

MA: “In order to improve savings and investments rate in the country and to develop a culture of capital market investments in Pakistan, demutualization is the only way forward. Through  demutualization, we have separated the regulatory and the commercial functions of the exchanges, and the regulatory function will be supervised very closely by the SECP.

Fortunately, the stock exchange members are, and have been very supportive of the demutualization process, and we got tremendous backing from the stockbroker community. From the Parliament, the late Ms. Fauzia Wahab supported us greatly, since she was the one who pushed for this bill in the joint session of Parliament. Going forward we hope to see a better level of supervision and much more transparency in the capital market.”

New equity, derivatives products and commodity futures contracts including exchange traded funds, index options, futures contracts in sugar and crude oil have been recently introduced. Can you elaborate on the benefits of these new innovations?

MA: “Our derivatives market is very small, especially as compared to other countries in the region. To have sufficient liquidity so that inherent risks in a market can be curbed, it is essential to have a properly developed and active derivatives trading system in place. The derivatives also go a long way towards attracting foreign investments, and offer local investors the opportunity to take positions on their short term and long term views on the market. It was keeping these factors in mind that we introduced the new derivatives products.

Regarding the various commodity contracts, we need to realize that Pakistan is an agriculture-based economy: 60% of our population depends on agriculture for its livelihood. If you look at the ground realities, farmers, producers and manufactures do not have any mechanism available to hedge their produce or to take a view on the future. They are mainly dealing in spot markets. As far as spot markets are concerned, we have mandis all over Pakistan where a farmer goes with his produce and, on that specific day, the buyers pay a price depending on demand and supply within a small geographical location, and manipulate the market inefficiencies to their advantage. As a result, farmers are unable to get the best possible price. For example, a farmer living in Dera Ghazi Khan will go to his local mandi where the buyer will offer a certain price, but the price in another town only 100 kilometres away might be a lot better. In other words, there is no information sharing or price efficiency in the existing system.

Here we can take advantage of our commodities futures market, which has active trading, but only in a few commodities. What we need is a market which offers active trading in 20 or 30 agricultural commodities. We should take a lead from India and China where, over the last few years, the commodities markets, spot as well as futures, have taken off very well.

For this, we intend to talk to producers of various commodities, and to people who would be interested in hedging their positions and getting these market players to come and trade. We are working closely with the Pakistan Mercantile Exchange and are restructuring their board. Whatever contracts have been approved, hopefully we will see more trading in the future to derive the real benefit. We are also looking at introducing more commodities exchanges in the country, since one will not be able to meet the demands of the Pakistani economy.

Another idea is to have a market for spot commodities trading. India has done this very successfully. We have studied their model in detail and are considering creating a completely automated spot market in which warehouses are set up all over Pakistan, allowing farmers to go to these warehouses with their produce, deposit it and get an electronic receipt which can be traded. This will enable farmers to sell their produce on a computer-based system which will have terminals all over Pakistan. It will also help them get the best price for their produce. The logistics and transportation will also be made more efficient. This will go a long way in reducing poverty levels in the country and closing the income disparity gap in Pakistan.”

Globally, debt is a major part of capital market investments. In Pakistan, we do not have an active bond market. What do we need to do to develop a bond market in Pakistan?

MA: “In Pakistan, trading of T-Bills and PIBs is primarily dominated by banks, if the government were to adequately utilize the capital markets for their borrowing needs, it would result in significant advantages, both to the government and the market. Presently, depositors in Pakistan keep their savings with banks at 5% return. The banks, in turn, lend these savings to the government at 13%. The banks’ spread is around 8%, which is one of the highest in the world. Now if the government were to borrow directly from the public via the capital markets, various depositors who are getting 5% on their deposits with banks will be willing to lend to the government, for 3-6 months, at a rate of 8-9%, meaning higher return for depositors and massive savings for the government. So, not only can the capital markets provide a significantly wider audience to government securities, such an initiative will also develop a secondary market of government debt which will lead to an effective yield curve, various interest based derivative products and creation of bond market for companies in the private sector as retail participation will encourage the private sector to come to capital markets and issue fixed income instruments.

Second, government securities in Pakistan are presently being traded on the Bloomberg-based trading system known as E-Bonds which has been approved by the State Bank of Pakistan. Recently, we also revamped the Bonds Automated Trading System as a trading platform for listed corporate debt securities. In order to promote the overall debt market, there has to be a single trading platform for both government and corporate debt securities, and since the BATS is a domestically developed system which provides the regulators better control measures, linkages with settlement and clearing functions, ability to implement the desired changes in the future, and significantly lower costs, it would make sense to abolish Bloomberg and develop the BATS as the national debt securities trading platform. For this the SBP’s cooperation will be required. Other Asian countries have achieved development of debt market exactly in this manner.

Another key prerequisite for development of debt capital market is the provision of an efficient and transparent price discovery mechanism. Presently, the Mutual Funds Association of Pakistan is performing the function of pricing of corporate debt. In order to bring further transparency and independence into the process, we are aggressively pursuing the establishment of a neutral bond pricing agency in Pakistan, in collaboration with potential sponsors and a renowned international bond pricing agency.

The credit rating process of corporate debt also plays a significant role in promoting secondary debt markets and providing confidence to investors. To improve the regulatory framework for the credit rating process, we have prepared a significantly revamped regulatory framework for credit rating agencies which will be issued shortly.”

Despite various attempts in the past, why haven’t we been able to set up a culture of investment in capital markets? What steps are you taking to do this successfully?

MA: “In the past, the focus has always been on a few select aspects of the capital market development process instead of a holistic approach. In order to achieve long term and sustainable growth, I think we will need to simultaneously focus on five basic aspects of the capital markets.

First, there is a need to promote the capital market through investor education and awareness. From 2000-2010, Pakistani capital markets gave an annual return of 30% and  outperformed even gold whose annual return in this period was 20%. Traditionally accepted low risk alternatives such as defense savings certificates with 11% and bank deposits with 4% average annual growth lag far behind the returns that were available on our exchanges. The investors are not aware of these figures, and remain wary of investing in the capital markets on account of the perception that they will go through a crisis every few years. As part of a wider strategy to revitalize our capital market, we have initiated an ambitious country-wide program for investor education which  aims at bringing various categories of potential investors into the system. This will hopefully attract previously untapped sources of wealth to the capital market.

Second, the capital market needs infrastructure development through provision of strong distribution networks. In Pakistan, financial inclusion, one of the lowest in the region, is only 14% in comparison with Bangladesh at 30%, India with 45% and Sri Lanka with 60%. In terms of distribution, we have less than 200,000 investors, i.e. 0.1% of our total population. Of these, 80%  live in Karachi, Lahore and Islamabad. The AMC’s and brokers have less than 200 branches nationwide in Pakistan, while in India, the National Stock Exchange (NSE) has presence in 3,150 cities, the AMC’s and brokers have 34,000 branches and around 250,000 access points are available to investors. We have asked the exchanges to look into the possibility of providing Internet and mobile-based trading platforms to all brokers which will be a much cheaper alternatives instead of each broker investing these amounts in their individual capacity. We also need to work on introduction of a sub-broker regime which will assist greatly in the outreach.

Third, there is a need for a larger product portfolio to meet the demands and risk appetite of various strata of investors. Currently, in Pakistan the average daily turnover in the equities is  only $54 million, and $9 million in the derivatives, while the NSE in India boasts of an average daily turnover of $3.5 billion in the equities and $15 billion in the derivatives.

Fourth, there is a strong need to establish high standards of governance across the capital market and involving the market participants to follow the best practices, in order to generate greater investor confidence.

Last, we are also working on human resource capacity building and establishing standards of ethical conduct for the market participants through certifications. We are actively engaged with the Institute of Capital Markets and the development of regulations to train and certify market intermediaries, with an eventual aim to mandate such programs for all persons providing services in the capital markets.”

What are your views on the recent efforts to secure an upgrade of Pakistan’s capital market to re-enter Pakistan on Morgan Stanley’s Emerging Markets Index?

MA: “The closure of the market in 2008 had a negative impact within the foreign investor community. We spoke to Morgan Stanley last year and assured them that the 2008 closure was an extraordinary measure which would not happen  again. Unfortunately, our volumes were very low when we spoke to them last year, which have now increased by three to four times. The recent meetings between Morgan Stanley and the KSE were very encouraging. One day Pakistan will be back in the MSCI Emerging Markets Index and I am hopeful that day will come soon.”

In May 2012, the SECP was elected to the executive board of the International Organization of Securities Commissions (IOSCO). How did this come about?

MA: “In the IOSCO Board formation, some of the major markets from Asia, including India, China, Japan and Malaysia, were automatically elected on the IOSCO Board. Countries from the developed markets like the US, France, Germany, Italy, Australia, etc., were also already elected. This year, the competition for the Asian and Australian continent seats was between New Zealand, Korea, Pakistan and Singapore. We pitched ourselves as a representative of the developing world. If a global organization only consists of representation from developed countries, emerging markets’ needs will not be catered to and they cannot graduate to the level of developed markets, which is contrary to the objectives of the IOSCO. We spoke to the heads of Asian regulators and convinced them that Pakistan, being at the upper end of the developing markets, could be the voice of smaller markets. Being on the board is a huge honour because now Pakistan is part of the policymaking and legislation as far as global capital markets are concerned.”

How will the SECP encourage greater investment opportunities and listings?

MA: “Listing is the final stage of a corporate’s desire to raise capital. The problem in Pakistan lies at the steps leading to the listing process, because in order to have listings we need to have large corporates with good governance standards. In order to have large sized corporates, we need to start with smaller sized companies. For smaller sized companies, we need a culture of corporatization. The problem is at the grassroots level. We have not thought about how to bring businesses under an umbrella where they can be regulated better and which will reduce the size of the undocumented economy.

The size of the undocumented economy in the country is massive. It is an economy where people are not declaring their profits and are avoiding paying taxes. The tax-to-GDP ratio is 10%. On the one hand, consumer businesses are booming and the private sector is making money, while the government is consistently going through a deficit. The State Bank figures suggest that there are 3 million businesses in Pakistan. Out of this number, only 60,000 are incorporated as companies. This means only 2 out of every 100 businesses fall within the corporate structure in Pakistan.

This dilemma exists partly due to the tax structure in Pakistan. The tax rate on individual businesses and partnerships is 25%, but the moment one becomes a corporate, not only does the tax rate goes up to 35%, the regulation and disclosure requirements also increase. The thinking of tax policymakers in the past was to tax individuals and partnerships at a lower rate as they were perceived to be small sized businesses. However, this has been massively misused and today partnerships and individual businesses may be larger than corporates but are subject to a lower tax rate and do not even report their tax liabilities properly. If we want to impose a lower tax rate on businesses making lesser profits, the way to do it is through tax slabs and not by providing tax incentives and lower tax rates to businesses that do not face regulatory and audit requirements and hide their real profits.

Last year, we gave a proposal to the FBR to increase the rate of tax on partnerships and individual businesses over a three year period and reduce the tax rate on corporates so that FBR does not suffer any revenue loss. Once people start shifting to corporate structures, the tax revenue for the government will go up automatically. Once businesses come under a corporate set-up, their mindset changes automatically as their governance standards, systems, board and management structures, disclosure and audit requirements–everything improves. The banks are also more comfortable lending to them, as they are expected to be more transparent. When these companies gradually grow in size, listings will also increase.” 

The revised Code of Corporate Governance was launched in April 2012. What has been the impact of this revision?

 MA: “The market has taken it well. We spent more than a year consulting with stakeholders and held extensive roundtables in Karachi, Lahore and Islamabad. The Code looks at the ground realities of our corporate world and is very practical. However, we need to do a lot more work as far as bringing in more transparency and better governance in our corporate world is concerned.

The protection of minority shareholders’ interests also requires more attention. The minority shareholders are fragmented in Pakistan. There are few associations but these consist of minority shareholders who own 50 or 100 shares only, and these associations are misusing their platforms rather than utilizing their position for better governance. We need to structure the minority shareholders’ associations in a way that minority shareholders owning a certain minimum number of shares, who are interested in the wellbeing of the organization, can join such associations. These shareholders can also promote one individual to represent them as a director on the board of a company.

We are also working on other ways to facilitate fragmented minority shareholders, especially in larger companies, such as taking advantage of the Internet and encouraging annual general meetings via video conferencing.  For example, if there is a company with its head office in Lahore, shareholders from cities across Pakistan can participate via video conferencing, instead of incurring heavy transportation costs, with the possibility that in the end a majority of them may not be able to participate at all.

We also need to develop a code for public sector enterprises, which we are working on and are in the final stages of completion. If public sector enterprises are governed better through a new governance code or through rules, it will help reduce some of the losses faced by these enterprises. Also, in Pakistan we need a code of governance for private limited and family-owned businesses which should be completely voluntary aimed at improving the awareness among business owners on how to manage their organizations better.”

The insurance penetration in Pakistan is among the lowest in the world. How do you intend to improve it?

MA: “Since, at 0.7%, insurance penetration in Pakistan is one of the lowest in the world, we need to work on a number of fronts to improve the situation. To get an overall sense of what needs to be done to develop this sector, we have constituted an Insurance Industry Reform Committee comprising of industry experts, professionals and members from within the SECP.  The committee is working in five distinct areas, including regulatory reforms, market development, operational challenges, education and awareness, and technological development.

Then in order to improve insurance policy holders’ confidence in the insurance industry, we have taken measures to strengthen the governance and sustainability of insurance operators, such as the introduction of the Sound and Prudent Management Regulations, 2012, prescribing the ‘fit and proper’ criteria as per best international  practices. We  also notified a new solvency regime for insurers in 2012 which rationalizes the admissibility limits for certain assets, enhances the minimum solvency requirement for insurers, etc.

At the same time, we are also working on the introduction of new products to tap into a wider audience for the insurance industry. In July 2012, the SECP notified a new set of rules for takaful business, allowing conventional insurance companies to offer takaful window operations and enabling them to offer Shariah-compliant products, provided that the accounts for both operations are segregated and reported separately. We are also working in collaboration with the World Bank on developing micro-insurance in Pakistan for the benefit of low-income groups and businesses not served by typical social or commercial insurance schemes.  A diagnostic report, covering demand and supply side analysis, has been prepared, which will be released in November 2012.”

Recently you set up a committee for reforms in REITs and investment advisory services regime. What are the major changes you envisage in these areas?

MA: “The reforms in REITs were part of the overall NBFC regime that we are working on. For this we had set up an NBFC reform committee around a year ago which looked at the NBFC, asset management, Islamic finance, private equity, REITS and investment advisory services. We intend to share the draft report of the reforms recommended with all stakeholders towards end October this year.

A number of reasons for the unsuccessful implementation of the REIT structure, such as poor monitoring of the real estate sector, absence of a price discovery mechanism, cumbersome legal process, unattractive rental yields, etc. Keeping these in mind, significant reforms have been proposed, including a reduction in the minimum REIT fund size to attract investors with capital constraints and allow launching of medium sized REIT projects with a better potential for growth and return. A reduction in capital requirements is also proposed for REIT management companies to facilitate professionally qualified fund managers in the REITs business. At the same time, existing asset management companies will also be allowed to manage REITs. The proposed changes also envisage expansion in the domain of REIT eligible cities.

Similarly, the committee also worked on the development of a properly regulated investment advisory services sector, encompassing all entities offering or intending to offer such services. Presently, there is an absence of a centralized supervisory framework of these services. The committee has recommended the development of a broad regulatory framework under which asset management companies, investment advisors, corporate brokerage houses, DFIs, commercial banks and any other companies involved in capital market services business can be licensed to provide investment advisory services. The proposed regulatory framework will cover the provision of simple advice, non-discretionary portfolio management, discretionary portfolio management, etc.”

What are the major challenges you are facing in the implementation of your programs in different areas and how do you plan  to overcome these challenges?

MA: “The development of a financial market is not possible without  the backing of a strong legal and regulatory framework providing the basic structure for product innovation and market integrity, which is why, in 2004-2005, the SECP initiated the exercise of revamping key laws being administered by it. After years of hard work and numerous consultative processes, today we have a number of draft laws which are at different stages of approval. The SECP Bill, which has been pending parliamentary approval since June 2011, aims at strengthening the regulatory capabilities of the SECP, and enhancing its enforcement powers. Similarly, the Securities Bill, pending with Parliament since October 2011, was introduced with a view to bringing about much needed structural and legal reforms in the capital markets. An amendment to the Companies Ordinance, 1984, whereby companies can hold treasury shares, and which will change the way in which companies operate in Pakistan today, has been pending parliamentary approval since May 2002 after having lapsed as an ordinance.

These laws, once passed, will revolutionize the way we are performing our functions, and the way the capital market will develop. However, there appears to be a lack of appreciation for the significance of these laws. A strong support from the Parliament is needed for early enactment and implementation of all these laws.

Second, we have to acknowledge that investor confidence in our capital markets can only be fully restored when the markets are efficient, fair and transparent and people engaged in unfair practices are caught and punished. However, a number of investigations, inspections and adjudication proceedings initiated by the SECP, are in many instances stayed by the court of respective jurisdiction, before the SECP is given an opportunity of hearing. Such injunctions  usually remain operative till final disposal of the matter, which can sometimes take years. Given the nature of the SECP’s functions, this delay usually translates into financial losses to the investing public.

Although, I understand the constraints on the judiciary in terms of being over burdened with litigation, and I also appreciate that steps which have been taken to speed up the judicial process, like the implementation of the National Judicial Policy. I feel a lot more can be done in this area.

Recently, we approved the signing of a memorandum of understanding with the Karachi Centre for Dispute Resolution, so that the SECP can effectively refer inter-regulatee and investor disputes to an accredited mediator for out of court settlements, and reduce the burden on the courts. This will not apply to cases in which the SECP is itself directly a party to the dispute, since regulatory actions cannot be the subject of mediation, so on that front, we are working closely with the judiciary to develop seminars and trainings on the role of the SECP and the laws which it administers.”

In order to achieve your ambitious plans, what internal changes have you made and what changes do you intent to bring about in the future?

MA: “At the moment, the SECP is structured into different divisions dealing with different regulated sectors. Each of our sector team performs all functions involved in the enforcement activity, which is the most important activity that SECP is responsible for. Most global regulators structure themselves on functional basis to introduce transparency and specialization in each function. This also ensures consistency of procedures and systems in each function across all sectors. Keeping this in mind, we are studying restructuring of our enforcement activities on functional basis to ensure standardization and consistency of these functions across all sectors under our ambit. We expect the new structure to be much more efficient, transparent and also in line with the principles of natural justice.  For example, the supervision/investigation function is being separated from the adjudication function by creating separate divisions.  This will ensure that the adjudication process takes place before an impartial officer who is removed from the investigation process and can therefore form an independent view during the proceedings.

Similarly, in order to give impetus to the reform process, a specialized Research and Development Division is being created. A separate office of the General Counsel has been established, which will be independent of all other divisions and departments, so that impartial legal advice can be given to the Commission and our various divisions.

To enhance the SECP’s internal governance, in May 2012, we also launched an extensive exercise of preparing standardized manuals covering all aspects of our enforcement function. This exercise saw completion last month and now we have standardized written down procedures for offsite and onsite inspections, investigation, adjudication and litigation. We are also working on effective implementation of these SOPs, their compliance and training of all our officers in these procedures.”

What is your vision for the future for Pakistan’s capital market?

MA: “We need to have a culture where business plans are funded and not individuals, where entrepreneurs with the right idea can raise financial capital irrespective of their background or financial strength as long as their track record is clean and they meet the desired ethical and moral standards. With that objective in mind we are working on revising our regime for the private equity, venture capital and the entire NBFC sector. In addition, we are working with the stock exchanges on introducing a small and medium enterprises exchange. There has to be a marketplace where small and medium businesses can offer their business plans. If there is a business which is not profitable and is in its nascent stages, then perhaps only institutional investors should be allowed to participate. If a business is medium sized, is profitable and is not too risky then maybe institutional investors as well as high net worth individuals can participate. The businesses which fall within the low risk category can be allowed investment by the general public too. In other words, we need to match the risk profile of different types of investors with the risk profile of different businesses. We can also achieve investor protection by defining minimum investment size.

In the past, our attitude has been to prohibit small and medium sized companies from approaching the investors. Globally, countries and regulators have created market places and have encouraged small and medium sized companies to go to capital markets and raise capital. Internationally, private equity and venture capital investors have made significant contribution by investing in some of the most successful companies. In the US, Amazon lost money for a number of years. Apple, which is the highest market capitalization company today in the world, went through a stage where all the experts predicted that the company would go into bankruptcy; e-Bay and Yahoo also lost money for a number of years. But these businesses and companies were created because there were high risk investors whose investment profile matched the risk profile of these companies and the regulators and the system encouraged entrepreneurship. Without this encouragement and the mindset of the regulators these businesses could not have been created.

In terms of vision, I would like to see a capital market where any entrepreneur in Pakistan, who meets a certain minimum requirement of size and governance, should be able to raise capital in the form of debt, equity or quasi-equity. Right now we only have a “stock market”, we do not have a “capital market”. We need a capital market where equities are actively traded; liquidity and efficient price discoveries exist, investors are educated and aware of the risks, capital market participants are well trained and certified, and where sponsors realize that capital markets are the best way to unlock their capital, separating management of businesses and ownership allows them to manage their businesses in the best possible manner and also to ensure that their wealth is maximised–for present as well as for future generations.”

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