The SECP team is particularly grateful for the efforts put in by the National Assembly's Standing Committee on Finance and Revenue and its former Chairperson Ms Fouzia Wahab for her untiring efforts in debating and finalising the law. The enactment of the law today reflects the government's recognition of capital markets' importance in the economic growth of the country. The top management of the SECP, of course, provided commendable leadership during the entire process.
In Pakistan the banking sector continues to dominate the overall financial sector, however, for systemic stability and for capital formation, in particular for new projects and the SME sector, a vibrant and transparent capital market is vital something proven across the globe in both developed and developing countries. The capital markets play a crucial role in fostering economic growth of a country by providing an efficient platform for fundraising through various investment products. In the context of Pakistan, the capital market has played pivotal role in the drive for privatisation. Be it strategic sale or privatisation for masses the capital market has successfully facilitated price discovery and today the government of Pakistan is the largest shareholder in the market. The SECP being cognisant of the significance of a transparent and efficient capital market, had as part of its overall capital market reform agenda also initiated the demutualization exercise way back in 2002.
However, while in the meantime various other reforms such as revised Code of Corporate Governance, introduction of KYC/CDD procedures, regulatory framework for anti-money laundering, automation of securities settlement, implementation of the capital gains tax regime and numerous other reforms were implemented successfully over time, deliberations on the model for such a massive structural change at the stock exchanges and an enabling legislative framework made accomplishing demutualization an even greater challenge. It is therefore a great privilege that today we can say that the stock exchanges stand corporatized and demutualized as of August 27, 2012. This would undoubtedly not have been possible without the utmost commitment and resolve at the SECP accompanied with the concerted efforts at the government and the stock exchanges level.
The demutualization law provides the framework for corporatisation, whereby the present structure of stock exchanges limited by guarantee has been converted into limited by shares; and demutualization of the stock exchanges whereby ownership and trading rights have been segregated. The mutualized structure of our exchanges was inherently conflicted as members being owners enjoyed exclusive trading rights and controlled affairs of the stock exchange which resulted in lack of transparency and compromised investors' interest. The demutualization eliminates this conflict of interest and goes a long way towards bringing our stock exchanges on par with international standards.
Globally, majority stock exchanges have a demutualized structure. This is what we see in jurisdictions such as India, Malaysia, Singapore, the US, the UK, Germany, Australia, Hong Kong, Turkey etc. The demutualized set-up of stock exchanges also results in an effective regulatory function distinct from its commercial functions. This brings about a balance between the interests of different stakeholders in the corporate and governance structure and ensures greater investor protection.
The SECP stands committed to introducing reforms for establishing a fair, vibrant and modern capital market in Pakistan. The demutualization 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 SECP seeks the government's support in ensuring early promulgation of these draft laws.
Demutualization is the first step towards the objectives we have set at the SECP and a lot more needs to be done, certainly in extensive consultations with the relevant stakeholders, to keep abreast of latest developments in the international market, ensure better supervision of the capital market and be aligned with internationally acclaimed principles of market regulation. In line with this vision, the SECP is even now actively pursuing various measures for the development of the capital market, which inter alia include setting up of a bond pricing agency, revisiting the framework for regulation and supervision of credit rating agencies, introduction of new products such as ETFs and Index Options, ensuring maximum benefits of automation by exploring avenues for introducing e-dividend payment, e-voting for corporate elections, and c-application for initial public offers, opening our market to foreign investors through introducing cross listing of shares and indices. Also, being fully cognisant of the constraints in our market which make access to financial capital limited in Pakistan, the SECP is working with the stock exchanges to set-up a separate board for small and medium cap companies. Such board will encourage easier fund-raising by venture capital/green field projects and will serve as a platform for growing companies to enjoy the benefits of a public listing amidst a flexible regulatory environment.
It is expected that these reforms including demutualization of the stock exchanges will further improve governance and transparency of Pakistani stock market thereby engendering greater investor confidence.
(The writer is Director, SMD, at the SECP.)