There was a substantial increase in the public floatation and over the years the number of listed companies reached 782. However, at present, four exchanges, ie, the Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE), Islamabad Stock Exchange (ISE) and the Pakistan Mercantile Exchange (PMEX) are functioning in the country. These exchanges were established in 1948, 1971, 1992 and 2002 respectively. However, the KSE is the premier institution, which is also called the mother bourse of the country has 574 listed companies with a paid-up capital of Rs 1,071,870,119 million and market capitalisation of Rs 3,760,750 billion. Since capital market plays a pivotal role for the development of a country as it facilitates mobilisation of long-term resources and helps its efficient allocation, it is universally known as the reflector of the economy.
It is obvious that a healthy and active capital market can greatly help in financing the development efforts of both the private and public sectors. Realising the need for effective regulations of the stock market, protecting interests of the investors, and regulating dealings in securities, the Securities and Exchange Ordinance, 1969, was promulgated first time in the country. This securities' law provided for, interalia, approval and registration of stock exchanges, listing of securities on the exchanges, powers to investigate bourses' affairs, prescribing qualifications of members and brokers, regulation of business of investment advisors and asset management companies, registration and regulation of central depository and rating companies. In order to administer the Securities and Exchange Ordinance, 1969, (the Ordinance), the Securities and Exchange Authority of Pakistan (SEAP), a precursor to the Corporate Law Authority, was set up in November 1970, with the approval of the President of Pakistan under Section 28 of the Ordinance. Under the Government Rules of business, the Authority was declared as an attached department of the Ministry of Finance. To achieve its objectives the Authority for the first time established an institutional framework aimed at (i) regulating the trade on the stock exchange by creating fair market mechanism and (ii) ensuring maximum disclosure of the affairs of the companies by adhering to fiduciary behaviour.
Meanwhile, the subject of Company Law Administration' and 'Accountancy' were transferred from the Ministry of Commerce to the Ministry of Finance in 1973 and 1974 respectively. In February 1974, the work relating to these subjects was further assigned to the SEAP, the newly created Authority by the government. As per international practice, the securities commissions/authorities are basically responsible for regulating capital market, but in the case of Pakistan-being a small country-it was decided to combine both regulation of the stock exchanges and the company law administration in one institution and to assign it to the SEAP.
This was the stage when I joined the SEAP as a team member of the Registrar of Companies Organisation and was posted in the Company Registration Office in Lahore. Up to February 1974, the subject of Company law Administration used to be with the Ministry of Commerce and the work with regard to its administration was assigned to the respective provinces. In those days, the Registrar offices being traditional provincial departments were really in bad shape and the concept of regulation did not exist. The record of companies was totally unorganised and it used to be a miracle to get any work done timely or on merit. On taking over the subject, the SEAP had posted only two officers in that office.
However, in spite of meager resources, we decided to take appropriate measures to bring about some visible change and to make office working as efficient and corruption free. Our efforts bore fruit in a short period of time, and we succeeded in changing the overall working environment of a public dealing office and converted it into a clean, efficient and proactive service provider. By taking legal action against the defaulters and also by providing guidance to the visiting public, the compliance rate improved substantially. As a result, our efforts were acknowledged and appreciated by the general public and even by the judiciary. The senior officers at the SEAP also termed the Lahore office as a model among the Company Registration Offices (CROs).
Being an attached department faced with financial constraints, the securities' regulator was not in a position to undertake reforms and to hire professional officers from the market. Thus, it became difficult for the SEAP to establish itself as a strong and effective regulator.
By that time, the main focus of the regulator remained on the examination of annual accounts of the listed companies to ensure disclosure requirements. The penal actions were taken against the defaulters who failed to file statutory returns particularly with regard to beneficial ownership by the directors and other officers of the listed companies. One of the main problems for not playing an active and effective role by the SEAP as a regulator was that unde rthe securities law as well as the company law, all important powers were vested with the Federal Government. It was, therefore, realised that either suitable amendments should be made to the relevant laws or maximum powers be delegated to the SEAP for proper functioning as a regulator.
Thus, the then government decided to constitute a new Authority with a different name, and the Corporate Law Authority (CLA) was established on March 10, 1981. Subsequently, pursuant to the provisions of Section 11 of the Companies Ordinance, 1984, it was conferred a statutory status on December 31, 1984, to administer the following laws in the area of corporate regulation and related fields:
The Companies Act, 1913, The Securities and Exchange Ordinance, 1969, the Monopoly and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970, The Companies (Appointment of Legal Adviser) Act, 1974, the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980. The work relating to the Institute of Chartered Accountants of Pakistan was also entrusted to the CLA in 1981 .The administration of the Capital Issues (Continuance and Control) Act, 1947, was transferred from Finance Division to the CLA on December 14, 1989.
The CLA came into existence through the merger of the SEAP, Registrar of Companies and the Monopoly Control Authority (MCA). By doing so, the scope of functions and activities of the CLA expanded considerably and the government delegated all its powers except power to make rules under the various laws to the newly constituted the CLA. Here it will be apt to mention that in order to give a new touch to the corporate regulator both the SEAP and the CLA were headed by private sector professionals. Heavyweight personalities belonging to accounting profession were hired. Since both gentlemen, Mr Rahim Jan and Mr Irtiza Husain, were senior chartered accountants, they did their best to ensure the preparation, circulation and filing of annual accounts by companies, their thorough examination in light of the company law requirements and the International Accounting Standards. As a result of keen interest taken by the then CLA chairman, the Companies Act, 1913, adapted by Pakistan on its creation was replaced with the Companies Ordinance, 1984, on October 8, 1984. For effective regulation of the stock exchanges and to nsure protection of the investors' interests while dealing in securities, the provisions of the securities law were implemented to some extent in its true spirit.
Meanwhile, some of the significant developments which took place at the relevant time in the corporate sector were pressing the stock exchanges to move in the direction of automation. Consequently, exchanges automated their market information systems and screen-listed trading was introduced. In order to enhance efficiency and bring transparency in operations of the stock market, the governing boards of the exchanges were restructured. To this end, the concept of independent management was introduced and first time professional but non-broker chief executive officers were appointed by the exchanges to manage their day-to-day operations. Necessary steps were initiated for the establishment of the National Clearing and Settlement System for all the three exchanges of the country. In order to do away with the age-old system of physical handling of securities, the Central Depository Company of Pakistan (CDC) was established and made operational in September 1997. With the assistance of the IFC, first credit rating company, in the name of Pakistan Credit Rating Agency was established. Subsequently, keeping in view the need for healthy competition, another rating company, ie, DCR-VIS was also allowed to operate in Pakistan.
A small piece of legislation but subsequently getting importance, ie, the Capital Issues (Continuance of Control) Act, 1947, was promulgated in united India for regulation of the issue of securities and was adapted by Pakistan and India upon their independence. Since government used to enjoy discretionary powers in issuing consent orders for issue of securities by companies, the existence of this law was considered an unnecessary intervention and inconsistent with the policy of liberalisation and deregulation. Thus in 1995, on recommendation of the CLA chairman, it was decided by the government to repeal the said Act.
With the onslaught of self-regulation and liberalisation, the subsequent governments underlined the need for further restructuring of both the corporate sector and the corporate watchdog. Therefore keeping in view the practice in many countries where regulatory functions pertaining to the securities market were performed by statutory bodies rather than government departments, the need for restructuring of the CLA the predecessor of the SECP further came under focus of the then government.
Thus on October 1, 1997, the federal cabinet decided to restructure the CLA, transforming it into the Securities and Exchange Commission of Pakistan (SECP) as an autonomous regulatory body, independent in financial, administrative and operational matters. Monopoly Control Authority (MCA) was separated from the CLA as its objectives and main functions were different from those of a capital market and corporate sector regulator. Subsequently, the MCA was transformed into the Competition Commission of Pakistan (CCP).
The administrative structure of the SECP was followed to some extent while establishing the CCP, but the requisite financial autonomy could not be managed for the newly established Commission, ie, CCP. As regards transformation of the CLA into the SECP, it was really a challenging job as it was the first experience and no model was available. When the SECP came into existence, many others followed it as a role model.
In fact, under the able, sincere, committed and dedicated leadership and guidance of Mr Shamim Ahmed Khan, the founder chairman of the SECP, we succeeded in bringing in a concise and excellent piece of legislation under which the Securities and Exchange Commission was established. In my view, it was the best law that provided for the creation of an independent autonomous regulator as a 'body corporate' which is enjoying autonomy in real sense, through proper checks and balances. The existence of a Policy Board to oversee performance of the SECP, approves the SECP's annual budget and annual accounts to be audited by a firm of chartered accountants to be appointed with the approval of the government and the Auditor General of Pakistan are the primary checks. Apart from this, the annual performance report of the SECP along with its audited accounts are required to be published in the official Gazette and also laid before both Houses of the Majlis-e-Shoora (Parliament) every year.
Gradually, the responsibilities of the SECP were expanded in 2002. In order to provide for holistic and consolidated regulation of the non-banking financial sector, regulatory authority over the leasing and insurance sectors was transferred to the SECP. The regulatory agenda was further expanded by amending the Companies Ordinance, 1984, through the Companies (Amendment) Ordinance, 2002, under which the concept of non-banking finance companies (NBFCs) was introduced. As such, the NBFC regime covered activities pertaining to investment finance services, leasing, housing finance services, venture capital investment, discounting services, investment advisory services and asset management services were transferred to the SECP. Most of these entities were previously regulated by the State Bank of Pakistan. Besides, on my recommendation, in order to increase corporatisation and to encourage documentation for the small businesses, the concept of the single member company (SMC) was first time introduced in Pakistan by making appropriate amendments to the Companies Ordinance, 1984. The enabling provisions with regard to the establishment of the SMCs encouraged the use of corporate structure by small businesses and sole proprietorships. The privileges of limited liability and independent legal status afforded better protections to small businesses and provided incentives to incorporate. Here it will also be relevant to mention that consequent upon the introduction of the concept of the SMC, most of the stock brokers who did not believe in sharing even with their near and dear ones decided to convert the status of their sole proprietorships into the SMCs. The SECP also appreciated and facilitated the move, as the regulator wanted to see maximum brokers as corporate entities for their effective regulation.
In 2003, the regulation of Voluntary Pension Schemes (VPS) and Real Estate Investment Trusts (RIETs) were also entrusted to the SECP. The significant reforms taken by the SECP for the development of capital market and the insurance industry include (i) new mechanism for determination and collection of CGT (ii) introduction of ETFs and Index Option (iii) implementation of Anti-Money Laundering (AML) Regime (iv) operationalization of e-services portal for online registration and fast-track registration services, a company may be registered just within four hours (v) for insurance companies, sound and prudent management regulations have been introduced. Besides, solvency and Takaful Rules have also been notified.
One of the latest achievements of the SECP is promulgation of the demutualization law. This issue had been pending since 2004, but last year the chairman desired that we should make a concerted effort for the early passage of the law. It was appreciated when we succeeded in getting it passed through a joint session of the Parliament. The Act was promulgated on May 7, 2012. The main objective of the new law is to change the mutualized structure of the stock exchanges wherein members enjoyed ownership as well as trading rights. The demutualized structure inherently created conflict of interest as members used to predominantly control affairs of stock exchange which resulted in lack of transparency in their operations and compromises investors' interest. Due to lack of resources stock exchanges were not able to grow up to expectations of investors. The demutualization of stock exchanges will entail converting their structure from non-profit, mutually owned organisation to for-profit entities owned by shareholders. The demutualization will result in increased transparency at stock exchanges and greater balance between interests of various stakeholders by clear segregation of commercial, regulatory functions and separation of trading rights and ownership rights. It is a well-established global trend and almost all stock exchanges world-wide operate in a demutualized manner.
The implementation of this law has brought Pakistan capital market on a par with other international jurisdictions. It will help expand market outreach, attract new investors, improve liquidity and enable stock exchange to attract international strategic partners. It will also facilitate consolidation of brokers leading to financially strong entities. The development of this law testifies to the government's commitment to promoting Pakistan capital market and it has reposed its trust in stock market for continued growth of economy. Introducing various reforms in the capital market and the entire corporate sector, the SECP has strengthened its internal systems and as a result has emerged as an effective, efficient and strong regulator, which is a signatory to IOSCO, MMOU and recently been elected to its Board.
It is no exaggeration to say that the corporate sector and its regulator have gone through massive reforms over the decades to reach current level on a par with the international institutions of the sort even in the developed world. There were times when stock markets in Pakistan were known as club of gamblers and now Pakistani bourses are going to adopt the latest concept of demutualized stock exchange wherein an ordinary small investor will be having shares of the exchange as a company.
There is always room for improvement. That's why we are doing our best to project to the world the existence of a vibrant and healthy corporate sector truly reflective of a growing economy of a developing country. The existence of an effective regulator will play the role of a market developer, giving a sense of transparency, prudence, and plausibility, especially to the foreign investors for their short-term and long-term investments in Pakistan.
The writer is Adviser to the Securities and Exchange Commission of Pakistan. He was associated with the transformation of the CLA into the SECP and contributed to subsequent achievements of the SECP as a Commissioner and acting Chairman.