Sources said that the notification for proposed amendments to the regulations has been placed at the SECP website to seek public comments. The amendment to the regulation 9(2) of the regulations is in line with the Code of Corporate Governance Regulations, 2017 and aimed at providing PSX stakeholders meaningful presence on the board of PSX. The SECP has recently directed the PSX to fix the number of directors and hold election of shareholder directors in accordance with requirements of the Companies Act.
The change in the composition of the PSX board aims at raising the representation of minority shareholders comprising general public as envisaged through the Demutualization Act 2012. The strengthening of the PSX board structure will ensure strong governance practices, product development and improve visibility and marketability of the PSX.
The SECP has spearheaded a number of significant reforms in Pakistan''s capital markets since 2000. The reforms focused on governance, risk management, market development and investor protection and resulted in making the markets fairer, efficient, and transparent and enhanced market''s capacity for capital formation. The continues reforms by the SECP made capital market a much better place than it was prior to 2000.
Despite all of these reforms, a lot more is required to be done to integrate Pakistani capital markets with the rest of the economy and provide much easier access for issuers and investors and it serves as true venue of capital formation. Therefore, the SECP envisaged the demutualization of exchanges to minimize conflicts, improve the governance structure, segregate regulatory functions from commercial functions and separate trading and ownership rights. Further, institutional investors prefer to invest in markets where the exchange demonstrates strong corporate governance, market surveillance and enforcement, as such markets are less likely to experience endemic market speculation and manipulation or be threatened by systemic failure.
In 2016, the Lahore and Islamabad stock exchanges were integrated into Karachi Stock Exchange and emerged as a single national stock exchange, ie Pakistan Stock Exchange (PSX). As a first step, under the Stock Exchange (Corporatization, Demutualization and Integration) Act, 2012, the sale of strategic stake to Chinese consortium was completed whereby 40% of paid-up capital was transferred to the five- member consortium, which included three Chinese exchanges and two local financial institutions. The composition of the PSX Board of Directors envisaged under the umbrella of the Demutualization Act and Securities Exchanges (Licensing and operations) Regulations, 2016, was changed by replacing the six directors nominated by the SECP on PSX with 4 nominees of Chinese consortium and the remaining 2 were approved as independent directors.
Subsequently, under the Demutualization Act, process of sale of PSX''s remaining 20% shares by way of offer for sale and public subscription was completed and PSX was self-listed on June 29, 2017. However, the requirements of Licensing Regulations provides reconstitution of board within six months from date of sale of 40% of shares of PSX and the SECP''s nominee directors were to be considered independent till the sale of the remaining 20% of shares. Moreover, Articles of Association of PSX also provide that on sale of shares to the general public, the nominees of the SECP shall be replaced by directors representing interest of the general public upon directive by the SECP in an election of directors held as per the requirements of the (repealed) Companies Ordinance, 1984, now the Companies Act, 2017. The PSX, however, did not hold elections post-IPO.
Therefore, the SECP recently directed the PSX to fix the number of directors and hold election of shareholder directors in accordance with requirements of the Companies Act. The SECP issued this to ensure good governance and for the true representation of shareholders on the PSX board. The direction perfectly fits the regulatory ambit, sources said.
The requirement with regard to board of a stock exchange after demutualization and the election of directors is clearly spelled out in the Demutualization Act, wherein it is provided that at any time after the date of demutualization, TRE certificate holders or connected persons of TRE certificate holders shall not hold the majority on the board of directors of any stock exchange, or hold more than forty per cent of the total paid-up capital of the stock exchange. Further, within 30 days of the date of demutualization, the stock exchange was to hold an election of directors. However, the elections shall only be in respect of the seats held by the first directors nominated by the stock exchange. The SECP''s nominees were to continue until such time as they stand replaced through its directive to allow co-option of nominees of the strategic investor and financial institutions or representatives of the general public. The Demutualization Act clearly provides that after demutualization, the chairman of the board of any stock exchange shall always be from among those directors who don''t represent the TRE certificate holders or their connected persons.
The Securities Act neither prescribes the modalities of fixing the number of directors on the board nor their mode of appointment; hence in this regard the provisions of the Companies Act, 2017 shall be followed.
In addition, another fundamental issue related to the PSX Board of Directors is the number of independent directors. The Licensing Regulations provide that the board of directors of a securities exchange shall have independent directors, shareholder directors and CEO. Furthermore, there is restriction in the regulations that the board of directors of a securities exchange shall have independent directors not less than the shareholder directors. This requirement of number of independent director is being criticized as discriminatory and unjustified. Moreover, the corporate governance requirements for listed companies prescribes one third of independent directors. Without going into the debate of effectiveness of independence on board, the presumption of independent directors being cure of all ails is misdirected. The role of director in enhancing the value of business is undisputed and independent director is therefore responsible to provide the unbiased view to decisions. However mandating equal numbers of independent directors as non-independent does not validate or guarantee enhanced performance and good governance rather may clog board to effectively perform. The SECP has, therefore, amended the Licensing Regulations in line with the Code of Corporate Governance Regulations, 2017, issued under the Companies Act, applicable to all listed companies, including the PSX, by mandating one third of board as independent director on stock exchange.
Following is the text of the SRO 9(I)/2018 issued here on Friday:-The following draft amendment which is proposed to be made by the Securities and Exchange Commission of Pakistan (the Commission) in the Securities Exchanges (Licensing and Operations) Regulations, 2016 in exercise of the powers conferred by section 169 of the Securities Act, 2015 (III of 2015), is hereby published for information of all persons likely to be affected thereby and notice is hereby given that objections or suggestions thereon, if any, may be sent to the Commission within a period of fourteen days of publication of this notification and placement of the draft amendment on the website of the Commission, shall be taken into consideration, namely:-
DRAFT AMENDMENT
In the aforesaid Regulations, in regulation 9, in sub-regulation (2) for the words "the shareholder directors" the words "one-third of its total directors" shall be substituted.