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The action was long over due

Oct 16 - 22, 2000

Lot of commendable work has been done by the Securities and Exchange Corporation of Pakistan (SECP) during the first 20 months of its operation to lay down the foundations of a sound and effective regulatory body to govern and supervise the capital markets in Pakistan. The SECP which came into being as a fully autonomous commission replacing the former corporate law authority (CLA) a subordinate department of Ministry of Finance in January 99 SECP has taken some bold initiatives and drastic measures to bring the capital markets, into an effective discipline specially to protect the interests and rights of small investors and minority share holders.

The latest addition to the various measures already taken by SECP to cleanse the working of stock exchanges are the draft regulations released last week aimed at curbing 'inside trading' and providing punishment for violators. Inside trading has been a chronic malady at the bourses and the small investors as well as the government was demanding an effective check on this unethical business practise. The proposed regulations which have been released to the Press to elicit comments from stake holders defines 'insider' as any person connected at present or in the past with a listed company and has or had access to unpublished price sensitive information of the listed companies. Further, connected person is defined as an official member of the stock exchange or of clearing house or employee of the member.

The definition of connected person also includes an investment banker, share transfer agent, trustees of TFCs, or employee thereof, member of the board of directors of an investment company or a member of the Board of Directors of the asset management company, or a member of the board of directors or an employee of a financial institution or a relative of aforementioned persons.

The unpublished price sensitive information is defined as information relating to financial results of the company, intended declaration of dividend, issue of shares by rights, bonus, etc. any major plan of expansion, amalgamations, mergers and takeovers, etc.

The proposed regulation prohibits the insiders from dealing in shares by himself or indirectly or communicate the unpublished price sensitive information. In case of violation of the regulations SECP would hold investigation whose procedure has been laid in the regulations. In case the charge is proved, the commission may without prejudice to its right to initiate criminal proceedings under section 15 B of the Companies Ordinance, may give directions to protect the interests of the investors as well as the exchange either direct the insider not to deal in securities, prohibit him from disposing of any securities acquired in violation of the regulations and restrain him from counseling any person to deal in securities.

The authority to issue these regulations is provided in the Securities & Exchange Commission of Pakistan Act, 1997, while insider trading is banned under the Securities & Exchange Ordinance, 1969 (SECO). The commission has asked all those persons who are likely to be affected, directly or indirectly, by these regulations to furnish their comments within 60 days.

Section 3 of the regulations states that no insider shall.

i) either on his own or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information; or

ii) communicate any unpublished price sensitive information to any person, with or without his request for such information, except as required in the ordinary course of business or under any law; or

iii) counsel or procure any other person to deal in securities of any company on the basis of unpublished price sensitive information.

Under section 4, "any insider, who deals in securities or communicates any information or counsels any person dealing in securities in contravention of the provisions of regulation 3 shall be guilty of insider trading".

Regulation 5 empowers the commission to appoint an enquiry officer to investigate and inspect the books of accounts and other relevant record of an insider. The purpose of the commission in undertaking this exercise, it is further provided, would be to:

Investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of insider trading; and

To investigate suo-motu upon its own knowledge or information in its possession to protect the interest of investors in securities against breach of these regulations.

This action was long over due. It is commendable that SECP has ultimately come out to deal with this menace also in its attempt to cleanse the functioning of the stock exchanges in the country. It will be of interest to note that although the stock exchange started functioning in Karachi only a few months after the independent state of Pakistan came into being, it is for the first time that an attempt has been made officially to counteract and root out the activities of the privileged class of the corporate sector in the trading of stocks and shares.

The unhealthy practice involves use of unpublished but positive information with regard to a company's operational programme, including plans to declare an interim/final dividend, right for bonus issues, expansion projects and similar other undeclared or unreleased facts which usually has the potential to influence large scale price fluctuations in the shares of a listed company. The persons having advance knowledge about a company's vital decisions, not yet publicly declared, are generally described as insiders" within the purview of the rules and regulations which officially regulate trading in shares on the bourses of the advanced countries of the world. No such law was so far in effect in Pakistan, in the absence of which, this unhealthy practice remained uncontrolled in the Country's stock markets and consequently genuine and innocent investors were mercilessly deprived of their profit by the professional class in possession of vital corporate information in advance.

The draft law released by the SECP for eliciting public opinion, defines inside information as one which is 'price sensitive' but not yet published by a company. The access to this information is generally enjoyed by the directors of a company, their friends, employees, auditors of the company etc. However, the definition of an insider has been rather unnecessarily broadened in the draft law to bring into its scope all the members of the stock exchange, their agents and employees, members and employees of clearing houses; directors, officials and employees of development finance companies, investment banks, asset management companies, open and closed-end mutual funds, etc.

This practice has been one of the major causes of discouragement to genuine investors of modest means who are known as retail investors. While the stock markets of the country are dominated by professional speculators indulging in short term buying and selling of shares and securities, the absence of long term investment activity due to the image of the stock markets in the eyes of retail investors as a place of speculative activity, has been lately adversely affecting the pace of capital formation in the country. This is evident from the fact that during the last two years no important projects in the industrial sector were floated in the capital market given the reluctance of the investors to respond to public share issues. Elimination of the practice of speculative activity on the basis of inside information of a listed company is undoubtedly an essential task to accomplish and then alone can the stock markets develop as a vehicle of capital formation.