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From Shamim Ahmad Rizvi, Islamabad
Jan 31 - Feb 06, 2000

The Securities and Exchange Commission of Pakistan (SECP) throughout the year 1999, had been actively persuing the objective of reforming the stock exchanges. Following are the steps taken in this respect by SECP.

1. Nomination of outside directors on the stock exchange

In pursuance of the reforms of the capital market in Pakistan under the Capital Market Development Programme Loan of Asian Development Bank, the Boards of Directors of stock exchanges of Karachi, Lahore and Islamabad Stock Exchanges were restructured by induction of outside directors who are not members of the stock exchanges. Previously, the Boards of stock exchanges consisted of members of stock exchanges alongwith heads of NIT and ICP. The induction of outside directors, which is in line with the systems in vogue in practically all countries, is aimed at making the managements of the stock exchanges more transparent and responsive to the requirements of the investors.

As a result of restructuring, the composition of each of the stock exchanges is as under:

(i) Karachi Stock Exchange:

Out of total number of 18 directors, 11 directors (including the Chairman and Vice Chairman) are elected from among the members of the stock exchange. The remaining 7 directors are outsiders; out of whom 5 are nominated by Karachi Stock Exchange on the basis of recommendations of various professional bodies, while 2 are to be nominated by the Securities and Exchange Commission of Pakistan (SECP) Policy Board.

SECP Policy Board nominated for the following two persons on the Board:

i) Mr. Etrat H. Rizvi,

Managing Director,

Paramount Leasing Ltd.

ii) Prof. Dr. Shahida Wizarat

Research Professor

Applied Economic Research Centre,

Karachi.

(ii) Lahore Stock Exchange

Out of total number of 18 directors, 11 directors (including the Chairman and Vice Chairman) are elected from among of the Stock Exchange. The remaining 7 directors are outsiders; out of whom 5 are nominated by Lahore Stock Exchange on the basis of proposals of various professional bodies while 2 are to be nominated by the Securities and Exchange Commission of Pakistan (SECP) Policy Board. SECP Policy Board nominated the following two persons on the board:

i) Mr. Fakir Syed Aijazuddin

Managing Director/Chief Executive,

First International Investment Bank Ltd.

Lahore.

ii) Mr. Javed Masud

Chief Executive,

Pakistan Credit Rating Agency (Pvt.) Ltd. Lahore.

(iii) Islamabad Stock Exchange

Out of total number of 12 directors, 7 directors (including the Chairman and Vice Chairman) are elected from among the members of the stock exchange. The remaining 5 directors are outsiders; out of whom 3 are nominated by the Islamabad Stock Exchange while 2 are to be nominated by the Securities and Exchange Commission (SECP). The Policy Board nominated the following two persons on the board:

i) Mr. Iltifat Rasul Khan. FCA

Director Finance

Fauji Foundation,

Rawalpindi.

ii) Mr. Muzaffar Ali Qureshi,

Professor and Chairman

Department of Administrative Sciences

Quaid-e-Azam University,

Islamabad,

2. Monitoring of stock exchange (S)

Keeping in view the unusual volatility in the stock market SECP advised the managements of Stock Exchanges to review the existing exposure and risk management measures system taking in to account the following aspects.

i) The members had facility to trade upto Rs.300 million without any margin. This initial limit of exposure lead to distortions and speculative bursts due to non-requirement of cash outlay for such trade. Hence policy review was advised.

ii) During the period of volatility the deposit requirements against the losses were needed to be reduced.

iii) The stock exchange(s) were advised to review the policy of shares deposits against the exposure. It was made clear that the practice of accepting shares deposit against the enhancement of exposure instead of cash should be discontinued keeping in line with the generally practiced principals of risk management.

The Stock Exchange complied with the instruction issued by the Commission accordingly.

3. System audit of accounts of members of the stock exchanges

Section 6(1) of the Securities and Exchange Ordinance, l969 lays down that every stock exchange and every director, officer, and member thereof shall prepare and maintain such books of accounts and other documents in such manner as may be prescribed and every book of accounts or documents shall be subject to inspection at all reasonable time by any person authorised by the Commission in this behalf.

System audit of 12 members each of KSE and LSE and 6 members of ISE were ordered ten reports have been received, which are under examination. The other will be received in due course of time.

Inquiries

Section 21 of the Securities & Exchange Ordinance, 1969 lays down that Commission may, on its own motion or on representation of not less than one-fifth in number of the number of the members of the Stock Exchange or, in the case of the business or any transaction mentioned in clause (b), of the said section or on the representation of the Stock Exchange or any person interested in or affected by such business or transaction, at any time by order in writing cause an inquiry to be made by any person appointed in this behalf into:

(a) the affairs of, or dealings in any Stock Exchange; or

(b) the dealings, business or any transaction in securities by any broker, member, director or officer of a Stock Exchange.

During the year 5 representations under section 21 were received in the Commission against the LSE. The investors mainly pleaded that LSE has not included their name in the list of claimant against the defaulter member, Eng. Mahmood Akhtar. Hearing was held in the matter at Lahore and Islamabad but was adjourned on the request either by the stock exchange or by the investor.

Another representation was received under section 21 from Major Javed Saeed against the Mian Mohammed Saeed, Member, LSE. Hearing in the matter was held at Lahore but was adjourned on the request of Mian Mohammad Saeed, Member, LSE. Further proceedings have yet to take place before decision regarding holding of inquiry against the said member.

Suspension of trading

Suspension of trading in the shares of Ghulam Muhammad Dadabhoy Ltd. (Formerly Dadabhoy Padube Ltd.) The Commission took serious notice of disposal of certain assets by the management of Ghullam Muhammad Dadabhoy Ltd. the issue was taken up with the management of the company. Certain proposals aimed at safeguarding the interest of the minority shareholders are under consideration of the Commission and it has directed Karachi and Lahore Stock Exchange to suspend the trading of the company.

Approval / amendments of regulations

The stock exchange require prior approval of the Commission to make amendments in their regulations under section 34 of the Securities & Exchange Ordinance, 1969 for day to day operations of the Stock Exchange. Some important regulations sent by the stock exchange and approved by the Commission are as under:

Amendment in ready delivery contract rules of kse

(i) RULE 43(1)

Large number of KSE members were not following the prescribed scales of brokerage rates on the purchase and sale of shares and securities from the individual and institutional clients, therefore it became difficult for the Exchange to ensure compliance of the Rules. The KSE approached the Commission seeking amendment in the rules, it was decided that rates of the commission should be determined through negotiations by the parties concerned in order to ensure level playing field for all members and competitive rates of commission would be in the best interest of the investors.

The following amendment was, accordingly, made in the delivery contract rules:

"Members shall render contract notes to non-Members in respect of every bargain made for such non-Member accounts, stating the price at which the bargains have been made.

(ii) RULE 26 (a)

Under Rule 26(a) of our Rules for Ready Delivery Contract Rules members are liable to the other members to whom they have delivered the shares for their title, regularity and genuineness. The liability in such cases relates to replacement of shares which the company refuses to transfer in cases where the shares are lodged with the company for registration by or on behalf of the purchaser or any subsequent purchaser within 2 years of the date of the receipt of such documents or the closure of the books by the company for any entitlement, whichever is earlier.

The rule was primarily linked with the physical delivery of shares which was in practice before the introduction of the CDC. Since the settlement of large companies are to be done through CDC, it was felt that liability to the members would be reduced from the 2 years to 2 months and Rule 26(a) was amended accordingly.

Amendments in Lahore automated trading system

The regulation for computerized trading was introduced by LSE in l997. To enhance efficiency of the system by following amendments were proposed in the system in the LOTS. The LSE proposed amendment in the lots.

i) Carry over (Badla) Market.

ii) Odd lot Market.

iii) Squaring ups Market (Buy in/sellout)

iv) contingent order.

The principle objectives for the amendment were as follows:

i) To provide for odd lots trading on the computer.

ii) Provide for "sell-out" and "buy-in" on LOTS where a member defaults.

iii) Introduce "Contingent Order" so that an order may remain on the computer system till the anticipated position is attained. Such an order will be in line in queue to the existing market orders on the system.

iv) To bring the carry over trades on the automated system for better control and supervision.

After going through the whole system and regulation, the Commission approved the amendments.

Lse regulations for trade and settlement of deemed listed securities

Massive trading of M/s. Hubco shares was taking place at Lahore and Islamabad Stock Exchanges even though the script was not listed on these exchanges. Section 8(2) of the Stock Exchange Ordinance prohibits business on a Stock Exchange in a security which is not listed on such stock exchange. To avoid complications, which might be created in future, Lahore and Islamabad Stock Exchanges submitted regulations for trade and settlement of Shares of deemed listed securities for approval of the Commission.

The salient feature of the proposed Regulations as by the approved Commission are under:

i) Trading will be allowed in such scripts where public interest is quite high as reflected by heavy trading volume and the company being listed on another stock exchange.

ii) To qualify for such deemed listing of the scrip the trading volume of such shares period of two calendar months will be more than 10% of the total volume traded on the stock exchange where the company is listed.

iii) The paid up capital of the company has to be not less than 200 million rupees.

iv) The Exchange shall not charge initial listing fee, annual listing fee, fee or any other fee from the company.

v) During the period the shares of a company are traded on the stock exchange, the company shall be required to furnish copies of all notices, ten copies of annual report and accounts and half-yearly accounts and copies of other documents and information to the stock exchange where the scrip is placed on deemed listing basis which are required to be submitted under the listing regulation; of the stock exchange where the company is listed.

vi) As and when the shares of the company are no more actively traded and the trading volume falls below the criteria prescribed, Commission on its own motion or on the application of the Exchange or the company may direct the discontinuation of trading in the company's shares.

The Regulations provide for the following procedure for grant of permission for trading of shares of such companies:

a) The Exchange shall make an application to the Commission for permission to allow trade and settlement in the shares of the particular company.

b) The Commission on being satisfied that the company's shares comply with the eligibility criteria and that it would be in the interest of the trade and the pubhc to allow such trading, the Commission shall serve the notice on the company and the stock exchange where the company is listed of its intention to allow trading in the shares of the company.

(c) On grant of the permission by the Commission, the exchange shall serve a notice on the company as to the date from which its shares would be traded on the Stock Exchange .

(d) Amendments in The Regulations Governing members' exposure

Keeping in view unusual volatility in the market and to ensure better risk management, KSE proposed amendments in their regulation 3(1) and 3(ii) in the Regulations governing members explosure. The amendments have conferred powered on the Board to specify the time within which the members are required to pay the deposit against explosure and losses. The contents of amended regulations are as under:

lf at any time during clearing period, the exposure of a Member exceeds the limit prescribed for the purpose, such Member shall deposit with the Clearing House the amount computed in accordance with the prescribed rates within the time specified by the Board.

In case a Member sustains loss during any particular clearing period in excess of the limit prescribed for this purpose, such member shall deposit with the Clearing House the amount of such loss within the time specified by the Board. The amendments were approved by the Commission with slight changes.

Capital issues section:-

Approval for issue, circulation or publication of prospectus for publicly offering of Securities under section 57 of the Companies Ordinance, l984.

During the year from January 1st l999 to December 31st, 1999 a total of 09 applications were received for approval of prospectus for public offer of shares /Term Finance Certificates /Corporate Bonds, under section 57 of the Companies Ordinance, 1984. Out of these 09 proposals, 05 were approved by the Commission (Annex-I). Out of the remaining four cases, one is under process and will be placed before the Commissioner (S.M) for approval, soon after its clearance from KSE. One case has been sent to KSE for comments and two cases have been sent back to the companies with the advice to comply with the legal statutory requirements.

1. Further issue of capital:-

The companies can issue further capital by way of right and/or bonus issues of shares without the approval of the Commission. However, for right issues the listed companies are required to follow the procedure as laid down in section 86 of the Companies Ordinance, 1984 and rule 5 of the Companies (Issue of Capital) Rules, 1996. For Bonus Issues the listed companies are required to comply with the requirements of rule-6 of the Companies (Issue of Capital) Rules, l996.

But in certain exceptional circumstances the listed companies on the basis of special resolution may be allowed to further raise their capital without issue of right shares, under the proviso to sub-section 1 of section 86 of the Companies Ordinance, 1984. During the examination of such proposals the Commission takes into consideration the pre-emptive right of the existing shareholders specially the minority shareholders despite the fact that these specific issues are approved by the members in general meetings of the companies. The cases of further issue of capital without issue of right shares are very-carefully considered by the Commission and are generally discouraged because it not only deprive the existing shareholders from their preemptive right, but also dilute their holdings, however in cases of inflow of foreign capital, contractual obligations and conversion of redeemable capital into equity, the proposals are agreed to, after compliance with all the other legal/statutory requirements by the issuers, if found beneficial to the company as well as the minority shareholders.

In this regard 12 cases were received by the Commission during the year for seeking dispensation under the proviso to sub-section 1 of section 86 of the Companies Ordinance, 1984, out of which only 03 have been approved (Annex-II). The remaining 09 proposals were duly considered by the Commission, but not approved due to insufficient grounds for dispensation of application of normal law.

2. Issue of shares at discount:-

The listed companies pursuant to the Special Resolution passed in general meetings of the company may issue shares at discount if approved by the Commission u/s. 84 of the Companies Ordinance, 1984. The rate of discount, upto 10% is to be fixed/determined by the members in the general meetings whereas in case of more than 10% discount, the rates are fixed by the Commission. The Commission examines very carefully the proposals for issue of shares at discount and take into consideration the protection of minority shareholders. During the year a total of 05 companies approached for approval of the Commission to issue right shares at discount. The Commission keeping in view the financial position, circumstances, inflow of foreign capital, interest of the minority shareholders and that of the employees of the companies had accorded approval under section 84 of the Companies Ordinance, 1984 to only 03 companies Annex-III).

3. Investment in associated companies and undertakings:-

The companies, who intend to make investment in their associated companies/undertakings to the extent of more than 30% of their paid up capital plus free reserves, are required to seek relaxation/approval of the Commission under the further proviso to sub-section 1 of section 208 of the Companies Ordinance, 1984. Under this provisions only one company namely M/s. ORIX Leasing Pakistan Ltd., pursuant to the Special Resolution passed in Annual General Meeting of the members of the company was allowed to invest Rs.90 million in its associated company, which was being established in the Kingdom of Saudi Arabia with other joint venture partners including International Finance Corporation, ORIX Corporation Japan, Saudi Investment Bank and Saudi Business group.

4. Monitoring:-

Two cases namely M/s. D.G. Khan Electric Company Limited and Saadi Cement Company Limited were forwarded during the year to E&M Division. These companies were found to have violated the commitments made in their respective prospectuses published circulated for public subscription.

5. Cases recommended for liquidation:-

Tri-Star Energy Limited was allowed in 1994 under the Controller of Capital Issues (Continuance of Control) Act, 1947 to raise funds for establishment of a Power Generation Plant at Karachi. The company was allowed to make preferential allocation of shares to the shareholders of the associated companies. The company had raised Rs.90.000 million from these shareholders but could not installed/established the project. The shareholders of the company approached the Commission as well as the Federal Ombudsman to instruct the company to refund the money to them. The issue was taken up with the company and a number of opportunities were given to the management/sponsors for hearing. The attitude of the Sponsors was evasive, non-committal and non-co-operative. The company was told point blank that being an unlisted company, Tri-Star Energy Ltd., could not retain public money. So it was decided to initiate winding up proceedings against the company. A report on the issue was prepared and forwarded to the Registrar of Companies (HQ) for filing a petition in the Honourable High Court of Sindh for liquidation of the company under section 309 of the Companies Ordinance, 1984. The case being unique in nature, the detailed report sent to Registrar of Companies is annexed at Iv.

Policy section:-

The Securities and Exchange Commission has been striving hard for healthy development of the capital market. With a view to improve infrastructure facilities, SECP is presently engaged in preparing master plan for establishment of a National Clearing and Settlement System ( NCSS ) with the assistance of Asian Development Bank. Further Commission has finalized and recently notified following laws which are of critical importance for future development of the capital market.

A) Institutional framework for asset securitization

Securitization is the process of using financial assets of banks, leasing companies utilities and corporates etc. to issue securities. Assets that can be securitized include mortgage loans, auto loans, credit card and cellular phone receivables, leases, utility payment etc.

Securitization is an emerging funding option for NBFI's, specially in the current state of the financial markets. Its relevance has increased, given the squeeze in the traditional funding sources like banks, institutional finance and fixed deposits and enhanced focus of investors on the asset quality of a finance company. Securitization results in an asset backed tradable debt instrument, with the asset quality being closely scrutinized and monitored by a rating agency while credit enhancement are built in to take care of possible defaults. The entire structure provides added comfort to the investor.

SECP has been actively involved in the process of finalization of the legal frame work for securitization of assets which has been prepared by a committee of legal and financial experts. With the promulgation of the law Pakistan would enter in an era where financial markets could reap the advantages of this new concept from which the developed markets have benefited to a great extent.

SECP has notified "The Companies Assets Backed Securitization) Rules, l999 on December 14, 1999.

b) To permit companies to buy back their own shares

The proposal for allowing companies to buy back their own shares (treasury stock) has remained under consideration of the Government for a long time. Presently, companies are prohibited from buying back their own shares under section 95 of the Companies Ordinance, l984.

The Commission constituted under the chairmanship of Justice (Rtd) Shafi-ur-Rehman to review the corporate laws also recommended the proposal. Karachi Stock Exchange has been consistently emphasizing the fact that the proposed measure would contribute towards stabilizing the market as some companies having excess liquidity would be able to purchase their shares from the market, if according to their perception, these were under-priced, as number of companies were being quoted in the market at prices much below their break up value.

The proposed measure was considered at different forums in the context of neutralizing turbulence in the stock market and there had been consensus that companies should be allowed to buy-back their own shares subject to effective safeguards against possibility of manipulation of share prices. In view of the complexities involved in the issue, the Securities and Exchange Commission of Pakistan (formerly Corporate Law Authority) constituted a Committee under the chairmanship of Mr. Khalil Mian, a senior Chartered Accountant and Chairman of the Policy Board of Securities and Exchange Commission of Pakistan. The Committee consisted of Chairman, Securities and Exchange Commission of Pakistan, Chairman, Karachi Stock Exchange, some eminent bankers, professionals, businessmen and lawyers.

Based on the recommendations of the above Committee and in the light of the experience of other countries the legal frame-work viz. "The Companies (Buy-back of shares) Rules, 1999" have been finalized and notified on December 14, l999.

c) Lse regulations for trade and settlement of deemed listed securities

Massive trading of M/s. Hubco shares was taking place at Lahore and Islamabad Stock Exchanges even though the script was not listed on these exchanges. Interest of large number of investors, who were investing in the said scrip was involved since trading in the scrip could not take place in these stock exchanges, because section 8(2) of the Stock Exchange Ordinance prohibits business on a Stock Exchange in a security which is not listed on such stock exchange. To avoid complications, which might be created in future, Lahore and Islamabad Stock Exchanges submitted regulations for trade and settlement of Shares of "deemed listed securities" for approval of the Commission providing for temporary listing as such facilitating trade of scrips, wherein public interest is high but the scrip has not been listed on these stock exchanges.

After careful consideration the regulations for deemed listing have been approved on December 23, 1999 whereunder specific criteria has been laid down for deemed listing of companies on other exchanges apart from the stock exchange, where such companies are listed. This step would go a long way in solving investors problems.

d) Monitoring of stock exchange

Keeping in view the unusual volatility in the stock market SECP advised the managements of Stock Exchanges to review and improve the existing exposure and risk management measures. Detailed guidelines outlining the measures to be adopted by the exchanges were issued for compliance by the exchanges in order to obviate the possibilities of default by members due to over-exposure.

e) Promulgation of regulations aiming at Capital Market reforms

In order to comply with the conditionalities of the Capital Market Development Loan (CMDPL) of Asian Development Bank, improve regulatory environment transparency in the business of stock exchanges and provide new avenues for capital market development several steps were taken which amongst other included the following:

i) Draft regulations for the Members' Agents and Traders (Eligibility Standards) have been finalized and awaiting Commissions approval.

ii) Draft regulation for prohibition of trading by insiders and draft regulations for inspection of a member of a stock exchange, which provide for procedures for inspection of a Member of a Stock Exchange are ready for eliciting public opinion.

In Regulation of Prohibition of insider trading, persons associated with a company have been prohibited to deal in securities of a company or to give any sensitive information to any person. Member Agents & Traders Eligibility Standards were required for prescribing minimum standards for appointment of agents or traders of members by stock exchanges to ensure that adequately qualified/trained persons are appointed to these positions.

Policy decision was taken by the Commission on the matter of incorporating a company engaging itself in hire purchase business in Pakistan, thus opening new avenues and broadening the scope of business in line with new emerging trends, with the following conditions:

Memorandum of Association shall contain a clause about "hire purchase" and shall also include restrictive clause in the memorandum that it shall not engage in leasing business in terms of Leasing Companies Rules 1996.

In addition to the above a committee has been constituted to review the recommendations of the consultants regarding design and parameters of National Clearing and Settlement Systems (NCSS), with a view to give suggestions in the matter. The first meeting of the Committee was held on l2th November, l999, where vital issues were discussed and certain recommendations were made. Minutes of this meeting have since been circulated.

In compliance with the conditions of World Trade Organization Treaty in respect of financial services, a circular relating to the Securities Market was issued by the Commission. The stock exchanges, listed financial institutions, the concerned company registrars and the Central Depository Company of Pakistan Ltd. have been directed to comply with the requirements of the circular as stated below:

i) Prior permission in writing of the Central Bank (State Bank of Pakistan) will be required by any person for holding beneficial ownership of 5% or more of the paid up capital of any bank/financial institution incorporated in Pakistan

ii) The foreign nationals and foreign financial institutions will be allowed to invest in the shares of domestic commercial banks for trading purposes only.

Research section

Research Section has yet to be formally set up in the Commission, however presently research work has been organized on a small scale which is being looked after by an Assistant Research Officer under the direct supervision of Chief (Securities). Presently the basic thrust is on collection and storage of statistical data particularly relating to stock exchanges, capital issues and preparation of certain reports on the stock market. The focus on stock market trading activity relates to data pertaining to movement in market capitalization, daily, weekly and monthly turnover, various Indices, like SBP General Index of share prices (90-91) = 100 KSE-100 Index, turnover Index etc. has been monitored since 1971. Similarly data regarding fresh issues both equity and fixed income securities (Bonds, TFCs etc.) is collected and stored in data base maintained for this purpose. Based on the statistical data, analytical reports, several reports on various aspects are regularly prepared for submission to chairman and Commissioners. Some of such statistical reports are exhibited at Annex-A - G.

In addition to maintenance of data base several important reports like, Monthly Stock Market Reports are prepared and sent on regular basis to the President/Prime Minister of Pakistan. The Reports cover events which affect market performance during the period, monthly turnover position, statistical information regarding blue chip companies, new companies and TFCs which were floated during the period, sector wise companies with highest and lowest prices at the month end, details of companies who have declared dividends /bonus during the month are also incorporated in these reports.

Material is regularly prepared and sent to concerned quarters on capital market for Economic survey, SBP's Annual Report, Annual Plan published by Planning and Development Division. The material includes Capital Market report, important developments during said period, which in the recent material supplied for instance included, latest information regarding Automated Trading, CDC's, TFC's, Brokerage Houses, New concepts like Assets Securitization, Rules for Rehabilitation of Sick Industrial Units etc. Material also includes most recent review of stock market performance during the period.

Material for Finance Minister's Budget Speech which generally includes recommendations on tax proposals received from stock exchanges, mutual funds association and other associations, organizations and corporate bodies. Proposal for promotion of stock market are also included.

Research section also attends to various requests received through e-mails from various Research Scholars, Corporate Bodies, Financial Institutions, Foreign Universities for supply of information etc. relating to Securities & Exchange Commission of Pakistan, various activities of stock markets, legal frame work etc. Such information is compiled and supplied in minimum possible time.

Complaints section.

a) Over view:

Protection of interest of investors has been stated to be as one of the primary objectives of enacting the Securities and Exehange Ordinance, 1969 and the Companies Ordinance, 1984. SECP has accordingly been attaching high priority to attend to complaints from the investors. To this end, SECP has put in place its own system for extending neeessary assistance to investors and shareholders. This mechanism is in addition to that evolved by stock exchanges, on the desire of SECP for settling the complaints against stock brokers.

SECP believes that a large number of shareholders and investors belong to lower income groups, who are neither fully aware of the legal intricacies nor economically well-off to bear costs of entering into litigations with the companies or the stock brokers. Therefore, common investors and shareholders are usually allowed to lodge their complaints without observing formalities prescribed in rule 30 of the Companies General (Provision and Forms) Rules of 1985, if any of their rights is infringed by the companies or the stock brokers.

SECP is determined to create and promote environment of good corporate governance through education, persuasion and actions. Seriousness of the SECP to achieve this goal can be assessed from the fact that the Chairman, SECP himself supervises the section made responsible for acknowledging receipt of the complaints and providing guidance to the shareholders.

Prompt action by the section has made the companies, the share registrars and the stock brokers conscious of their obligations towards small shareholders and investors. The approach has also created awareness among the shareholders and investors about the existence of an agency, they can rely on, for alleviating their genuine problems.

Complaints received by the SECP can be grouped into two categories as follows:

A. Complaints against listed companies.

B. Complaints against stock brokers and the stock exchanges.

b) Complaints against stock brokers & stock exchanges.

The Securities and Exchange Ordinance of 1969 does not clearly spell out rights of the investors against members of stock exchanges. It leaves much to be done by SECP and the stock exchanges. Both the agencies have accordingly framed rules and regulations which, among others also explain, the obligations of members of a stock exchange towards investors.

The rules made by the SECP, in this regard, prescribe qualifications for membership and manner of transaction of business including maintenance of books of accounts by the members. However, penalties for failing to get accounts audited and maintain the books of accounts do not appear to have been stipulated except arranging an enquiry under section 21 of the Securities and Exchange Ordinance. During the period under review one application for inquiry under the said section was received against one member.

The regulations of stock exchanges provide for "arbitration in the event of disputes between members interse, or between any of them on the one hand and their constituent on the other hand or between any of the members on the one hand and their authorized clerks on the other hand and between authorized clerk on the one hand and their constituent on the other hand touching or in connection with the trade or transaction therein, therein". The effectiveness of this system is questionable particularly because the investors are not an organized group. Lahore Stock Exchange and Islamabad Stock Exchange have also made informal arrangements to settle the disputes between investors and the members besides following the formal mechanism of arbitration.

Stock exchange-wise position of complaints received, resolved and in balance is given in Table- below:

Table -

Complaints of Investors

Name of the Received Settled Balance

Stock

Exchange

Karachi Stock 7 3 4

Exchange

Lahore Stock 22 4 18

Exchange

Islamabad 20 3 17

Stock

Exchange

Total 49 10 39

Percentage 100% 20 % 80 %

The table indicates that KSE has been successful not only in containing the number of complaints flowing to SECP but also has been effective to settle those complaints which were referred to it by SECP. Other stock exchange despite having informal mechanism to examine the complaints and to help out the parties have been quite unimpressive both in curtailing the number of complaints and settling the same. One of the reasons for rising number of complaints against members of Lahore and Islamabad stock exchanges has been that rising number of members of these stock exchanges failed to clear their obligations towards clearing houses.

Most of the investors who approached SECP complained about non delivery of shares and non payment outstanding balance by the members. Other complaints included squaring up of position of the investors by members without their consent and failure to sell the securities at a price limits advised by the investors.

All the cases received in SECP were referred to respective stock exchanges for examination and necessary action. Except few cases which are pending because of the order of the court, in all other cases stock exchanges promised to get the matters settled shortly. Out of 49 cases referred to the stock exchanges 13 were received in the months of November and December 1999. It is hoped that most of these cases would be resolved in the coming months because the stock exchanges remained pre-occupied with elections of members of their Boards during the last two months of the year.