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Capital market reforms

May help developing a strong cottage industry base in Pakistan

Aug  06 - 12 , 2001

The Chairman, Securities and Exchange Commission of Pakistan (SECP) Mr. Khalid A. Mirza has said the first phase of reforms in the capital market has been completed and a solid foundation has been laid to ensure healthy growth of Capital Market in a transparent manner. In the second phase which has already started, the Commission is focusing its attention to play a developmental role besides monitoring the implementation of the reforms carried out in the first phase and its consolidation.

The Chairman, SECP who was talking to this correspondent in his office in Islamabad last week, felt satisfied that the reforms carried out in first phase has been noticed both within and outside the country. Within the country, as a result of these measures, public confidence in the stock market has been restored to a large extent. There has been a marked increase last year in the number of companies declaring and paying dividends as compared with the position about two three years back. During last year, more than three hundred companies out of 780 listed with Karachi Stock Exchange declared dividend and paid an amount of over 33 billion to shareholders.

The fact that the capital market in Pakistan today conforms to 30 international standards as prescribed by the International Organization of Securities Commissions (IOSCO) was acknowledged internationally. In its recent meeting, at Stockholm, IOSCO, in recognition of Pakistan's achievements in this field has honoured Pakistan to play host the International Conference on Emerging Markets in November this year.

Mr. Khalid Mirza represented Pakistan at the annual meeting of IOSCO in Stockholm where other strong contenders were Nigeria, South Korea, Poland and Egypt. India was also among the contenders to hold this important international event, but it decided to support Pakistan at the time of voting. According to the Chairman SECP, Pakistan has been honoured to host this important conference because of its improved image, mainly due to economic reforms of the government and IMF's consent to release the third tranche of adjustment loan. The successful Asia Pacific Regional Committee (APRC) of IOSCO was held in October 2000 in Bhurban was also to the credit of SEC.

"The participants went back with extremely positive attitude towards business environment in Pakistan and supported Pakistan to hold this major official international event," he said and added that heads of securities regulators, finance ministers and key economic policy makers from about 70 emerging markets would attend the conference at Lahore in November. He was hoping that top securities regulators from selected OECD countries will also participate.

He said that SECP has managed to implement 30 principles of IOSCO that conform to international standards of securities market under the capital market reform programme of this government in collaboration with the ADB. "Of these standards, important steps include implementation of T+3 system of settlement, independent management for stock exchange, and enhanced monitoring capacity of the Securities regulator to provide maximum protection to the investors," he added.

For the second phase of Capital Market Reforms in Pakistan we have not waited for the time the ADB releases the second programme loan," he said, adding that SECP has already launched the further reform agenda with the beginning of this financial year.

He was anticipating the next loan from the ADB by June 2002. "Much before that we would be working on many fronts having segmental financial assistance from different donors." The second phase of capital market reforms would be implemented quickly, he maintained, with the establishment of National Clearing House and Settlement System. "What we have already launched is increasing the market depth by introducing the trade of futures and derivatives parallel to further improvement in the risk management by the stock exchanges." Enhancing the institutional capacity of the SEC as a regulatory body is also part of the second phase of reforms which would also regulate short selling. Audit would also be the focus of this programme where international audit principles besides the international company standards would be implemented, the Chairman said.

Continuing Mr. Khalid Mirza said that the coming year is of consolidation of reforms and to ensure smooth functioning of the market under new framework. The Commission has planned several developmental steps to improve market functioning and more importantly to restore investors' confidence. We need to concentrate on institutional strengthening of the Commission through induction of quality staff and training existing team of managers to coordinate under the changed management environment, where performance comes first. The second phase of computerization will include nationwide networking that would have significant impact on employees' productivity, transparency, and client service. On the securities market side, we plan to undertake in-depth studies on revival of mutual funds sector, regulation of online trading, introduction of derivatives, and development of a second-tier or OTC market. In coordination with management of stock exchanges, we need to further strengthen the risk management of stock exchanges. "I would like to encourage stockbrokers to set-up electronic communication networks (ECNs) to have a wider access to stock trading. I would also like to encourage Pakistani companies to raise capital from international stock exchanges and similarly we would welcome foreign companies to get their securities listed on stock exchanges in Pakistan," he added.

The SECP has taken more initiatives for the development of fixed income securities and encourage the debt market. Since 1995 as many as 27 companies have raised finances through TFC to the extent of Rs. 12.765 billion. Out of these, a total of 12 companies has been given permission during the current year to float TFCs for an amount of Rs. 7.875 billion, of these five companies have been given permission for issue of TFCs worth Rs. 2.950 billion during the last week. These companies includes the following, which are issuing TFCs for the amount shown against their names:

S. #

Name of Company

Total Offer

Green Shoe

Total Offer


(Rs. in million)


(With Green Shoe Option)


First International Investment Bank (Ist tranche of total authorizedRs. 500 million)


(100% of Public Offer)



Gulistan Textile Mills Ltd.


(100% of Public Offer)



Dawood Leasing Co. Ltd.


(100% of Public Offer)



Packages Limited


(100% of Public Offer)



I.C.I (Pakistan)


(100% of Public Offer)







TFCs have a great potential of raising resources not only for the private sector but also for the public sector including the provincial and local governments/authorities within the available framework. The potential is largely unexplored.

The Chairman SECP was asked two specific questions which are reproduced below along with the answer in view of their importance:

Q. Despite all these reforms the stock market has not picked up. How you will explain the long continuing depressing trends in the stock market?

Ans. The stock markets all over the world go through various cycles and I am afraid, the market in Pakistan is going through a bear trend at the moment. However, in my opinion, this trend is temporary and should come to a halt soon. The Government has put in place important economic reforms that are likely to have a positive impact on industrial revival. At the capital market front, SECP has implemented unprecedented structural reforms that would ensure the transparency and efficiency of stock exchanges. With a possible industrial revival, the capital market in Pakistan is ready to regain investors' confidence. As I have mentioned before, the continuous down turn in the market has a lot to do with general sentiment of the investors that usually undermines market fundamentals. I would like to assure you that our stock market would start generating new capital soon. Already, over Rs. 4 billion have been raised through TFCs during past few months.

Q. There is an allegation from some circles that the SECP has rushed through its agenda without fully taking into confidence the management and board of directors of the stock exchanges that has adversely affected trading volume in the 3 stock exchanges in the country. In this connection introduction of T+3 is specially mentioned which according to these circles is the main cause of decline in trading activities in the bourses. What are your views?

Ans. This allegation is absolutely baseless. The Commission has not rushed through its reform agenda in any way. All these measures including T+3 have been implemented after consultation with the representatives of all the three stock exchanges in the country. The timing and strategy of implementation was also decided after due consultation. The Commission has been patient and taken months in discussion and mutual consultation while keeping in mind the practical difficulties likely to be faced by the brokers in implementing any regulatory measures. This is not correct to say that the introduction of T+3 system has caused a sharp decline in the trading activity of KSE. The T+3 system, which provides for the settlement of trading account (trading date+3 days) is presently practiced in most stock markets in the World and is unanimously proposed by the G-30 countries. As a matter of fact, countries like Hong Kong and Bangladesh are moving a step further to T+1. it was originally proposed in 1998 in Pakistan. Later on, the KSE proposed implementation of T+3 on June 12,2000 as a remedial measure after the stock market crisis of May 2000. T+3 finally implemented on pilot basis with 2 scrips on April 30 and continuously adding more companies. I hope all listed companies will be in T+3 system by the end of this year.