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  5. PAKISTAN AND OTHER STOCK MARKETS IN 2001.                                    

There is still a lot to be desired

Jan 14 - 20, 2002

Several instances in FY2001 have revealed that while the newly formed SECP is beginning to take a more proactive role in regulating the exchanges and listed companies. But we believe, driven by fiascos such as Crescent Bank and Prudential, there is still a lot to be desired. Rather than pointing fingers, our focus is on what the regulators priorities should be, how to set up the structure to successfully implement these priorities and some specific measures needed immediately to discourage market manipulation by speculators.

Key regulatory priorities

1) Transparency in dealings with stock exchanges, listed companies and investors

2) Ensuring that a level playing field is created and maintained for all investors, institutional, retail and foreign

3) Comprehensive regulations regarding disclosure, broker ethics and practices, and corporate governance. Ensuring that the rule of law is followed by all constituencies

4) Consistency in policies and their implementation

5) Encouraging the development of Self-regulatory, Investor protection and learning bodies (eg pension funds, financial institutions that are institutional investors should form an investor advisory body to represent their views on market working), who then should have a pivotal role in the management of the bourses

Obviously all this has been pointed out previously, particularly by research groups in the brokerage industry who themselves are driven to this by constant complaints by foreign investors of the constant bouts of unethical behaviour by companies, company directors/ management, brokers, etc. Going a step further we would like to present simple guidelines of how these priorities are to be implemented.

1) Radically improving the professionalism of SECP staff at all levels. A process that we believe has already started with the help of outside consultants

2) Institution building and organization strengthening within the SECP itself with specific focus on technology induction and current data base generation and maintenance. A process that is also happening, but here one must ask, is it being done quickly enough? And does the point above constrain such a process?

3) Swift and decisive NON-PARTISAN action and communication of the same to the investing public as soon as any wrong doing is suspected or detected. The reflex action here tends to be 'parentalisitic' in nature, at least not transparent until key constituencies have brokered a deal after which the smaller investors are presented with what is more often than not a fait accompli

4) Active communication and scrutiny of all constituencies, i.e listed companies, the exchanges, financial institutions involved actively in the stock exchanges, brokers and investor representative bodies (once these are formed)

On a more specific level, we propose the following regulations to be put into place:

1) Anyone acquiring 5% or more of the voting stock of any listed company must report the same to the SECP within 24 hours, and the SECP must immediately notify this to the exchanges and the general public. This would, of course, entail that existing 5% plus shareholders should be declared, and that this be made a mandatory part of the required quarterly financial results

2) No broker (individual or corporate) can have more than seat in each of the three exchanges. Further, no broker (or immediate dependents / associated companies of ) can lend to any other broker or any member of any of the three stock exchanges, against the collateral of the borrower's seat

3) Any institution or broker that leverages its own equity portfolio by 50% or more must report the same to SECP and the SECP must make this info public immediately.

4) All financial institutions must report borrowings by institutions / individuals against listed shares collateral, where such lending is in excess of Rs 5 million or 5% of the voting stock of the company whose shares are being used as collateral for borrowing. Further, any borrowing against shares of Rs 5 million or more for a margin of less than 50% must be reported by the lending institution to the SECP and the SECP must make this info public

5) Stock exchanges must notify the SECP of any large trading volume in a particular stock at the close of the day, if the trading volume of that day is (for example more than 25% of the average daily volume for the last THREE months. Why 3 months? Because it is in the nearer period that the speculative action occurs and so a longer average say one year will hide this activity)

6) The linkage between the futures positions and spot positions of brokers must be carefully monitored by the stock exchanges and reported to the SECP on a weekly basis.

The writer is Head of Research at Khadim Ali Shah Bukhari & Company.