The fresh directive of the Securities and Exchange Commission of Pakistan (SECP) reducing the number of directors of stock exchanges is a significant step towards demutualisation for which the SEC has been pressing upon the Management of bourses since long. It is being realised the world over that demutualisation of stock exchange i.e. separating membership from ownership is of vital importance for making bourses operation more transparent and efficient.

On August 13, 2002 SECP has issued a new directive to all the stock exchanges that the number of directors of the stock exchange shall comprise eight directors, four directors elected from amongst the members by the general body of the stock exchange and four independent directors to be nominated and appointed by the Commission from amongst the professionals including securities market experts, lawyers, chartered accountants, investment bankers, I.T. experts in consultation with the professional bodies as the Commission may consider appropriate. They included Management Association of Pakistan (MAP), Institute of Chartered Accountants of Pakistan (ICAP), Institute of Cost and Management Accountants of Pakistan (ICMAP), Pakistan Banks Association (PBA), Investment Banks Association of Pakistan (IBAP), Modaraba Association of Pakistan (MAP) and Leasing Association of Pakistan (LAP).

The Managing Director of the Exchange shall be a director, virtue of his office. Another major change is that the Chairman of the Board of directors shall be elected by the Board from amongst the non-member directors and the post of Vice Chairman of the Exchange has been abolished. These changes, according to the said directive will not be applicable to the present term of the existing Board of the Stock Exchanges.

The existing Board of Directors of an exchange comprises of 17 directors, out of which members are elected by the members/ brokers and seven independent directors are nominated and appointed by the SECP. This is in addition to the Managing Director, who is appointed by the Board with the prior approval of the SECP.

The new measures described as death knell to brokers dominance is being resented by the "big brokers community" who had virtual control of the stock Market while it has been received well by small brokers class who had no share in the previous dominant role of brokers in the management. Some brokers whose vested interests have been threatened by the new directive have launched a campaign against the SECP, but its Chairman, Mr. Khalid Mirza, who has a representation of a strong regulator seems determined to carry out its regulatory programme. Even otherwise he enjoys the support of silent majority in bourses as well as professionals, independent institutional investors and the Asian Development Bank who are hailing the reforms in the capital market of Pakistan.

Some of the changes that have been brought about by the regulator in spite of strong resistance and displeasure of the brokerage fraternity, include installation of an MD independent of members, nomination of outside directors on the board, revision of capital adequacy regulations, change in capital balance, implementation of brokerage registration rules, change to T+3 system of trading, increase in transaction fee and separation of the role of Chairman KSE and that of CDC. More recently, the regulator got the stock exchanges to make the 'Code of corporate governance' a part of listing regulations. Given such a success record, Mirza is not likely to relent on his latest directive as he continues to argue that it is the responsibility of the Regulator not only to protect the interests of members, but also the issuers of capital and the investors.

The SECP has been pressing upon the managements of the stock exchanges for their demutualisation; however, no significant progress has been made so far in this direction. The new directive, it appears, may tend to achieve some of the objectives, which otherwise would have been achieved had the de-mutualisation of out capital market taken place in this country. There is worldwide trend for de-mutualisation of the stock exchanges to divorce the membership from the ownership of the stock exchanges and where the stock exchanges have not yet been de-mutualised, their Board have majority members as independent/ non-member directors. This is considered as extremely important for the good governance of the capital markets. It was generally observed that where the Board of Directors comprise very large number, divergent views hinder the quality of the management particularly when it comes to the Board of Directors of Stock Exchanges where it is generally believed that the member directors work only for their self-interest.

The reduction in the number of directors, it is believed would significantly improve the good governance, transparency and efficiency of the stock markets. This reduction was long overdue and would put the houses of the stock exchange in order.

All the members of the World Federation of Exchanges had been or were in the process of being demutualised. There were 52 stock exchanges in the world, out of these, 32 had demutualised, while 14 others had decided, in principle, to follow suit.

India has made a similar move and might soon adopt laws for demutualisation. Stock market regulators in India, after the 2000 crisis, are making efforts to do away with member brokers from the management of the bourses.

Similarly some of the stock exchanges, which have initiated the process of demutualisation and will be completed by end this year, are Stockholm Stock Exchange, Helsinki Stock Exchange, and Copenhagen Stock Exchange.