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
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
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.