The regulatory measures carried out by the Securities
and Exchange Commission of Pakistan (SEC) during the last three years
have not only received international acclaim but has also made a very
positive impact on the stock market and the corporate sector in
Pakistan. The effectiveness of the regulatory system is evident from the
fact that Pakistan's stock market has been termed as one of the best
performing markets in the world with no systemic issues despite several
The former Chairman of the SEC Mr. Khalid A. Mirza,
who captained the regulatory team during this epoch making period in the
history of the Commission has left after completing his three-year term
to join back the World Bank. His key role as a strong and fearless
regulator will, however, always be remembered as he vigorously pursued
the well conceived reform agenda despite stiff resistance and opposition
from the entrenched interests.
Capital market experts have paid generous tribute to
Khalid A. Mirza for the pioneer work he did to reform and improve the
capital market in Pakistan. He was a man with a vision and achieved a
lot during a short period. He wanted to do a lot more but unfortunately
he had to leave for personal reasons.
Paying tribute to Mirza, an expert of capital market
said, "During his tenure, Pakistan's capital markets have witnessed
major metamorphosis. Significant milestones have been achieved during
this era to make our capital markets, particularly the stock market
investor-friendly. Markets must offer a fair opportunity to market
participants. While the late 1990s depicted Pakistan's stock exchanges'
showing major developments from the technological point of view, many
loopholes from the regulatory perspective remained. In particular, our
markets were prone to allegations of insider trading, front running,
manipulation and so on. Today, the situation is completely different.
Regulatory developments during the past three years have not only
virtually transformed the functioning of the market as a whole but also
significantly altered perceptions towards the available risk-return
tradeoffs. All this has followed the various measures undertaken by the
In his message for the second annual report of the
SEC released recently, Mr. Khalid Mirza also noted down the items on his
unfinished agenda which included: deepening the market and improving
risk management at the exchanges, further strengthening audit practice
and enforcement of IASs; to clarify, reinforce, and enhance standards of
corporate governance; facilitate with strong underrating and
distributive capacity; develop and strengthen the mutual funds, the
pension funds and the insurance industry to provide the market
institutional underpinning; develop and implement a phased programme for
replacement of carry-over transactions or "Badla" by margin
financing and future contracts; and to encourage on-line trading,
electronic communication networks (ECNs) and alternate trading systems
and develop a regulatory framework for on-line trading. ECN is seen to
be on the future agenda of the Commission.
According to annual report, the SEC has covered a
long journey to establish itself as a strong regulatory authority from
an ineffective subordinate department under the Ministry of Finance
known as Corporate Law Authority. The SEC was established in pursuance
of the Securities and Exchange Commission of Pakistan Act, 1997 and
became operational on January 1, 1999. The Commission operationally
comprises six divisions, namely, Securities Market Division, Specialized
Companies Division, Enforcement Division, Company Law Administration
Division, Insurance Division and Support Services Division. The reforms
have been carried out in all the sectors but main focus has been on
stock market reforms.
SEC has implemented a well thought out reform program
to bring stability, transparency and efficiency in the capital market.
These reforms were also necessitated due to the stock market crisis of
May 2000. The crisis occurred as a consequence of extreme overtrading,
weak risk management, and poor governance at the stock exchanges.
The objective of the reform program was to achieve
market integrity and establish a fair, transparent, and efficient market
that engenders investor confidence. The first phase of SEC's reform
agenda, has been successfully completed with the implementation of the
T+3 Settlement System at all three stock exchanges. Prior to this, the
SEC had already implemented the following measures: (i)
improvement in stock exchange governance, (ii)
(iii) setting up of market surveillance wing by SEC (iv)
strengthening of margin requirements (v)
introducing trading in derivatives (vi)
stipulating capital adequacy and enhancing the required minimum capital
balance for brokers (vii)
restraining blank sale, and (viii)
undisclosed market system.
FOLLOWING STEPS WERE TAKEN TO IMPROVE THE GOVERNANCE OF STOCK
- Restructuring of the composition of the Boards of
Directors of the stock exchanges — five directors to be elected from
amongst the members by the general body and four non-member directors to
be nominated and appointed by the SEC (in consultation with the
- Chairman of the exchange to be elected from amongst
the elected directors.
- Stock Exchange Managing Directors to be appointed,
removed and terminated with SEC approval.
- No operational authority can be delegated to any
director other than managing director.
- All brokers and agents to be registered with the
- Introduction of a two-tier arbitration procedure
Risk management measures
- Net capital balance requirement in conformity with
international acceptable norms — redefined and enhanced 10 times.
- Capital Adequacy introduced — exposure of brokers
must not exceed 25 times net capital balance.
- Margin requirements strengthened (margin
requirement raised, free exposure limit abolished).
- Prohibition on "blank selling" of any
- T+3 system fully implemented at the three stock
- Introduced regulations for short selling.
- Improved COT regulations (COT allowed in specific
liquid shares, higher margins to be mandated for COT, COT for a minimum
period of 10 days).
- Investor Protection Fund and Clearing House
Protection Fund to be fully funded by June 30, 2007.
In order to strengthen the regulatory framework of
the Capital Market, the implementation of the SEC's reform agenda, a
number of rules and regulations were issued, which include:
- Brokers, Agents Registration Rules.
- Members, Agents and Traders (Eligibility Standards)
- Insider Trading Guidelines.
- Stock Exchange Members (Inspection of Books &
- Public Companies (Employees Stock Option Scheme)
- Share Transfer Agents, Underwriters, Balloters and
Consultant to the Issue Rules.
- Companies Share Capital (Variations in Rights and
- Regulations for Futures Trading in Provisionally
- Guidelines for the preparation of prospectus and
- Regulations for short selling.
- Establishment of Futures Contracts Market
- National Clearing & Settlement System: The
National Clearing Company of Pakistan Limited was incorporated on July
3, 2001 and has commenced operations w.e.f. December 24, 2001 and so far
27 scrips have been added to the NCSS.
- Approval for establishment of National Commodity
- Approval, in principle, of an OTC market.
In addition, steps are being taken towards the
demutualization of the stock exchanges, which will strengthen corporate
governance and boost investor confidence.
Enhanced disclosure requirements
- The Commission has directed all the listed
companies to submit their quarterly account in an effort to improve
transparency and disclosure by companies.
- The companies are required to submit these accounts
to their registrars and shareholders as well as to the Stock Exchange
and the Commission.
Steps taken for the improvement of the primary market
- Maximum Disclosure has been ensured in the
prospectus for information of prospective investors.
- SEC has taken a number of measures to simplify and
expedite the processing/approval of public offerings.
- Stock exchange listing fee, brokerage and bankers
to the issue commissions have been reduced.
- Shelf registration has been allowed.
- TFCs can now be issued in
- Publication of abridged prospectus has been
- The review of prospectus for further improving the
quality of disclosure in the prospectus has been initiated.
- Rationalization of documents to be sent to SEC
along with the application for approval of prospectus.
For future, it is extremely critical that the
regulatory tone set by the Commission under leadership of Mr. Khalid
Mirza must continue. The Commission has a lot more to achieve and it is
hoped that same degree of commitment and professionalism will be
maintained in future. The government who has been taking credit for
developing SEC as a world class regulator must appoint a new Chairman at
the earliest. The head of this rather sensitive and highly technical
organization must be an individual of high integrity and professional