Following the trend of other developed countries

Dec 28 - Jan 05, 2003

Under capital market restructuring reforms programme, funded by the international donor agencies, the Securities and Exchange Commission of Pakistan (SECP) has taken various measures. All these steps are aimed at making the local market efficient and transparent to protect the interest of all the stakeholders. Yet another step in this direction is aimed at demutualization of local stock exchanges. Like all other initiatives taken in the past, the broker's community may not like the move.

The first step in this direction, nomination of non-member directors of the board of stock exchanges, was resisted to the last by the brokers' community. The sponsors of listed companies also resisted introduction of the Code of Corporate Governance. However, the credit must go to the SECP Chairman for ultimate acceptance of his suggestions. He is a very good salesman. To put a convincing argument in favour of his move, he arranges awareness programmes, develop his clout and finally make his opponents to agree to his suggestions. All these suggested moves ultimately become part of the regulatory system and all and sundry has to follow these.

Following the same strategy, the SECP recently arranged a seminar 'Demutualization of Stock Exchanges'. In order to put forward a convincing argument, the selection of speakers was made very wisely. Dr. Shamshad Akhtar, Director, Asian Development Bank was the keynote speaker. The other presenters from the clout included Ali Ansari, CEO of AKD Securities and Samir Ahmed, Managing Director, Lahore Stock Exchange. However, the Managing Director of Karachi Stock Exchange was missing from the list of speakers.

Khalid Mirza the SECP Chairman, in his concluding remarks very intelligently made his point. He said, "It is not my intention to direct the stock exchanges must demutualize, or even recommend that the stock exchanges should demutualize. There will be no directive or fiat from the SECP in this connection. All I am asking the stock exchanges to do is to very seriously consider demutualization. After all, if 44 out of 52 leading stocks in the world have either demutualized or are in the process of doing so - then, I believe, our stock exchanges would be doing themselves a singular disservice if they did not properly and objectively consider the matter." In other words the local stock exchanges have no option but to go for demutualization.

Earlier, Dr. Shamshad talked about the process of demutualization, its benefits and the experience of leading stock exchanges of the world that have undergone demutualization. It was a very comprehensive and detailed presentation. According to Dr. Shamshad that the number of demutualized exchanges is constantly increasing. Around 52 per cent of stock market capitalization of the members of the World Federation of Stock Exchanges now account for demutualized exchanges. In Asia, demutualized stock exchanges including the Tokyo Stock Exchange now account for 76 per cent of the region's market capitalization.

Ali Ansari talked about the commercial issues and potential benefits of demutualization. His point of view was, "Internationally, demutualization has been adopted by exchanges more for resource generation to meet rising capital requirement and less for better corporate governance." He was also of the view; "Consolidation of bourses and clearing houses within a single entity would bring economies in terms of operational efficiencies, savings in infrastructure investment and financial strength."

Samir Ahmed presented the perspective of the exchange. Stock exchanges are unique organizations being commercial enterprises as well as regulatory bodies. Members (Brokers) have multiple roles as owners, users/customers and managers. The multiple role of members is more problematic because it gives rise to serious conflict of interest. Therefore, it is desirable to separate the roles- achievable through demutualization. The traditional model of mutualized body, geared towards safeguarding members interest, worked in protected world but is not suitable any more.

The KSE-100 index is now touching the new highs. The SECP may rightly claim the credit for this. However, the regulators must also realize that the number of investors in equities market is still very small. The listed companies are not paying dividend despite earning huge profit as well as without disclosing the reasons for retaining the funds. It may be true that they (regulators) wish to make stock exchanges more efficient but unless they restore the confidence of people in equities market, all these efforts may not help in achieving the ultimate objective - development of capital market as a vibrant source for resource mobilization.


It is the process of converting a non-profit, mutually owned organization to a for-profit, investor-owned corporation. Although, demutualized exchanges will continue to provide many if not most of the services, they will have different governance structures in which outside shareholders are represented by boards of directors. There are two main forces driving stock exchanges to demutualize: 1) increased global competition and 2) advances in technology.