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i.CHAIRMAN’S
STATEMENT
I have great pleasure in
presenting the first Report of the Securities and Exchange Commission of Pakistan (the
Commission), which became operational on 1st January 1999. The Commission became
financially autonomous six months later, with effect from 1st July, 1999. This
report covers the working of the Commission for the initial 18 month period i.e. from 1st
January 1999 to 30th June, 2000.
I took over as Chairman of the Commission on 31st March, 2000. Mr. Shamim Ahmad Khan, my
predecessor, was Chairman from 1st January, 1999 until March this year. I must acknowledge
the contribution made by Mr. Shamim Ahmad Khan in not only establishing the Commission but
also successfully guiding its operations during its infancy. Mr. Khan can be rightly
proud of leading the process of restructuring the Corporate Law Authority (CLA, the
Authority), a government department, into an autonomous securities commission, which was
indeed a very challenging task. Only a respected civil servant who is also imbued with the
requisite professional and technical skills relevant to a deep understanding of capital
market issues (a combination that is rare) could have accomplished this with the aplomb
displayed by Mr. Khan.
The period under review is characterised by momentous developments in terms of reshaping
of the legal framework and regulatory system, development of market institutions and
infrastructure, and streamlining of government policies with regard to the capital
market. Some of these steps constituted a fundamental departure from the past.
These would, I am sanguine, have a positive impact on capital market development.
The foremost measure adopted is, of course, the establishment of an autonomous Securities
and Exchange Commission. This was long over-due. The policies of liberalisation
implemented in the 1990s led to rapid expansion in Pakistan’s capital market, which
called for a more professional approach towards regulation. As a department of the
government, the CLA could not possibly meet the new challenges arising out of dynamic
market development. The Authority was unable to recruit professionally qualified staff, as
it was obliged to follow the government’s salary structure for civil servants.
Although the Authority strived to play its statutory role of regulating the market, the
limitations imposed upon it by virtue of being a government department were too obvious.
The establishment of the Commission was accompanied by a number of other initiatives and
an agenda of reforms under the umbrella of the Capital Market Development Programme (the
Programme) of the Asian Development Bank (ADB). This Programme, initiated in 1997,
comprehensively covered key aspects of capital market development. It focused on
creating an enabling policy environment, strengthening governance and market institutions,
moderning market infrastructure, developing corporate debt market and promoting mutual
funds, leasing and insurance industries. We have been able to substantively implement the
Programme that reflects not only our commitment but also our capacity to implement reforms
in the financial sector. The Programme also reflects the high priority attached by
the Government to the establishment of an efficient and fair capital market. I must
take this opportunity for placing on record our profound gratitude to ADB for extending
their assistance and providing us a framework of reforms for the capital market.
Under the Programme, steps were taken to improve the management of stock exchanges and
their Boards were restructured to give a voice to non-members in their management. The
market infrastructure was also developed and government policies were streamlined with the
objective of providing a level playing field to private sector mutual funds vis-à-vis the
public sector that continues to dominate in this field.
Given the dynamic nature of the corporate sector, company law has to keep pace with and
anticipate developments in the corporate sector. During the period under review
significant changes, some of them fundamental in nature, were made in the Companies
Ordinance, 1984. Companies have now been allowed to issue more than one kind and class of
shares removing the limitations in existence since 1984. Listed companies have been
allowed to purchase their own shares within parameters defined by the Commission.
Disclosure requirements in the Directors’ Report have been expanded. The law
has been amended to enable Employees Stock Option Schemes. An important development
during the period was notification of rules governing asset-backed securitization. A new
set of rules regulating leasing companies has been promulgated that combines all the
fragmented rules on the subject. Several International Accounting Standards (IAS)
were adopted in order to move closer to global accounting standards. The system of the
issuance of corporate bonds was simplified. Importantly, the Commission prompted a
code of corporate governance to be prepared by the Institute of Chartered Accountants of
Pakistan (ICAP), which is now under active consideration.
We are conscious of the criticism that is often levelled against regulatory bodies for
being weak in enforcement albeit the existence of excellent laws. The Commission, despite
being engaged in considerable administrative work during its infancy, sharpened its focus
on enforcement of corporate laws. During the period under review, the Commission has
exercised a higher degree of vigilance to ensure statutory compliance by listed companies
as well as due protection of minority shareholders. The Commission firmly believes that
future development and consolidation of the corporate sector largely depend on shareholder
and investor confidence, which can be bolstered by an effective mechanism of enforcement.
Despite a number of initiatives taken by the Commission during the period under review,
the market remained under pressure due largely to external factors. The stock exchange
indices showed volatility as a consequence of non-market considerations. During the
period, we also noticed weaknesses in the risk management system of the stock
exchanges. The Commission intends to deal with these issues in an effective manner.
We have a vision of transforming the Commission into a more professional regulatory body
with effective enforcement capability and to develop an efficient and fair capital
market. In the coming years, the Commission would be further strengthened and its
working rendered more efficient through effective reorganization, automation, and
personnel training. Pakistan’s stock market with capitalisation of US$ 8
billion and daily trading volume of US$ 100-200 million has considerable potential.
The market appears to have the basic ingredients, which can be nurtured and developed so
that it becomes an effective instrument for mobilising and allocating risk capital.
The securities market in Pakistan clearly needs greater depth. My present thinking
suggests a four-pronged game plan for the near future i.e. over a 2 - 3 year
horizon. This plan encompasses strengthening the institutional capability of the
Commission, developing enhanced underwriting and distribution capacity, expanding the
investor base, and increasing market depth by introducing new financial products.
This plan would be accompanied by other changes in the regulatory system, strengthening of
audit practices and adoption of global accounting standards.
(Khalid A. Mirza)
September 29, 2000
