SECP asked to demonstrate prudent approach

Business Recorder

The Securities and Exchange Commission of Pakistan (SECP) Policy Board has barred the SECP from referring cases to the law enforcement agencies including National Accountability Bureau (NAB) and Federal Investigation Agency (FIA) and decided to call back all SECP officials presently deputed at different agencies like NAB/FIA.

The SECP Policy Board met at the SECP Headquarters under the Chairmanship of Professor Khalid Mirza. The Board took decisions in connection with several matters pertaining to the development and growth of the primary market for issuance of securities, and gave other significant directions to improve the working of the Commission, inter alia, directions with respect to the Commission”s dealings with law enforcement agencies.

Khalid Mirza told Business Recorder, “It is shameful that the commission is referring complaints/cases to the law enforcement agencies. The SECP should itself investigate cases covered within the domain of the commission. Under no circumstances, the commission should send cases to the law enforcement agencies unless there is a court order or very strong reason that investigation is beyond the capacity of the SECP. Before sending any case to the law enforcement agencies, permission/clearance has to be taken from the SECP and Policy Board,” Khalid Mirza added. “If there is a complaint the SECP should itself fully investigate being father and custodian of the market,” Mirza said.

He said, “Policy Board has further directed the SECP that do not send any official to the law enforcement agencies on deputation except there is a court order or very goods reason for this. The clearance of the commission and Policy Board is also needed for this in future, head of the SECP Policy Board added.

Presently, 12-15 SECP officials are working in different law enforcement agencies on deputation basis.

“The regulator of the market should be firm, helpful and fair, but it should not interfere into the market operations”, he said. During the meeting, the Policy Board also reviewed the manner and process by which SECP, firstly, refers cases to the law enforcement agencies and, secondly, lends its personnel to such agencies. It was noted with concern that in the past few years, despite having requisite powers under legislation, the Commission had been referring cases to law enforcement agencies that fell within its regulatory ambit and that should have been dealt with by the Commission itself in accordance with law. The Policy Board directed that this practice must cease forthwith and no case should be forwarded to any law enforcement agency in the absence of an inconvertible reason based on the Commission”s legal inability to take action and prior clearance by the Commission as well as the Policy Board. The commission was directed to withdraw all cases that at present stood referred to law enforcement agencies unless there was a sound and objective reason not to do so, in which case the Policy Board should be advised accordingly.

Moreover, the Board also expressed its strong reservations over the secondment of SECP personnel to law enforcement agencies not only because this practice depleted SECP”s internal capacity adversely affecting its efficacy but also because the personnel in question were imbued with a culture that was not in consonance with SECP”s role as a beneficial regulator of the securities market. The Board directed that such personnel be repatriated back to the Commission unless there was a strong reason not to do so in specific instances and also that any future request for personnel from SECP should be cleared by the Board.

The Board reviewed the regulatory regime for Initial Public Offerings (IPOs) and appreciated the newly introduced reforms in the Public Offering regulatory framework, especially the newly implemented e-IPO system, which allows for an efficient, easy and hassle free mechanism for making applications for subscription of shares in IPOs by the general public. The Commission apprised the Policy Board that in order to make available long-term funding for expansion and growth of businesses and promote capital formation through capital markets a proposal has already been forwarded to Pakistan Stock Exchange (PSX) that seeks to broaden the scope of the existing SME Board through amendments in the PSXs” regulatory framework. The SME Board, renamed Growth Companies Board (GC Board), would facilitate listing by companies that do not meet the prescribed criteria of the Main Board of PSX but are aspiring to raise funds through capital markets. In this connection, SECP staff made a presentation that, among other matters, showed that a track record of profitability and/or other aspects of corporate viability were essential listing requirements in certain jurisdictions. It was pointed out by Policy Board members that other than the jurisdictions “selected” by staff, there were several other jurisdictions that did not have profitability as a listing criteria. As long as the disclosure requirements were adequately fulfilled, profitability or not would be duly reflected in the price. The Policy Board Chairman observed that in line with accepted global practice, the SECP should engage in disclosure based regulation rather than merit based regulation and that this would enormously facilitate the growth of the capital market.

It was brought to the attention of the Board that licenses of six brokers had not been renewed this year. A sample of two of these cases were discussed which left the Board unconvinced as to whether the action taken was justified. The Oversight Committee of the Board was then entrusted with the task of examining all cases of license non-renewal and to take a final decision with respect to license renewal in each case.

The Policy Board observed that the core issue in the capital market remains the dearth of securities on the supply side as the number of new listings at PSX are minimal. The Policy Board recognized the need to create awareness and understanding among the corporates about the capital markets as an avenue to meet their funding needs. However, in addition, the Policy Board noted that very little has been done by either the Commission or the PSX (which lacks the necessary incentive being a monopoly) to actively advocate and promote to new issues of securities. Investment banking being lackadaisical in Pakistan, the Policy Board felt that it was incumbent on the PSX – as is the case with many stock exchanges in the world that compete for new listings – to play a most active role in this connection and convince potential companies in a professionally robust manner to go public and tap the capital markets.

The Policy Board, further observed that the onerous listing rules of PSX obviously needed to be greatly simplified, rationalized and made considerably more issuer friendly; also, the Commission needs to revamp its processes and approach in order to expeditiously deal with and clear new issue applications. The Policy Board Chairman also expressed the opinion that to make a difference and improve the situation significantly, all this would not be necessary if the mind set and approach of the Commission”s regulatory staff changed to becoming fair and helpful in their approach.

The Policy Board also reviewed the progress of the Pakistan Mercantile Exchange and noted that the exchange should focus on further developing the commodities” futures market, particularly futures contracts in agricultural commodities. Professor Khalid Mirza said that there is potential for a futures market in agricultural commodities as it would provide a useful avenue for economic agents that depend on such commodities to hedge their positions. This area has not been covered as yet by the mercantile exchange in any substantive sense and the exchange should take cogent steps to fill the gap. The purported existence of kerb markets in commodity futures instruments and/or forward transactions underlines the huge potential for an organized futures exchange as opposed to the risks of exposure to grey markets. The Policy Board gave its consent, in principle, to a rather light (conduct based) regulatory regime for mercantile exchange intermediaries after the exchange has put in place satisfactory arrangements to ensure that intermediaries do not have any custody of client cash and securities and the clients also having the ability to deal directly on the exchange.

After some deliberation with respect to the Insurance sector, it was decided that the Chairman, SECP should have a meeting with the heads of the three Government controlled insurance companies to determine how these companies could be assisted on a sensible and prudent basis without adversely affecting the insurance industry.

The SECP Policy Board, in pursuance of Section 12 of the SECP Act 1997, comprises ex-officio members of the Ministries of Finance, Commerce, and Law, SBP, SECP and persons of eminence from the private sector.

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