In the currently raging controversy over the grant of license by the ex-chairman of the Securities and Exchange Commission of Pakistan (SECP) to PEX Limited for setting up fourth stock exchange, the Asian Development Bank has thrown its weight behind the proposed electronic stock exchange.
In an exchange of communication with this scribe, Mr.Marshuk Ali Shah, Country Director, Asian Development Bank, said that the ADB “fully supports the establishment of the new Electronic Networks (ECNs) and Alternative Trading Systems (ATS) and has explicitly made this a requirement under the ADB-financed Financial (non-bank) Markets and Governance Programme (FMGP) approved in December 2002”. Stock broker community at Karachi and Lahore has been up in arms since February 14, when the outgoing chairman, SECP, Khalid Mirza, put his signatures on a licence that allows, Jehangir Siddiqui—a stock broker turned investment banker—to set up an electronic stock exchange in Pakistan. Brokers allege that the decision by the previous chief regulator was taken “in haste” and that it lacks transparency and smacks of favouritism.
Delegations of panicky stock brokers have flown several times to Islamabad to meet Finance Minister Shaukat Aziz, pleading that the permission be cancelled. But the Finance Minister has made neither a public statement nor any promises. Mr. Marshuk Ali Shah, on the other hand made no bones on disclosing on which side of the divide the ADB stands.
On specific queries from this scribe, Mr. Shah categorically stated that the ADB does not think that the SECP had transgressed or trespassed its authority in the grant of a licence to PEX. “The license was granted in accordance with law and in accordance with established norms”, Mr. Shah wrote back within ten minutes of questions posted to him by e-mail. The ADB Country Director insisted that the SECP had adopted the correct approach and to extend invitation to all interested parties, before granting licence to one party, was not only unnecessary, but “would have been a rather unusual approach”.
Apart from the legal complications, one reason that the government has been loathe to make a move on the PEX matter in spite of the great uproar by the broker fraternity could be the known stance of the ADB. Its voice has to be heard, for ADB, since its first loan in 1968 to the end of December 2002, has disbursed a total of US $12.4 billion in development assistance to Pakistan. The Bank approved $255 million for capital market reforms under the “Capital Markets Development Programme, which was implemented over 1997-2001 and included the establishment of the SECP. Also, the ADB’s Financial (non-Bank) Markets and Governance Programme approved in December 2002 is worth another $266 million.
Discussing stock exchanges and the ECN, the Country Director of the ADB wrote back that the government’s policy objective—that was fully supported by the ADB—was to increase governance (linked to investor protection), transparency and efficiency. He argued that the establishment of new sub-national stock markets (i.e. ‘regional’ exchanges) as was earlier suggested by some parties for Multan, Peshawar or Quetta does not support those objectives.
“On the contrary, the proposal for those exchanges would lead to greater regional fragmentation of the market without direct competition to the existing markets”, Mr.Marshuk Ali Shah said, adding that establishment of such exchanges also bear little rationale during times where markets become increasingly technology-driven, and where internationally a trend of mergers of traditional exchanges was being witnessed.
In regard to the two questions that are at the heart of the current controversy, Marshuk Ali Shah was requested to give unambiguous answers, which he did: Question: The brokers, as is generally understood, are not against ECNS as such, but the manner in which the licence was granted by the outgoing SECP chief to PEX.
Would you comment on that? ADB: We do not share the concerns of parts of the broker community in this regard. We understand that the licence was granted in accordance with law and in accordance with established norms and the procedure followed when stock exchange licences were issued in the past (i.e on merit basis).
Incidentally, this procedure was also followed when SECP granted the licence for the National Commodity Exchange Limited (NCEL) last year that has been promoted by KSE. In the case of PEX, SECP may have gone a step further insofar as transparency is concerned by inviting stock exchanges to be present at the formal presentation made by the PEX sponsors to the Commission.
This was to provide an opportunity to the existing stock exchanges, albeit they were conflicted in the matter, to voice any concerns they may have although this was not mandated by law. We note reports in the press that suggest that some of the brokers felt misled about the topic of the presentation on the ECN, or that they try to establish a link between the timing of the decision to grant the license and the imminent departure of the SECP chief. Such reports may well serve to create perceptions and influence public opinion, but they are of little substance.
It is also well known that the former SECP chairman had at many occasions stressed the importance and his support to introduce ECNs in Pakistan and requested the financial community to come forward with proposals. Under Pakistan law, a registration as stock exchange is required for an ECN to fully exploit the benefits of technology and matching buyers and sellers. As this will create pressure on the existing cost structure, it is not surprising to now see opposition by those who in the past have benefited most from the existing system.
Question: Should the SECP have invited proposals for setting up ECNs from all interested parties, via media, before granting the licence to one party? ADB: No. This would have been a rather unusual approach. The law is quite clear that a license by SECP is required for operation of an exchange, and anyone who feels that the market has the potential to profitably accommodate another exchange may thus approach the Commission and submit an application for a license. Whenever anyone applies for a licence to set up a stock exchange, the Commission is obliged by law to consider the case on its merit and either grant or refuse to grant the license.
This is a qualitative judgment which the regulator has to make, and for which it is empowered. It must, of course, take its decision fairly, with due regard to all circumstances, the criteria laid down in the Securities and Exchange Ordinance, 1969, and above all in the interest of the capital market.
It follows, therefore, that a license should be granted only if the Commission is satisfied that the new exchange brings added value to the capital market, which is obviously expected in the case of PEX. Again, the same approach was also followed last year, when the promoters of NCEL, which include the KSE, submitted an application for a license which was granted by SECP on its merit.
Similarly, this approach was also followed in the case of other entities that require an SECP licensing, such as the Central Depository Company or the National Clearing and Settlement System where the promoters approached the regulator with a request for a licence that was granted on merit.
Capital market development is market driven and the establishment of new exchanges (or merger of existing ones) can’t be mandated but one has to create conditions for market participants to come forward when the timing is right.
