June 05, 2006	Monday	Jumadi-ul-Awwal 8, 1427

THERE are about 663 companies listed at KSE, 524 at LSE and 236 at ISE. In addition, there are companies that have securities other than ordinary shares, such as TFC, listed at the exchanges. Other than a few exceptions, companies listed at ISE are also listed at LSE which in turn are also listed at KSE.

These companies are a core stakeholder in the exchanges along with investors and stock brokers. Till a few years ago, all three exchanges have been primarily financed by fees paid by listed companies. However, little has been done to facilitate listed companies as they are subject to an inefficient listing regime.

Listing is a conventional function of exchanges, like trading, clearing, and, to some extent, custody. With the establishment of CDC and NCC, custody and clearing have already been successfully separated and centralised. Since unification of the three exchanges is unlikely in foreseeable future, listing services should also be separated and centralised through a specialised entity- a central listing company (CLC).

Like the NCC, CLC is justified by local requirements rather than international precedents because in most foreign markets, problems of multiple domestic listings are either absent or insignificant.

The Indian market is perhaps the only regional market which faces problems in listing regime due to its 22 stock exchanges and the securities regulator there has also been trying to address this issue by centralising listings.

One model for establishing CLC would be to set up a new not-for-profit public company in which the three exchanges, listed companies, investment banks, and others stakeholders would be represented. CLC would be a small set up compared to exchanges. Its initial capital would be provided by its sponsors while on ongoing operations would be financed by giving CLC a part of listing fees.

CLC would replace the exchanges in performing the following functions: (i) process applications for listings and de-listings (ii) receive and disseminate corporate announcements (iii) monitor compliance with listing regulations and (iv) provide an electronic and publicly available data base of financial statements of all listed companies.

To keep adequate checks and balances in the system, approval given by CLC should remain subject to approval from SECP, as in the present regime. Following these two approvals, a company seeking listing should become automatically listed at or de-listed from all exchanges.

There are a number of major benefits of establishing CLC. First, it would reduce unnecessary bureaucracy and cost in listing regime. At present, companies with multiple listings have to deal with each exchange separately, seek different approvals, and pay a variety of fees.

Some listing requirements are clearly questionable, such as submission of hundreds of copies of annual reports for brokers and payment of large fees on increase in paid-up capital.

Together, the many unnecessary requirements of each exchange impose a significant burden on the companies. After establishment of CLC, companies would have one-window operation. The balance between stakeholders on the board of directors of CLC would lead to rationalisation of procedures and fees. For providing liquidity and price discovery in securities, exchanges would be paid listing fees to be shared according to an agreed formula.

Second, CLC would raise the standards in listings. Unlike exchanges which remain pre-occupied with matters relating to trading and lack in human capital, CLC would specialise in listings and it would be run by qualified and experienced professionals. This would enable the CLC to keep listing regime updated with international developments and attract listing of suitable domestic companies, government securities and international companies.

Third, CLC would broaden market access. Since each security would be listed and therefore tradable at all exchanges, investors would be able to trade through local broker. This would also help reduce the need for inter-exchange trading which costs more and carries risks in custody.

Fourth, CLC would substantially improve dissemination of corporate announcements. At present, when a company with multiple listings makes a corporate announcement, which is often price sensitive, it has to send a fax to each exchange separately. Companies send these faxes to exchanges sequentially so that announcement is often made in one exchange before the fax is received by the other.

Exchanges also do not disseminate corporate announcements to all investors simultaneously. Instead, they first make the announcement through the speaker system installed in the premises of exchanges, which gives the brokers and clients present in the building an advantage over other investors. This fax and speaker system is both unfair and obsolete.

Internationally, exchanges use secure online systems to gather and disseminate corporate announcements. Since CLC would be a new setup, it would be best able to modernize corporate announcements function and ensure simultaneous disclosure to all investors.

Fifth, CLC would relieve the exchanges of their role as “front line regulators” of listed companies and address conflicts of interest in listings. Repeated market scandals are evidence that exchanges cannot fulfil their regulatory responsibilities. Due to a poor perception of exchanges, listed companies also do not treat them as regulators. At times, exchanges also resist applications for de-listings on frivolous grounds so that they do not loose listing fees and the strategic importance that comes with listings. By July 2007, income tax rate for unlisted companies would become the same as that of listed companies, which would accelerate de-listings and strain relationship between exchanges and listed companies.

Moreover, post demutualization, exchanges would also be for-profit companies with regulatory jurisdiction over listed companies, which would worsen conflicts in listings. Establishment of CLC would address these issues. CLC need not act as front line regulator of listed companies. It should simply monitor compliance with its listing regulations and refer non-compliance to the SECP for appropriate action.

In sum, CLC would be a reform offering benefits to listed companies, investors and exchanges. Clearly, it would take time and effort to establish it. The legal framework, including the Securities and Exchange Ordinance 1969 would also have to be amended. As the apex regulator of capital market, SECP would do well take the lead in establishing CLC for the longer term development of capital market.