February 26, 2007	Monday	Safar 8, 1428

ON August 10, 2002, the Security Exchange Commission of Pakistan (SECP) asked the Karachi Stock Exchange (KSE) to submit its proposals on the demutualisation of the bourses. Despite a lapse of the nearly five years that witnessed 9000 points rise in KSE- index and few market crises, demutualization is still only an agenda on the table of the regulators and the stock exchange. Now, the deadline for demutualisation has been set for December 2007.

Demutualisation brings a change in the legal status of a stock exchange from a company constituted by one-vote per member to a firm limited by shares with one vote per share. It converts stock exchange from a not-for-profit body to a profit-making organisation. It also segregates trading rights and ownership of members.

Currently if a member sells his card, it means he has also sold away his trading rights. In case of demutualization, the two will be treated differently and the selling of shareholding will not result in suspension of trading rights.

Shahzad Chamdia, chairman, Demutualization Cell says that there are many legal, accounting, company’s act and tax issues involved in demutualisation. Deutsche Bank, the advisor on demutualisation, is working on its valuations and placement of shares; lawyers are looking at the company’s memorandum and articles of association while various consultants and auditors are grappling with key issues in demutualisation.

The KSE lacks depth and liquidity and has not been able to attract significant local or global interest. The first and foremost problem is low volume of free float which cannot be sorted out merely by demutualisation but requires some incentives for listed companies over non-listed ones, in the form of corporate tax which is the same at 35 per cent. “ We can then think of regional competition in terms of portfolio investment”, says a stock broker.

Corporate governance is a key issue not only for listed companies but also within stock exchange itself. The KSE has not met its dead lines on certain reforms and the SECP officials expressed their annoyance over this issue at a client-level netting. Disparity between the first announcement and a company’s actual results has also occurred many times.

Surveillance has also been weak as a recent example showed that a listed company’s shares in CFS were found more than its free-float which caused losses to many investors. Moreover, abnormal movements in certain scrips were not monitored and sudden consecutive upper and lower locks in these scrips became a daily practice. Suspensions of trading due to software problems or failure of generators are also the events that do not create a good local and global image of our equity market.

Will demutualisation improve the corporate governance, not only in listed companies but also in the stock exchange itself? The answer could be a `yes’ but with so many ifs and buts. If the SECP limits individual shareholding with a ceiling and ensures more institutional participation and public shareholding, the stakeholders may demand neutral and professional decision-making which may benefit all the participants. However, no improvement is visible following the nomination of a neutral chairman.

In a demutualised entity, stakeholders may force the exchange to be efficient enough in bringing in products and services. Huge investment needs to be done in technology and infrastructure. KSE building is unable to facilitate whole broker community due to shortage of space; the software faces limitations and human resource has also been a key issue.

A demutualised for profit stock exchange will be accountable to its stakeholders and is thus expected to improve its performance.