January 28, 2008	Monday	Muharram 18, 1429

Rushing of the ordinance on demutualisation and corporatisation of stock exchanges by a caretaker cabinet on Tuesday has raised eyebrows over what should normally have been a vital decision of the parliament.

It never was an easy task to make the powerful brokers share the trading rights of stocks with the general public, strategic investors and financial institutions at a time when brokers were in virtual control of the equities markets. Since the process of demutualisation started in November 2002, the two former heads of the Securities and Exchange Commission of Pakistan (SECP) — Khalid Mirza and Dr Tariq Hassan — had to face immense resistance from the brokers that delayed the move for more than five years.

But many think that the end of this long and tiresome process should have been a democratic one. The draft of the law on Stock Exchanges Corporatisation, Demutualisation and Integration should have been tabled in the Parliament and discussed by the public representatives and amended if required instead of putting it for approval to the caretaker cabinet. Now President Pervez Musharraf has to give it the status of an ordinance. Why not a parliament empowered with a fresh mandate of the electorate? "It was a right thing, but was done at a very wrong time," remarked former SECP Chairman, Dr Tariq Hassan, while talking to Dawn.

He said the draft should have been debated not only on the floor of the Parliament, but also at other forums to avoid the "vested interests". He said the Stock Exchanges (Corporatisation, Demutualisation and Integration) Ordinance 2008 should be benchmarked by analysing the recommendations of the Expert Committee on Demutualisation and Integration formed in September 2004 and headed by Shamim Ahmed Khan, a former SECP chairman at that time.

But the SECP chairman Raziur Rehman is of the view that it did not matter whether the demutualisation law was debated in the parliament or not so far as it strived to make the affairs of the country's bourses transparent and improve their international image and attract foreign investment.

He says that stock markets, from Dubai, Korea, Norway and London, have already shown interests in buying stakes in the Pakistani bourses once the demutualisation mechanisms were in place. He however agrees that stock exchanges could only benefit from demutualisation if there is "political stability"..

So far about 20 stock exchanges have been demutualised worldwide including Bombay Stock Exchange and the National Stock Exchange of India.

After demutualization, brokers will have the right to hold 40 per cent shares against 20 per cent of the general public, while the remaining 40 per cent go to strategic investors and financial institutions. The demutualisation process would be initiated within the next four months, while the completion of the whole process may take a year or so. The three stock exchanges are expected to be ready for implementation of the ordinance within 119 days of its approval by the cabinet

The dormant brokerage firms at the stock exchanges (KSE 45, LSE 80 and ISE 100) have been asked to become active or else sell their trading rights by 2010. After that, the trading licenses of dormant firms will be withdrawn.

The demutualisation will enhance the confidence of the international and local markets in the Pakistani equity markets. There is a growing trend in the Asian markets towards demutualisation and integration..

In spite of the economic growth, companies are currently not seeking listing at the exchanges and little capital formation is taking place through bourses. Issuers lack confidence in the equities markets and sense little value addition in listing.

Investor base is small as less than one per cent of the country's adult population owns shares. Growth in mutual funds has not led to increase in the number of investors. The number of shareholders in listed companies has remained almost stagnant over the last several years. Though a number of governance related reforms were initiated recently, professional management is still much of a dream for the exchanges. The role of non-member directors in improving governance is rather mixed while bourses are being run literally by brokers. .

Liquidity and price discovery are fragmented and costs escalate for all stakeholders across the KSE, LSE, and ISE. While the number of issuers and investors is very small, the number of intermediaries is disproportionately large. Investors are vulnerable to different forms of market abuse. Market remains rife with allegations of price manipulation, front running, insiders trading and blank selling.

Stock exchanges are also unable to attract and retain professionals. Most of the staff is non-professional. The mutual structure of the stock markets is a cause for many of the market failures. It is now hoped to be cured through demutualisation.