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Stock markets have been predominantly engaged with trading in just equities, and the regulators have been aware of the savers’ thirst for more investment avenues.
The need for a deeper corporate debt market, and progress in trading in government papers at the bourse, have always stood at the top of the corporate regulators’ agenda. Yet, the bureaucratic roadblocks have thwarted a successful take off.
However, the PML-N government is again looking at the issue. In a recent meeting with stockbrokers, bankers and regulators, Finance Minister Ishaq Dar asked them to suggest a framework for the sale of T-bills and Pakistan Investment Bonds (PIBs) through stock exchanges.
The minister also directed that a committee comprising representatives of the central bank, the Karachi Stock Exchange (KSE) and the Securities and Exchange Commission of Pakistan (SECP) be formed to identify and suggest measures that could promote investment in government papers.
Dar reportedly asked for a preliminary report, showing the modus operandi of the proposal, by August 30.
Muhammad Ali, the outgoing chairman of the SECP, told Dawn last Thursday that it was essential to move from a purely banking loans market to a vibrant debt and capital market. He said that the initiation of trading of government papers through stock exchanges was a step in the right direction, and that currently, trading in government papers lacked transparency, as the transaction takes place between a bank and the client through a broker.
The changeover of trading through computerised terminals of the stock exchanges would provide transparency and also result in better pricing. Mr Ali said that it would help the government raise long-term financing for the tenor of the debt instrument. It would also provide an avenue for investment for corporates with excess cash on hand.
However, the former SECP chief cautioned that since handling of such debt instruments required expertise, only those brokers who maintain money market desks should be allowed to participate.
Meanwhile, KSE Managing Director Nadeem Naqvi said that trading of T-Bills and PIBs through the bourse would diversify the government’s investment base. He observed that if an investor currently wants to place money in government papers, he has to approach banks, and since the prime focus of banks’ treasury is to compete for deposits, they are scarcely eager to encourage debt instruments to their customers.
Mr Naqvi listed several advantages of the proposed initiative, such as increasing capital market participation, with a larger number of distributors in the form of brokers and approved distributors. It would also provide individual savers an easy access to government papers.
“As the retail investor becomes accustomed, it would open up the opportunity for the government to finance large infrastructure projects by launching ‘infrastructure bonds’,” said Naqvi.
The KSE MD pointed out that the whole process would be facilitated since the Central Depository Company (CDC) had been given the authority for ‘real time gross settlement’ (RTGS) of government securities, just like banks, so that there was no risk for settlement failure.
Mohammad Sohail, CEO of Topline Securities, was also encouraged. “The debt market would get a new non-bank investor class with trading at stock exchanges, with proper regulations, infrastructure and market makers,” he said. He added that transparency and visibility of the proposed bond market could also attract foreign investors who have been investing in Pakistan equity markets since the doors of the Exchange were thrown open for them a little over two decades ago.
But some detractors yawn at the latest proposed move, saying that there is nothing new in it. One such market participant recalled that in order to lure investors to the debt market, a meeting of KSE’s board of directors was held on Nov 29, 2011, which decided to grant approval in principle for the development of a trading platform and a system for government securities — T-bills and PIBs — through the bourse.
Some stockbrokers had at the time expressed enthusiasm over the opening of a window to an alternative avenue of investment and a brand new market product.
But the cynics alluded to an already present over-the-counter market at the KSE, which invests in government securities. Yet the counter is not particularly popular with general investors, and it is mainly used by banks, financial institutions and some high net-worth individuals.
The KSE MD also agreed that the issue of trading of T-bills and PIBs through stock exchanges had been with regulators for some time, and had made little progress. “However, the interest of Finance Minister Dar has now moved it closer to reality,” he said.
Meanwhile, some experts expressed reservations over the success of the procedure. Muzammil Aslam, managing director of Emerging Economics Research, has reason to be skeptic. He says that out of the 200-broker fraternity, barely 10 maintain money market desks; the reason being that dealing in government debt papers is a ‘no value business’.
Muzammil thinks that in order to make it feasible, the ‘commission structure’ needs to be reviewed. For brokers, dealing in stocks is far more lucrative than government debt instruments. Giving an example, he said that in trading shares for investors, a broker earns Rs5,000 in commissions on, say, a five- paisa per share in a transaction worth Rs0.1 million. Conversely, on trading in T-Bills of an equal amount, the broker would receive a commission as little as Rs300.
Moreover, since stockbrokers have limited paid-up capital, they are unlikely to be able to handle such hugely valued government papers. “If one quarterly auction is for, say, Rs300 billion, the full year amount to be handled would be Rs1 trillion, which is beyond the stockbrokers’ capacity,” he says.