KARACHI: The Karachi Stock Exchange (KSE) dispelled concerns “expressed by some constituencies of the capital market” regarding lack of support for the smaller stock exchanges, which the Exchange said comprised less than 10 per cent of trading activity and value in the overall capital market equation in Pakistan.

“One lament has been lack of liquidity in Islamabad and Lahore stock exchanges with suggestions that there should be a single order book (trading platform) nationally and a single investor protection fund for all investors,” a press release signed by the KSE MD, Nadeem Naqvi, released on Thursday stated.

The KSE said that though laudable objectives, those had to be “viewed in a holistic context with a realistic assessment of institutional capacity, financial soundness, risk management capability and commercial viability.”

Taking a closer look at the low liquidity issue in Islamabad and Lahore, the starting point in any analysis has to be financial and institutional capability of respective exchanges and brokerage houses, the KSE MD observed, adding: “If financial, marketing and operational capability have the needed economic scale, then liquidity can be generated with product innovation and targeted marketing.”

The KSE said that in the post-demutualisation of the stock exchanges in August 2012, there have been structural changes in the working of capital market institutions with separation of regulatory and commercial functions of each of the three stock exchanges, ie Islamabad, Karachi and Lahore.

“The Securities and Exchange Commission of Pakistan has taken a strong lead, not only in strengthening the regulatory framework that protects investors interest but also in launching initiatives to broaden the reach of capital market investment products to savers across the nation,” the KSE asserted.

“As far as narrow investor base is concerned, the problem is not limited to smaller exchanges. It is a national capital market issue,” said the KSE MD.

“And the issue is one of policy. At present, there is an uneven playing field which is a major impediment to the growth and development of the capital market in Pakistan.”

This relates to the National Savings Schemes (NSS) where not only guaranteed returns are higher than government bonds, but there is relatively lower level of formalities to open an account. “Further, allowing institutions to invest in NSS diverts savings away from the capital market and is a drag on its capacity to serve the long-term funding needs of industry and commerce.

“It is here that our focus ought to be rather than simply lamenting about distribution of liquidity within the capital market eco-system,” said the KSE MD, adding, despite the above, the SECP had taken a serious initiative to address the liquidity issue in the smaller exchanges.

“In view of the above, it is incorrect to say that smaller exchanges are being ignored,” KSE stated and asserted that the SECP was actually putting the larger exchange (KSE) under far greater and more stringent scrutiny simply because of larger transaction values generated there.

Published in Dawn, March 6th, 2015

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