HAVING been in business for decades, stockbrokers know that when a finance minister meets the chief regulator to discuss things about the bourses, it seldom is to convey any good news.

So when Finance Minister Ishaq Dar sat across the table with the the Securities and Exchange Commission of Pakistan (SECP) on August 16, the discussion centred on the completion of the demutualisation process of the stock exchanges, in addition to the report of the 2008 market crash.

Reports indicated that Dar directed the SECP to complete the demutualisation process ‘without any further delay’ in consultations with the stakeholders if the exchanges were unable to abide by the timeline. SECP Chairman Zafar Hijazi briefed the finance minister on the progress on demutualisation.

The major issue that remains to be resolved under the Stock Exchange (Corporatisation, Demutualisation and Integration) Act 2012 is to hunt down strategic buyers for 40pc shares of the demutualised exchanges, and to float the remaining 20pc shares for subscription by public and financial institutions. The brokers have already taken their cut of 40pc.

There are indications that if the stock exchanges are unable to get buyers by tomorrow, the initiative will pass on to the apex regulator

Originally, the stock exchanges had to find a strategic buyer within 119 days. That period expired in August 2014. The chief regulator extended the date till this August to enable the exchanges to strike a favourable deal with the prospective buyer.

Under the Act, the process of demutualisation, which includes the search and sale of the exchanges to strategic buyers, is to be completed by August 25 (tomorrow). There are indications that if the exchanges are unable to get the buyers by tomorrow, the initiative will pass on to the apex regulator. This will be unfortunate for the broker fraternity, which will be more comfortable with a strategic buyer of their own choice.

A person in the knowledge of things said the stock exchanges have found a way to stave off the chief regulator. “The Act states that up to 40pc shares are to be divested to the strategic buyer,” he said, adding that a potential buyer could be sold just a 5pc stake, for instance, and that would also fulfil the condition of the Act.

This February, talks were known to have gone beyond the expression of interest with three parties: Bursa Malaysia, the Tokyo Stock Exchange and the Qatar Exchange. However, it seems that those three quietly slipped out for reasons that have never been made public.

The latest interested party is reckoned to the Borsa Istanbul, the sole exchange entity in Turkey. A short while ago, the representatives of the Turkish bourse had come calling at the stock exchanges. Few people know what actually transpired and if the talks with the delegation concluded on anything close to a firm commitment.

And then there is the lingering issue of the integration of the country’s three stock exchanges. In their meeting on August 15, the SECP chairman briefed Dar on the international trend in the integration of stock exchanges and how it helps reduce fragmentation.

“The finance minister was told that through integration, the markets benefit from operational synergies, cost-cutting, economies of scale, and streamlined regulation,” a SECP official said. Following that meeting, the integration of stock exchanges has emerged as a priority.

Several meetings have been held between the demutualisation committees of the three stock exchanges. An insider affirmed that the issue might be resolved at a meeting of the representatives of the Karachi, Lahore and Islamabad stock exchanges with the apex regulator, slated to be held this afternoon.

While a member on the board of the Islamabad Stock Exchange (ISE) — the smallest of the three bourses — said the talks had made ‘significant progress,’ many other market experts believed that there were some major huddles that were unlikely to make integration an easy task.

One outspoken detractor is Khalid Mirza — the former chairman of the SECP and the Competition Commission of Pakistan, who is now the chairman of the board of directors of the Lahore Stock Exchange (LSE). He told Dawn that he did not see eye to eye with those striving to integrate the three stock exchanges.

“If successfully done, it will go on to create a monopoly with just one stock exchange, without any competitor.” He thinks that this might only provide some short-term advantages, and believes that it will be more fruitful if the Lahore and Islamabad stock exchange are raised to the national level and together they will offer competition to the Karachi Stock Exchange (KSE). “The exchanges must be made to compete,” he emphasised.

Mirza also told this writer that he had decided to step down from the chairmanship of the LSE board from September 1 and that he had already handed over his resignation. He stressed that he held SECP chief Zafar Hajazi in high esteem, but he found it useless to hang on to the position of the LSE chairman as he was neither able to make any worthy contribution nor was being paid well.

Some other informed persons, requesting anonymity, also believe that a host of issues will have to be resolved before integration becomes possible.

These include the approval of shareholders and the sanctioning of the Trading Rights Entitlement Certificate Holders (TREC holders); the method by which trust funds, such as the market protection and the brokers’ protection funds, can be dissolved; integration at not just at the operational but also at the inter-corporate level; and the reconciliation of the basic minimum capital for the bourses, which is Rs40m for the KSE, Rs15m for the LSE and even lower for the ISE.

At the KSE, just around 20 brokers command 80pc of the business.

Will they want to be at par with the rest?

Published in Dawn, Economic & Business, August 24th, 2015

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