Integrated stock market

Published August 30, 2015

MORE than three years after the passage of key enabling legislation, stock market reforms took another step in the right direction this week when the finance minister put his signature down for integrating the three stock exchanges of the country. The step had been held up since the passage of the Stock Exchanges (Corporatisation, Demutualisation & Integration) Act, back in 2012, but the memorandum of understanding signed on Thursday has got the process moving once again. The demutualisation of the stock exchanges — basically separating ownership of the exchange itself from trading rights — is an important step in the right direction. Although some progress has been made in removing the influence of brokers at the stock exchanges, there is still a long way to go. The presence of brokers on the board of directors has shrunk since talk of demutualisation began about a decade ago, but it needs to end altogether before the frontline regulator’s autonomy is secure.

The next step is crucial because that is when the real material progress towards this goal begins. The process of acquisition of shares of the integrated stock exchange, and the reconstitution of its board is the goal towards which progress must be made rapidly, although thus far it appears there are no strategic buyers on the government’s radar. There are also concerns that integration will produce a monopoly in the country’s share market, although it is not possible to see how this can be avoided given the sheer disparity in weight between the Karachi Stock Exchange and all the others, unless a host of smaller regional exchanges are organically grown and merged together, which can take years. The influence of brokers on the management of the stock exchange can be reduced, but curbing it on the trade floor will be the bigger challenge, especially given the enormous concentration of holdings in the hands of a small number of brokers. Practices like insider trading and price manipulation will be harder to eliminate if the regulator is not ramped up, and the rumoured role of brokers in selecting the heads of key capital market regulators is not curbed. In short, demutualisation is an important step for Pakistan’s capital markets to take, but it must be accompanied by a host of other steps as well for the process to have genuine credibility. Perhaps this is why the search for a strategic buyer is proving so elusive.

Published in Dawn, August 30th, 2015

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