THE move to integrate the country’s three stock exchanges — in Karachi, Lahore and Islamabad — into a single Pakistan Stock Exchange is likely to conclude by next Monday when a proposal will be placed before an extraordinary general meeting of the members (brokers) of the Karachi Stock Exchange.

Earlier on August 27, a memorandum of understanding was signed in the presence of Finance Minister Ishaq Dar to merge the stock exchanges into a single entity.

Dar had said it was a ‘win-win situation’ for all, while Securities and Exchange Commission of Pakistan Chairman Zafar Hijazi had described the formation of the Pakistan Stock Exchange (PSE) as a major milestone in the history of the country’s capital market.

While the front line regulators at the KSE, ISE and LSE are on the same page with the government and the apex regulator, stockbrokers are still assessing their gains and losses in the proposed merger. And most of those who have already done their homework are not exactly dancing with joy.

KSE Managing Director Nadeem Naqvi told Dawn that stakeholders of all the three stock exchanges were on board ‘as per my understanding’. He said after the proposal’s expected approval by the extraordinary general meeting on October 26, it would be delivered to the SECP, which would set a timeline for the completion of the process.

He listed three top benefits of the bourses’ integration. First, one stock exchange would be easier to regulate and monitor than three.

Second, it would extend the pool of resources in the stock business. “The big pool of liquidity available in central and northern Punjab could flow into the stock market, which would also boost the number of investors,” Naqvi said.

And the third benefit would be that instead of searching for three ‘strategic investors’ (who would be offered 40pc stakes in the exchanges), a single buyer would be need to be found, which would be relatively easier, he added.

“Many who have shown interest in acquiring a strategic stake in the exchanges have stepped out, as they were confused that three stock exchanges exist in one comparatively small country.”

Naqvi also lauded the SECP’s efforts to build the first hub in Abbottabad, with the second one at Sialkot slated to become operational by next month.

Islamabad Stock Exchange (ISE) MD Mian Ayyaz Afzal concurred with Naqvi, saying the integration of the courses was in line with the international practice of providing a single trading platform for all.

“It would bring about transparency and efficiency as well as price discovery of equities,” he affirmed. Other advantages would include the low cost of listing for companies as they would have to pay the listing fee to just one exchange. This could prompt more companies to enter the capital market, he said.

“More listings mean that more investors would likely line up to trade shares; the current number of equity investors in the country is the lowest in the region.”

He also pointed out that brokers of a single exchange could tap the huge scope in the small and medium enterprise (SME) segment. The ISE MD said the core business of the exchange would be transferred to Karachi, while its non-core assets would be formed into a real estate investment trust (REIT).

Lahore Stock Exchange (LSE) MD Aftab Ahmad Chaudhry also favoured integration. But he had a host of complaints against the supremacy of the KSE as well. “I have been opposing the KSE’s dominance since 2006,” he said. He also argued that the KSE was not generating enough volumes and that there was no focus on growth or even full compliance with the law.

“The weakness in enforcement and compliance can be gauged from the fact that every trading day, many brokers and high net worth individuals manage to peep into the positions of the KSE’s other brokers as well as those of their major clients. The law strictly forbids such activities,” he said and asked for such practices to be checked.

But a Lahore-based stockbroker held a grim view about the prospect of integration of the city’s bourse. “Unlike the ISE, the LSE has no non-core assets to build into a REIT.” But he said the greatest disadvantage to Lahore-based brokers would be in terms of their daily trade.

“At present, almost all transactions are carried out between members of the LSE and the KSE and the ‘exposure’ is taken by the KSE’s brokers, who charge ‘commissions’ from LSE members,” he explained.

He lamented that following the integration, the LSE brokers would also become full-fledged members of the clearing house, which would entail providing for their own ‘exposure’. He emphasised that the trading volumes at the PSE could fall drastically as 55pc of the overall trading was generated by the LSE and the ISE.

When this scribe doubted his figures, he reasoned that the biggest speculators — known as ‘satturia’ in market dialect — had always emerged from Lahore. He recounted several episodes, starting from the infamous Hanif Moosa- (Danka) generated stock market crisis in 2000.

However, LSE MD Chaudhry mused that quoting the share of the two smaller exchanges in overall trading at 55pc was carrying it a bit too far. He believed the number to be around 20pc.

Published in Dawn, Business & Finance weekly, October 19th , 2015

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