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Bourses’ merger, lurking fears

November 23, 2015

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THE scheme to create a national stock exchange through the ‘integration’ of the three existing exchanges might prove detrimental to the development of the capital market and for interests of up-country investors.

It will also establish the complete monopoly of a single bourse over all key areas of the market, such as depository, clearing and settlement, and commodity services.

The Security and Exchange Commission of Pakistan (SECP) is executing the project in spite of strong opposition by a committee comprising the chairmen of the three bourses that the apex regulator had constituted earlier this year.

Some Lahore Stock Exchange brokers claim that the regulator had actually twisted their arms to compel them to agree to the proposal for the creation of the Pakistan Stock Exchange (PSE). For all practical purposes, it will be the ‘renaming’ of the Karachi Stock Exchange (KSE) as the two other bourses in Lahore and Islamabad will be de-licensed, they add.


“Competition is important because demutualisation makes stock exchanges ‘for profit’ entities. It is also important because the quality of the market in one region [for example Punjab] is quite different from another [like Karachi],” says ex-SECP chairman Khalid Mirza


But the regulator insists that the creation of a single national stock exchange is crucial for an efficient and transparent capital market and for attracting a foreign strategic partner for investment in latest technology and products.

The plan, an SECP official told Dawn, is being implemented to complete the demutualisation of the exchanges initiated under the Stock Exchanges (Corporatisation, Demutualisation and Integration) Act 2012.

The law, which segregated the majority ownership of each bourse from their right to trade on it, bound the three exchanges to sell 40pc of their shares to foreign strategic investors by this August, which they failed to comply with because of the overall investment conditions in the country.

The committee of the chairmen had recommended extending the disinvestment deadline in view of the overall investment climate conditions.

Meanwhile, SECP officials privately say the integration of the bourses into one exchange makes sense as over 95pc of the trading is commanded by the KSE and the Lahore and Islamabad brokers have for long been trading through their peers in Karachi.

Former SECP chairman Khalid Mirza is opposed to the creation of a national bourse, saying the regulator’s scheme will “eliminate competition for the KSE and help the big Karachi brokers establish their monopoly over the capital market”.

“Competition is important because demutualisation makes stock exchanges ‘for profit’ entities. It is also important because the quality of the market in one region [for example Punjab] is quite different from another [like Karachi],” he argues.

He says countries like Malaysia and Singapore with single stock exchanges are regionally connected and compete with each other for investors and company listings.

“Pakistan’s situation is different and it requires the creation of competition and not its elimination.”

Mirza, who currently teaches at LUMS, believes that the merger of the LSE and the ISE would have made sense, as recommended by the SECP committee.

According to him, the creation of one bourse will be a disaster for the market, and he blames some big brokers in Karachi for forcing the regulator to pursue the project. “It isn’t a pretty picture; it’s a picture of a regulator gone berserk and taking measures that are harmful for the capital market.”

It is pertinent to note that the demutualisation law provides for a framework for the SECP to facilitate the integration of the stock exchanges that are inclined to merge, but this is not ‘mandated’ by the law; nor does the law specifically encourage stock exchange mergers.

The commission is only obliged to regulate merger proposals in accordance with the law and not ‘manage’ them.

Asim Zafar, a leading Lahore broker, also doesn’t agree with the concept of a single bourse. “Investors from Punjab have a very important role to play in the capital market. The Lahore bourse could have taken care of the needs of the off-market (trade), bonds market and small companies, as well as prevented the establishment of Karachi’s monopoly.

“All exchanges should have been given an opportunity to target potential investors based on their own realities rather than forced to integrate,” he says.

He agrees that the merger of the Lahore and Islamabad bourses would have created a competitive environment for the KSE and contributed to the growth of the capital market in the country.

Others like Ali Abbasi, director at Abbasi Securities in Karachi, support the concept of a single national stock exchange. “The [low] volume of trade and the number of investors in the country justify the integration of the stock exchanges.”

But he does not favour the heavy regulatory regime, including capital requirements for TREC holders, that the apex regulator is introducing to reduce the number of brokers, and believes that they are detrimental to the market.

“I agree that the size of our market doesn’t justify the presence of about 400 brokers but the SECP should let them phase out through an evolutionary process instead of throwing the skill-set they have developed over time out of the market. The regulator needs to bridge the trust deficit through light regulations and heavy enforcement.”

Published in Dawn, Business & Finance weekly, November 23rd, 2015