ISLAMABAD, June 2: The federal government has decided to launch second generation reforms in the capital market, which would focus on ‘insider trading’ besides reducing the number of stocks in KSE 100-index to 20-30 and decrease the weight of privatized public sector units. Sources in the finance ministry told Dawn that these and a set of other reforms would be initiated through the next year’s budget and completed over a period of five years.

These measures have been envisaged owing to recent stock market crisis that started with a sudden slide in Karachi Stock Exchange in March when it dropped from 10,303 points to 7,708 points within a period of 13 days. This had caused billions of rupees loss in market capitalization and small investors were the major victims. These sources said the fall also exposed the hidden as well as so far overlooked weaknesses of the stock market and of the regulators. Some of these included lack of safeguards for small investors, lack of sufficient float or non-availability of shares of listed companies and the rationale behind having an index of 100 shares, selection of shares and weightage given to them.

The government was also criticised for not taking action to control inside information and clash of interest and failure of the regulators to enforce timely risk management measures. The sources said the government has decided to consider reserving about 30-40 per cent of the seats on board of directors of listed companies for minority shareholders.

In this way not only the interest of minority shareholders will be safeguarded, the temptation of the sponsors to have more than 50 per cent share in their names will vanish, leaving sufficient float available for the general public and hence they would not be forced to concentrate their investments in top 10-20 companies.

The government was also considering to provide incentives for the listing including reduction in the cost of listing. Proportional weightage in the index would be given to the shares actually privatized. For example, PTCL, OGDCL, PIA, Kapco and NBP besides a number of other public units have weight in the 100-index on the basis of their total size, although only 5-10 per cent shares of these companies are listed in the market.

A workable mechanism would be introduced to cope with the menace of inside information and conflict of interest notwithstanding the fact that this may have bearing on the profitability of the public sector institutions. These sources said the federal government was also considering relieving the Securities and Exchange Commission of Pakistan (SECP) of the administration of office of registrar of companies and regulation of insurance sector to enable it to concentrate on its core function of regulating stock market and listed companies like other regulators of the world.

These measures have been finalized on the assumption that stock market would grow at the rate of 20-35 per cent in the next five years on the back of monetary and fiscal policies and expected growth in equities at the rate of 10 per cent per annum in the form of new listings, IPOs, right shares, bonus shares and the corporate retained earnings.