Index alone proves nothing

25 Nov 2019

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Going by the plethora of directions that the Securities and Exchange Policy Board gave to the Securities and Exchange Commission of Pakistan (SECP) last week, it does not take long to conclude that the board is less than happy with the working of the regulators.

The policy board was established under the Securities and Exchange Commission of Pakistan Act 1997 to provide the SECP with guidance in all matters relating to its functions. The policy board is also responsible for advising the government on matters falling within the purview of the Act and other corporate laws. The board is also expected to express its opinion on policy matters referred to it by the government or the commission.

Following its meeting on Nov 16, the policy board stated that it had decided to initiate a review of the Securities Act 2015 to remove harsh regulatory impediments that hampered the overall growth of the securities market.

The board also decided to review and rationalise the Futures Act 2016 and the Limited Liability Partnership Act 2017 which, it believed, were “onerous and cumbersome”. The board gave directions for making appropriate amendments to the Companies (Further Issue of Shares) Regulations 2018. It said the Growth Enterprise Market (GEM) Listing Regulations of the PSX might be revisited to encourage initial public offerings (IPOs) in the primary market.

The board also touched on sensitive subjects. It gave “firm directions” to the commission to recall all staff members seconded to law enforcement agencies (LEAs) and also transfer back cases wrongfully referred to the National Accountability Bureau (NAB). Directions were also given for the LEAs to appropriately reimburse the cost of the SECP staff seconded to them.

‘LEAs should ask the SECP to provide them with staff for particular tasks instead of summoning officials of its choice for deputation’

The board also decided that the SECP should give a second look to its annual report of 2019 and ensure that it was professional and portrayed both positive and negative facts, stating clearly “the problems faced by the commission during the past year particularly in reference to (the) unwarranted intrusion by LEAs”.

Did the board exceed its authority in taking on LEAs? “Not at all,” says board chairman Khalid Mirza. He said LEAs should ask the SECP to provide staff required for particular tasks and for specified periods instead of summoning officials of its choice for deputation.

According to sources, about a dozen SECP officials have been seconded to LEAs — some of them have been away for over a year or two.

“The discrimination in posting demoralises the staff at the commission because of higher emoluments and other benefits at LEAs,” Mr Mirza said. He also expressed displeasure at LEAs for exercising their authority and picking up corporate people for questioning. He said the right approach would be to first hold an internal enquiry by the commission before referring any serious matter to LEAs.

In a statement released on Nov 16, the policy board expressed concerns about the “negative mindset” of the commission’s staff and directed that appropriate steps be taken to ensure that service orientation is inculcated in the staff rather than the current obstructive and “ruler-like” mindset.

When asked to elaborate, Mr Mirza said the SECP could only improve with the right type of leadership that had integrity and competence. “The current chairman is a decent person but (is) surrounded by nincompoops and political hacks who draw huge salaries without the least knowledge of how to foster the market,” he claimed.

One seat of commissioner lies vacant at the SECP. He said it should be filled in consultation with the policy board with the right type of person who is bold, resolute, incorruptible and discerning.

Mr Mirza was not hugely impressed by the performance of the Pakistan Stock Exchange (PSX) which, over the last three months, has witnessed its benchmark index surge 30 per cent, making Pakistan one of the top-performing markets in the world. He argued that although the index is one measure of monitoring the market progress, it alone proves nothing.

“It can go up and it can come down,” he said, noting that what differentiated a good market from a bad one was the capital that it mobilised (only one IPO in 2019) and the market depth. “When the index goes one blip up, there should be heavy volumes in not just a few shares but all across the board. The policy board chairman repeated his oft-proclaimed belief that the growth and improvement in the PSX was contingent on tough competition in the form of more exchanges in the country — just like what happened on Dalal Street.

The governance structure of the stock exchange was also reviewed by the policy board, which made substantial recommendations. It noted with concern that the last CEO resigned almost six months ago and yet no one had replaced him.

A source at the exchange said the bourse had forwarded a couple of names for approval, but the apex regulator turned these down.

The board also complained that the ex-officio secretaries who are its members did not attend meetings. They invariably sent nominees, which had effectively short-changed the working of the board.

Published in Dawn, The Business and Finance Weekly, November 25th, 2019