LAHORE: Pakistan’s stock market, often described as Asia’s best performing market, has fewer than 60,000 active investors out of around 278,000 registered with the Central Depository Company (CDC), according to CDC chief executive officer Badiuddin Akber.

“Most investors still like to invest their savings in government debt and savings schemes instead of in the stock market. This is despite an average rate of return of 27pc — or 7-8pc in dollar terms — earned by the investors on the stock investments during the last 10-15 years,” Mr Akber said in an interview with Dawn.

He blames the lack of awareness among people about the stock market as well as certain government policies, which encourage the savers to ‘put their money in the risk-free government securities and national savings schemes that offer guaranteed profits to them’.

Govt policies, lack of awareness key reasons for low number of equity investors

“Besides, people are reluctant to invest in the stock market since it is a highly regulated place, and your investment here may expose you to asset inspections and inquiries (about the source of funds). However, there is no such risk when you put your money in savings schemes and government papers,” the CDC chief argued.

The CDC was incorporated in 1993 for the establishment and operation of book-entry systems for the transfer of securities by central depository companies, to implement and operate a depository system and eliminate the tedious process of physical shares handling and transfer.

It is owned by the PSX, which controls almost 40pc stake in the company, and MCB Bank and HBL, which together hold over 26pc of its shares. Established as a central securities depository, CDC is the sole entity handling the electronic or paperless settlement of transactions carried out at the PSX.

Mr Akber says the CDC is not a monopoly under the law. “The Central Depository Act 1997 and the Securities Act of 2015 have defined criteria of who can become a depository company. The law does not encourage monopoly; anyone can set up a new depository if they can meet the defined criteria. But in a country like Pakistan where the number of investors is so small it is commercially not viable for any financial institution to set up a depository company; it is not a profitable venture.”

According to him, there are large markets like India where they now have two depositories. In India, the first depository company retained monopoly for 40-50 years before the competition came. “Like India, we can have more than one depository in Pakistan.” He explained that CDC manages a database of shares worth Rs5.8tn. “It is a huge responsibility.”

Recently, the CDC partnered with the State Bank of Pakistan to run the pilot for its micropayment gateway or digital payment system for routing payments through one centralised point called Raast to transfer dividends to the shareholders of different companies. “Now the central bank is expanding the system for the bulk government payments such as salary and pension to its employees through the Raast system.”

Besides, the CDC has also helped some 4,500 non-residents Pakistanis (NRPs), who have their Roshan Digital Account (RDAs), to open their capital market accounts with brokers of their choice for investment of over Rs2.2bn in the stock market.

“We have launched several initiatives to support and facilitate investors. For example, our eIPO allows investors to make digital subscriptions against IPOs. We also have developed a Zakat Repository and an Insurance Repository. The eDividend or Dividend Repository allows investors to easily track their dividend entitlements from a single source,” the CEO said.

In addition to that, he said, “CDC, through its wholly owned subsidiary ITMinds, has ventured to provide a consolidated digital platform for mutual fund investments — Emlaak Financials — to facilitate investors in making informed decisions by providing a convenient, informative and interactive medium to invest in a wide range of investment products offered by different fund families. By creating an account through Emlaak Financials, investors can open an online account with mutual funds of their choice, make online investments, redeem and convert transactions, etc.”

According to him, small brokers face capacity issues in the provision of clearing, settlement & custodial services since such services require a high degree of infrastructure and compliance requirements. The SECP has recently introduced a new ‘Broker Regime’, which, according to the CDC chief, will divide the brokers into three categories and all the small brokers – currently more than 100 – will now fall in the third category, where they will have to acquire the services of a third party Clearing, Settlement & Custodial Services provider.

“The CDC is working with other stakeholders of capital market to offer a high tech independent solution, which will allow brokers to have ‘plug & play’ kind of system, enabling them and their clients to enjoy specialised clearing, settlement and custodial services through Professional Clearing Member (PCM) that will be operated by an independent company by the name of eClear.”

Published in Dawn, June 27th, 2021