ISLAMABAD, Dec 28: The Securities and Exchange Commission of Pakistan (SECP) has moved to amend regulations for the election of a non-member director as the chairman of the Karachi Stock Exchange (KSE) and Lahore Stock Exchange (LSE) after failing to persuade the two exchanges to comply and make necessary changes in their rules to this effect.

This is yet another effort by the country’s corporate regulator to make the two exchanges elect a non-member chairman. The majority of players in the two exchanges do not favour such a change as they perceive it to be an encroachment over their independence.

“The regulations so made by the SECP are deemed to have been made by the exchanges and take effect accordingly,” stated an official announcement issued here on Wednesday.

The SECP has made the regulations in exercise of its powers under section 34(5) of the Securities and Exchange Ordinance,1969.

On December 9, the SECP had issued a directive (under section 34(4) of the Securities and Exchange Ordinance, 1969) to all three exchanges requiring them to the make the necessary amendments in their regulations or articles of association for this purpose, however, only Islamabad Stock Exchange adopted these amendments.

Backed by brokers, the KSE and LSE refused to implement the directive and elected non-member individuals as their chairmen. They said that the amendment would disturb the balance of power in the board.

The SECP had provided another opportunity to the KSE and LSE to make the appropriate amendments by issuing a further directive under section 34(4) on December 16, asking them to comply with it within 10 days.

After the lapse of the stipulated 10-day period, the SECP was constrained to issue the aforesaid directive whereby the regulations made by the SECP are deemed to have been made by the exchanges.

“The election of a non-member director as the chairman of the board of the exchanges is aimed at limiting the possibility of conflict of interests in the board and is an important reform measure for the protection of investors”, the announcement said.

The conflict of interests created by a member chairman has significantly delayed the implementation of important reform measures recommended by the SECP in the public interest for the protection of investors, strengthening risk management, enhancing transparency and good governance.

An independent non-member chairman is likely to provide the desirable leadership to the board of the exchange in matters relating to the effective execution of all the board’s responsibilities, vis-a-vis the protection of investors. The necessity of an independent non-member chairman has also been recommended in a number of experts studies of the capital markets, e.g. the report of the Experts Committee on Demutualization and Integration (comprising national and international experts) and the report of the Task Force established by the SECP to review the stock market situation in March 2005.

The measure has already been adopted internationally: numerous stock exchanges around the world have adopted the international best practice of requiring the chairman of the board of the exchange to be an independent non-member director to safeguard the interests of the investors.