IT is not that a strategic investor is not to be found. Regulators and market participants suggest that bourses have themselves abandoned hunt for a 'strategic buyer' of 40 per cent stake in demutualised stock exchanges.

Chairman Demutualisation Committee ( Karachi) Haji Ghani Haji Usman says, according to the schedule, the bourse still has ample time of over 20 months to find a buyer of strategic shares who fulfills the fit and proper criteria laid down in the rules.

Haji Ghani told Dawn that stock exchange would begin search for a strategic buyer in right earnest after general elections. "We want to give prospective buyers a clear view, which will be possible only after general elections, when the dust settles on the political front".

The criteria drawn up in the rules would be followed in selection of strategic investor regarding experience, equity and financial strength. Market experts say that since the law requires that the buyer must have ‘experience’, the strategic investor has to be a bigger stock exchange of global reach.

The strategic investor would be expected to bring in investment, experience, technological assistance and new products. Those in the know of things say several international players are eyeing the Pakistani equity markets for its huge untapped potential and queries have come up from, among others, Turkey, Oman and London Stock Exchange.

Many people still unfamiliar with the demutalisation phenomenon wonder: Where does the strategic investor fit in the bourse? A senior broker explained that as a result of completion of process of demutualisation of the stock exchange, the KSE stands corporatised and demutualised as a public company limited by shares under the name of ‘Karachi Stock Exchange Limited’, with effect from August 27, 2012. That ensures segregation of ownership rights from trading rights. The first meeting of the newly-constituted board of demutualised KSE was held on Aug 30, 2012.

The KSE statutory status having changed from company limited by guarantee to company limited by shares, the entire equity of the company (KSE) is vested in the members (brokers). However, 40 per cent of those shares have passed on to the members’ own accounts, while the remaining 60 per cent is parked in the ‘restricted account’ of the members with the Central Depository Company (CDC).

A strategic investor would be offered 40 per cent of those shares and the remaining 20 per cent would be floated in the initial public offering (IPO).

No one knows at what price per share the strategic investor would be offered 40 per cent stake in the demutualised exchange. Market participants in the knowledge of affairs say that the essential thing is the valuation of the stock exchange. The figure has been worked out but complete secrecy prevails and the paper is securely placed in a sealed cover. The need of keeping the valuation under wraps is to prevent it from falling into the hands of a possible strategic investor.

“The knowledge will make it easier for the buyers of majority shares to make a bid. In case valuation is found to be lower than what has been worked out by him, the strategic investor would surely make a lower bid, which would be a loss to other shareholders,” says a senior member. Haji Ghani confirmed that the valuation was done and said that the strategic shares would not be sold at discount to the valuation price.

The commissioner, securities market at SECP, Imtiaz Haider told Dawn on Thursday that following the demutualisation of stock exchanges, three steps remained to be taken: to find a strategic investor; to list the stock exchanges on to themselves and to integrate the three exchanges in the country; the last being optional. SECP Commissioner said, after the promulgation of the demutualisation Ordinance on Aug 27, 2012, the power is vested in SECP to direct the stock exchanges to find a strategic buyer within 180 days.

Also, SECP would direct the bourses to go for listing within two years. Both instructions have not been issued so far. He, however, said SECP could relax the dates, but in case the exchange was unable to find a buyer by the due dates, the initiative would pass on to the SECP.

He said that among the three stock exchanges, those in Karachi and Islamabad were cash-rich. The statement was confirmed by a cursory glance at the KSE’s last available Annual Report 2012, as on December 31, 2011 on its website. The bourse carried on its balance sheet a mountain of cash and bank balances, amounting to Rs1.3 billion. It was supplemented by ‘short term investments’ at Rs1.4 billion. The net assets of KSE stood at Rs8 billion, represented by ‘general reserves’ of Rs4.5 billion; ‘general entrance fee fund’ of Rs140 million and ‘surplus on revaluation of property and equipment’ at Rs3.3 billion.

The revaluation was carried out on the directions of SECP to assess fair value before the bourse went through the process of demutualisation. Haji Ghani points out that that the Rs8 billion against net assets has been converted into paid-up capital which has been apportioned among the members, strategic investors and the general public in the agreed percentages.

With regard to integration and merger of the three stock exchanges into a national stock exchange, the sticking point is perhaps the valuations. The price of the KSE membership card, currently stands at Rs60 million. In comparison, the price of members’ card in Lahore and Islamabad are all but peanuts. But the Commissioner said that the stock exchanges could sit together and work out a formula or ratio of the membership of the three stock exchanges in the unified stock exchange.

“Rather than competing with each other and utilising their energies separately, they should consolidate their energies for attracting foreign investment”, he said.