ISLAMABAD (January 29 2003) : After going through three years of tough reforms the future agenda of the Securities and Exchange Commission of Pakistan (SECP) consists of deepening the market and improving risk management, strengthening audit practices, enhancing standards of corporate governance, facilitating primary market, strengthening the mutual funds and the insurance industry.
It also includes encouraging on-line trading, electronic communication networks and alternate trading systems and developing a regulatory framework for on-line trading, replacement of “Badla” by margin financing.
This was stated by Khalid A Mirza while releasing Annual Report 2002 of SECP here at a press briefing.
Explaining the future agenda he enlisted:
— Deepen the market and improve risk management at the exchange;
— Further strengthen audit practices and enforce IASs;
— Clarify, reinforce, and enhance standards of corporate governance;
— Facilitate a vibrant primary market with strong underwriting and distributive capacity;
— Develop and strengthen the mutual funds, the pension funds and the insurance industry to provide the market institutional underpinning;
— Encourage on-line trading, electronic communication networks and alternate trading systems and develop a regulatory framework for on-line trading;
— Develop and implement a phased programme for replacement of carry-over transactions or “Badla” by margin financing and futures contracts; and further strengthen the institutional capacity of the Commission.
Talking about the past performance, Khalid Mirza said the Commission was eventually able to finalise and implement a Code of Corporate Governance by making it a part of the listing regulations, which consequently became applicable to all listed companies.
Essentially based on the Organisation for Economic Co-operation and Development's (OECD) principles of corporate governance, the code acquired its present shape after extensive consultations with the business community.
Despite this, implementation of the code was resisted by some elements in the private sector and the commission had to stand firm to ensure that the initiative was not derailed.
Other areas related to corporate governance, like dissemination of adequate and timely information as well as the issue of reliable audits, were also addressed by the commission. Listed companies were directed to:
— Publish quarterly financial statements;
— Facilitate quality control reviews of auditors by permitting the release of audit working papers for this purpose;
— Refrain from engaging their auditors for other services except those specifically permitted; and
— Rotate the firm of auditors after every five years (with forbearance in this respect granted up to December 31, 2003).
The observance of International Accounting Standards (IASs) was enhanced further and by end-June 2002, a total of 38 out of 41 IASs had been adopted.
Furthermore, the commission also directed that an auditor found guilty of professional misconduct would not be allowed to audit the accounts of listed companies for a period up to three years, as may be determined by the commission, he maintained.
About the previous performance the report said: all these measures appear to have had a salutary impact on the level of investor confidence and we are now witnessing a qualitative change in the market, as reflected by a significant rise in the proportion of “real” investments (as distinct from “squared trades” and “carry-over transactions”, ie trades carried forward to a subsequent settlement period) from as low as 1 to 2 per cent of transactions' volume to over 10 per cent.
The performance of the market was also ranked as among the best in the world, largely, as a consequence of enhanced investor confidence arising out of the proactive regulatory approach adopted as well as the market's visible under-valuation in relative terms.
For a variety of reasons, this has yet to translate into an upsurge in new equity offerings albeit there occurred a large number of corporate debt issues (Term Finance Certificates), mobilising an aggregate of Rs 10.13 billion, mainly in order to enhance capacity or re-profile balance sheets.
In addition, the commission, as a regulator, has been entirely transformed through implementation of a drastic restructuring programme that was largely completed during the year under review.
The institutional capacity has been greatly strengthened through appropriate re-organisation, staffing, training and automation.
The commission now has reasonably well-functioning units that keep the market under surveillance, enforce the laws it administers, closely monitor and try to foster the various specialised institutions it regulates, and keep vigil to ensure that the various activities under the ambit of the Commission are performed effectively and efficiently.
While there is considerable ground that is yet to be covered, it is felt that in many respects the commission is approaching international standards in the discharge of its regulatory responsibilities.
Enforcement of corporate and securities laws (as well as legislation governing institutions within the purview of the commission) was specifically emphasised during the year under review.
As a result of effective enforcement actions taken by the commission – vastly exceeding those taken in any previous year – the corporate sector appears to have become much more responsible and disciplined and the quality of corporate disclosure, including financial reporting, has greatly improved.
The impact was similar when the commission tightened its enforcement screws vis-…-vis auditors, stock brokerage houses, modarabas and insurance companies.
It is noteworthy that insurance companies were asked to enter into reinsurance arrangements with re-insurers that had a minimum 'A' rating and later those companies that were unable to do so, possibly due to reduced global reinsurance capacity, were asked to obtain a satisfactory “claims paying ability” or “financial strength” rating from a recognised rating agency.
Insurance companies that could not comply with either requirement were barred from engaging in further insurance business, thereby saving the general public from being offered potentially unworkable insurance policies.
It is also a matter of satisfaction that the commission was able to enforce the minimum capital requirement imposed on leasing companies and that the sector is largely in compliance with this stipulation.
Further, in order to clean up its corporate registration records, the Commission launched, and successfully implemented, carefully devised schemes to regularise the default of private and non-listed public companies with respect to their reporting requirements and to facilitate dormant companies exit out of the register of companies.
Further, in line with evolving international practice, the government decided to consolidate the regulation of all financial institutions, other than commercial banks and development finance institutions, under the regulatory purview of the commission; and also to institute the concept of Non-bank Finance Companies (NBFCs)-essentially an umbrella approach whereby the same institution, ie NBFC, can be licensed to engage in one or more financial services provided it meets the prescribed regulatory criteria for each of these services.
In response, the commission geared itself with staffing readjustments in addition to proposing needed legislative changes and preparing a set of comprehensive rules to serve as the basic regulatory framework for NBFCs.
Among a variety of developmental measures taken by the commission, approval was granted for establishing, under the aegis of the Karachi Stock Exchange, the framework of an over-the-counter, quote-driven market targeting closely held or smaller capitalised companies as well as debt securities.
This would appropriately tier the stock market with trading modalities determined to suit each tier.
While trading in futures contracts of 13 highly liquid shares commenced in July 2001, towards the end of the year, the commission approved, in principle, the setting up of an exchange to trade futures contracts in commodities.
Also, the commission was able to see its way around a few impediments and approve the first securitisation transaction, which should be a harbinger for others to follow.
Overall, the commission would appear to have consistently acted in consonance with its declared mission, namely: “to install and sustain a dynamic, modern, and proactive regulatory body that provides impetus for the development of a fair, efficient and transparent capital market and a robust corporate sector”.
— While a lot has been achieved in the last two-and-a-half years, there is a lot that still needs to be accomplished. Of the three primary drivers of capital market development which constitute the drip feed into the market, ie venture capital, securitisation and corporate debt, considerable progress has been made with respect to the latter two as a consequence of satisfactory resolution of impeding issues.
Only venture capital remains a problem since the tax aspect has not been appropriately addressed so far.
During the briefing Mirza was accompanied by Haroon Sharif, Principal Staff Officer, Shahed Ghaffar, Commissioner SMD, Shamim Rizvi, Media Director and other officials of the commission.
