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Chairman’s
Statement 2000 -2001
This is the second report of the
Securities and Exchange Commission of Pakistan (the Commission) covering the year July 1,
2000 to June 30, 2001.
During the year under review, the Commission was able to implement far-reaching reforms
over a broad front besides taking several steps to develop its regulatory capacity. As a
cumulative result of all these measures, the Commission has advanced closer towards the
goal of achieving a fair, transparent and efficient capital market; furthermore, there has
been a visible reduction in systemic risk.
The development program agreed with the Asian Development Bank (ADB) under its Capital
Market Development Program Loan was faithfully and vigorously pursued. This provided the
impetus for the reforms carried out. We are indeed most grateful to the ADB for its
assistance.
The stock market crisis of May 2000 - essentially arising out of settlement defaults -
occurred as a consequence of excessive overtrading and weak risk management at the stock
exchanges. A number of governance issues were also highlighted by the crisis. To remedy
the situation, several measures were taken in consultation with the stock exchanges. These
included: strengthening of margin requirements; redefining as well as sharply raising net
capital requirements for stock brokers and imposing capital adequacy limits on broker
exposure; abolishing the system of disclosed trading (a major source of front running);
restraining and eventually banning "blank" sales; and implementing the T+3
settlement system in place of the previous archaic system of weekly settlement with all
the systemic risks it entailed. Importantly, governance issues were substantially
addressed by installing independent, professional Chief Executives at two out of three
stock exchanges and ensuring that at least 40 percent of the board members of each stock
exchange were independent, "non-broker" professionals.
Apart from these steps, a direct regulatory nexus was established between the Commission
and the stock brokerage community by stipulating the registration of stock brokers with
the Commission as well as devising a code of conduct for them. Furthermore, the Commission
took an important step to achieve financial autonomy by levying a small fee of 0.0009
percent on the value of each concluded stock market transaction - perhaps the lowest
transaction fee in the world. All these steps, along with others taken in the recent past,
mean that in large measure IOSCO's 30 principles of Securities Regulation have been
implemented.
In addition, this year saw fundamental initiatives by the Commission to build its capacity
and broaden its reach to more effectively cover all areas of its responsibility. The
Commission acquired considerable depth in its organizational structure through setting up
of, or adding muscle to, several dedicated units such as a Specialized Companies Division
that regulates a variety of financial sector institutions, a Market Monitoring and
Surveillance Wing that monitors the market closely, a Vigilance Cell to ensure prompt
disposal of complaints, petitions etc. and a Public Relations Cell to deal with media and
image issues. The Enforcement and Monitoring Division has been strengthened and has done a
remarkable job in enforcing corporate laws as has the Specialized Companies Division in
ensuring prudence, discipline and sound conduct amongst non-bank financial institutions.
In fact, the year under review probably witnessed unparalleled regulatory steps and
enforcement actions to protect the integrity of the corporate sector, promote a sound
financial system and safeguard the interests of the investor.
In discharging its regulatory responsibilities, the Commission endeavors to be "firm,
helpful and fair" and strives to achieve equitable dispensations through a
substantively progressive interpretation of laws and eschewing decisions based on
technicalities. The Commission has also emphasized staff training and development; and
apart from effectively laying off 80 unsuitable employees inherited from the erstwhile
Corporate Law Authority, around 60 relatively young, highly educated persons from the
private sector or international institutions were employed - some in leadership positions
- which largely constitute the core to spearhead change.
A master corporate plan for the Commission developed with ADB's assistance was
implemented. Also, the underlying conceptual scheme of the Commission was fully realized:
this envisages the Commission functioning as a collegiate body with the Chairman as Chief
Executive, operational authority being largely devolved to departmental heads (Executive
Directors) and each Commissioner assigned certain "oversight" responsibilities
to assist the Chairman. This together with a new service manual adopting a merit-based
orientation (similar to staff rules of private organizations), a salary structure more
generous than that applicable to government employees and rapid strides made in automation
has meant a visibly more effective regulatory body.
Apart from issuing a plethora of rules and regulations - far more than in any previous
year - the Commission sponsored the enactment of significant amendments in several laws
administered by it. Importantly, in consultation with the insurance industry, the
Commission drafted the necessary rules to implement the new Insurance law. The
effectiveness of the Commission's working is gaining public recognition and can be gauged
from: (a) its immeasurably greater disposals of complaints and appeals; (b) its ability to
take prompt cognizance of corporate lapses or misdemeanors as also untoward stock market
developments; (c) the rapidity of its regulatory response; and (d) its expeditious
disposal of corporate registration work. It is also noteworthy that the report of the
Committee, appointed to inquire into the causes of the stock market crisis of May 2000,
was not only published in full but also consequential action has been taken, as
appropriate.
During the year, the stock market suffered from the after effects of the May 2000 crisis
and was essentially bearish albeit it did display volatility and sporadic bouts of
buoyancy. The reforms put in place as well as regulatory vigil prevented the emergence of
systemic problems. To impart depth to the market and add another dimension to it, the
Commission has encouraged the introduction of derivatives - as a result, trading in stock
futures contracts has already begun and, in due course, other types of derivatives are
also likely to be introduced with the support of the Commission.
Apart from continuing efforts to deepen the market, improve risk management at the stock
exchanges and enhance the Commission's institutional capacity, there are a number of
priority aims the Commission intends to pursue as part of its game plan for the immediate
future. These include: the strengthening of audit practices and enforcement of
International Accounting Standards; facilitating the development of a vibrant primary
market with strong underwriting and distributive capacity; ensuring that the national
clearing and settlement system gets properly implemented; the development of a second-tier
or over-the-counter market; and addressing residual governance issues at the stock
exchanges as well as facilitating their demutualization. The Commission is already moving
forward in all these areas.
The report has been prepared in pursuance of section 25 of the Securities and Exchange
Commission of Pakistan Act, 1997 for the purpose of reporting the activities and
performance of the Commission during the period, 1st January, 1999 to 30th
June, 2000.
Mr. Khalid A. Mirza, Chairman
