Introduction:

The Securities and Exchange Commission of Pakistan was created under the Securities and Exchange Commission Act of 1997. The main purpose of creating such an organization was to maintain the strength and vitality of Capital markets, keep the corporate entities under check, keep an eye on the Non Banking financial sector, evaluate and maintain the insurance sector as well as protecting the interests of the investor. The commission is divided into five main divisions:

1. Company Law Division2. Securities Market Division3. Specialized Companies Division4. Insurance Division5. Law Division

The Need:

The government had tried many a times to stop insider trading, imperfect flow of information, restore investors’ confidence in the market and take some measures in order to ensure credibility of all three stock exchanges. Therefore, in order to curb these problems the government required a body that could address all of these issues. This led on to the creation of the SECP.

Current Performance:

1. Price/Earnings ratio of Emerging Markets1:

Country Index PE (ESTIMATED)

China SSE A 43.48

India SENSEX 19.96

Singapore STI 16.82

Philippines PSEi 16.21

Indonesia JSX 15.09

Korea KOSPI 13.40

Taiwan TW II 14.47

Thailand SET1 11.95

Pakistan KSE-100 10.85

Sri-Lanka CSE ALL 10.30

As can be observed, the leading stock exchange in the Pakistani Market the KSE-100 has a P/E ratio of 10.85 which is substantially lower than India.

2. The total number of public limited companies is 2784, of which only 616 are listed. The rest of the 2168 remain unlisted.

Companies

Public ListedUnlisted

Problems:

1. Insider trading is all time high in Pakistan. The entire KSE is manipulated by three key stock brokers. Their cartel cannot be broken as anyone from the SECP trying to do something out is usually sacked. Ex-Chairman Tariq Hussain tried to start proceedings against these three powerful brokerage houses but he was soon shown the door for this.

2. The SECP senior management is under the influence of the three powerful stock brokers. Mr. Salman Sheikh traveled to Karachi to meet brokers and heads of financial companies to extend his stay as the Chairman of SECP. Mr. M. Ali, the present head of the SECP, came from the corporate world where he was the chairman of Indosuez W.I. Carr Securities. Moreover, the regulators working in the SECP were once part brokerage houses in Pakistan therefore there is a conflict of interest there as well.

3. SECP is located in Islamabad and the KSE is located in Karachi. Due to the extensive distance between these two institutions there is lack of communication resulting in unnecessary problems such as politicization and improper implementation of checks and balances.

4. The KSE currently regulates 95% of the total trading volume in the country while the other stock exchanges, LSE and ISE, are either spectators or middlemen.

5. No independent tribunal has been set up to hear offences that have been committed in the market. The regulators in the SECP are brokers turned regulators and the maximum amount they have fined is Rs. 100,000.

6. A mechanism needs to be introduced that protects investors from brokerage default. In Pakistan a fund has been introduced which addresses investor losses when there is brokerage default but it is in the hands of the brokers therefore the fund does not fulfill its required purpose.

Recommendations:

1. The brokerage houses should not be allowed to intervene in the workings of the SECP. A tribunal needs to be established for the main purpose of alleviating any pressure that brokers might levy.

2. The power of the 3 main brokers needs to be cut down. As the market is in the hands of these brokers they have the power to bankrupt people overnight. This can be done by making the SECP more powerful and placing a Chairman who is not biased or influenced by unnecessary forces.

3. The headquarters of the SECP needs to be shifted from Islamabad to Karachi. This will lead to a lower amount of politicization as well as a firmer control over the functions of KSE.

4. Although there are laws against insider trading but they have not been implemented well enough which has led to it being practiced widely. Powerful checks need to be planted and in order to curb this problem. A fund that is independent from brokers needs to be established so that investors are protected if a broker defaults.

5. The LSE and ISE need to be taken over by the KSE. This is because most of the trading is done in the Karachi Stock Exchange, therefore the other two are not required.

6. A tribunal needs to be set up in order to make sure there is no malpractice in the KSE. This tribunal should not include ex-brokers or executives from the corporate world. It should include officials who do not have a conflict of interest.

References:

Policy Board SECP . Courtesy Dr. Bashir A. Malik and Osama Hafeez

http://www.defence.pk/forums/economy-development/18336-urgently-needed-reforms-capital-

markets.html

http://www.secp.gov.pk/

http://en.wikipedia.org/wiki/Securities_and_Exchange_Commission_of_Pakistan

http://www.finance.gov.pk/