spring edition 2017 newsletter · 3 newsletter 2017 spring edition t he 26th meeting of the secp...

1

Securities and Exchange Commission Of Pakistan

INSIDE

07

11

13

17

15

16

19

News in Brief

SECP to enable the entrepreneurial ecosystem in

Gilgit-Baltistan

SECP facilitating regulated microfinance to enhance

financial inclusion

Framework to nurture governance culture in non-listed companies

New user registration system under e-Services

SECP’s Activities

Board Games

Spring Edition 2017

Newsletter

SECP to reform margin

financing system

SECP, SBP vow to

eradicate financial scams

SECP’s paradigm shift on

companies’ incorporation

regime

Investor protection

a top priority

SECP’s Activities

Production Team

Shakil ChaudharyMuhammad Sajid Gondal

Mehreen RafiqNida Mansoor Khan

2

Newsletter 2017Spring Edition

The Securities and Exchange Commission of

Pakistan has approved recommendations

of the committee already constituted to review

financing by securities’ brokers to clients.

The SECP had constituted a committee

comprising senior market professionals and

stakeholders. It was mandated to review the

matter of in-house financing, identification

of any issues, inefficiencies or hurdles in the

existing leverage products like margin financ-

ing and margin trading and provide recom-

mendations for practical and viable solutions

in light of best international practices to meet

the needs of market participants in relation to

financing through brokers.

The committee had submitted its report to

the Commission on March 29, which primarily

focused that reforms be introduced in the mar-

gin financing system (MFS) so that banks can

provide funding to investors through brokers.

The committee gave various recommen-

dations to the SECP which include removal of

the requirement to collect 10 percent financ-

ing participation ratio (FPR) in the form of cash

and to allow deposit of entire FPR in the form

of securities as is being done by banks.

It also advised to allow pledging of margin

financed securities in favor of bank through a

tripartite agreement between bank, broker

and client.

For risk management mark-to-market

(MTM) losses in case of decline in the price of

financed securities shall be collected in cash

from the client (finance).

In case of increase in the price of financed

securities’ margins and marked-to-market

(MTM) losses shall be collected from propri-

etary account of broker.

For transparency, monitoring and inves-

tor protection a special sub-accounts of clients

shall be opened for the purpose of benefiting

from margin finance and pledging of financed

securities.

The Commission reviewed the report in

detail in its last two meetings and gave go

ahead to make necessary changes to the regu-

latory framework and operational system at

Central Depository Company (CDC) and Na-

tional Clearing Company of Pakistan Limited

(NCCPL).

To make the product transparent and pro-

tect investors, some additional operational and

disclosure requirements have been incorpo-

rated.

These includes that all investors desirous

of benefiting from margin financing shall be

required to submit MF agreement to CDC prior

to opening of MF sub-account.

Distinct pledge ID for securities pledged

for MF shall be created by CDC and it shall

ensure that in the case of MF pledge ID, the

pledge from normal sub-account will only be

allowed if there is an open MF position of such

client in the MF.

Subscription to CDC Access (including

web-access, e-alerts, SMS) and UIS system of

NCCPL shall be mandatory for clients opening

the MF sub-account.

It will be also mandatory that CDC Account

set-up report is signed in respect of CDC sub-

account of such client. Client shall be able to

view the pledge position of its securities and

the open MF position through web access and

UIS.

Besides, NCCPL shall make available a facil-

ity on the MF system whereby the broker will

identify the clients, who have open positions

and against which pledge call shall be made by

the bank.

This system generated report will be sub-

mitted by the broker to the bank. In case of dis-

pute over an MF transaction and consequential

pledge transaction, the NCCPL shall be em-

powered to review and decide the matter. The

NCCPL shall make necessary reports for disclo-

sure to the public and for monitoring purposes.

SECP to reform margin financing system

For transparency,

monitoring and inves-

tor protection a special

sub-accounts of clients

shall be opened for the

purpose of benefiting

from margin finance

and pledging of fi-

nanced securities.

3


The 26th meeting of the SECP and the

State Bank of Pakistan (SBP) Coordina-

tion Committee held on February 22, at the

SECP head office. Mr. Ashraf Mahmood Wath-

ra, SBP Governor, and Mr. Zafar Hijazi, SECP

Chairman, headed their teams consisting of

senior officers.

The forum viewed with concern the

history of financial scams and fraudulent

financial activities as well as illegal liquid-

ity mobilization schemes and unregulated

lending operations. It was decided to pay

special attention to these areas by adopting

a joint approach aimed at eradicating such

practices, seeking the cooperation of law en-

forcement agencies to catch the culprits and

ensuring that such people are denied access

to the formal financial sector, by imposing re-

strictions and information sharing among all

stakeholders.

During the meeting, numerous initiatives

were discussed that shall lead to develop-

ment of bond market, ease of doing business,

strict enforcement of financial laws, collec-

tive action against those involved in financial

malpractices and improving financial inclu-

sion in the country by promoting housing fi-

nance and encouraging the expansion of ac-

cess to finance. The SECP Chairman reiterated

the need for effective collaboration between

financial sector regulators for effective imple-

mentation of relevant rules and regulations

as well as development of efficient financial

markets. The SBP Governor stated that regu-

latory objectives of the two regulators are

being served well through ongoing consulta-

tive process between the SECP and SBP.

The SECP-SBP Coordination Committee

meets once in a quarter. There was a broad

consensus on approaching the systemic risk

and financial stability issues in close collabo-

ration between the two regulators. The SECP-

SBP Coordination Committee meets once in

a quarter. These formal meetings supplement

the ongoing regular coordination between

the two regulators on all matters of mutual

interest. These meetings enable the two

regulators to share their viewpoints and col-

laborate with each other for the overall stabil-

ity, and smooth functioning of the financial

sector.

SECP, SBP vow to eradicate financial scams

The SBP Governor

stated that regulatory

objectives of the two

regulators are being

served well through

ongoing consultative

process between the

SECP and SBP.

4


The SECP Chairman, Zafar Hijazi has launched a new User Registration System

under eServices. The new system will reduce the incorporation cost from Rs1,500 per user to Rs100 per user besides reducing the turna-round time from days to minutes for registra-tion of users of eServices.

Mr. Hijazi inaugurated the new user regis-tration system during the Financial Reporting Workshop for economic journalists organized by the SECP on March 30. The SECP’s senior of-ficials spoke defaulting members of the stock exchange, its legal perspective, the SECP’s sur-veillance and supervision system for the capital market in the workshop.

The SECP Chairman lauded the efforts of Corporate Compliance Department for intro-ducing the revolutionary steps to ensure ease of doing business through a number of initia-tives during the last couple of years. He termed the new user registration system a paradigm shift from the traditional registration system to a new modern incorporation regime. The new simplified User Registration System under eServices replaced the cumbersome process of obtaining digital signatures from NIFT. The user registration under eServices now can be obtained simply by employing user login, pass-word and PIN code.

The user registration under eServices are required for incorporation of new company through online and for signing of the docu-ments to be submitted to the Commission and the registrar concerned. This will also be a one-time registration without any renewal and associated cost as is presently required on an

annual basis. This facility will be a great incen-tive for potential promoters of companies, and is likely to further propel corporate growth.

The Chairman also highlighted the robust corporate growth in the country resulting from the wide range of reform measures dur-ing the last couple of years. SECP registered 854 companies during February 2017, which exhibited a robust growth of 71% over the cor-responding month of the last year. Overall, an impressive growth of 34% has been observed in corporate sector during the current financial year over the corresponding period of the last

year. A number of other reform measures are in the offing which are likely to further elevate the corporate trajectory to a higher level, and will also assist the government in meeting its fiscal targets through enhanced documenta-tion of the economy. Salient reform measures which are being taken to further ease doing business environment in the country include revamping of eServices and integration of cor-porate registry with the provincial authorities, etc. The Limited Liability Partnership Bill, 2017 has been passed by the National Assembly on February 1, 2017 and has now been introduced in the Senate.

SECP’s paradigm shift on companies’ incorporation regime

5


Investor protection a

top priority: SECP Chief

The SECP Chairman, Zafar Hijazi said the apex regulator’s top priority is to protect

small investors, bring about over all transpar-ency, and ensure enduring growth of the capi-tal market.

He was addressing a joint press conference along with PSX Chairman Muneer Kamal and Managing Director Nadeem Naqvi at the SECP head office on February 28.

The SECP Chairman informed the media that nine brokers had been declared default-ers hundred percent payments were made to claimants of four brokerage houses and 77 percent of payments have been made to other claimants, he said. He explained that a total of 3,453 complaints were received against these nine defaulting brokers out of which 2,453 (76.8 percent) complaints were settled. In this regard, Rs689million have been paid to claim-ants. He stated that 100 percent payments were made to small investors who invested up to Rs100,000. These payments have been made from the recoveries from defaulting brokers as well as from the investor protection fund.

The SECP Chairman said that the prime re-sponsibility of the regulator was to secure the small investor, bring transparency and ensure growth of the capital market. He pointed out that there were five brokers under strict obser-vation of the SECP and warnings had already been issued to the brokers who overexposed their investments. The SECP conducts off-site and on-site inspections and in more sensitive cases the inspections are done by the Joint In-spection Team of CDC, NPCCL and PSX.

As the market touched new heights, a fresh wave of investors entered the market and some brokers started deposit taking and offering fixed profits to investors illegally, he explained.

Mr. Hijazi said the SECP had started opera-tions for market intelligence. This is to check and preempt brokers if they continue their wrongdoings despite warnings. He suggested to the PSX to adopt the market intelligence methodology to monitor brokers’ behaviour.

The SECP chairman said that SECP’s regu-

latory enforcement was a continuing process and even today he referred a case to NAB for investigation. To a question, he confirmed that the SECP had already forwarded the name of defaulting brokers to relevant department to place them on ECL. He said the SECP was closely coordinating with the law enforcement agencies and red warrants would be issued against absconding brokers if needed.

The capital market’s regulators also ex-pressed their satisfaction with the stock market working, strength and fundamentals. Muneer Kamal said the capital market was strong, stable and on right track, therefore investors should not lose confidence due to wrongdo-ings of a few persons. Regulatory and oversight bodies are vigilant and proactively engaged with brokers who are vulnerable, he added. He said the SECP had adopted a methodology to conduct at least one audit of each broker in a year. There are about 303 brokers registered with PSX.

He said that Pakistan’s market was growing and well established and there was no need for panic. As opposed to the previous crashes in stock market, the market conditions are stable. He reiterated that no single group was strong enough to dictate the market’s direction. Keep-ing checks and balances and making queries is the right and responsibility of regulators, the SECP and PSX, he added. Therefore, the brokers should be appreciative of regulators’ proactive approach to safeguarding the market and in-vestors.

Explaining the market fundamentals, Na-deem Naqvi said that total market capitaliza-tion stood at $90 billion. The free float of shares is around 24 per cent, while one third of the shareholding is with foreign investors and one third of the market share is with local financial institutions, mutual funds etc.

Therefore, only 40% of the market is with retailers and because of market diversity, we believe that individual brokers cannot manipu-late it, he said.

Mr. Hijazi said that SECP’s current actions looked stringent and strict because the regula-tors never adopted such a proactive approach in the past. He expressed his determination that no relaxation would be given to brokers violating the law.

SECP’s current ac-

tions look stringent

and strict because

the regulators never

adopted such a proac-

tive approach in

the past.

6


O n March 10, the SECP Commissioner

Zafar Abdullah inaugurated a new Islamic

finance centre for promotion of Islamic invest-

ments at the Abbottabad Sarmayakari Markaz.

As envisioned by the SECP chairman, this

is an initiative of the non-bank financial institu-

tions (NBFIs) and the Modaraba Association to

expand the reach of regulated Islamic invest-

ments.

Speaking on the occasion, Mr. Abdullah

said that the SECP was committed to promot-

ing modarabas as pure Islamic financial institu-

tions. In consultation with stakeholders, he said

that the SECP had already reviewed the entire

regulatory framework for modarabas and had

approved the concept paper for structural re-

forms to implement the concept of modaraba

in its true Islamic spirit.

He told stakeholders that he had advised

the modaraba sector to set up a consumer-

financing centre in Rawalpindi to provide con-

sumer finance to the public in a regulated form

at affordable rates. “The modaraba sector re-

sponded overwhelmingly, and four modarabas

had established the first Islamic finance centre

in Rawalpindi to provide Islamic finance to

low-income customers for purchase of motor-

cycles. Until February 28, 2017, the centre had

disbursed Rs14.97 million to 249 clients.”

In his remarks, NBFIs and Modaraba Asso-

ciation Chairman Ayaz Dawood said the centre

would initially focus on providing investor edu-

cation and awareness about the NBFIs and the

modaraba sector, expanding outreach of the

association’s members to the public in Abbot-

tabad and its adjoining areas. “Later, the centre

will provide public affordable Sharia-compli-

ant financing.” He appreciated the vision the

SECP chairman for extending the outreach of

modarabas to the general public and broaden-

ing the range of Islamic financial products.

Senior officials of the SECP, chief executive

officers of modaraba companies and officials

of various financial institutions attended the

inaugural ceremony.

It may be noted that modaraba is the pio-

neering form of Islamic finance in Pakistan.

At present, it has as many as 80,000 investors

- three times more than the number of share-

holders in Islamic banks.

Islamic finance centre inaugurated in Abbottabad

7


SECP’s Religious Board approves

prospectuses of two new modarabas

SECP vows to facilitate women

entrepreneurs

The Religious Board constituted by the fed-eral government for the SECP under Modaraba Companies and Modaraba (Floatation and Con-trol) Ordinance, 1980, has approved the pro-spectuses of two new modarabas, Habib Metro Modaraba and Orient Rental Modaraba. The Board certified that the business specified in the prospectuses of both the modarabas is not op-posed to the injunctions of Islam.

The board meeting held on February 22, 2017 was presided over by Justice (R) Khalil-ur-Rehman Khan, Chairman of the Board. Habib Metropolitan Modaraba Management Company (Pvt.) Limited has proposed to float a new modaraba with the paid-up modaraba funds of Rs300 million. It shall be a perpetual, multipurpose and financial services modaraba. The Orient Rental Modaraba will be floated by EMAN Management (Pvt.) Limited, with the au-thorized and paid-up modaraba funds of Rs500 million.

As part of its “Jamapunji” awareness cam-paign, the SECP in association with The Indus Entrepreneurs (TiE) and the US-Pakistan Wom-en’s Council (USPWC), held its first preparatory session with regard to Supply Chain Diversity Expo for incipient entrepreneurs at TiE’s WECRE-ATE center on March 2, 2017. The objective of this event was to encourage gender diverse supply chains where men and women avail themselves of equal opportunity in benefiting from new market without any gender discrimi-nation.

The SECP assured the audience that, in collaboration with TiE, it would do everything possible to facilitate women entrepreneurs. The SECP officials briefed the audience about the company registration process and corporate structure of startups. The audience were told about compliance requirements to be followed after company incorporation as well as regula-tion of the corporate sector, common forms of businesses and their pros and cons.

SECP sets up anti-money laundering cell

SECP to take strict action against brokers’ malpractices

In line with the present government’s

agenda of combating money laundering

and terrorist financing activities, the SECP

has established an Anti-Money Laundering

(AML) Cell to effectively address any poten-

tial of money laundering within the capital

markets, insurance, the NBFCs and the not-

for-profit corporate sector.

The SECP has approved thresholds for

various sectors for reporting of investments

made in securities markets, the NBFCs and

the insurance sector. The AML cell compris-

es of senior SECP officers from each super-

visory area. For life insurance products, the

defined threshold is the annual premium of

Rs5 million for a single life policy. For securi-

ties brokers the threshold shall be Rs5 mil-

lion for an individual investor, Rs25 million

for corporate entity and Rs20 million for pro-

priety broker. For AMCs/modarabas/NBFCs,

the threshold is of 100 million for corporate

entities, 50 million for trusts and Rs10 mil-

lion for individual investment.

No reporting will be required of finan-

cial institutions, public listed companies,

licensed entities, AMCs, mutual funds, in-

surance companies and government ad-

ministration/entities investing in AMCs/

modaraba/NBFCs. Further, any donation of

Rs5 million and more from a single source to

a not-for-profit section 42 company will also

be reported to the SECP.

The SECP Chairman, Zafar Hijazi has ex-pressed the SECP’s firm resolve to take strict action against brokerage houses found involved in malpractices and misuse of cli-ent assets. He was addressing the capital market consultative group on February 23, 2017.

Mr. Hijazi also said that the SECP is ac-tively coordinating with law enforcement agencies, including NAB to apprehend the culprits involved in misappropriation of in-vestor assets in a timely and efficient man-ner.

The consultative group is comprising of senior market participants, including Mr. Arif Habib, Mr. Aqueel Karim Dhedhi, Mr. Amin Issa Tai, Mr. Yasin Lakhani, Mr. Najam Ali, Mr. Zahid Latif, Mr. Omar Iqbal Pasha, Mr. Asim Zafar, Dr. Yasir Mehmood, Mr. Shahid

Ghaffar, MD NIT and Mr. Farid Khan from MUFAP. He was accompanied by Commis-sioner, SMD.

The SECP also shared its findings from the probe of brokerage houses and it was noted with concern that some brokerage houses are engaged in the illegal activities of raising deposits from the public/inves-tors against promise of fixed rate of return under the umbrella of stock market invest-ments.

It was agreed that that the said activi-ties of brokers are illegal and tantamount to defrauding the public. It was also em-phasized that the investors and the public should be cautious of these illegal activities and should not engage themselves or be a party to any such illegal investment activi-ties.

8


SECP organizes awareness session

for Askari Bank employees

SECP takes notice of statutory auditors of

brokerage houses

The SECP, in collaboration with the Askari Bank Limited, conducted an awareness session for the employees of Askari Bank Limited. The session was held on March 7, 2017 at its region-al training facility in Rawalpindi.

The session stressed on the need for ac-quiring requisite knowledge prior to financial investment decisions. The focus of the event remained on mutual funds and voluntary pen-sion system (VPS) segments regulated by the SECP.

The session was attended by the Principal, Askari Bank Training Academy North, Head of Training and Development of the Academy, several Vice Presidents and other senior Askari Bank Limited bankers and employees. The par-ticipants took keen interest in the products and showed inclination for participating as inves-tors.

In the wake of recent broker defaults, the SECP is critically reviewing the role of statutory auditors of brokerage houses. In this regards, the SECP, on March 10 has sought information from six auditors to assess the audit quality. The 2015 Securities Act assigns certain specific responsibilities to statutory auditors of broker-age houses, in particular regarding client assets. It has been observed that some auditing firms are acting as statutory auditors for a large num-ber of brokers. For example, two auditing firms are working as statutory auditors for about 100 brokers.

One of these firms had audited the ac-counts of three brokers who recently defaulted. As part of the ongoing inquiry against recently defaulted brokers, the conduct of the said audit-ing firm is also under scrutiny. Additionally, the SECP has started looking at financials of brokers audited by this firm.

SECP, HEC collaborate to develop entrepreneurial ecosystem

SECP reports defaulting broker to international securities regulators

In order to spread awareness through its investor education program ‘Jamapunji’, the SECP in collaboration with the Higher Education Commission (HEC) conducted an awareness and facilitation session for senior professionals of HEC-recognized uni-versities of the Karachi region. The seminar invited individuals spearheading at their re-spective universities, the Office of Research, Innovation and Commercialization (ORIC) and took place on March 1, 2017 at the HEC Regional Center, Karachi. The seminar was conducted by senior subject matter experts from the SECP elaborating on the legal framework for incorporating businesses, private equity for financing startups and mutual funds distribution.

The SECP had also arranged for an ex-pert speaker from the PSX to speak on capi-tal markets for raising finance for SMEs. Ex-pert speakers provided information on the SECP’s online incorporation services, fast track registration services and in particular SECP’s supportive role for development of the entrepreneurial ecosystem of Pakistan by encouraging sole proprietors to reap the benefits of company incorporation by availing themselves of the provision of sin-gle-member company incorporation. The interactive discussion around private equity for financing startups and the SECP’s role in encouraging SME listing led to healthy de-bate and feedback.

The SECP on March 3, 2017, reported

M.R. Securities, a Lahore-based stockbroker

involved in financial fraud, to international

securities regulators through the Interna-

tional Organization of Securities Commis-

sions (IOSCO). It has also reported this bro-

kerage house to the Financial Monitoring

Unit to initiate action under the Anti-Money

Laundering Act, 2010.

There is a trend among Pakistani finan-

cial fraudsters to run abroad, assuming that

they will not be on the radar of the securi-

ties’ regulator of the host jurisdiction. The

owners of defaulting brokerage houses

such as Ace Securities, Stock Street, and

M.R. Securities are all believed to be hid-

ing abroad. The SECP’s reporting measures

will help discourage securities’ fraud and

tighten accountability for the culprits. “The

SECP will continue to report to international

regulators any stockbroker found involved

in securities fraud in Pakistan,” said Zafar Hi-

jazi, the SECP Chairman.

9


Pakistan to chair important insurance

body in 2017

Senate clears limited liability partnership bill

The SECP will have the privilege of chairing the Mutual Exchange Forum on Inclusive Insur-ance Network (MEFIN) for the year 2017. MEFIN is a peer network of insurance policymakers and regulators in Asia. The regulators from Indone-sia, the Philippines, Vietnam, Nepal, Mongolia and Pakistan pledged to support inclusive in-surance as a strategy for poverty reduction in the region. It has been established as a platform for an effective and resourceful exchange of ap-plicable knowledge and best practices on inclu-sive insurance.

Now the network serves as a platform of peer-to-peer learning among policy makers and insurance regulators in the region as it develops and implements programs that provide mutual benefit to its members in advancing inclusive insurance solutions. GIZ Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia) supports the network with ex-pertise provided by the International Associa-tion of Insurance Supervisors through the Ac-cess to Insurance Initiative to build capacity of insurance supervisors. The second MEFIN Public Private Dialogue (PPD) was conducted in Hanoi, Vietnam, from March 14 to March 16, together with Munich Re Foundation and Microinsurance Network.

The Senate on April 19 approved the Lim-ited Liability Partnership (LLP) Bill 2017, which is considered an updated and internationally acceptable business vehicle for entrepreneurs with limited capital.

The bill was tabled before the Senate by Commerce Minister Khurram Dastgir on behalf of Finance Minister Ishaq Dar.

The proposed law is expected to fill the gaps between business firms such as sole pro-prietorships or partnerships, the liability of whose partners is unlimited, and the companies governed under the Companies Ordinance of 1984, whose members enjoy the benefits of lim-ited liability. It also provides an alternative form of business organisation, which has the flexibil-ity of general partnership and would avail all the advantages of a limited liability company.

30,000 companies provided relief by amending law

SECP organizes workshop on Principles of Corporate Governance

The SECP has decided to approach the Fi-nancial Conduct Authority (FCA) of the Unit-ed Kingdom regarding the misappropriation of funds and illegal deposit-taking by Mazhar Rafiq of M.R. Securities, a broker who recently defaulted and fled the country. The move by the SECP is likely to curb further misconduct and market abuse by the brokers of the Paki-stan Stock Exchange (PSX).

The SECP Chairman Zafar Hijazi on March 17 approved the use of the International Organization of Securities Commissions (IOSCO), which is the international coop-eration forum for the regulation of securities laws, to confront bad players in the market. The SECP has obtained information about

British passports and travel details of the owners and director of the defaulting broker-age, which are being shared with the FCA, the regulator of the UK capital markets.

The SECP, under the IOSCO multilateral memorandum of understanding (MMOU), is providing the records and particulars of the owners of another defaulting broker, Ace Securities, to the Canadian securities regula-tory authorities, which are ‘very responsive’ to the SECP’s earlier requests for assistance in the matter of absconding brokers. The SECP has also provided details of some potential defaulting brokers to the interior ministry for the placement of their names on the Exit Control List (ECL).

SECP seeks international help to curb market abuse

The SECP has achieved another mile-stone in ease of doing business as its rec-ommendations to amend the 43-year-old Companies (Appointment of Legal Advisors) Act, 1974, has been approved by the Parlia-ment.

The Companies (Appointment of Legal Advisors) Act, 1974, was promulgated in 1974, which earlier required the companies having paid-up capital of 0.5 million and above, to appoint a legal advisor to advise such companies in the performance of their functions and the discharge of its duties in accordance with the law. It was considered

that the requirements of the legal advisor for the small companies was a major hurdle in their corporatization, as it increased the cost of doing business due to hiring of le-gal advisor to fulfill this mandatory require-ment.

Now, the Companies (Appointment of Legal Advisers) (Amendment) Act, 2017, has been promulgated and the threshold of paid-up capital for companies to appoint their legal advisor has been increased to companies having more than 7.5 million paid-up capital.

In collaboration with the International Finance Corporation (IFC) and Centre for International Private Enterprise (CIPE), the SECP on March 18 conducted a workshop to raise awareness about Principles of Cor-porate Governance for Non-Listed Compa-nies.

The SECP has introduced a voluntary regime of Principles to provide guidelines aimed at improving corporate governance in these companies, which are mainly fam-ily owned businesses. The principles are in line with the best international practices and local statutory requirements. The principles

provide guidance in the areas, including role of board of directors and independent direc-tors, remuneration, oversight, and training of directors, internal control mechanism, and performance evaluation.

Ms. Amina Aziz, SECP director, Corpo-rate Supervision Department, highlighted the importance of principles for SMEs and non-listed companies. She said that small business incubators have tremendous po-tential for growth and could transform to large-scale entities with potential for listing on stock exchange to attract capital from public.

10


Enabling regulation facilitates Islamic

finance growth

Ambassador Aizaz Chaudhry praises SECP

The assets in Islamic banking have dou-bled from 2012 to 2016, jumping from Rs837 billion to Rs1.6 trillion, now accounting for 11.7% of the total banking assets. There is an even stronger growth of Islamic assets in the non-bank financial institutions (NBFI). Their market share is now approaching 33% from only 14% in 2012. Two reasons that help ex-plain this growth are demand from custom-ers and enabling regulations by the SECP and the State Bank of Pakistan.

This growth in Islamic finance and the role of regulation was highlighted at a semi-nar at the SECP’s head office on March 4, 2017. Speaking on the occasion, Mr. Usman Hayat, head of the Islamic Finance Depart-ment at the SECP, explained that develop-ing Islamic capital market is a priority of the regulator. The SECP has recently conducted two consultation sessions with market par-ticipants to facilitate issuance of sukuk and real estate investment trust (REIT).

The SECP is analyzing the industry pro-posals and it shall consider making appropri-ate amendments to the relevant regulations, further reducing the cost and hassle for both issuers and investors. The industry proposals pertaining to tax issues regarding sukuk and REIT are being referred to the FBR.

A delegation of SECP officials along with senior officers of US Department of Com-merce met the Pakistan ambassador to United States, Mr. Aizaz Ahmad Chaudhry at the Paki-stan Embassy in Washington, DC, at his special invitation. The SECP officials were in the US to attend the 27th Annual International Institute on Securities Market Growth and Develop-ment at the United States Securities and Ex-change Commission (US SEC). Mr. Aizaz appre-ciated the SECP’s role in introducing corporate and capital market reforms for the promotion of trade and investment in the country.

Ambassador Chaudhry applauded the SECP’s leadership for playing an effective reg-ulatory role for disciplining the financial and corporate sector of Pakistan. In order to pro-vide conducive environment for investment in capital market, the SECP has implemented sig-nificant reforms in legislative framework in line with the best international practices, includ-ing promulgation of the 2015 Securities Act, amendments to 1997 the SECP Act, amend-ments to the NBFC Regulations, Securities’ Bro-kers Regulations, Research Analyst Regulation and Private Fund Regulations.

US regulatory body lauds SECP

SECP, AOB sign agreement

At the opening ceremony of the 27th Annual International Institute on Securities Market Growth and Develop-ment at the United States Securities and

Exchange Commission (US SEC) the Acting

Chairman US SEC Michael Piwowar, lauded

the recent developments undertaken by

the SECP in its regulatory framework, par-

ticularly the securities’ laws. He appreci-

ated that “there are also new amendments

to the securities law in Pakistan that allow

the Securities and Exchange Commission of Pakistan (SECP) to assist foreign authorities by obtaining “any information” from “any person” at the request of a foreign authority, even if the potential violation in the foreign country would not violate the law in Paki-stan.

The SECP has been a signatory to the IOSCO MMOU since 2011, but this new comprehensive assistance available from the SECP goes beyond the minimum stand-

ards of the MMOU, and serves as a model for other jurisdictions.” Delegates from around 50 jurisdictions are attending the US SEC Spring Institute’s program, including SECP’s participants at US SEC’s special invitation.

The SECP has achieved international rec-

ognition for its efforts to reform Pakistan’s

securities markets and extend international

cooperation to the member countries of

the International Organization of Securities

Commission (IOSCO), helping global efforts

to detect and prevent violations of securi-

ties’ laws.

Further, the World Bank team carrying

out assessment of Pakistan’s financial re-

porting and auditing practices under Re-port on Observance of Standards and Codes of Auditing and Accounting (ROSC) praised the SEC’s tremendous efforts to implement international financial reporting standards in corporate sector of Pakistan.

The Securities and Exchange Com-

mission of Pakistan (SECP) and the Audit

Oversight Board (AOB) on April 7 signed a

memorandum of understanding (MoU) to

cooperate for an effective oversight of the

auditing profession and regulation of cor-

porate entities.

SECP Chairman Zafar ul Haq Hijazi and

AOB chief Dr Tariq Hassan signed the MoU.

The MoU establishes a framework for col-

laboration, coordination and sharing of in-

formation in areas of common regulatory

and supervisory interests. It also provides

for administrative coordination and facilita-

tion by the SECP for an interim period. Mr

Hijazi said that the AOB should expedite

the commencement of its operations and

become a leading audit regulator of inter-

national standard.

11

SECP’S AC TIVITIES

The SECP on February 10, 2017 organized a two and half hour training session on the modarba sector for the SECP officers. Mr. Muhammad Shoaib Ibrahim, CEO, First Habib Modarba, address the session, which covered the following topics:

1. Historical developments and current state of the modarba setor

2. Opportunities and challenges facing the modaraba sector

3. Economic, social and environmental value addition by the modaraba sector

In collaboration with the Islamic Finance Department, the PDD organized a ses-sion on March 2, 2017 on risk management in asset management companies. Mr. Aly Osman, head of Risk Management and Compliance, UBL Fund Managers Ltd, addressed the session. The session covered the following topics:

1. How the risk management function is generally organized in an AMC?

2. How do risk management, compliance and internal audit complement each other in an AMC?

3. How risk management policies and practices are applied on a day-to-day basis?

The Professional Development Department (PDD) organized a three-hour training session on Systemic Risk for officers of the Com-mission. Mr. Rehman Khan Daha, Head of Market & Liquidity Risk Division, ABL address the session, which covered systemic risks in the following contexts:

1. Regulatory requirements

2. Internal requirements

3. Implementation of Internal and regulatory requirements

Workshop on Modarba Sector

Risk Management in Asset Management Companies

Training Session on Systemic Risk

Training Session on the Role of NCCPL

on February 9, 2017, the PDD organized a full day training session on the role of National Clearing Company of Pakistan Limited (NCCPL) for the SECP officers. Mr. Badiuddin Akber, former head of Operations, NC-CPL, address the session. The session covered in detail the role and re-sponsibilities of NCCPL as a central counterparty, overview of its func-tions, working of National Clearing and Settlement System (NCSS) and NCSS regulations and procedures.

12

The PDD organized a two and half hours training session for of-ficers of the Commission. Mr. Ghulam Abbasi, Director IBD SBP and IM Sciences, addressed the session. The session covered the follow-ing topics:

1. Where does Islamic banking stand with reference to con-ventional banking?

2. What are the opportunities and challenges facing Islamic banking?

3. What is the economic, social and environmental value ad-dition by Islamic banking?

PDD in collaboration with IFD organized a two and half hour train-ing session on “Islamic Microfinance: A Way Forwards Financial Inclusion in Pakistan” for officers of the Commission. Dr. Muhammad Amjad Sa-qib, Executive Director, Akhuwat, addressed the session, which covered the following topics:

The session covered following topics:

1. What is the financing model of Akhuwat? How does it ensure the successful disbursement and recovery of interest-free loans?

2. What is the significance of Islamic microfinance in the develop-ment of small scale enterprises?

3. What is the economic and social value addition by Akhuwat’s Islamic microfinance operations?

On February 7, Mr. Omer Morshed, Chief Executive, Sidat Hyder

Morshed Asociates, addressed a training session on insurance. It

covered the following areas:

1. Key areas for the development of insurance industry in Paki-

stan

2. Early warning systems for the effective regulation of insurance

industry in Pakistan

3. Roadmap for development and implementation of risk-based

insurance supervision framework in Pakistan

Training Session on Islamic Banking Data and Analysis

Training Session on Islamic Microfinance on April 6, 2017

Training Session on Insurance

13

PDD organized an Inter-Departmental Board Games

Tournament in February 2017. The objective behind or-

ganizing sports events in the Commission is to encour-

age healthy activities among employees. Such events

provide employees an opportunity to interact with

each other in a causal and friendly environment which

further strengthens employees relationships. Each

game demands discipline, time management, strate-

gic/technical teamwork and decision making skills. The

results of the 5th board games are as follows:

SECP’s 5thBoard Games

Tournament 2017

CARROMWINNERS: Furqan-ud-Din Faisal and Imran Saeed

RUNNERS-UP: Syed Muhammad Safdar and Babar Nadeem Haider

LUDOWINNERS: Muhammad Imran Khan and Muhammad Hassam

RUNNERS-UP: Muhammad Riaz Khan and Muzamil Shah

CHECKERSWINNERS: Ghulam Mujtaba

RUNNERS-UP: Muhammad Rehan

14


The SECP has extended its flagship ‘Jama-

Punji’ investor awareness drive to the young

men and women entrepreneurs of the Gilgit,

Baltistan and Chitral (GBC) region.

It accomplished this by participating in

the Aga Khan Development Network (AKDN)

‘Prosperity Cup’ made possible through the

collaboration of The Indus Entrepreneurs (TiE)

Islamabad and Aga Khan Rural Support Pro-

gram (AKRSP). The Prosperity Cup invited more

than 50 startups from the GBC region that

were shortlisted from 3,000 applicants. They

were given focused mentoring and coaching

by seasoned entrepreneurs from all over Paki-

stan over a course of several months. Five final-

ist startups will be given financial support and

professional advisory to ensure success of their

respective ventures through this initiative.

The workshop, held on March 14, was the

third of a series of such workshops conducted

in Gilgit during which participating startups

were shortlisted through a process of elimi-

nation based on careful assessment of the

progress they were supposed to have made

based on guidance given to them during pre-

vious sessions. The SECP’s senior officers gave

the participants detailed understanding of

their organization’s continuing efforts to assist

the growth of the entrepreneurial eco-system

of Pakistan through such collaborative efforts

quoting examples of several recent events and

activities which include collaborative activities

with HEC and TiE.

During the session, participants were

given succinct information on the process,

requirements and benefits of incorporating

their respective businesses. The participants

were informed of recent reforms, and changes

in rules and regulations, which facilitate swift

incorporation. They were also informed of the

SECP’s measures, which encourage sole pro-

prietors to register their businesses as single

member companies with fewer requirements

and low fees.

The interactive session conducted by the

SECP was attended by TiE charter members, es-

tablished entrepreneur mentors and coaches,

teams of shortlisted startups of the Prosper-

ity Cup and senior academics of the Office of

Research, Innovation and Commercialization

(ORIC) from Karakoram International University

Gilgit-Baltistan. The SECP confirmed its full sup-

port to all participants by stationing staff at its

Gilgit office for their assistance.


SECP to enable entrepreneurial

ecosystem in Gilgit-Baltistan

15


In order to increase financial inclusion

in Pakistan, the SECP is providing enabling

regulations for the non-banking microfinance

institution segment. Zafar Abdullah, Commis-

sioner, Specialized Companies Division, said

this while speaking at a seminar on Islamic mi-

crofinance at the SECP head office on April 7.

Microfinance promotes financial inclusion

without compromising the dignity of the indi-

viduals and it is only befitting that interest-free

financing should enjoy the support of both

policy makers and citizens, he added. Micro-

finance is a regulated activity in Pakistan and

only those entities, which are either licensed

from the SBP or the SECP can undertake the

microfinance business. A company registered

under the Companies Ordinance can become

a non-bank finance company or an NGO for

providing microfinance.

Twenty entities have already obtained li-

cense from the SECP and more are in process.

Becoming a regulated entity offers huge ben-

efits to the microfinance providers, including

greater donor confidence, more fund raising

opportunities, and recognition as a financial

institution.

The SECP’s framework allows microfinance

providers to use both conventional and Islamic

modes of financing. In developing microfi-

nance regulations, the SECP has been actively

engaging with stakeholders in microfinance

including Pakistan Microfinance Network, Pa-

kistan Poverty Alleviation Fund, as well as pro-

viders of micro finance, explained Ms. Saima

Ahrar from SECP Policy, Regulation, and Devel-

opment Department concerning microfinance.

Dr. Amjad Saqib, Executive Director, Akhuwat,

the largest interest-free loan provider in Pa-

kistan, said that it had disbursed Rs37 billion

among 1.8 million households with a 99.9%

recovery rate.

It relies on donations, qarde hasan, and a

spirit of volunteerism. It is inspired and guided

by Islam, it serves all Pakistanis irrespective of

their faith, and shuns discrimination. He said

that the principles underlying Akhuwat begin

where the principles of traditional econom-

ics end. Against all skepticism about lending

money without charging any interest, Akhu-

wat’s model has proven itself to be robustly

sustainable.

Mr. Usman Hayat, head of Islamic Finance

Department at SECP, pointed out that the pro-

posed Sharia governance framework by the

SECP is meant to cover all sectors regulated

by SECP and it will address the sector-specific

requirements of Islamic microfinance institu-

tions. This seminar on Islamic microfinance

was organized in collaboration with Center for

Excellence in Islamic Finance (CEIF) IMSciences

Peshawar and participants from Ministry of

Finance, National Rural Support Program, and

academia attended it.

SECP facilitating

regulated

microfinance to

enhance financial

inclusion

16


Corporate governance has emerged as a key component in the successful functioning of financial and capital markets and the over-all corporate sector. Corporate governance is concerned with promoting corporate prac-tices that ensures transparency, enables com-pliance of laws and accountability. It entails holding the balance between economic and social goals and between individual and or-ganizational aims. Good corporate governance seeks to create an institutional framework that encourages all participants of the governance system to contribute towards better corporate performance through an alignment of their objectives. Corporate governance framework provides guidance to the board of directors on the areas such a as governance, strategy, performance, integrity, human capital and risk management. Hence, effective corporate gov-ernance framework institutionalizes the role of board of directors and management in order to better achieve organizational objectives by en-suring transparency and enhancing efficiency. It is deemed an effective tool to create checks and balances in the organizational culture through excercise of independence.

In view of contemporary developments, Securities and Exchange Commission of Paki-stan (SECP) introduced the Code of Corporate Governance for Listed Companies in 2002 in order to strengthen the regulatory mecha-nism and its enforcement. “Comply or explain” approach was introduced through the code, which was enforced through listing regula-tions of stock exchanges and its enforcement was primarily relied on frontline regulators, i.e. stock exchanges. Subsequently, in order to cope with the developments in the corporate sector, the SECP introduced the Code of Cor-porate Governance of 2012. The key features of this code were mandatory introduction of at least one independent director and preferably one third of board composition comprising of independent directors, separation of office of CEO and chairman, board evaluation and self-appraisal, role of board committees, and requirements for appointment of internal audi-tors and chief financial officers as key manage-

ment organs. The Code of 2012 is applicable to 558 companies listed on the Pakistan Stock Exchange.

There are more than 72,000 registered companies that are not listed on the Pakistan Stock Exchange. These companies have been divided into three main classes: small-sized companies, medium-sized companies, public interest and large-sized companies, including section 42/43 companies. The governance lit-erature on non-listed companies highlights the following major features of such companies1:

(i) These are mainly family-owned busi-nesses and lack succession planning and con-flict of interest;

(ii) Access to capital is limited and major reliance is on borrowings from financial insti-tutions or sponsors providing loans to compa-nies;

(iii) Transparency of disclosures in finan-cial statements is variant due to existence of variety of classes of companies;

(iv) Effective internal controls do not exist due to limited resources and lack of ability to manage internal and external risks;

(v) Ability to attract professional man-agement is restricted and a conducive culture to retain high value employees does not exist.

(vi) Idea of financial reporting is remote in such companies. Like in case of Pakistan, only approximately 25-30% of the total regis-tered non-listed companies file accounts with the SECP, hence, financial performance of such companies cannot be ascertained.

In order to nurture governance frame-work in the best interest of stakeholders, it is essential to develop a framework providing guidance about corporate governance for such companies. The principles enshrined in the code are effective governance tool for non-listed companies as for listed companies. Some

countries, including Egypt, Turkey, Belgium, and Finland have developed voluntary indige-nous corporate governance guidance for non-listed companies2.

İn this backdrop it was deemed essential to develop a corporate governance regime for non-listed companies as well in order to encourage sustainability and growth by pro-viding an effective governance framework that meets expectations. With this objective, the SECP through a landmark program in col-laboration with International Finance Corpora-tion initiated the process of raising awareness about ‘Principles of Corporate Governance for Non-Listed Companies’ drafted by it.

These principles are not code or rules/regulations, rather these are about establish-ing a framework of company processes and attitudes that add value to the business, help build its reputation and ensure its long-term continuity and success. These principles are mainly voluntary guidelines of corporate gov-ernance for non-listed companies in Pakistan. These principles are based on the best local and international practices and are primarily inspired from the guidelines issued by Eco Da Corproate Governance Guidance. Moreover, these principles are in line with the best inter-national practices prevailing in jurisdictions like Europe and Dubai.

The SECP has proposed 13 principles in two phases of Corporate Governance for Non- Listed Companies on a voluntary basis. Phase 1 principles are applicable to all non-listed com-panies except small sized companies and pub-lic sector companies that are governed under Public Sector Companies (Corporate Govern-ance) Rules, 2013. Whereas Phase 2 principles are applicable to public interest and large sized companies only.

A tabular presentation of principles of cor-porate governance and respective applicability of these Principles3 is given as below:

• Phase 1 Principles • Phase 2 Principles

• Applicability: These principlease are ap-plicable to all non-listed companies except small-sized companies. These principles are not applicable to public sector comapnies that are governed under Public Sector Comapnies (Corporate Governance), Rules, 2013.

• Applicability: These principles are ap-plicable to large ınterest and public sector comapnies that are not governed under Public Sector Companies (Corporate Governance), Rules, 2013.

• Principle 1: General • Principle 8: Role of Chairman / CEO

• Principle 2: Board of Directors • Principle 9: Independent / Non Executive Directors

• Principle 3: Meetings of Board of Directors • Principle 10: Board Committees

• Principle 4: Remuneration of Board of Directors

• Principle 11: Appraisal of Board of Directors

• Principle 5: Internal Control • Principle 12: Annual Report

• Principle 6: Training of Board of Directors • Principle 13: Compliance or disclosure of deviation

• Principle 7: General Meetings

Framework to nurture gov-ernance culture

in non-listed companies

By Muhammad Anwar Hashmi and Shahzad Afzal Khan

17


The Principles of Corproate Governance in Pakisan shall nurture corporate governance framewok for non-listed companies for follow-ing reaons:

(i) Life cycle of companies has been considered important while developing these principles. Phase 1 principles are applicable to companies in nascent or in growth phase. Whereas Phase 2 principles are applicable to companies in maturity or sustainable phase. Hence, adoption of these guidelines is easy with respect to stage of the company.

(ii) The said framework provides clearly defined role of board of directors, independ-ent directors and non executive directors in line with applicable legal framework;

(iii) Encourages companies to hold board

meetings and general meetings in order to dis-cuss matters highlighted for effective perfor-mance and evaluation thereof;

(iv) Without effective internal controls and appropriate risk management measures, non-listed comapnies are prone to more finan-cial and operational exposures. Hence, boards are encouraged to adopt such measures, which could control risks in the best interest of business opeartions;

(v) Boards of directors are required to evaluate their own performance appraisals based on acceptable areas or targets in order to evaluate progress;

(vi) Annual reports of non-listed compa-nies are an effective measure to communicate financial and operational performance.

The Commission has directed dissemina-tion of the principles of corporate governance for non-listed companies. These principles shall transform corporate culture in Pakistan in the years to come, provided corporate sector complies with the voluntary regime in letter and spirit.

Sources:

1. Implementing Corporate Governance for Non-Listed Companies by Dr. Fouad Zom-khal,

2. The Corporate Governance Guide for Family Owned Businesses by Pakistan Institute of Corporate Governance.

3. A complete set of Principles of Corpo-rate Governance for Non-Listed Companies is available on website of the Commission.

Mr. Hashmi is associate member of Institute of

Cost and Management Accountants of Pakistan.

He earned his MBA from Punjab University. He is

working as additional joint director in Corporate

Supervision Department. Prior to joining the

SECP in 2007, he worked for the State Bank of

Pakistan.

Mr. Khan is a fellow member of Institute of Cost and Management Accountants of Pakistan. He earned his master’s in economics from Punjab University. At present, he is working as additional registrar in the Islamabad CRO. He is member of the Quality Assurance Board of Institute of Cost and Manage-ment Accountants of Pakistan. Prior to joining the SECP in 2005, he was with the Army Welfare Trust, Rawalpindi.

Advances in information and communica-

tion technologies are presenting new oppor-

tunities for enhancing the way services can

be delivered by business registries all over the

world, and that too, at reduced cost.

As apparent from the results of a survey

published in the 2016 International Business

Registers Report by the Corporate Registers

Forum (www.corporateregistersforum.org),

user ID/password is the most prevailing iden-

tity verification method. It is largely used in

Asia-Pacific and Africa and the Middle East.

Electronic certificate is more common in Eu-

rope than in the other regions. The two-factor

authentication method, a less commonly used

technique, entails a login requiring a second

layer of security, such as extra information (e.g.

a shared secret), or a physical device (e.g. bank

card, key).

Figure I illustrates different requirements

for identity verification across the globe when

delivering information electronically to the

business registry:

SECP achieves a

milestone

New user

registration

system under e-Services

By Waseem Ahmad Khan

18

The writer is an Additional Registrar of companies at Corporatization and Compliance Department, SECP, Islamabad. He did

his master’s in public administration from QAU and is a fellow member of ICMAP with DAIBP and CFE credentials. He joined

SECP in 2003. Earlier he had worked for Packages Limited and the State Bank of Pakistan.


Taking stock of the best international best

practices and with the underlying objective of

facilitating users of e-Services, it was envisaged

to replace the existing system of digital signa-

tures developed by the National Institutional

Facilitation Technologies (Pvt.) Limited (NIFT)

with a simpler, cheaper and user-friendly sys-

tem of user registration characterizing a User

Login, Password and PIN (personal identifica-

tion number). The proposal was discussed

in the fifth meeting of the Commission held

on January 12, 2017, wherein approval was

granted for replacement of existing practice of

obtaining digital signatures mandatorily for e-

Services through an alternative system which

shall allow users to create username, password

and security pin/code for logging into the sys-

tem with appropriate terms of use of the facil-

ity to be agreed and signed by the user. The new system was launched by the SECP Chair-man on March 30, 2017, and by the first week of April, 2017, more than 4,000 users had been registered under the new system. Further fa-

cilitation is being provided to the existing and

potential users through helpline, flyer, guide

and a video on the new system being avail-

able on the SECP website as well as displayed

at the CROs located in Islamabad, Lahore and

Karachi.

The New User Registration System is a

milestone achieved by the SECP towards ease

of doing business for investors and the busi-

ness community. Now, any Pakistani national

who wants to interact electronically with the

SECP can do so within seconds by generating

a user ID and password through the system if

he/she has a valid national identity card, mo-bile number and email address. In case the user is a foreign national, he/she must have a valid passport, photograph, mobile number and email address. Once the person has the user ID

and password, he can select the process to be

submitted, enter the relevant data in a data en-

try screen, generate the statutory form for the

process, sign the form with his/her unique PIN,

and submit it to the SECP.

A process flowchart of the new system is

illustrated in Figure II.

Introduction of the new system for reg-istration of users of e-Services will reduce turnaround time from days to minutes and re-duction of cost from Rs1,500 per user to Rs100 per user. This will also be a one-time registra-tion without any renewal and associated cost as was previously required on an annual basis. This facility will be a great incentive for poten-tial promoters of companies, and is likely to further propel corporate growth in the country.

It is pertinent to mention that Pakistan is ranked at 141 in the World Bank’s starting-a-business indicator as mentioned in the Doing Business Report for 2017. The underlying fac-tors for determination of the doing business ranking include time, cost and number of procedures taken to register. Any reform meas-ure that reduces time, cost and the number of procedures will not only contribute to the overarching objective of investor facilitation

leading to corporate growth, it will also posi-tively impact the doing business ranking of the country.

In line with the Commission’s vision of development of a modern and efficient corpo-rate sector, the new system is likely to further contribute towards the investor facilitation and corporate growth agenda being vigorously pursued by the Commission.

19


By Asad Ullah Gondal

The distinct regulatory regime and design of Pakistani IPOs aroused a curiosity to examine the empirical predictions of prevailing Fixed Price Offer Mechanism and Book Building Of-fer Mechanism in Pakistan’s equity market. A unique feature of the Pakistani Book Building Offer Mechanism is its transparency. It is re-quired by regulations that the information of the bidders be available at the bidding system during the whole Book Building period. Thus the pattern and timing of the different bidders is apparent during the entire Book Building pe-riod.

Such an arrangement in Pakistan is contrast with the book building mechanism prevailing in the US and the UK markets. In those markets the information of the bidders is usually available after the close of the bidding period and not in between as like Pakistan. This characteristic of Pakistani capital market permits investors to use this real time information to decide on their in-vestment decision while the order book is being opened during the bidding period. Perhaps, the most significant difference in the Pakistani book building regulations is that investment banks acting as book runner or the lead underwriter to the offer do not contain the discretionary power to distribute the IPO shares among the bidders rather preference is given to the successful bid-ders that have made bid earlier in the bidding period.

Now it is pertinent to mention here about the stock market industry practices, which are currently being followed in Pakistan being the unit of analysis. Since introduction of book-building regulatory framework the issuers are inclining towards this offer mechanism due to two major reasons. Firstly, for price discovery, it invites well-informed institutional and high net worth investors (i.e. individuals with minimum investment of Rs1,000,000). Secondly, it helps in low-cost underwriting because as per book building regulations up to 75% of the total offer-ing size has to be made through book building mechanism, therefore, remaining 25% of gen-eral public portion of the offer is underwritten.

Given the above context, the positivist research philosophy along with deductive ap-proach was used to empirically find which of-fering method results in lesser underpricing. The time dimensions of this study were cross sectional and quantitative research strategy was used to find an optimal offer mechanism for controlling underpricing of IPOs in Pakistani capital market. Among all the different expla-nations, the selection of the pricing method is frequently deliberated and proved helpful in

understanding the underpricing. Because dif-ferent pricing mechanisms do influence differ-ent underpricing levels according to various researchers and they have compared the under-pricing in IPOs using fixed-price, book building and auction pricing mechanism.

Since the introduction of the book building offer mechanism as an alternative to the fixed price offer mechanism, the issuance of capital by the new companies through this mode of offering is getting pace with each passing year. This is mainly due to its inherent feature of price discovery by the well-informed institutional and high net worth investors. Since promulgation of the book-building mechanism till Decem-ber 2013 witnessed 36% of the total IPOs came through this mode. But it cannot be concluded that book building offer mechanism has fully superseded the fixed price offer mechanism for IPO pricing. The data from year 2008 till 2013 of all the IPOs, which were floated during these six years, is used in this research. The companies that offered shares through book building and fixed price offering mechanism are 22, which is 100% data of IPOs offered during the span of 6 years. Out of the data set 45.5% companies were listed on provisional counter before formal list-ing over regular counter and 54.55% companies were directly listed over regular counter of the exchange.

Theoretical framework

The underpricing was measured by first day return. The descriptive statistics was used to empirically test the optimal offer mechanism for controlling underpricing. In this research study the relationship between two variables were examined in the presence of four control vari-ables. The independent variable is offer mecha-nism. The dependent variable is the underpric-ing. The offer mechanism is the antecedent and the underpricing is the consequent. The control variables are the financial leverage, i.e., debt to equity ratio, time lag from the IPO date to the first trading date, IPO proceeds and total assets of the issuing companies.

The dimensions of the independent vari-able are the fixed price offer mechanism and book building offer mechanism. Various firm specific control variables was used in this study. The dimensions of control variables are finan-cial leverage, i.e. debt to equity ratio, time lag from the IPO date to the first trading date, IPO proceeds and total assets of the issuing compa-nies. IPO proceeds are the total shares offered multiplied by price per share. TA is the firm size measured by natural log of assets. The theoreti-cal model is illustrated below:

Optimal offer mechanism for

controlling underpricing of

IPOsThis empirical study determines

whether fixed price offer mechanism or book building offer mechanism is useful for pricing of the initial public offerings (IPOs) in capital market of Pakistan or not. This article will contribute to better understanding for the dynamics of Paki-stani capital market for the companies, which are intending to get themselves listed at the Pakistan Stock Exchange. To determine the optimal offer mechanism between the fixed price offer mechanism and book building offer mechanism, the IPO pricing in Pakistan was studied since the promulgation of the Book Building Regulations in 2008. The IPO pricing of the 22 IPOs floated since 2008 till 2013 by us-ing these both offering mechanisms was empirically tested.

In an IPO of shares, the issuer or the company sells securities/shares for which there does not exist a secondary market for its value or price. Three most common-ly mechanisms are being used to achieve this purpose namely fixed price mecha-nism, auction mechanism and book build-ing mechanism. Fixed price mechanism is a traditional method of pricing the IPOs. In this mechanism the issuing company after carrying out valuation of its shares floats it IPO in the capital market. In the auctions mechanism, the investors submit bids and afterwards shares are priced and finally allocated according to the auctions rules. In book-building mechanism the book runner collects investor’s indications in the issue, settle at a price called strike price and then allocation of the securities is made among successful investors. Book-building mechanism usually results in ad-ditional aggressive pricing as compared to the traditional fixed price mechanism due to its inherent factor of price discovery by well-informed institutional and high net worth investors.

By Asad Ullah Gondal

20

The writer earned his MBA and MPhil from Bahria University, Islamabad. He is working as Assistant Director in the

Policy, Regulation and Development Department of SCD. Prior to joining the SECP in 2008, he had worked in Allied

Bank of Pakistan under its Management Trainee Officer batch of 2007.

Given the above-mentioned theoretical

model the following hypothesis were tested

empirically:

H1: Fixed price offer mechanism is posi-

tively associated with controlling underpricing

in Pakistani capital market.

H2: Book building offer mechanism is posi-

tively associated with controlling underpricing

in Pakistani capital market.

Methodology

This is a descriptive study and the time ho-

rizon of the study was cross-sectional because

the study was conducted at a single point of

time. This is a Quantitative research study fol-

lowed with a Positivist Research Philosophy

(school of thought) and deductive research

approach.

The above illustration depicts that out of total 22 IPOs 32% companies were under-priced by the issuers and 68% companies were over priced by the market. In other words, 68% companies were overpriced by the issuers in the IPO, hence leaving no room of initial under-pricing by them.

Conclusion

From the empirical analysis using first day

return it was concluded that fixed price offer mechanism controlled the underpricing of IPOs as compared to book building mechanism thus accepting hypothesis H1.

Implications

The future implications of the study are expected to be very beneficial to the Pakistani capital market due to a series of inter related consequential effects of better pricing of IPO

of the company through the optimal offer mechanism. The better pricing in an IPO en-sures higher net proceeds in the initial stage of fund raising by the issuing company, which is then utilized in its new projects, which might be expansion, balancing or modernization as allowed under the 1996 Companies Issue of Capital Rules. This research could also be used for the Follow on Secondary Public Offerings with respect to pricing mechanisms.

spring edition 2017 newsletter · 3 newsletter 2017 spring edition t he 26th meeting of the secp...

Documents