SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

PAKISTAN

COVERED AREA 796,000 Sq. Km POPULATION 137.50 Million LABOUR FORCE 39.40 Million GDP SIZE Rs. 3,120 Billion or US$ 54 Billion GDP GROWTH 4.9% PER CAPITA INCOME US$ 443 INFLATION RATE 3.11% MAJOR CROPS Cotton, Wheat, Rice, Sugar Cane, etc. MAJOR INDUSTRIES Textile, Polyester, Engineering,

Fertilizer, Cement, Sugar DOMESTIC SAVING RATE 14.00%

Source: Economic Survey of Pakistan, 2000.

SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

Securities & Exchange Commission of Pakistan was established w.e.f. January 1, 1999 under Securities and Exchange Commission of Pakistan Act, 1997.

 Corporate Law Authority (CLA), a Department of Ministry of Finance, was the regulatory authority for capital market and corporate sector until December 31, 1998.

The Commission attained financial autonomy w.e.f. July 1, 1999.

SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

The Commission comprises of Commissioners including a Chairman as may be fixed by the Federal Government. The minimum number of commissioners shall be five and maximum number of commissioners shall be seven. The Chairman is the Chief Executive Officer of the Commission. The Commission presently comprises of five Commissioners including the Chairman.

A Policy Board consisting of seven members has been established. The Chairman of the Commission is also the Chairman of the Policy Board.

SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

The Commission comprises of Commissioners including a Chairman as may be fixed by the Federal Government. The minimum number of commissioners shall be five and maximum number of commissioners shall be seven. The Chairman is the Chief Executive Officer of the Commission. The Commission presently comprises of five Commissioners including the Chairman.

A Policy Board consisting of seven members has been established. The Chairman of the Commission is also the Chairman of the Policy Board.

SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN

Securities & Exchange Commission of Pakistan was established w.e.f. January 1, 1999 under Securities and Exchange Commission of Pakistan Act, 1997.

Corporate Law Authority (CLA), a Department of Ministry of Finance, was the regulatory authority for capital market and corporate sector until December 31, 1998.

The Commission attained financial autonomy w.e.f. July 1, 1999.

STOCK EXCHANGES There are three stock exchanges in the country.

KSE LSE ISE Year of Establishment 1947 1971 1992 Number of companies 763 618 285 Listed Capital Rs in billion 230 208 162 US$ in billion 3.83 3.47 2.66 Market capitalization Rs in billion

407 366 298

US$ in billion 6.78 6.10 4.97 Average daily turnover Shares in billion 247 68 8 Rs in billion 9.5 2.4 0.1 US$ in billion 0.16 0.04 - KSE has emerged as the key institution of the capital market of Pakistan.

CAPITAL MARKET REFORMS The stock market was opened for foreign

portfolio investors on equal terms with local participants in May 1991.

Commercial banks, Investment banks, Leasing Companies, Modarabas and Mutual Funds were permitted to be established in the private sector.

Privatization of state-owned enterprises. Pricing of shares was freed for primary offerings.

IMPACT OF REFORMS Sector No. Equity Mobilized (Rs. in million) Commercial Banks 13 8,227 Investment Banks 14 3,366 Modarabas 47 8,190 Leasing Companies 32 4,742 Mutual Funds 13 1, 612

Market Indicator 1949-1990

1991-2000 Increase

Listed Capital (Rs. in million) 

28,056.00 230,250.90 721%

Market Capitalization (Rs. in million) 

61,750.00 407,073.00 559%

Average Daily Turnover(Shares in million) 

1.10 247.00 20,572%

No. of Shareholders 

0.20 1.50 650%

IMPACT OF REFORMS

IMPACT OF REFORMSPakistani companies were able to access international capital markets.

Euro bond of Dewan Salman and Exchangeable bond of PTCL were launched.

GDR’s of PTCL, HUBCO and Chakwal Cement were issued to foreign investors.

It was possible to float projects with all equity capital structure. Ibrahim Fiber, Dhan Fiber, Lucky Cement and Chakwal Cement made placements to international investors.

The above issues together with portfolio investment mobilized around US$ 2 billion.

IMPACT OF REFORMSThe stock market upsurge in 1991 and 1993-94 played a pivotal role in attracting resources for privatization and adding production capacity in industrial sector.

63 public sector companies were privatized and 15% of PTCL shares were dis-invested raising Rs.50 billion.

Financing of mega projects and expansions were made possible in power, polyester fiber and cement sectors, as they were profitable at that time.

Sector New Capacity % increase Power Projects 1,884.36 MW * 30.00** PSF 263,220 MT 220.27 Cement 10.465 MT 181.83 * Listed power projects. ** of energy produced in the country.

RECENT REFORMS Companies Ordinance and Securities and

Exchange Ordinance were amended to allow companies to issue debt securities to public.

Controller of Capital Issues Act was repealed. Capital issue rules were issued. SECP Act was enacted and SECP was

established. Buy-back of shares. Voluntary de-listing.

RECENT REFORMS AND EFFICIENCY ENHANCEMENT MEASURES

RESTRUCTURING OF THE BOARD

In 1997 Articles of Exchanges were amended to increase the number of non-member directors to strengthen the Board of Exchanges and creating a position of non-member Managing Director. 40% of the Board seats now go to non-members including nominees of the Commission.

RECENT REFORMS AND EFFICIENCY ENHANCEMENT MEASURES

AUTOMATING TRADING SYSTEM

The open-out cry system has been replaced by an automated trading system at the Exchanges. The impact of automation on turnover is apparent from the data given below: -

Year (Turnover in

Million)

Status

1996 29 Pre-automation 1997 56 Partial-automation 1998 77 Total Automation 1999 127 Total Automation 2000 247 Total Automation

RECENT REFORMS AND EFFICIENCY ENHANCEMENT MEASURES

AUTOMATION OF MARKET INFORMATION SYSTEM

The Exchanges have made arrangements to provide information on real-time basis to the investors through the Internet. Now general public can access and down load current information from the web of Exchanges.

The information regarding the trading activity are also available through telecommunication networks by Fascom, through Tele-text Technology by Wave Tech in Pakistan and 37 other countries and through Reuters across the world.

RECENT REFORMS AND EFFICIENCY ENHANCEMENT MEASURES

Electronic book entry transfer of securities i.e. Central Depository System has been set up to eliminate physical settlement of securities.

The CDS is managed by the Central Depository Company of Pakistan Limited, which has been sponsored by the stock exchanges and leading local and international financial institutions.

Presently 97 percent of settlement is routed through CDS.

CONT…

CONT… Investors Account Services have been introduced

in order to facilitate individual investors to have their account directly with CDC.

With the implementation of CDS and automated trading system, trading and settlement have become transparent and efficient.

RECENT SETTLEMENT CRISES During May, 2000 the volume of trade grew to very high

levels along with an increase in share prices. There were reports of over trading and possible cornering

of certain shares reportedly by some major market operators.

These operators were taking positions on borrowed capital.

In the process they took advantage of the bullish market and, consequently, the prices were unnecessarily pushed.

Initially, the operators were obtaining funds from the market at low rates.

RECENT SETTLEMENT CRISES When the operators were exposed as weak holders, the

market started declining, particularly, in shares held by these operators and, as a consequence, the market finance rate went up (from 14% to 50%) in those shares.

On 26 May, being the settlement date, these operators failed to make the settlement.

Due to this settlement problem the KSE index went down from 2000 to 1400.

The exchanges remained closed for one day. The KSE declared one of its brokers as a defaulter and

LSE suspended six of its brokers against whom proceedings are in progress.

REFORMS AND EFFICIENCY ENHANCEMENT MEASURES

SECP had to intervene and, among other rescue measures, created a lifeboat.

Due to these measures, the settlements were possible and the market started recovering.

SECP appointed an Enquiry Committee consisting of private sector professionals to investigate the causes of the crisis.

Even before the report of the enquiry, the SECP took certain measures to reform the market - discussed in the later part.

CONT…

CONT…

The report has since been received and also published in the press.

SECP is in the process of giving hearings to the accused operators before taking action against such persons.

REFORMS AND RISK MANAGEMENT MEASURES

On the advice of the Commission the Exchanges have agreed to further strengthen the risk management system. The measures include:

Minimum Net Capital balance has been increased by ten times to Rs.2.5 million. This will be effective from January 1, 2001.

Capital Adequacy concept for brokers is being introduced. The brokers would now be allowed to take position upto 25 times of their net capital balance w.e.f. January 1, 2001.

Exposure deposit requirements are being made more stringent. Internationally accepted T+3 settlement system will be introduced

in the Exchanges shortly. NCSS project is also under implementation. The introduction of

T+3 continuous Net Settlement would help in reducing risk.

OTHER REFORMS Under ADB program loan the whole regulatory

framework is being improved and strengthened. Rules of asset securitization have been

introduced. Takeover Law is being enacted. Impediments in the development of fixed income

securities are being removed. Venture Capital Rules are being introduced.