Capital market: Stranglehold of brokers may continue for two more years

Finance ministry proposes changes to law that allows entry of new players

ISLAMABAD:

The federal government has decided to reverse capital market reforms that had been introduced by the Pakistan Peoples Party (PPP) government to break the monopoly of stock brokers, as it is trying to block the entry of new players for two more years.

In an attempt to protect the interest of influential and wealthy brokers, the Ministry of Finance has proposed amendments to a law that had paved the way for the entry of new players after expiry of the deadline set at the time of enactment of the Corporatisation, Demutualisation and Integration of Stock Exchanges Act 2012.

The equity market regulator, the Securities and Exchange Commission of Pakistan (SECP), however, has opposed further extension in the monopoly of big brokers.

The PPP government had brought the law in May 2012 aimed at bringing transparency in the equity market and breaking the monopoly of influential brokers, who have been accused of two stock market crashes in the last 10 years. The 2005 and 2008 crashes caused losses of billions of rupees to small investors and underlined the urgent need of breaking the stranglehold of big brokers on the market.

Headed by Senator Saleem Mandviwalla of the PPP, the Senate Standing Committee on Finance on Tuesday deferred approval of the bill after sensing “mala fide intentions” behind the finance ministry’s proposal to amend certain sections of the 2012 law, which would bar the entry of new players for at least two more years.

The committee directed the Ministry of Law to review the bill before it was taken up for voting. Members of the committee said there was an “ill intention” behind the finance ministry’s move to delay the issuance of new Trading Right Entitlement (TRE) certificates for another two years.

In order to get the support of brokers for the 2012 law, the SECP had entered into an agreement with them, according to which new TRE certificates could not be issued for three and a half years after the enactment of the Act, said Akif Saeed, Commissioner Securities Division of the SECP.

He said the deadline would expire in December 2015 as the Act came into force in May 2012. However, a loophole was left for exploitation in the future.

Saeed said due to the drafting error instead of writing “three and a half years after the enactment of the law”, the June 30, 2010 deadline was written in the Act.

The SECP sought correction of the mistake and proposed that words “December 2015” should replace June 30, 2010. However, Finance Secretary Dr Waqar Masood sought a fresh deadline of December 31, 2017 and insisted it would not give benefit to any specific group - a view that was not endorsed by the SECP.

SECP Chairman Zafar Hijazi and the Securities Division commissioner were of the view that there was no need to extend the deadline beyond 2015. “The purpose of issuing new TRE certificates is to open avenues for the new players,” commented Hijazi.

“There is a mala fide intention behind proposing the 2017 deadline,” said Senator Talha Mehmood of Jamiat Ulema-e-Islam-Fazl (JUI-F).

“There is no rationale for extending the deadline, as the extension will clearly benefit existing brokers,” said Senator Kamil Ali Agha of the Pakistan Muslim League-Quaid-e-Azam (PML-Q).

The stock market players were working against the interests of small investors, said Agha.

Despite the expiry of the deadline in December this year, the SECP-brokers agreement and the 2012 law ensure that the brokers enjoy some kind of monopoly. The law states that the stock exchange management can issue only 15 TRE certificates annually for the next nine years in a manner prescribed by the SECP.

Published in The Express Tribune, July 29^th, 2015.

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