Opinion: Doubts persist over introduction of new securities law

Recasting the legal framework and bringing an entirely new law is a bridge too far.

KARACHI: Securities and Exchange Commission of Pakistan (SECP) Chairman Zafar Hijazi said about a week ago that there were major shortcomings in the existing Securities and Exchange Ordinance 1969 that needed to be replaced with the Securities Bill 2015.

However, Senate committee chairperson Nasreen Jalil said in the same meeting that the SECP needed to come up with details of the changes being made in the existing law.

Recasting the legal framework and bringing into existence an entirely new law is a bridge too far. It seems that it will not be possible to draft the necessary legislation. The reason is simple; the prime minister may not support the new law. The Senate has its limitations and there are doubts whether anything will come out of this initiative.

Let me say that the malaise has much deeper roots. I had been adviser to the Karachi Stock Exchange (KSE) for many years and represented the KSE on its board of directors for a complete term.

Show me a kid of a particular community who doesn’t choose to be a chartered accountant and chartered accountants make all the laws of the stock market.

But I don’t have the evidence that establishes this chain of cause and effect. Extensive forensic work needs to be done to establish this relationship.

There are chartered accountants belonging to other communities as well but this is a special relationship.

It is from this source that insider trading and information leaks take place. It is from here that all efforts to align the stock exchange with market-driven halts are resisted.

Day-long locks are the result. Whom do these locks benefit except the big boys? The rest of the market can go and fish. All the big players derive huge benefits.

Regulating the market

There are two types of products. Open-end funds are what you know as a mutual fund. They don’t have a limit as to how many shares they can issue. When an investor purchases shares in a mutual fund, more shares are created, and when somebody sells his or her shares, the shares are taken out of circulation.

If a large amount of shares are sold (called redemption), the fund may have to sell some of its investments in order to pay the investor.

You can’t watch an open-end fund like you watch your stocks, because they don’t trade on the open market. At the end of each trading day, the funds are re-priced based on the amount of shares bought and sold. Their price is based on the total value of the fund or the net asset value (NAV).

Closed-end funds look similar but they’re very different. A closed-end fund functions much more like an exchange-traded fund (ETF) than a mutual fund. They are launched through an IPO in order to raise money and then trade in the open market just like a stock or an ETF.

They only issue a set amount of shares and although their value is also based on NAV, the actual price is affected by supply and demand, allowing it to trade at prices above or below its real value.

But investors have to know one key fact about the closed-end funds. They are heavily leveraged. Leverage is a double-edged sword.

Open-end products may represent a safer choice than closed-end funds, but the latter might produce a better return, combining both dividend payments and capital appreciation. Of course, investors should always compare individual products within an asset class; some open-end funds may be more risky than some closed-end funds.

History

In Pakistan, mutual funds started in 1962 with the establishment of the National Investment Trust (NIT) and public offering of NIT, which is an open-end fund.

Renowned industrialist Ahmed Dawood was appointed founder-chairman of the trust. He continued to occupy the position for several years.

In 1966, another company Investment Corporation of Pakistan (ICP) was established, which offered a series of 26 closed-end mutual funds. In 2002, the government started the privatisation of ICP and Abamco Limited acquired 12 funds of ICP (Abamco was later acquired by Jahangir Siddiqui & Company). Rest of the funds were acquired by PICIC Asset Management Company.

Initially, there was both public and private sector participation in the management of these funds, but with the nationalisation in the 70s, the government’s role became more dominant. Later, the government also allowed the private sector to establish mutual funds.

There were more than 155 companies operating at the end of December 2014.

ICP was a pioneer of the mutual fund industry, but vested interests killed the institution and handed over the profitable carcass to NIT. Who does not know that NIT is the mother of all market manipulation? It is the original sin of the capital market.

The writer is the chairman of Ace Securities and a former adviser to the KSE and member of the KSE board

Published in The Express Tribune, February 9^th,  2015.

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