Opinion: The perplexities of regulators

The role of regulators operating in the country has always been perplexing. When one talks of the corporate sector, three main regulators come to mind: the State Bank of Pakistan (SBP), Securities and Exchange Commission of Pakistan (SECP) and Competition Commission of Pakistan (CCP).

The SBP has largely worked autonomously over the decades and we have seen that the country’s banking sector has grown at a fast pace and has remained quite stable in the current recessionary environment, at least comparatively speaking. The banking services we enjoy are above the bar set by countries with similar social indicators. The State Bank’s economic data and periodic releases have also made their name on the basis of authenticity.

Meanwhile, you may remember that just a few months back the CCP was being labelled the ‘messiah’ of Pakistan – only for its role to mellow down after formalisation of the commission. Have price hikes, hoarding and cartelisation ended? Most definitely not, but key stakeholders at the CCP sure have secured their jobs.

Then there is the Securities and Exchange Commission, whose main task is to regulate the corporate sector – except for those banking institutions already under the State Bank’s radar.

In the larger canvas being managed by the SECP, there are the capital markets of our country which include three stock exchanges, the National Commodity Exchange Limited, the 645 companies listed on the exchanges and various bonds/sukuks being traded in the market.

What is really perplexing is that focus of the SECP remains largely on the stock exchanges, its members and a handful of the listed companies.

Recently, the term of Karachi Stock Exchange Managing Director Adnan Afridi came to an end. A new managing director should have been appointed by the board of directors of the KSE but that did not happen. KSE veteran Haroon Askari, who has been at the exchange for a decent amount of time, was appointed acting MD to manage the affairs till a formal appointment was made. Was it an incorrect decision to have an acting head than have no head at all?

Apparently, the KSE member-directors and the SECP-nominated directors on the KSE board just cannot get down to approving the appointment of a new MD. KSE members and the SECP have been at loggerheads on a number of occasions. Be it the appointment of directors and chairman of the board, introduction of leverage products or the risk management regime, they just cannot sort out the differences.

The SECP has generally maintained a hostile posture towards the capital markets. Call it principles, the fact remains that basic differences exist between the regulator and members of the exchange. The SECP must realise that the biggest stakeholders in the exchange will always be its members.

It can exert as much pressure as it wants but the fact remains that the capital markets cannot function without the stock exchange and with the way it is structured, the stock exchange cannot function without the members who hold the trading rights.

It has been argued our markets have the capability to outperform many equity markets of the world mainly because of attractive fundamentals and inexpensive valuations. We had two main issues that have been hindering market performance: lack of clarity on the capital gains tax regime and unavailability of a leverage product. The issue of a managing director can be added as the latest.

This, of course, is a non-issue which makes Pakistan a laughing stock! How many investors care to know who the MD of a stock exchange is except when they read news-items highlighting differences between board members.

As for the SECP, please let the capital markets work. Your job should be to assist in establishment of a robust risk management regime and facilitating corporatisation in the country. You can call a leverage product ‘CFS’, ‘CFS MK II’ or simply margin financing but it will all fail if the risk management framework is not well planned.

You also need to focus more on the 57,000 registered firms in the country than just three exchanges and a few brokers who are playing an important role in bringing in portfolio investment in the country.

The writer is an investment banker based in Sharjah

Published in The Express Tribune, December 27^th, 2010.