Reforms in the Pakistani Capital Market
Capital markets in the world need to be stringently monitored and regulated as they are considered the backbone of the economy and a reflection of its stability. The purpose of such governance is to safeguard investors from fraud and deception, leading to minimizing financial losses, secure capital markets, stability in the economy, causing a cyclical impact on long-term investments.
Upon careful comparative analysis of international capital markets, it can be observed that markets with consistent bullish trends attract greater Foreign Direct Investments (FDI’s); relaying a sense of trust and guaranteed returns on their investments, which is all that matters to an investor. Consequently, continuous investments in return effectively support the economy while maintaining stability in the market; a cyclical pattern of a stable market
Capital markets like UK, USA or Turkey which observed significant growth in 2012, are prime examples of stable markets and are implications of well managed and governed systems. Pakistan as a developing economy needs to cater to the needs of investors by applying rigorous mechanisms that secure its investors.
All three stock exchanges in the country, particularly Karachi Stock Exchange (KSE), have seen steady times following a series of downfalls in 2008. However, in 2011-2012, KSE reached 16,218 points and was labeled as the best emerging market in Asia with financial returns of 40—50%. In the 2013-2014, KSE hit a record high of 28,913 points (the index has since then crossed the 30,000 mark) which was an increase of 45.2% than the previous year.
The year 2014, has proven to be a year of growth and high spirits for the Pakistani capital market. Pakistan ranked third in 2014 amongst the top ten best performing markets in the world, for the third consecutive year. Throughout the year, the benchmark KSE 100-index exhibited outstanding performance, touching historic levels in terms of value and volume.
Although in order to maintain such record highs, continuous measures need to be adopted. In 2012-13, a number of market reforms were implemented which in return led to the apparent bullish trends. The Securities and Exchange Commission of Pakistan (SECP) introduced legal and structural changes, while strengthening its Risk Management and improved transparency that led to a build in trust and credibility in the markets.
Firstly the SECP, corporatized and demutualized the stock exchanges in Pakistan, which was considered one of the most revolutionary reforms of all times in 2012. This led to segmentation of commercial and regulatory functions and a separation between ownership and trading rights. This not only led to greater governance and transparency but also projected a positive image internationally, attracting global strategic investors of good stature and increase the depth of primary and secondary markets.
With the initiation of Trading Right Entitlement Certificate (TREC), a Base Minimum Capital (BMC) was required that was to be maintained at all times, and was used as collateral in the event of a default.
To fulfill the hedging requirements of various investors in the commodity markets and to further enhance the product Suite at Pakistan Mercantile Exchange (PMEX) was approved in silver. They further implemented regular inspections and audits to follow compliance and the regulatory framework.
With the introduction of the code of corporate governance in 2012 applied to all listed companies as a part of stock exchange regulations. This code also incorporated international best practices and standards to ensure transparency and good governance.
Moreover, SECP has also in the past made similar moves to bring investor confidence back, especially by setting up a centralized clearing company in the form of National Clearing Company of Pakistan Limited (NCCPL). NCCPL’s introduction in to the market replaced the separate and individual Clearing Houses of three Stock Exchanges by a single and centralized entity. NCCPL introduced the National Clearing and Settlements System (NCSS), an electronic clearing and settlement system, which ended the need for 3 separate clearing houses in the country and provided relief on time involved for clearing trades between parties.
Since its inception, NCCPL has not only grown as a clearing and settlement service organization in terms of its capacity and capability, but has also started making valuable additions in its products and services portfolio to facilitate the capital market investors and contribute towards development and transparency of capital market operations. NCCPL’s latest offering to the public, the National Custodial Services (NCS), is another product which looks to build investors’ confidence and increase investor participation in capital market activities.
Similarly with the introduction of NCS, by NCCPL, it takes away one liability of investing in the stock markets and lets the investor only worry about the natural course of events. The capital market investors opting to avail the NCS can continue to transact in the capital markets through their respective TREC Holders. Further, custody of cash and securities will also be maintained with NCCPL.
“NCS is one of the key institutional products introduced in the capital market that shall significantly reduce market risk, add transparency, and enhance transactional efficiency”, said Mr. Nadeem Naqvi, MD, KSE and Chairman NCCPL Board. “The TREC holders should be welcoming this development as it increases the credibility of the capital market as whole. NCS provides investors the option to have national capital market institutions look after their assets if they so wish and this should go a long way to avoid the issues related to the custody of their assets. The reignited fears around investing should be put to bed and potential investors should look towards the stock exchange to invest money in instead of just properties.”
Speaking about NCCPL’s latest offering, Mr. Muhammad Lukman, CEO, NCCPL stated, “The NCS is an effort made by NCCPL to add to the effectiveness of the capital market operations. It offers safe custody of investors’ cash and securities in a cost effective manner and facilitates the TREC Holders by providing relief in margin and capital adequacy requirements.” Further talking about overseas Pakistanis, he added, “Through this product we are also targeting overseas Pakistanis, who are not investing money back home in the capital market. A campaign will soon be launched to create awareness amongst non-resident Pakistanis about this.”
Change over the years and recognizable improvements in the Pakistani capital markets was due to the implementation of stringent reform, revolutionary strategic legal and structural changes and efficient transparency and security offered to its investors. The attempt to improve the capital structure was fruitful with the results reflected in 2014 and the consecutive third position for three years running as the top ten best performing markets in the world.