Establishing small, medium stock exchanges: bourses assigned job to explore possibilities

The Securities and Exchange Commission of Pakistan (SECP) has assigned the stock exchanges the job to explore possibilities of establishing small and medium stock exchanges for nearly three million small and medium enterprises.
The SECP Chairman, Muhammad Ali, told media on Wednesday that the SECP is seriously working on different proposals for establishment of at least two more commodity exchanges, an independent bond pricing agency, Code of Conduct for Credit Rating Agencies, and new Take-over Regulations.
Explaining the rationale of establishing the small and medium stock exchanges, he said that according to the State Bank of Pakistan there are around 3 million small and medium enterprises in the country and there is need to facilitate financing by allowing establishment of small exchanges for such SMEs. The stock exchanges would provide feedback on the proposal of the small and medium stock exchanges.
He said that there is also a proposal under consideration to form a Bond Pricing Agency to facilitate corporate debt pricing, and the SECP is working on the proposal in consultation with two credit rating agencies. He said that there is limited role of credit rating agencies in Pakistan and these agencies are assigning ratings to some 600 companies in Pakistan against 3000 companies in Bangladesh. The SECP intends to expand credit rating mechanism and wants to make more stringent the supervision of the credit rating agencies and a new Code of Conduct is being finalised for them, and there would be on-sight inspection.
To create debt market, a meeting was held with State Bank of Pakistan and a 12-member committee is being formed, comprising SECP, SBP and representatives from banking sector. A committee for revision in regulatory regime for the non-banking finance companies (NBFCs) is also being formed. Regulatory regime for NBFCs is needed to facilitate mutual funds and venture capital and new regulatory framework is expected to be finalised within a month, the SECP Chairman added.
Muhammad Ali said that the SBP and the SECP, being the regulators of government and corporate debt market respectively, must join efforts to create a vibrant debt market in Pakistan. The SECP has, therefore, proposed that a joint committee be formed consisting of officials from SBP and SECP to work in close co-ordination with the objectives to carry out a holistic review of the debt market, identifying problems and initiatives required at strategic and operational levels, formulate long-term and short-term roadmap for development of market and provide focal point for close co-ordination with the stakeholders to ensure smooth implementation of the measures taken.
With reference to further developing the debt markets, a meeting of the domestic credit rating agencies (CRAs) was held at the SECP, which was attended by a representative from the SBP. In the meeting it was decided that a committee comprising officials of SECP, SBP and CRAs shall be constituted to look into the existing regulatory framework for the CRAs in line with the international best practices; the existing regulatory framework for CRAs and their code of conduct; capital structure of CRAs and their listing on the stock exchanges; and establishing a Bond Pricing Agency (BPA), the SECP Chairman said.
The ABPA (also called Bond Valuation Agency in few jurisdictions) is an independent entity with the role to provide fair valuations of debt securities issued by governments and corporations based on comprehensive data collection, validation, pricing, and dissemination to the stakeholders, the SECP Chairman said.
He said that a draft law for proposed Corporate Rehabilitation Act would be again submitted to the Federal Cabinet soon after incorporating the required amendments proposed by the Federal Cabinet. The SECP Chairman said that SECP is developing three roadmaps for investor education and this would be implemented through 300 functioning brokerage houses of the country. Some 300 seminars would be conducted through these brokerages houses for investors'' education.
Explaining the new Take-Over Regulation, the SECP Chairman said that the proposed regulation has been finalised and has been placed on SECP''s website for obtaining viewpoint of the general public. The SECP intends to complete consultation within a month, and it is hoped that new Take-over Regulations should be enforced before March 2012.
The SECP had organised a roundtable meeting of representatives of the corporate sector on proposed amendments to the 2008 Take-over Regulations. A final roundtable with the stakeholders is to be held in Karachi to finalise the matter. About the developments in the insurance sector, the SECP has approved the draft Takaful Rules. Takaful, the Islamic alternative to traditional insurance, is a scheme based on the principles of mutual assistance in compliance with the provisions of the Shariah, and which provides for mutual financial aid and assistance to the participants in case of occurrence of certain contingencies and whereby the participants mutually agree to contribute to the common fund for that purpose.
The SECP Chairman said that Pakistan has been late in establishing commodity exchanges and, at present, one commodity exchange is working in the country. To promote competition and facilitate trading of more commodities, including currency, the SECP intends to allow establishing at least two more commodity exchanges in the country. A framework for minimum capital requirements for new commodity exchanges, fit a proper criterion for their management, rules and regulations, transparent pricing mechanism to be finalised by June 2012.
Muhammad Ali said that establishment of new commodity exchanges would not only protect the rights of growers but would also help indeveloping food security in the country. More commodity exchanges are needed to develop the futures markets in the country. The crop hedging and forward selling will help reduce the dependence of farmers on the spot buyers, who are mostly the middlemen, bagging heavy profits in the buy-sell trade. At present, the commodity spots markets and the wholesale markets are established by provinces, but most of these markets lack regulatory framework to protect the rights of growers who come to sell their produce, whereas the selling prices are also decided by the wholesalers. The commodity exchanges are in their evolution stage in the country and it can take years to have well regulated commodity trade in the country. The development of futures trade will eventually promote the warehousing sector in the country - which will also help enhance grains storage capacity, he added.
There is a need for establishment of more commodity exchanges in the country for which the SECP is working on a new regulatory framework to grant 1-2 more licensees to new commodity exchanges. "We are talking about future commodity exchanges. The SECP is analysing the law whether the spot commodity exchanges fall within the purview of the Commission''s regulatory regime. As far as issuance of new licences is concerned, the issue is related to the future commodity exchanges, whereas the decision about the spot commodity exchanges would be taken after examining the regulatory framework in this regard", he added.
The SECP feels that three stock exchanges of Karachi, Lahore and Islamabad are enough for the country. After de-mutualisation of stock exchanges the outreach of the exchanges would be extended to remote areas, he added. Muhammad Ali elaborated that globally commodities'' markets are among the fastest growing segments of the overall capital market and the value traded on commodity exchanges is multiple of value traded on stock exchanges.
The significance of the commodity exchange becomes even more vital in a primarily agricultural country like Pakistan. Enhanced activity in this market can benefit the whole agriculture value chain from farmers to policy makers. A comparison with international markets depicts that the Pakistani commodity market has still to go a long way in evolving and contributing towards the overall economic objectives.
The traded value of the exchange-traded futures contracts was a mere $8.8 billion in Pakistan as compared to $2.9 trillion in India, $239 billion in Turkey and $5.3 trillion in China for the year ended 2011. This clearly shows the limited penetration and outreach of the commodities'' market in Pakistan despite the immense potential.
The Pakistan Mercantile Exchange Limited (PMEX) also has a part to play in investor awareness and education activities to broaden its investor base. The SECP has recently framed a three-year investor education plan, which will target the existing and potential investors for the capital market, including commodities market.
The SECP is contemplating to allow more commodity exchanges to function in the country which will result in increased competition, capitalisation, automation and business generation and ultimately the market size would grow. Possible subsequent listing of such exchange will also help diversifying the shareholding as well as investor base. The SECP will look into the potential shareholding structure and may place per party shareholding limits also, the SECP Chairman added.