Chairmans’ message

The SECP Chairman Zafar HijazhiI accepted my present responsibilities in December 2014, with the firm resolve to turn this prestigious organization into an efficient and strong regulatory authority that can effectively protect investors’ interest, while ensuring fair practices and complete transparency in the markets. I firmly believe that only a strong SECP operating in an independent environment can guarantee a stable capital market and thus contribute to the development of national economy.

Immediately upon taking this responsibility, I started implementing a robust reform agenda for the capital market and the corporate sector. This reform-roadmap was designed to strengthen the SECP’s enforcement regime, enhance the monitoring and surveillance for timely detection of misconduct and unfair practices, and incorporating zero tolerance for market manipulation – all essential prerequisites for a fair and well-functioning market that attracts and protects investors.

A vibrant and robust capital market has a pivotal role in the economic growth and development of a country. Liquid and well-regulated stock markets not only provide investment opportunities to the general public, but also enable the corporate sector to meet funding requirements through a variety of financial products. Alhamdulillah, in this first year we have taken a giant step forward in the development of our stock market. The three stock exchanges have been integrated to form one national level stock exchange, called the Pakistan Stock Exchange. This is a very significant achievement having the potential to develop Pakistan’s capital market by attracting investors domestically as well as internationally.

This development was fully supported by the honorable Federal Minister for Finance and Revenue, who while addressing the gathering at the signing ceremony of MOU between the three stock exchanges spelled out government’s vision for Pakistan’s capital market. The key message in his speech was:

  • It is my wish and desire to make Pakistan’s stock market strong, vibrant and competitive vis-a-vis the global financial markets.
  • China, India and Singapore have been built with foreign direct investment (FDI) and Pakistani stock market has to play a great role in attracting FDI to Pakistan.

I am quite satisfied with the SECP’s performance for improving the regulations and compliance and I advise them to continue to be vigilant, because irregularities such as insider trading and issues of noncompliance are being reported even in the most developed countries. The SECP should check irregularities and show zero tolerance for insider trading or market manipulation or any other violation.

Efforts are being made for diversification of newly formed Pakistan Stock Exchange by bringing together financial institutions and strategic investor(s) in line with the requirement of demutualization and integration law. This will provide an opportunity to remodel the landscape of our capital market and make it a regional hub for raising capital and attracting investors from around the globe. However, any decision on the matter would be taken in consultation with the stakeholders and after taking into consideration factors like market development, improved governance, investor protection, liquidity and best order execution for the investors.

We feel that national economy is undergoing a turnaround. International financial institutions are acknowledging that Pakistan’s economy has experienced a remarkable recovery in a short span of time. The government has instituted far-reaching economic reforms such as tax measures and adjustments in administered prices. In this regard, the government’s decision to gradually reduce the corporate tax rate from 35% to 30% is bold and result-oriented. Such measures, along with a historic reduction in interest rates, will certainly provide impetus to all sectors of the economy, in particular the underperforming manufacturing sector. This will also promote a culture of corporatization and improve Pakistan’s international competitiveness.

Also, SECP has made significant improvement with regard to compliance with the International Organization of Securities Commission (IOSCO) benchmark principles of securities regulation. The compliance rate has gone up from 37% in 2004 to 62% in 2015 and efforts are underway for achieving enhanced compliance with those principles which are as yet not fully compliant.

In pursuance of the government’s National Action Plan to end terrorism and to halt financing sources of terrorists, the SECP decided to revalidate the licenses of all non-profit organizations or NGOs registered with the SECP in order to ensure that no transgressions have taken place. Steps such as development of new modules under e-Services for licensing under section 42 of the Companies Ordinance, 1984, for non-profit associations, filing of accounts, obtaining certified true copies and inspection by third parties/consultants were to aimed at ensuring comprehensive documentation and monitoring of such organizations.

A lack of documentation in our economy is a major factor causing hindrance in the economic growth. To this end, our initiative for establishing a virtual one-stop shop portal for integrated business registration with FBR and EOBI will certainly be of assistance.

Accordingly, various initiatives undertaken by SECP are:

Investor protection and education

Investor protection is the foundation of the SECP’s reforms program, and it is our top priority. The introduction of direct settlement service mechanism at the CDC and NCCPL are significant steps in this direction. This will prevent unauthorized use of clients’ securities by broker participants. Investor account holders at the CDC were provided an online transaction facility for movement of securities. It is also worth mentioning that during the year, companies have been allowed to circulate annual accounts to shareholders by email, if so desired by any shareholder.

Under its Investor Education Program, the SECP is imparting knowledge through the media, seminars and workshops. Fifteen investor awareness seminars were organized in Abbottabad, Peshawar, Muzaffarabad, Mirpur, Rawalpindi and Islamabad. Also, a web portal was launched by the honorable Finance Minister. Keeping pace with the latest trends, awareness about non-banking financial sector and products is also being created through social media. For the youth, in particular for students at schools and universities, a comprehensive outreach program has been rolled out under which MOUs with the partnering institutions are being signed for conducting on campus awareness sessions and to run trading competition on real time feed from exchange.

In order to facilitate availability of non-banking financial products at one place and expand outreach to smaller cities, a concept of Capital Market Hub has been introduced under which offices or representatives of stock brokers, mutual funds, banks, pension funds and insurance companies are being made available under one roof. The first such hub has been opened in the city of Abbottabad, will be followed by other smaller cities.

Legal reforms

One of our major successes was the promulgation of the new Securities Act that came into effect in May 2015. Besides addressing various shortcomings of the 1969 ordinance, the new law incorporates IOSCO benchmarks and contains provisions for promoting public confidence in the market, including full disclosure at the time of the initial offering, continuous disclosure requirements and an inclusive compliance regime. It also contains provisions for curbing activities like market abuse and insider trading. Other significant legislative achievements include; Real Estate Investment Trust (REIT) Regulations, 2015, amendment to the Single Member Companies Rules, 2003, introduction of legal framework for unit-linked products and funds, amendment to the Insurance Rules, 2002 and Sukuk Regulations, 2015. Stakeholder consultation on the Research Analyst Regulations and Limited Liability Partnership (LLP) concept paper is also concluded.

Capital market reforms

In order to bring the initial public offering (IPO) process on a par with the developed markets, revised regulations for book building have been enforced to ensure a user-friendly and transparent model, which also provides investors with an opportunity to participate in the process electronically. Secondly, in order to attract new listings, the existing manual procedures for listings have been simplified. Regulatory amendments were approved to change exchanges’ pre-open modalities to curb manipulation during pre-open session.

Considering the immense potential of Small and Medium Enterprises (SME) in capital formation and social growth, the concept of SME Board has been introduced at the stock exchanges to facilitate listings. Moreover, with a view to encouraging development of Islamic capital market, the Shariah Advisory Board has also been reconstituted.

It is worth mentioning that stakeholder response to the SECP reforms has been positive, which is evident from the fact that in 2014-15 the stock market indices recorded a steady growth of 16% by opening at 28,701.58 points, and closing at 34,398.86 on June 30, 2015. In this regard one remarkable achievement was the launch of South Asia’s first ever Real Estate Investment Trust (REIT) worth Rs. 22.237 billion at Karachi Stock Exchange (KSE). Moreover, new future contracts for PMEX-Gold (Milli ounce); Brent Crude Oil; Mill Specific Sugar were also approved to trade in Pakistan Mercantile Exchange (PMEX).

Insurance Sector Reforms

In order to provide sustainable growth to the insurance sector and to address the issues faced by the stakeholders involved therein, the Bancassurance Regulations have been issued along with formation of small dispute resolution committees in Islamabad, Karachi and Lahore, to expedite the insurance sector related disputes resolution process at a little or no cost to the policyholders and that too at their doorstep.

Efforts are underway to ensure full compliance with the Insurance Core Principles (ICPs) of International Association of Insurance Supervisors (IAIS) by the end of the next financial year. Code of Corporate Governance for Insurance Sector is being developed. In order to increase the insurers’ capacity to underwrite and retain risks, thereby serving to retain foreign exchange in the country, the paid-up capital requirements for the insurance sector are to be increased to Rs. 500 million and Rs. 700 million for non-life and life insurers respectively. The SECP has also requested the Ministry of Finance to get implemented the legally compulsory group insurance by recommending amendments to labour laws to enhance the scope of the coverage.

Monitoring and enforcement regime

The SECP’s monitoring and enforcement regime has been framed in a manner that it precludes undue harassment to market participants for minor omissions but demonstrates zero tolerance for major offences and irregularities. Furthermore, the Commission has ensured speedy disposal of appeals, that were pending at the Appellate Bench and in a short span of time the pendency has been considerably reduced. Going forward, it has been decided the Appellate Bench will endeavor to dispose-off an appeal within 45 days of its registration. The Commission is also striving to improve the corporate governance within the public sector companies and in this respect the enforcement of Public Sector (Corporate Governance) Rules, 2013 has already been initiated.

Financial position

Financial results of the Commission for the year 2014-15 show surplus of income over expenditure after tax Rs. 203.78 million as against last year’s surplus of Rs.154.08 million, registering an increase of Rs. 49.70 million (32%).

Total revenues (net of levies) for the financial year 2014-15 are Rs. 2,483 million which are higher by Rs. 469 million (23%) as compared to last year’s revenue of Rs. 2,014 million. Revenues of Company Law Division, Security Market Division, Specialized Companies Division and Insurance Division have increased during the year by 34%, 41%, 12% and 14% respectively, when compared to last year’s revenues. Income from investment has decreased by Rs. 8 million mainly due to decrease in discount rate by the State Bank of Pakistan.

Total operating expenses for the year under review are Rs. 1,932 million showing an increase of Rs. 114 million (6%) over the last year. The increase is mainly due to increase in cost of utilities, rent expenses, salary and other operating expenses. Capital expenditures for the year remained within the limits as per the approved budget for the year. An amount of Rs. 11.60 million received as penalties by the Commission during the current year and Rs. 63.424 million as surplus for the year 2013-14 has been transferred to the Federal Consolidated Fund.

The external auditors in their report have given the opinion that the financial statement of the SECP have been presented fairly in all material respects and its financial performance is according to approved accounting standards.

Code of Conduct

For the first time in the SECP history, a wide ranging code of conduct was approved and put into effect immediately. This Code of Conduct is a statement of rules and principles which bind all SECP employees under oath to remain committed to the highest standards of honesty and integrity, performing the duty unfettered by any improper influence and apparent or potential conflict of interest.

Future roadmap

Our achievements have not made us complacent. We have a clear vision and a roadmap for the future. We are determined to revitalize our capital market and the SECP in consultation with the relevant stakeholders will be framing a comprehensive Capital Market Development Plan outlining future roadmap for the capital market. The plan will entail introduction of key structural and regulatory reforms, development of equity, derivatives, debt, commodities markets, and measures for improving governance, risk management, efficiency and transparency in capital market operations.

Alongside capital market growth, the SECP as part of the National Financial Inclusion Strategy of Pakistan is also actively engaged in supporting the government agenda of financial inclusion, export growth and employment generation through growth of the SME’s sector. Major restructuring in the regulatory regime of the NBFCs and Modarbas is underway to ensure the growth of small and specialized financial institutions that principally focus on the SME sector. Additionally, work is ongoing for creating an enabling and empowering regulatory framework for the hitherto unregulated microfinance institutions. These two steps will lead to improvement in access to finance and employment generation.

Further, we plan to tackle the issue of defaulting/non-performing listed companies while providing them with an opportunity to rectify their defaults. However, those involved in willful default will be strictly dealt with in accordance with the law. They will not be allowed to enjoy the benefits of listing while ignoring the rights of investors. Similarly, process has been initiated for increasing free float of the listed companies as per the regulatory framework and during the current year all possible measures will be taken to complete this important reform initiative.

Another important but neglected area is development of the debt market. A concerted effort will be made in collaboration with the State Bank of Pakistan and Ministry of Finance to remove all impediments and strengthen the relevant intermediaries like credit rating companies, debenture trustees, underwriters, etc. The process has been started with a comprehensive review of credit rating companies which will lead to revamping of existing intermediaries and bringing in international players with established brand names and global presence.

We will make concerted efforts to ensure full compliance with the IOSCO principles in various areas which have been highlighted as partially compliant in the recent assessment of the Pakistani securities market conducted by IOSCO. Efforts will also be made for re-inclusion of Pakistan in the MSCI Emerging Markets (EM) Index, as we meet the qualitative and quantitative criteria for the same.

We shall also increase corporatization, insurance penetration, capital market outreach and the investor-base through implementation of the following initiatives:

  • In order to encourage small and medium sized companies to register with the SECP, the new corporate law will provide a breathing space to small companies by way of fewer regulations and an encouraging regime for raising and maintaining capital for large companies;
  • The SECP is also working on formation of the Audit Oversight Board of Pakistan, a panel of auditors, establishment of insurance repository, introduction of Shariah audit mechanism, and adoption of new accounting standards on Islamic finance issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI);
  • The SECP is contemplating various policy options for the promotion of microinsurance market in Pakistan, which include introduction of lower capital requirements for dedicated microinsurance companies, relaxing solvency requirements to encourage investment in microinsurance infrastructure, allowing tie-up between life and non-life insurance companies to offer integrated products to the low income groups.
  • The SECP will also revamp the regulatory regime for insurance brokers by bringing the reinsurance brokers within its regulatory ambit through appropriate amendments to the insurance laws. This will lead to retention of valuable foreign exchange in the country.
  • Efforts are being made to build liquidity in the commodities exchange through introduction of new products, and improve existing risk management regime and framework for default management at Pakistan Mercantile Exchange (PMEX);
  • The establishment of a centralized Know Your Client (KYC) organization to protect investor interests;
  • A new Company Registration Office in Gilgit-Baltistan is proposed to be set up. Besides, facilitation centers are also being set up in all major cities, where the SECP does not have its presence. The objective is to vigorously encourage investors from small cities to join the corporate/capital market.

In the end, I have to acknowledge that the support and encouragement by the government and the Federal Minister for Finance, Senetor Muhammad Ishaq Dar in particular, has been a source of strength for the Commission as it helped to ensure sound and sustainable development of the sectors regulated by the Commission. I am grateful for this patronage.

I also place on record my special thanks to the members of the Policy Board for their guidance. Their profound input enabled us to speed-up the desired progress. I would also like to express my appreciation to the staff, officers and brother Commissioners of the SECP whose dedicated services made the Commission’s efforts productive and successful.