Chairman Securities and Exchange Commission of Pakistan (SECP) Muhammad Ali said on Wednesday the approval of the demutualization of stock exchanges bill will help end the reign of the stock market brokers by segregating the ownership and trading rights at the exchanges. Addressing a press conference, he said one of the major advantages of the demutualization will be that the brokers will not have 100 percent ownership, as a certain percentage of shareholding will remain with the brokers, but the strategic investors and people will also be able to obtain shareholding of the stock exchanges.
Giving major advantages of demutualization, Chairman SECP said the supervision and enforcement functions will become more effective. The new membership will not open for a period of at least three and half years after demutualization of exchanges. The new member ship will open after the specified time period. In the next 4-5 years a number of investors will come into the stock exchanges.
He said that an investment bank of international repute will be appointed for evaluation of the stock exchanges after demutualization. He said present 200 financially sound brokers have obtained membership of stock exchange, whereas 150 members were active. These brokers are engaged in trading as well as settlement of shares. Following demutualization, the active members will be at least 200. Responding to a query on the merger of stock exchanges, Chairman said the merger will be the decision of the stock exchanges. Under the long term strategy, stock exchanges have to think about the merger which will be for the benefit of the shareholders of the exchanges. The stock exchanges desirous of integration or to merge into one entity will be required to submit scheme of integration to the commission. The commission shall have the powers to approve the scheme of integration and effectuate transfer of rights and obligations as if the scheme was approved by the court.
The parliament had approved the Stock Exchanges Corporatization, Demutualization and Integration Bill on Tuesday. Within a time period of four months, the stock exchanges will be corporatized and demutualized. The status of the stock exchanges would be changed from guarantee limited to public limited company. This public limited company will be listed on the stock exchanges. The demutualization will convent mutually owned company to a company owned by the shareholders. This will convert stock exchange limited by guarantee into the one limited by shares but also segregates ownership and trading rights.
Another major feature of the demutualization of exchanges is that the composition of the board of directors of the stock exchanges will be changed. Thus, demutualization would bring balance among interest of different stakeholders in the corporate and governance structure of a stock exchange. The outreach of the capital market would be expanded attracting investors in the small cities and far flung areas of the country. The demutualized exchanges will end the conflict of interest. The stock exchanges management, board and shareholding will become independent. After demutualization, out of 10 directors, six directors will be nominated by the SECP from private sector whereas the remaining four directors would be elected.
Presently, members of stock exchanges have the ownership as well as trading rights. This structure inherently creates conflict of interest as members predominantly control the affairs of the stock exchange which results in lack of transparency in the operations of the stock exchange and compromises investors’ interest.
The brokers control will also be ended because they have to be required to fulfill the stringent fit and proper criteria and cannot have automatic trading rights by virtue of being member of the exchange. The management of the stock exchanges would be able to work independently without being influenced by brokers which is good omen for investors as well as general public. Under the new shareholding structure after divestment, upto 40 percent shares would be offered to the strategic investors and local financial institutions. General pubic would not be offered less than 20 percent shares and 40 percent shares would be offered to the brokers. In this way, there would be shareholding of the general public in the stock market after demutualization. After demutualization of stock exchanges, the only way to increase the value of the shares is by increasing profitability of the stock exchanges. When general public will come into the stock exchanges, the confidence of the investors on the exchanges will be further increased and values of the shares would show further improvement.
Revised, corporised and demutualised
