CCP approves integration of stock exchanges; addresses competition concerns

The Competition Commission of Pakistan (CCP) has issued the detailed Phase II Review order in the matter of integration of Islamabad, Lahore, and Karachi Stock Exchanges, approving the merger while imposing conditions to remedy certain competition concerns.

The order was issued by a bench comprised of Chairperson Vadiyya Khalil, Mergers and Acquisitions Member Mueen Batlay, OFT and Advocacy Member Shahzad Ansar and Cartels, Trade Abuse and Legal Member Ikramul Haque Qureshi.

In its detailed judgment, CCP has undertaken a comprehensive competitive analysis of the merger to determine if it substantially lessens competition by creating or strengthening a dominant position. The order provides that the market under scrutiny is the ‘trading platform for the sale, purchase and exchange of listed securities’. It further elaborates that an integral subset of this market is the broker to broker interaction. The Commission has taken a two-pronged approach to consider both the horizontal and vertical effects of the merger on the market.

With respect to the vertical effects, the Commission has held that until the divestment of 40% of the post-merger Pakistan Stock Exchange’s (PSE) shares to a strategic investor is carried out, the brokers transferring from LSE and ISE remain vulnerable to biased treatment at the hands of KSE shareholders. Another concern the Commission has identified is the effect the merger might have on Central Depository Company (CDC) and National Clearing Company Pakistan Limited (NCCPL).

With respect to horizontal effects, the Commission has found that the integration of the exchanges will not lead to elimination of an important or effective competitor from the market. The order states that the unification of trading on one platform will instead improve the liquidity of the markets as a whole. In relation to how the integration would affect the listing of companies, the order finds that the companies listed on the LSE and ISE will be deemed listed on PSE upon its creation, without any additional cost or regulatory requirements which would create efficiencies. With regards to listing of new companies, the Commission observed that Securities and Exchange Commission of Pakistan (SECP) remains responsible to ensure listing fees are not set arbitrarily and to review any instances of unfair refusal to list a company.

The order also considers how entry into the market by new stock exchanges will be affected by this merger. It finds that there are no legal barriers to entry at this stage, and further that if at any time in the post-merger scenario, the Commission finds the integrated exchange to be engaging in abuse of its dominant position, it has the power to penalize the undertaking and rectify such a situation under the provisions of Section 3 of the Act. With regards to new entry by brokers, the order emphasizes that the Base Minimum Capital (BMC) requirements to be set by SECP must not be onerous in comparison to the existing requirements and should be in line with international best practices.

In view of the various efficiencies to be gained from the merger, the Commission has held that the transaction will not lead to a substantial lessening of competition. Nevertheless, the Commission observed some lesser competition concerns vis-a-vis potential discrimination of shareholder and non-shareholder brokers and listing of new companies. The merger has therefore been approved subject to the conditions that PSE will carry out the divestment of 40% of its shares to a strategic investor within one year of the date of integration; that the sale of 20% of the shares of PSE to the public will also be carried out within the timelines specified and that more than fifty per cent of the directors on the board of PSE shall be independent and shall be nominated/approved by SECP until the divestment is made to the strategic investor. Furthermore, the Commission has stipulated that PSE will establish an SME counter within one year in order to facilitate smaller new companies to list on the exchange.

The Commission has also recommended that SECP should facilitate the entry of new exchanges to the market as and when it may be deemed appropriate; that new financial requirements being specified in the Securities Brokers Regulations, 2015 must not be burdensome for existing brokers and that SECP should ensure that any new exchanges entering the market are provided due access to the clearing and settlement functions, irrespective of the shareholding of PSE in CDC and NCCPL.

The Phase II Review has been undertaken under Section 11 of the Competition Act, 2010. The Commission is empowered to assess the effects of the transaction on the relevant market after one year from the date of the closing of the transaction under Section 11(13) of the Act.