Download Expansion of investor base must for capital market

Expansion of investor base
must for capital market
Nadeem Naqvi, Managing Director, KSE
This interview was published in the
Customs Today in Nov 04 - Nov 10, 2014 Vol 2 Issue No. 42
Customs Today interviewed Karachi Stock Exchange (KSE)
Managing Director, Nadeem Naqvi and sought his views
about a wide range of topics and issues related to capital
market.
Naqvi was asked about the single most important catalyst
for the growth of capital market in Pakistan; the government's
role in giving capital market a boost; the KSE's dialogue with
index providers to put Pakistan back to Emerging Market
Index; improving the technology platform and operational
efficiency of the KSE; KSE's initiative to ensure IT security
and, last but not least, the role of capital market in Pakistan's
economic development.
To a question about growth of the capital market, Naqvi
said, "I think the single most important thing is expansion
of the investor base which stands at just around 250,000
since 1948. This is too small when compared to Bangladesh's
over one million and Iran's and Turkey's six million. This
needs to change because a narrow investor (base) not only
creates market volatility and low liquidity but also renders
the price discovery mechanism inefficient. The narrow investor
base also discourages companies that want to list the
potential universe of investors in shares because they feel
that it deprives them the incentive to raise long term capital.
However, this is just one of the factors that discourage
companies to list."
While elaborating his viewpoint, the KSE MD said, "I feel
that this problem requires many pronged solutions. We need
to bring new products such as derivatives, which is a norm
in other parts of the world. We also need to come up with
new technology platform to enable both the domestic and
non-resident Pakistanis to access the capital market online
as well as through smart phone and other online media. We
also need a simplified as well as unified account opening
and documentation process that is convenient for investors
as single-window system."
To another question about enhancing the circle of investor
awareness programme, Mr. Nadeem Naqvi said, "Last year,
around 7,000 participants across the country attended the
programme that KSE had sponsored. This fiscal year our
target is 10,000 plus. However, what is really needed is to
have a wider coverage."
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Exchange
Limited
Seeking Finance Minister Ishaq Dar's support, the KSE MD
said, "New instruments are also needed to be introduced,
especially in the fixed income area. KSE has launched
government debt secondary market trading platform in
partnership with the Central Depository Company. However,
a lot of support is required from the banking industry, the
asset management, the insurance and pension industry as
well as the brokerage industry to create a nationwide
distribution system so an average saver could access this
facility."
Talking about Islamic financing, Mr Naqvi said, "Presently,
it is the fastest growing segment of financial services
worldwide. Although, Islamic banking has taken off smoothly
in Pakistan but Islamic capital market instruments such as
Ijara Sukook and Sharia-compliant ETF baskets need to be
introduced. As a first step, the KSE Islamic Index in partnership
with Meezan Bank Group is already there in the form of
KMI (KSE Meezan Index). Under the guidance from the
Securities and Exchange Commission, the KSE is participating
in the All Share Islamic Index under scholar Dr Imran Usmani."
Differentiating between the roles of KSE and SECP, the KSE
MD, said, "KSE is the frontline regulator while the SECP is
the apex regulator.
The primary role of KSE is to propose specific rules and
regulations that govern listed companies, brokers and market
participants in the interest of level playing field, fair play
and transparency for all constituencies using the capital
market. The SECP's role, on the other hand, is to assess and
approve the regulatory policies and procedures developed
by the exchanges and agreed upon by their respective
regulatory affairs committees comprising independent
directors and the board of the exchanges. SECP can, of
course, take direct decisions as well as create rules that it
believes are important in public interest and safety of capital
market. SECP can also issue directives to the exchanges
from time to time."
Sharing his views about the Frontier Market and Emerging
Market, Mr Naqvi, said, "Mechanisms are in place in terms
of a formal coordination between the SECP and the State
Bank of Pakistan (SBP) to ensure better management and
provision of liquidity in the event of a future system-wide
Karachi Stock Exchange Limited
crisis. Some Index providers are still continuing to keep
Pakistan in the Frontier Market Index although technically
Pakistani capital market fulfils all the prerequisites to move
back to Emerging Market Index.
through the capital market. Out of this, twenty percent has
been raised by the Government of Pakistan via privatisation
through stock exchanges."
KSE is in constant dialogue with index providers, including
MSCI, to put Pakistan back to Emerging Market Index. It is
symbolically important if Pakistan regains its former Emerging
Market Index status both in terms of greater visibility in
international investment radar screen as well as (for) Pakistani
listed corporate sector to tap international capital markets
for its funding needs”. I expect that we will move back in the
Emerging Market Index in future."
About improving technology platform and operational
efficiency of KSE, he said, "After demutualisation in August
2012 the organisational structure of the KSE has changed
significantly. The enactment of Demutualisation Act provided
a framework for corporatisation and demutualisation of stock
exchanges which is expected to result in expanding market
outreach, attracting new investors, improving liquidity and
enabling the stock exchanges to attract international strategic
partners. It also envisages facilitating the consolidation of
brokers, leading to financially strong entities.
The regulatory and public interest role of the Exchange may
be contrasted with its commercial role and objectives. In this
regard, the SECP also approved a 'Plan for Segregation of
Commercial and Regulatory Functions of Stock Exchanges'
which provides for separation of regulatory and commercial
functions performed by various departments of the exchange.
The Regulatory Affairs Committee is to function as a “Chinese
Wall” for effectively segregating the regulatory functions of
the Exchange from its commercial activities. To successfully
attain segregation, two distinct reporting lines have been
identified, wherein the regulatory departments report to the
chief regulatory officer and the commercial departments
report to the MD."
Talking about measures taken to secure data from hacking,
the KSE managing director said, "IT security, both internal
and external, is a major priority of KSE management and the
Board. For the first time a new position of chief information
security officer has been created and an internationally
experienced IT security professional has been inducted to
lead a team of experts in this regard."
Sharing his views about role of capital market in the economic
development and industrial growth, Mr Naqvi said, "During
the last one-and-half decade Rs 1 trillion have been raised
by the corporate sector in the form of debt and equity
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