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Expansion of investor base must for capital market growth: KSE MD

KARACHI: Karachi Stock Exchange (KSE) Managing Director (MD) Nadeem Naqvi has said that there is a need to expand investors’ base for the growth of capital market in the country.

Talking to Customs Today, he said that “the single most important thing is expansion of the investors’ base which stands at just around 250,000 since 1948.” He said that this is too small when compared to Bangladesh’s over one million and Iran and Turkey’s six million investors.

“This needs to be changed because a narrow investor not only creates market volatility and low liquidity but also renders the price discovery mechanism inefficient. However, this is just one of the factors that discourage companies,” he said.

While elaborating his viewpoint, the KSE MD said: “I feel that this problem requires multi-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 one-window system.”

To another question about investors awareness programme, 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.”

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. The 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, Naqvi said: “Presently, it is the fastest growing segment of the 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 needs 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, “The 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 the 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. The 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. The SECP can also issue directives to the exchanges from time to time.”

Sharing his views about the Frontier Market and Emerging Market, 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 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. The KSE is in constant dialogue with the 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 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 department’s 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 the 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 the role of capital market in the economic development and industrial growth, 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 through the capital market. Out of this, 20 percent has been raised by the Government of Pakistan via privatisation through stock exchanges.”