The Securities and Exchange Commission of Pakistan (SECP) as the apex regulator of the capital markets is closely monitoring the ongoing stock market situation. SECP’s new management has managed to introduce a multifaceted reform agenda for the capital markets and corporate sector through extensive efforts, that too in a short span of time.
To ensure better coordination and encourage the involvement of the stakeholders in the market reform process, Chairman SECP held back-to-back meetings with key market participants, practitioners, heads of leading corporate and financial institutions and managers of the market infrastructure institutions prior to rolling out its reform package.
The reforms aim to bring stability to the market, attract liquidity, facilitate ease of doing business, revitalize development of the market and restore investor confidence without compromising on the principles of sound risk management and investor protection.
- Repeal of Circular 20 of 2017: Regarding deposit-taking by brokers through Circular 12 of 2019. Brokers complying with certain conditions are now allowed to pay interest on subordinated loans taken from their directors, sponsors or substantial shareholders.
- Risk Management Reforms: To enhance the trading capacity of market participants, amendments approved to NCCPL Regulations for:
- Discontinuing the 10% additional margins being collected from brokers; and the 10% additional haircuts being applied by NCCPL on margin eligible securities.
- Revision in slabs of Liquidity Margins, which would now be applicable only on large exposures of brokers, and to manage risks, credit rating has been added while implementing the revised slabs.
- For brokers to efficiently utilize capital, basic deposits collected by NCCPL from brokers trading in Deliverable Futures Contract Market to be used towards NCCPL margin requirements.
- Murabaha Share Financing Regulations introduced: The SECP granted approval to allow leverage financing in Shariah-compliant securities.
- Resolution of issues with Blank Selling in Deliverable Futures Contract Market: amendments to PSX Regulations introduced to address practical difficulties limiting trading activity by market participants.
- Unblocking and Pledging of Margin Financing Securities: for meeting the NCCPL margin requirements, and additional margins from a proprietary account may be removed, subject to certain conditions. Requirements of the tripartite agreement for Margin Financing also removed.
- Minimum Brokerage Commission: To address anomalies, encourage market development and support the commercial viability of brokerage industry, instructions have been issued to PSX for formulating regulations relating to a minimum brokerage commission.
- Centralized KYC Organization (CKO): regulatory framework revised to facilitate investors and bring efficiency in the process. Further, certain account holders maintaining non-trading accounts with CDC under the Investor Account Service have been facilitated regarding the opening of an account in CDC.
- Resolved issues with biometric verification of stock market investors: after extensive coordination between the SECP and NADRA. NCCPL advised proceeding in line with the NADRA instructions.
- Unblocking of PSX Shares: to enable efficient utilization of broker assets, shares held by brokers as shareholders of PSX, which were previously blocked have been unblocked.
- Borrowing by Collective Investment Schemes: in addition to borrowing allowed for meeting redemption, requirements have been permitted to borrow from financial institutions for investment purposes for a period of 180 days from the date of notification. All such borrowing shall be repaid within the period allowed under the notification.
- Code of Corporate Governance: regarding the broader corporate sector, the SECP in an endeavor to align corporate governance regime with global best practices and to facilitate ease of doing business, considered shifting from rule-based corporate governance framework towards a combination of mandatory practices and recommended practices i.e. “comply or explain” approach. The draft Listed Companies (Code of Corporate Governance) Regulations, 2019 driven from OECD principles are in the process of issuance of final notification.
- Fourth and Fifth Schedule: SECP through its notification SRO 961 (I)/2019 dated August 23, 2019, specified that the amendments brought through SRO 888(I)/2019 dated July 29, 2019, in fourth and fifth schedules of the Companies Act 2017 shall be applicable on companies preparing financial statements as on June 30, 2019, and onwards. The amendments to the respective schedules were made to reduce excessive disclosure burden and remove impediments in implementation by the corporate sector.
- IFRS 9: SECP after extensive deliberation and consultation has exempted applicability of International Financial Reporting Standards (IFRS) 9 in respect of debts due from the government to power supply chain companies for a limited period of three years i.e. till June 30, 2021.
- IFRS 16: The SECP has also extended the earlier exemption from IFRIC 4, now IFRS 16 to all companies, which have entered into power purchase arrangements before January 01, 2019. The said exemptions were made in light of concerns expressed by companies regarding practical limitations in their applicability.
SECP is committed towards its objectives of robust development of the capital markets and corporate sector and will be introducing other measures for ensuring enhanced transparency, good governance practices, and stronger investor protection mechanisms.