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SECP Introduces Major Capital Market Reforms

The Securities and Exchange Commission of Pakistan (SECP) has introduced major capital market reforms featuring legal, structural, regulatory, operational, and product development initiatives for a robust and transparent capital market in the country.

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According to the details, the SECP’s capital market reforms are focused to ensure the provision of a complete eco-system desirable for capital formation. While doing so, SECP continuously seeks feedback from IOSCO member countries, in addition to independent research of the international legal standards and best practices.

In line with international practice, to facilitate the listing of companies, especially State-Owned Enterprises (SOEs), and promote the culture of good governance among the corporate sector, SECP, in collaboration with PSX, has introduced the concept of Direct Listing.

Direct Listing is an alternative way of listing whereby shares of a company are listed on the stock exchange with minimal involvement of intermediaries. This approach of the listing is globally adopted in many jurisdictions and is expected to provide the companies with the option of tapping the capital market efficiently.

To increase investor outreach, accredited investors have been redefined. All institutional investors and individual investors, having a net worth of greater than Rs. 5 million, can now invest in securities on GEM Board. Moreover, intending to bring efficiency and create ease in capital formation, the SECP has now allowed banks, accounting, and auditing firms to act as advisors for listings on GEM Board at PSX.

To facilitate the formation of capital by companies, a listed company can now list their other class of shares without mandatorily making a public offer of respective class of shares. Consequential amendments have been made in the PSX Regulations.

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Moreover, the listed companies making secondary public offerings and initial public offerings of other classes of shares, if compliant with the listing requirements, can now publish the offering document based on audited accounts older than eight months. Consequential amendments were made in the PSX Regulations.

Officials explained that with recent amendments in the Trust Act, where legal persons were removed as an eligible entity to act as trustee/investor, and to streamline the issuance of secured and unsecured debt securities, the scope of activities performed by investment agents has been enhanced. The framework now caters to the scenario where the Government can also opt in to issue Sukuk and other debt instruments through the capital market. As a result of these changes, multiple private placements and two public offerings were completed during the year.

To address liquidity concerns of the secondary debt market and provide enabling environment for trading of government debt securities at PSX, the Market-Making framework has been revamped. Non-broker members, including commercial banks, have been allowed to place quote(s) for both corporate debt and government debt securities at the Bonds Automated Trading System (BATS) of PSX. As of June 30, 2021, ten financial institutions have been registered with PSX as Market Maker for placing quotes on BATS for both Corporate and Government Debt Securities. The PSX witnessed trades in the BATS segment during the year, after almost a decade.

For increasing outreach to investors, the State Bank of Pakistan, after seeking comments of the SECP, has revised Primary Dealer Framework, whereby capital market investors can now directly participate/invest in Government debt instruments and Sukuks by registering with CDC and NCCPL. In this regard, the profitability requirement has been relaxed, where State-Owned Enterprises (SoEs) intends to raise funds from the public through the issuance of Government guaranteed instruments or hold investment-grade entity rating, officials said.

For efficient spread discovery, an automated book-building mechanism has been introduced. This method has effectively been run by the Government of Pakistan (GoP) in the issuance of Power Energy Sukuk – II, which resulted in historic below KIBOR spread discovery, and the GoP successfully increased its outreach to different categories of investors, including individuals.

The SECP introduced the electronic-IPO system in coordination with the Central Depository Company of Pakistan Limited (CDC). Through the said system investor(s) can submit IPO applications electronically and make subscription payments through e-banking channels.

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Over the years, the Centralized EIPO System (CES) received an overwhelming response from IPO investor(s), and on average more than 50% of IPO application(s) were submitted electronically. However, the limitation of CES was that it only allowed individual investors to submit IPO applications and pay subscription money electronically.

To enable institutional corporate investors and Roshan Digital Account holders to apply electronically, SECP, in coordination with PSX, has launched PES, allowing all categories of investors to seamlessly apply through the electronic platform. Though this is a platform, banks and brokers can also submit an electronic application on behalf of their respective clients. PSX e-IPO system was made operational during the IPO of Service Global Footwear Limited.

The SECP has also issued guidelines for the Issuance of Gender Bonds; Green Bonds, and guidelines on convertible debt securities.

As a step towards the promotion of gender equality – with a growing recognition of women’s role in the economy, SECP has developed guidelines for the issuance of Gender Bonds. These guidelines are aimed to facilitate the issuers of debt securities to diversify their sources of financing and provide an additional financial instrument to a particular class of investors, SECP officials added.

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