Capital market reforms

Exclusive: Pakistan’s SEC chairman goes public on his 2020 reform agenda

Aamir Khan was parachuted into the top job in mid-August and has since swept through the Securities and Exchange Commission of Pakistan streamlining and simplifying regulations. He spoke to FinanceAsia about his vision to re-ignite the country’s capital markets.
Aamir Khan, chairman, Securities and Exchange Commission of Pakistan
Aamir Khan, chairman, Securities and Exchange Commission of Pakistan

For the first nine months of last year, the Pakistan Stock Exchange benchmark KSE 100-Share Index was one of Asian’s worst-performing indices. That all changed in 2019’s final quarter when stocks surged 35.5%, according to Bloomberg figures.

Its performance in November alone – up 14.9% – caused Abdul Hafeez Shaikh, advisor to the prime minister on finance and revenue, to tweet excitedly that this was the exchange’s highest one-month performance since May 2013.

“The strong rally in the stock market shows increasing investor confidence on stabilisation measures taken by the government,” he tweeted

The architect of the turnaround is Aamir Khan. Parachuted in as chairman of the Securities and Exchange Commission of Pakistan (SECP) in only mid-August, he replaced Farrukh Sabzwari, whose brief nine-month tenure was overshadowed by disputes with the cabinet.

The capital markets community in Pakistan breathed an almost audible sigh of relief at Khan’s appointment, one which has been characterised so far by openness, accessibility and reform.

In conversations, senior bankers in the country sing his praises – not common for the chairman of the SEC. Part of the reason for the adulation is that he has not stood still since his appointment.

To list just a few of his reforms, Khan has already approved Shariah-compliant financing products; tweaked Exchange Traded Funds regulations; eased the regime for credit ratings companies, simplified regulations for future brokers; streamlined regulations for startups; approved a secondary Growth Enterprise Market (GEM); and, at the very end of the year, revamped the initial public offering (IPO) regime to make the process what the SEC calls “simple, cost-effective and more efficient”.

A new tone to Pakistan’s capital markets is apparent. The SECP saw a 30% increase in new incorporations in November thanks to the simplified registration processes. And what was a sleepy exchange has seen trading volumes jump almost 420% since the start of September.

Here, Aamir Khan talks exclusively to FinanceAsia about his reforms and what he plans to do next.

Later this week we will look at his IPO reforms in detail. 

The following transcript of FinanceAsia's interview with Aamir Khan has been edited for brevity and clarity.

Q What are your priorities for 2020?

A We are looking to promote competition by reducing the entry barriers to products, to new ideas, to people who want to come to the capital markets as issuers. That is a high priority. What is also important to us are external [issues]. We have cut down a lot of costs and fixed the basic things. Now we need to align them to the flow of new products and entry of new participants.

We currently have an 18-month plan to digitise everything from end to end. We already have a couple of RFPs [request for proposals] out and project implementation could start as early as April. We need to modernise our supervisory technology, surveillance techniques, enforcement, etc. Plus, we are trying to reform the way we inspect, supervise, adjudicate.

Q There have only been three IPOs in Pakistan since 2017 – Interloop last year, and AGP and Matco in 2018. Why so few?

A It must be viewed as a function of the overall state of the economy. Obviously, that is the backdrop, but I also feel that there was a certain amount of regulatory overreach that had crept into the system over the years… as well as the costs of doing an IPO.

Q The IPO consultation period before you announced the reforms was long. Did you get much push-back internally?

A I wouldn’t call it pushback – debate was well intentioned. It was obviously a transitional phase as I was just taking over. There was also the feeling things must be done rather quickly. When I took over, trading volumes had totally evaporated from the market and action was required quickly. The driving force was to do the right thing for the market and the investors.

Q The SECP saw a record 30% rise in the registration of new companies in November. How many do you expect to list?

A I wouldn't want to put a number on it… but I am optimistic about more IPOs.

The IPO framework was modified, and we created a lot of space for potential IPO participants. What has been on the drawing board for a long time and was complicated was the GEM.

We have also looked at reform from a slightly broader perspective. If you look at corporate governance, we have moved from a mandatory to a comply-and-explain regime, again to encourage companies to list. There was a sense that there was a lot of pressure on companies in terms of compliance and costs associated with that.

The idea is to take advantage of the macroeconomic stability that the economic team of the government has been able to manage and to create the right kind of environment for companies.

Q What kind of interest have you seen in the GEM?

A We did a lot of public consultation in Islamabad, Lahore, and Karachi. And we deliberately focused on smaller companies, startups, tech companies and those associated with that space. Another initiative is to encourage access to finance and creating room for startups and small businesses, where there is a lot of interest. I have a feeling we will see listings this year.

Q Should the changes brought to the futures market be seen as part of this broader plan to simplify and remove regulations?

A I will give you two examples. Right now, we have two different acts that deal with the securities space. One is the Futures Act and one is the Securities Act. We are now working to merge both so that it becomes simpler and more convenient with just one primary law. There are a lot of redundancies and practical difficulties that can be removed.

We are working to reform that law significantly. The first draft should be ready as early as next month.

We have also looked very deeply at the Companies Act itself. We have already overhauled some of the regulations in a major way – for example, the further capital issuance regulations – but there are other things that we need to enable smaller companies as well as removing some of the difficulties [in their path]. This regulatory reform agenda is going to continue well into the third quarter.

Q You have waived the margin requirements for foreign institutional investors. Will that be enough to increase foreign participation?

A It has only been four to five months since we started the reform programme. We need to talk more about it and spread the message. It is not just the margin regime. If you look at the governance side of things, there is a new trading system at the exchange and new surveillance which is going to be put in place to ensure fair market practises. If you look at the trading volumes compared to where they were in August, you can see a major shift.

Q What other steps have you taken to improve secondary trading?

A [The process] must be transparent and it must be cost-efficient.

There are presently two main issues. The first is new product supply. That is why IPOs are so important. One of our primary focuses over the next couple of months is to build up the supply of instruments and products and issues that come to the market. That will invariably create interest and support the secondary market.

The other issue is how we can improve the comparative environment by lowering some of the barriers to entry and allowing new participants to come in. Just to give you one example, some of the margin requirements were put in place a few years ago in order to restrain liquidity. The market has declined significantly over the next few years, but the margin requirements are still there.

From here on it is competition and new supply which will generate more secondary market activity. We will see more volumes I am quite confident of that.

Q Do you have any intention to harmonise your settlement process and move towards a T+3 regime as in other markets?

A I wouldn’t say that it is an immediate priority, but I am confident will get to everything that matters over the course of time.

Q You approved Shariah-compliant products last year. Do you have ambitions to be a centre for Islamic financing?

A Islamic finance has a lot of potential in this country for the simple reason that there is a very big demand from the investor side. And we probably haven’t had enough supply of products. I feel very passionately about it and the commission is very focused on creating it. It is too early to say, but the potential is enormous there. And we intend to work closely with all concerned to promote Islamic products.

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