Critical analysis of the capital market reforms introduced in Pakistan

Abstract

A modern and efficient capital market is the backbone of an economy. The level of capital market development is thus an important determinant of a country's level of savings, efficiency of investment, and ultimately of its rate of economic growth. This descriptive research studies the reforms introduced by ADB for the development of the capital market in Pakistan. All the data was gathered from secondary sources such as business newspapers, magazines, research journals, Agency news releases and annual reports of Securities Exchange Commission of Pakistan (SECP) and State Bank. Pakistan's equity market was underdeveloped for many years. In the early 1990s, it were suffering from limited resource base, lack of depth, unfair pricing of shares, information distortion and lack of investor confidence. To cope with these problems, in 1997, the Asian Development Bank (ADB) introduced reforms under its Capital Market Development Program. A regulatory body, SECP came in to being in January 1999 for the enforcement of these reforms. The Ministry of Finance, which was the executing agency, ensured the adequate support from the government. As part of the reform process, the SECP has introduced regulations for brokers, stock exchanges, corporate debt market, National Savings Schemes, insurance, leasing and mobaraba sector as well as risk management measures to protect the rights of the minority shareholders. It has also modernized the stock market with innovative ideas- like Automated Trading, Futures Market, National Clearing and Settlement System, Central Depository Company, Electronic Stock Exchange, Corporate Governance, demutualization of the stock exchanges and a National Stock Exchange. ADB brought an important package of reforms to Pakistan, and initiated the process of developing a sound and efficient capital market. It was broad based and touched on all integral components of the capital market. It was successfully implemented and produced some concrete results. 1vlany of the risks identified at the time of program formulation materialized, and overcoming them proved more complex than assumed. The reform program also raised awareness in the Government and among capital market stakeholders, including market participants, of critical issues of governance, transparency, efficiency, and best market practices. The observance of enhanced accounting standards, reliable audits, institutional strengthening and capacity building of the SECP have been the hallmark of the capital market reform program. The market friendly measures introduced during the last four and a half years have had a significant impact on investor confidence and the stock market is no longer viewed as attracting only die- hard speculators. Credible maturity has been achieved in the working of the capital market despite some adverse domestic and international shocks in the last few years. The implementation process was hampered by some forces, which were directly affected by the regulations imposed by SECP. These include the executive members of the stock exchanges, brokers and speculative investors who were quite active in short selling. However, Pakistan has no\v a capital market with high degree of integrity and transparency in terms of price discovery and trade settlement. There are many discrepancies in the regulations brought forward by SECP regarding the capital markets. The stock market has failed to achieve its primary objectives of raising capital and thereby contributing to the economic growth of the country. Despite regulations to curb insider trading and short selling, these malpractices are still being carried out and in some cases being assisted by the brokers. The phenomenal rise in the stock market at present has more to do with speculation that economic fundamentals. The reform process is aimed more towards macro level performance than micro aspects, which is the basis of macro economic prosperity. The 11 T + 3 settlement system has been affective m curbing short selling and enhancing transparency in the stock market . . Although, a lot has been achieved during the last 4-5 years, however there is a lot, which still needs to be accomplished like stringent disclosure requirements, development of the primary market •and hiring of independent directors from the public rather than chartered accountants and bankers only. The reforms introduced were necessary for bringing the stock market to the international operational, technical and regulatory standards and, to gain and maintain the confidence of investors as one of the best regional stock market. In short, Pakistani stock markets are on the road to better performance and efficiency. Although their volatility, an essential part of all emerging markets, creates higher risks they also magnify the potential for higher returns for any investor who has the patience and sophistication to participate in the growth of this emerging market.