The above dramatic development took place exactly three years after the demutualisation of the domestic stock exchanges, when all three stock exchanges failed to divest their shares to international strategic investors within the given deadline. In fact, the demutualisation process, which converted the stock exchanges into joint stock companies with the separation of the ownership rights from the trading rights, had opened a pathway for the integration of the domestic exchanges that was bound to take place over a period of time. The presence of three stock exchanges to serve a market size of about 250,000 investors was untenable and sooner or later, some consolidation of these exchanges had to occur.
While the eventual culmination of the process of integration of the exchanges would still take few months, however, it is important to understand the benefits that the consolidated structure of the market would provide to a variety of stakeholders. Alongside this, it would also be fruitful to identify the challenges that the single stock market would face, and how the same could be addressed.
There is no doubt that the merger of the stock exchanges would immensely benefit the investors all across Pakistan. In the pre-merger scenario where three different stock exchanges provided their separate trading platforms, the investors of the smaller stock exchanges often faced poor price discovery and delayed execution of their trading orders.
The unified exchange would enable investors all across Pakistan to benefit from the liquidity of one common pool of trading and get better price discovery. Another aspect of investors’ benefit is that the ensuing single market would be accessible to all potential investors who earlier had no recourse but to trade through the platforms provided by their neighbourhood brokers or their agents. Besides the price discovery and accessibility, the investors are also likely to benefit from the possible savings in the commission rates that they used to pay to their LSE and ISE brokers.
As far as the future challenges are concerned, by far the most difficult task for the PSE would be to make an image transition in the minds of the investors from a brokers dominated institution to an investor friendly marketplace. Despite the stellar performance of KSE during the last many years, the perception of investors of this exchange has not been positive, and its transformation into PSE may not help its image, if the PSE does not introduce substantive changes in its governance and investor protection standards.
Another challenge for PSE would be to popularise the culture of equity investments in the country. In India, the growth in the stock market has largely come through the expansion of equity investment culture to the country’s second and third tier cities.
Despite the existence of the three exchanges in Pakistan, the equity investment culture has not expanded beyond the three market centres of Karachi, Lahore, and Islamabad. For PSE to happen, it would need to invest in large scale education of investors, and adopt a model of hub and spoke facilities to cover
more and more urban cities to provide an expanded access to the market.
Another challenge for the PSE would be to increase the depth of the market by ensuring a regular supply of the new companies to the market, whereby newer companies of all sizes turn to the market to access the risk capital provided by the investors.
Stock markets conventionally compete with the banking industry by providing a cost effective medium to the emerging corporations to raise funds from the market instead of relying on the debt financing provided by the banks. In this respect, PSE would need to deploy a great deal of its resources on marketing its market to the entrepreneurs in our society so that it can tap all sort of manufacturing, services, and
the emerging knowledge economy companies for listing on the market
While all of the above three challenges would define the ultimate success of PSE, however a good beginning has been made with the decision to merge the domestic markets and create a single market to position itself as a true contributor to the economic development of our country.
The writer is the Managing Director of the Lahore Stock Exchange