Inadequate safeguards keep share investor base ‘extremely’ narrow

ISLAMABAD: Pakistan’s stock market capitalisation to GDP ratio is the lowest in the region with very narrow investor base as public is skeptical about share trading due to lack of protection, a brokers committee said on Tuesday.

A stock market reforms committee, formed by the Securities and Exchange Commission of Pakistan (SECP), said the country’s market capitalisation to GDP currently stands at a paltry 17 percent, which is significantly lower than regional players, such as India (90 percent) and Malaysia (135 percent).

“One reason for lower penetration in Pakistan’s equity market is quite clearly the fact that the general public is often suspicious of the stock market due to the actions of a few that often receive undue spotlight,” the committee said in a statement. “Then the same paintbrush is used to smear the entire brokerage industry.”

SECP constituted the stock market reforms committee in September last year to review and improve the current situation of the stock market. The body comprises of professionals from securities brokers, Pakistan Stock Exchange, National Clearing Company of Pakistan Limited, Central Depository Company, banks and mutual fund industry.

The committee said the stock market crises of the last 20 years have also cemented the view of a highly speculative market with inadequate safeguards to retail investors.

“As a result, our stock market investor base has remained extremely low with only 250,000 accounts with the Central Depository Company,” it added. “Our regional peers have an enviable record to their credit.”

The reforms committee said new broker regime was a step long overdue to improve industry standards. The committee submitted a number of recommendations to SECP, including revising the ‘novel concept of a new broker regime’, “which was undertaken by SECP some years back but was not pursued”.

“We are extremely pleased to note that the SECP has now notified the above regime of stock market brokers,” it said. “However, it seems some of the quantitative and qualitative criteria have been diluted to accommodate some practical concerns of the market participants. We sincerely hope that our recommendations will be fully implemented in due course.”

The committee said the new regime would usher in a new era for the stock market. Pakistan has an ‘outstanding’ capital market infrastructure, “but the brokerage industry was not structured and regulated as per best international practices,” it said.

“We continue to encourage and support SECP to improve governance and compliance standards of the local brokerage industry, especially in the ongoing global pressure of increasing transparency and documentation,” it added. “We not only encourage steps taken by SECP that enhance investor protection, but also emphasise focus on the industry’s core competence of trading and investment advice.”

The committee said new regime aims to improve compliance standards in the industry and bring the country in line with best international practices and especially with reference to anti-money laundering laws as custody of client assets would only be retained by financially sound brokers and clearing members.