Pakistan has entered a new era of equity trading after merger of all the three stock exchanges into Pakistan Stock Exchange, a vital step towards demutulisation of the shares market in the country. Finance Minister Ishaq Dar, on January 11, formally inaugurated the unified Pakistan Stock Exchange, which would replace the three key stock exchanges at Karachi, Lahore and Islamabad with a unified index called PSX.

Under the Stock Exchanges (Corporatisation, Demutualisation and Integration) Act, 2012 all three stock exchanges would be merged and in the later stage the unified Pakistan Stock Exchange would be offered to a "strategic investor" that must be a stock exchange, a depository company, a derivative exchange or a clearing house meeting a certain criteria approved by Securities and Exchange Commission of Pakistan (SECP).

"It was difficult to sell three stock exchanges, so after the unification, it would be now easy to sell it to a wealthy buyer," said Mohammad Sohail, CEO of Topline Securities and a Director of PSX.

He said this decision of a unified stock exchange would attract new investors and some new products and new listing can be introduced. Earlier only five to six new companies were being listed at Karachi Stock Exchange in a year, but now it is possible to list 15 to 16 new companies at PSX.

Merger of stock markets is not a new phenomenon in the world as many developing countries like India, Philippines, Turkey and Thailand have already done it. Malaysia, Singapore, USA, UK, Germany, Australia, Hong Kong and many other developed countries also run their equity markets on the same lines.

Examples of some leading demutualised international stock markets include Stockholm Stock Exchange, Amsterdam Stock Exchange, Borsa Italiana, Australian Stock Exchange, Stock Exchange of Singapore, Toronto Stock Exchange, London Stock Exchange, Euronext, The Nasdaq Stock Market, Tokyo Stock Exchange, Bursa Malaysia, Bombay Stock Exchange, New York Stock Exchange, BOVESPA (Brazil).

Major advantages of the demutulisation of the stock exchanges included better governance structures, access to economic capital, access to human capital, profit motivation for growth and development, removal of barrier to entry for new brokers, unlocking of value of membership cards, greater ability to attract listings, domestic and international recognition and ability to make international alliances. PSX can qualify to become a member of the World Federation of Exchanges, which has currently 68 members.

But there are some concerns about single stock exchange in a country, which include a lack of focus on regulatory responsibilities, higher costs for investors, brokers, and listed companies to increase profits, relaxation of listing standards to maximise new listing and listing revenue, unfair penalties’ imposition for revenues and compromise over risk management and surveillance to increase trading activities and revenues. There is a fear of monopoly as a result of single stock exchange. This concern was also raised by the former chairman of the Securities and Exchange Commission of Pakistan (SECP) and the Competition Commission of Pakistan, Khalid Mirza, who was once the chairman of the board of directors of the Lahore Stock Exchange (LSE).

In Pakistan, before January 11, 2016, three stock exchanges were operating separately in Karachi, Lahore and Islamabad as nonprofit companies with a mutualised structure in which their members were enjoying ownership as well as trading rights. The workings of the shares in individual markets had actually created a conflict of interest, which often resulted in lack of transparency in the operations of the exchanges, thus compromising the interests of investors. Many major crashes in the stock market in the recent past (2005, 2008, 2009) were mostly attributed to this inherent fault of the mutualised stock markets. After the receipt of a report on the 2008-09 market crash, the present government had reportedly ordered the process to be expedited.

Due to lack of resources, the mutualised stock exchanges were unable to further make progress as trading activity was mostly concentrated in only three buildings of these exchanges with a lion’s share going to the Karachi Stock Exchange.

The corporatisation and demutualisation of the stock exchanges will actually convert the stock exchanges’ structure from nonprofit, mutually-owned organisation to for-profit public limited company, owned by shareholders. The unified stock exchange can also raise its capital from new shareholders, institutions and individuals. This access to capital would allow the PSX to undertake large investments required in the technological infrastructure and it would also be able to borrow from conventional lenders like banks and the financial institutions. PSX is registered with Securities and Exchange Commission of Pakistan as Public Limited Company.

According to supporters of the demutualisation process, the merger of the stock exchanges is a prerequisite to complete the demutualisation process under the Act. This would also result in increased transparency in the shares trading and greater balance between interests of various stakeholders by clear separation of the commercial and regulatory functions and trading and ownership rights.

"The merger of three stocks would help expand the market outreach, attract new investors, improve liquidity and enable the stock exchange to attract international strategic partners," said Abid Ali Habib, another member of the PSX Board of the Directors, who was also director of the defunct KSE. "Under the law a strategic investor had to take over the management of the unified stock exchange, but due to delay in the search of an international investor, an amendment was introduced in the law in September 2015 which integrated the three bourses into one."

According to Habib, 40 per cent shares of the PSX have been transferred to the existing members of all former three stock exchanges with their trading right entitlement certificates (TREC). A least 40 per cent shares would be offered to the strategic buyer, which is being searched by the financial advisers.

The remaining 20 per cent shares would be offered to the general public which would be offered through Initial Public Offering (IPO).

Under the SECP rules, Board of Director of the PSX would comprise 11 members, out of which 4 would be proposed by the former members of three exchanges. Other members would be proposed by the regulator -- SECP.

Although the process of demutualisation of the equity market has expedited as a result of merger of three bourses, the arduous job to find a "strategic investor" is still a challenge for the managers of the major bourses of Pakistan.