Representatives of the Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE) and Islamabad Stock Exchange (ISE) will sign a memorandum of understanding (MoU) on Thursday, which will lead to the integration of the three stock exchanges into the Pakistan Stock Exchange (PSE), a spokesman for the apex regulator of the capital markets said in a statement.
The decision was taken in a joint meeting of the demutualisation committees of the three stock exchanges at the Securities and Exchange Commission of Pakistan (SECP), he said. “There was a general agreement that in order to achieve the government’s vision of a fair, efficient and transparent market with one national stock exchange conforming to international standards, integration of the local bourses was to be pursued.”
Although there was only a passing reference to a “strong case for attracting strategic partnerships” in the official statement, analysts believe the real reason for merging the two smaller exchanges with the main bourse in Karachi is to complete the process of demutualisation.
Demutualisation – initiated through the Stock Exchanges (Corporatisation, Demutualisation and Integration) Act 2012 – ensures the segregation of the majority ownership of a stock exchange from the right toTRADE ON it. The piece of legislation gave each of the three stock exchanges a timeline to sell up to 40% of its total issued shares to a “strategic investor,” which could be a foreign stock exchange or depository company.
Original members of these stock exchanges control 40% shareholding while the rest of 20% shares are going to be sold to the general public under the demutualisation scheme. Strategic investors are supposed to bring with them fresh investment as well as the latest technologies and products.
However, stock exchanges failed to stick to the timeline given by the SECP for bringing in strategic investors and offering 20% stakes to the general public through a public listing.
According to one official who is involved in the demutualisation process, a poor law and order situation in Karachi has been the major reason for the KSE’s failure to attract foreign investment in the shape of a strategic investor.
As for the LSE and ISE, he said their strategic sale makes little business sense because of their small size. While shares worth Rs19.1 billion wereTRADED ON the KSE on Tuesday, trading of shares amounting to only Rs18.3 million and Rs669,925 took place on the LSE and ISE, respectively.
Sources say the three exchanges will take about a month following the signing of the MoU to finalise modalities and then go back to the SECP for final approval. A number of operational issues will arise once the exchanges begin to carry out the merger. For example, the paid-up capital for brokers of the KSE is Rs50 million while the requirement for LSE and ISE brokers is Rs20 million only.
Speaking to The Express Tribune, a member of the demutualisation committee of one of the exchanges said the head office of the PSE will be in Karachi. Assets of the exchanges, such as their buildings and other physical infrastructure, will be transferred to stand-alone companies that will not have the exchange licences.
Brokers of the three exchanges will become Trading Right Entitlement Certificate (TREC) holders of the PSE without any fee, he added. “Brokers of each exchange are going to welcome the integration scheme, as they will have the opportunity to scale up their operations,” he said.