LAHORE STOCK EXCHANGE & DEMUTUALIZATION OF STOCK EXCHANGES OF PAKISTAN. By Mian Shakeel Aslam Managing Director/CEO, LSE

Transcription

1 LAHORE STOCK EXCHANGE & DEMUTUALIZATION OF STOCK EXCHANGES OF PAKISTAN By Mian Shakeel Aslam Managing Director/CEO, LSE 1

2 Presentation Summary Definitions/Concepts About Lahore Stock Exchange Definitions/Concepts LSE Yesterday LSE Today LSE: The Road Ahead Corporatization, Demutualization & Integration(Report of Demutualization & Integration Committee) Definitions/Concepts Introduction of Committee Comments & Recommendations Problems of Stock Exchanges Commonly cited reasons Advantages Concerns after Demutualization Stock Exchanges (Corporatization, Demutualization & Integration) Bill 2009 Proposed Plan Timeline Activities involved International Experiences Comparison from WFE members Significant International Cases Profits: Before and after The Case of Euronext 2

3 ABOUT LAHORE STOCK EXCHANGE (G) LIMITED 3

4 Stock Exchange (Guarantee) Limited Stock Exchange: As defined by Securities & Exchange Ordinance, 1969: means any person who maintains or provides a market place or facilities for bringing together buyers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a Stock Exchange, as that term is generally understood, and includes such market place and facilities (Guarantee) Limited: As defined by Companies Ordinance, 1984: means a company having the liability of its members limited by the memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its winding up; 4

5 WHAT DOES A STOCK EXCHANGE DO? It is an organization that provides for the raising of capital / funding through securities and provides a platform where these securities can be traded. Market for long term capital Main Components Primary market Raises Capital for Companies Secondary Market Facilitates exchange of / liquidity in ownership 5

6 LSE Yesterday 1987 In order to boost the capital market in the province of Punjab, the Corporate Law Authority (CLA) imposed condition that companies would be listed at both LSE and KSE simultaneously. However this condition was removed in July LSE shifted to its new building. Corporate Members were allowed to become member of LSE Central Depository Company of Pakistan Limited (CDC) was incorporated to manage and operate the Central Depository System (CDS). Corp Ind

7 LSE Yesterday 1994 LSE embarked upon the computerization (automation) program. Pakistan Credit Rating Agency (PACRA), the first credit rating agency was established LSE introduced T+3 settlement system. (previously T+5) Members Contribution Fund was established LSE was the first Exchange in Pakistan to introduce automated trading. 7

8 LSE Yesterday 1997 Asian Development Bank approved two loans totaling US$255 million for the Capital Markets Development Program. The process of restructuring of CLA was initiated. Investors Protection Fund was established First restructuring of LSE Board of Directors with induction of 5 outside Directors and appointment of independent Managing Director The Securities and Exchange Commission of Pakistan (SECP) succeeded the CLA. 8

9 LSE Yesterday 2001 LSE launch Internet Trading System (trading from terminals out of building). The National Clearing Company of Pakistan Limited (NCCPL) was incorporated to replace the separate and individual Clearing Houses operated by each of the three Pakistani Stock Exchanges Pakistan s stock market was declared as the Best Performing Stock Market of the World for the year 2002 by international magazine Business Week. Code of Corporate Governance was incorporated in the Listing Regulations. LSE implemented automated Trade Risk Filter (TRF) to monitor the members trading exposure on real time basis. Banks and financial institutions were allowed to become Associate Member of LSE Clearing House. Trading in Futures Contracts was introduced. LSE launched new LSE 25 Index replacing LSE 101 index. 9

10 LSE Yesterday 2003 The size and composition of LSE Board of Directors was changed. The Board of Directors constituted 10 members, of whom 5 are elected members of the Exchange, 4 are non members nominated by SECP, and a Managing Director, who is also non Member. Surveillance Department was established at LSE The System Audit of LSE members introduced. Clearing and Settlement Operations of LSE were switched over to the National Clearing Company of Pakistan Limited. LSE opened first out stationed Trading Floor at Faisalabad. 10

11 LSE Yesterday 2005 LSE opened second Trading Floor at Sialkot. LSE launched a series of investor education and awareness programs. Investigation & Enforcement Unit was setup to maintain a check on the market abuses (scope of Surveillance enhanced). The concept of Unique Identification Numbers was introduced 2006 LSE Training Institute was established MOU was signed with ISE for the establishment of Unified Trading Platform. The Finance Act 2006 included provisions for corporatization and demutualization of Exchanges in Pakistan. The Demutualization Committee of the Exchange recommended to corporatize LSE. VaR based Margining Regime introduced 2007 LSE & ISE started joint trading on a common platform through Unified Trading System (UTS). 11

12 LSE Yesterday 2008 ULTRA Trading Software was sold to Ghana Stock Exchange Cash Settled Future Contracts were launched 2009 Securities Lending & Borrowing Software was developed and sold Client Level Margining was implemented Debt Securities automated trading was launched Corporatization & Demutualization Act was passed by National Assembly 12

13 LSE Today 13

14 LSE Today 14

15 LSE Today The Automation Advantage 15

16 LSE Today Regional Advantage Pakistan s sock markets have historically exhibited low correlation with World markets as evidenced by this Correlation Matrix: Correlation Matrix DJIA FTSE DAX NIKKEI Hang Seng Sensex LSE DJIA FTSE DAX Hang Seng NIKKEI Sensex LSE Based on Nov 03 till Jan 10 Monthly Returns The Low correlation provides international fund manager diversification benefit, and Pakistan s stock markets competitive advantage over other Emerging and/or regional markets 16

17 LSE Today LSE 25 index returns appear more volatile and uncorrelated to other indices 17

18 LSE: The Road Ahead Increase in investor activity and investor base Increase in listings Introduction of more products Increased intensity towards; 18

19 Corporatization & Demutualization As defined in Stock Exchanges (Corporatization, Demutualization and Integration) Bill, 2009: Corporatization means the conversion of a stock exchange from a company limited by guarantee to a public company limited by shares; Demutualization means the segregation of the majority ownership of a stock exchange from the right to trade on such Stock Exchange; Integration means the merger of two or more stock exchanges; 19

20 Corporatization, Demutualization & Integration Report of the Expert Committee on Demutualization and Integration/Transformation September 02,

21 Expert Committee on Demutualization & Integration/Transformation The Committee was constituted by the SECP in February, 2004 Terms of reference Demutualization Integration/Transformation Recommendations/Implementation To consider and advise on any ancillary or incidental issues The Committee consisted of 7 members (4 local members, 3 foreign members and a secretary) Report submitted on September 02,

22 Expert Committee on Demutualization & Integration/Transformation Comments The Committee is of the view that a demutualized structure would offer a more conducive environment for addressing critical problems of our market and its development on healthy lines. The Committee is of the view that given the strong public interest involved in demutualization, SECP should take decision to demutualize the exchanges. The Committee is of the view that the arguments and precedents supporting integration outweigh those against integration. Real and sustainable development of stock exchanges can only be achieved through demutualization and integration. Recommendation The process of demutualization and integration occur simultaneously, and that the 3 existing exchanges should form a fully integrated demutualized exchange. The Committee proposed to the regulator that if sufficient progress is not made towards demutualization and integration within 1 year, a new demutualized exchange, sponsored by financial institutions should be established. 22

23 Problems of Stock Exchanges 1 Insufficient Growth in Market Capitalization Market Size below International Benchmark Too Few Listings Low Quality of Many Listed Companies Limited Free Float and Supply Demand Imbalance Narrow Base of Investors Minimal Share Ownership Stagnation in Number of Shareholders Small Number of Unit Holders in Mutual Funds Lack of the Market Awareness Lack of Balance in Governance Structures Weak Professional Management Ineffective Regulation of Members Ineffective Regulation of Listed Companies Unequal Access to Corporate Announcements Mixed Performance of Non Member Directors 23

24 Problems of Stock Exchanges 2 Fragmentation of Market Division of Liquidity and Distortion of Price Discovery Cost Inefficiency for All Stakeholders Complexity in Operations Lack of Inter exchange Competition Inadequate Investor Protection Weak Management of Systemic Risk Insufficient Economic Capital Limited Revenues Inequitable Burden Sharing Low Level of Capital Expenditure No Financial Guarantee Insufficient Human Capital Few Professionals Inability to develop New Products and Services 24

25 Problems of Stock Exchanges 3 High Degree of Speculation and Concentration Low Levels of Actual Settlement Concentration of Liquidity and Market Capitalization Preference of Badla Financing (unregulated) Excess Volatility Large Number and Low Quality of Intermediaries Weak Criteria to become a Member Weak Criteria to become a Broker Weak Criteria to become an Agent or Trader Barrier to Entry to New Intermediaries Membership Card Treated as Real Estate Low Capitalization of Brokers A Single Class of Brokers 25

26 Commonly cited reasons for demutualization by demutualized Exchanges Competitiveness Ownership Reforms Facilitating Alliances Broadening Access Unlocking Value 26

27 Advantages of Demutualization Better Governance Structures Access to Economic Capital Access to Human Capital Profit Motive 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 Ability to Make International Alliances 27

28 Concerns after Demutualization Lack of Focus on Regulatory responsibilities Higher costs for investors, brokers, and listed companies to increase Profits Listing standards may be relaxed to maximize new listing and listing revenue. Unfair penalties imposition for revenues Risk management & Surveillance may be compromised to increase trading activities and revenues 28

29 Corporatization, Demutualization & Integration Stock Exchanges (Corporatization, Demutualization & Integration) Act 2009 Salient Features 29

30 Proposed Plan Separation of Trading Rights Holders and Owners Segregation of Commercial and Regulatory Function Ownership Structure Members 40% Strategic Investor 40% General Public 20% Board of Directors Proposed by Exchange 4 Proposed by SECP 6 Managing Director 1 Total 11 30

31 Timeline: Corporatization & Demutualization Step 1: Ordinance promulgated Step 2: Formation of Demutualization Committee Time Period: within 30 days of commencement of ordinance Authority: Approve valuation of Exchange by any approved Financial advisor Negotiate and finalize sale of 40% to strategic investors Strategic Investor : means a stock exchange, depository company, a derivative exchange or a clearing house which has been approved by the Commission in accordance with the prescribed criteria, for the purposes of acquiring shares of a stock exchange Determine the offer price for sale of shares to General Public 31

32 Timeline: Corporatization & Demutualization Step 3: Submission of Information by Exchanges to SECP Time Period: within 45 days of commencement of ordinance Information: Valuation of Stock Exchange (may be relaxed to 120 days by SECP) Proposed Authorized and Paid up Capital 4 Members nominated as first directors Plan for segregation of Commercial and regulatory Function Draft Memorandum & Article of Association 5 Years Development Plan Step 4: Approval of information by SECP Time Period: within 30 days of receipt of information Approval of: Information sent by Exchanges Nomination of 6 First directors 32

33 Timeline: Corporatization & Demutualization Step 5: Approval of Exchange Time Period: within 30 days of approval by SECP Actions: Adoption of approved of Memorandum & Articles of Association Allotment of Shares Issuance of Trading Rights Entitlement (TRE) Certificate Step 6: M & A of Association Sent to Registrar Time Period: within 7 days of adoption by Exchanges. Step 7: Certificate of Re registration issued to Exchange Time Period: within 7 days of receipt of M & A of Association. Corporatization Complete Maximum number of days for completion of corporatization = 149 DAYS 33

34 Timeline: Corporatization & Demutualization Demutualization: Demutualized from the date of corporatization Election of Directors: within 30 days of demutualization Sale of blocked shares: Time period: within 2 year on directions of SECP 40% to strategic investor 20% to general public (within 180 days of SECP s direction) Listing of shares: as and when prescribed by SECP (as above) 34

35 Timeline: Corporatization & Demutualization After demutualization, only corporate brokerage houses shall be eligible to obtain registration as a broker on a stock exchange. Issuance of Trading Rights Entitlement (TRE) Initial TRE holders to register as brokers within two years (transferable once) No new TRE issuances till 30 th June 2010* 15 TREs each year in the manner prescribed by SECP till 31 st December 2019* (non transferable) After 2019* no restriction shall be placed on the issuance of TRE certificates by the stock exchange (non transferable) * May change subject to materialization of demutualization 35

36 Timeline: Corporatization & Demutualization Integration: Any two or more stock exchanges may integrate with each other after following required procedure and approval of SECP. 36

37 Activities involved in Demutualization & Placement of Shares Review of Business Plan Due Diligence Re valuation of Assets & Liabilities Valuation Demutualization Methodology & Placement Plan Transaction Documentation Marketing Private Placement Post Closing Activities 37

38 INTERNATIONAL EXPERIENCES 38

39 Comparison from WFE Members The WFE is the association of 52 regulated exchanges around the world. The number of exchanges that have privatized or listed has been increasing since the Stockholm Stock Exchange demutualized in

40 Significant International Cases Stockholm Stock Exchange 1993 Amsterdam Stock Exchange 1997 Borsa Italiana 1997 Australian Stock Exchange 1998 Stock Exchange of Singapore 2000 Toronto Stock Exchange 2000 London Stock Exchange 2000 Euronext 2000 The Nasdaq Stock Market 2000 Tokyo Stock Exchange 2000 Bursa Malaysia 2003 Bombay Stock Exchange 2005 New York Stock Exchange 2006 BOVESPA (Brazil)

41 Change in Operating Profit Before and After Demutualization 41

42 The case of NYSE Euronext, Inc. NYSE Euronext is an example of: International expansion, forming alliances and mergers & acquisition. NYSE Euronext, Inc. is a Euro American for profit corporation that operates multiple securities exchanges NYSE Euronext is considered as the "first global stock exchange. Euronext N.V. was a pan European stock exchange formed in 2000 in order to take advantage of the harmonization of the European Union financial markets Euronext was formed following a merger of: Amsterdam Stock Exchange Brussels Stock Exchange, and Paris Bourse, In 2001, acquired the shares of the London International Financial Futures and Options Exchange (LIFFE). In 2002 the group merged with the Portuguese stock exchange 42

43 The case of NYSE Euronext, Inc. NYSE Euronext was formed in 2007, after acquisition of Euronext by NYSE Group Inc. In 2008 acquired 5% (maximum allowed) equity position in the Multi Commodity Exchange (MCX), India s leading commodity marketplace. In 2009 signed an agreement with Qatar to launch Qatar Exchange with 20% ownership stake. 43

44 THANK YOU 44