INTRODUCTION

SECP stands for Securities and Exchange Commission of Pakistan. The Securities and Exchange
Commission of Pakistan (SECP) is a government agency whose purpose is to develop a modern
and efficient corporate sector and a capital market based on sound regulatory principles, in order
to foster economic growth and prosperity in Pakistan.

Why does a Country Need a Security & Exchange Commission?

A well- developed stock market reduces investment risk by offering opportunities for portfolio
diversification. The availability of different investment opportunities with differing risk
characteristics encourages savers to acquire diverse investment assets, as this ensures minimum
risk exposure.
(Levine, 1991)

Weak institutions—tangled laws, corrupt courts, deeply biased credit systems, and elaborate
business registration requirements—hurt people and hinder development. Without effective
institutions, people and developing countries are excluded from the benefits of markets.
Countries that systematically deal with such problems and create new institutions suited to local
needs can dramatically increase incomes and reduce poverty. These institutions range from
unwritten customs and traditions to complex legal codes that regulate international commerce.

(Ryou, 2001)

History:

Pre-independence Scenario:

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.
The earliest records of security dealings in India are insufficient and obscure. The East India
Company was the dominant institution in those days and business in its loan securities used to be
transacted towards the close of the 18th century.

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the
Punjab Stock Exchange Limited, which was incorporated in 1936.

Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was
closed during partition of the country and later migrated to Delhi and merged with Delhi Stock
Exchange.

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Karachi Stock Exchange was founded in 1947. It is Pakistan’s largest and oldest Stock
Exchange, with many Pakistani as well as overseas listings. Its current premises are situated on
Stock Exchange Road, in the heart of Karachi’s business district.

The Lahore Stock Exchange came into existence in October 1970, under the SEC ordinance of
1969, by the Government of Pakistan, in response to the need of the provincial metropolis of the
province of Punjab.

Islamabad Stock Exchange is also one of the three Stock Exchanges of Pakistan and is located in
the capital. It was incorporated on October 25, 1989, and it became fully operational on August
10, 1992.

Corporate Law Authority:

The Securities and Exchange Commission of Pakistan (SECP) has succeeded the Corporate Law
Authority (CLA) since 1981, for the purpose of the administration of the Companies Act 1913. It
was an affiliated department of the Finance Division (Ministry of Finance).
It had two (2) wings:

 Monopoly Control Wing

It constituted the Monopoly Control Authority (MCA), formed in 971, which is
responsible for the implementation of the rules and regulations to prevent a concentration
of the financial and commercial activity

 Corporate Regulatory Wing

It dealt explicitly with the enforcement of the companies’ law, security and market
regulation, etc.

The Corporate Law Authority (CLA), the regulatory arm of the Government of Pakistan (GOP)
for the implementation of the companies’ legislation and the regulator of the anti-trust through
the autonomous Monopoly Control Authority (MCA) was replaced by the Security & Exchange
Commission of Pakistan (SECP) in 1999.

Need of SECP Formation

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The government of Pakistan and its respective regulatory agencies has been striving hard to tame
negative speculations, restore investors' confidence and stabilize stock market for the last many
years and numerous regulatory, financial and other corrective measures have already been taken
to obtain these objectives. But even then, by the end of 1997, the index was at the bottom, market
was indecisive between the spell of greed and gloom, investors were living in the state of despair
and the country's financial image had been shattered. The market mechanism has not been
working under the principle of demand and supply, as well as the economic fundamentals for as
long as can be remembered.

(State Bank Report, 2000)

In the development of its capital markets, Pakistan has faced issues similar to those in other
emerging markets in Asia. But the economic turmoil presents Pakistan with some unique
problems.

The decline in the capital market dates back to late 1994.

 1994-1995:

- Macroeconomic imbalances and deep-rooted structural problems,

- Shortcomings in policy implementation

This brought the country to the brink of a foreign exchange crisis in October 1995.

 1995-1998:

- Between the end of 1995 and April 1998, the rupee depreciated by 24 percent.
- Since 1995 the threat of currency de-valuation has deterred foreign portfolio
investment.
- From 1996 onward, deteriorating law and order in Karachi, the Government’s
prolonged tussle with foreign independent power producers (IPPs), and the
constitutional crisis in late 1997 all dampened growth of the capital market.
- In March 1998, the withdrawal of tax exemption granted to corporate holders of
Term Finance Certificates (TFCs) also hit the corporate bond market (Chou, 1998).

The country has already achieved a moderate level of capital mobilization through the bond and
equity markets at 43 and 22 percent of gross domestic product (GDP), respectively, at the end of
1997. However, the figures are deceptive as government issues dominate the corporate bond
market—with corporate bonds accounting for only 1 percent of GDP. Similarly, the equity
market became more skewed from 1996-1998, resulting in the top five stocks representing more
than 70 percent of market capitalization by May 1998.

Nuclear tests of 28–30 May 1998

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Finally, in the outcome of the nuclear tests of 28–30 May 1998, foreign currency accounts were
frozen and sanctions were imposed by G-8 countries. As a result,

 Activities in the foreign exchange market almost closed down and so did foreign
portfolio flows.
 The currency plunged in the market along with fears of future debt default. Under
the threat of a recession, the bond and equity markets received a crucial setback.
 The negative market sentiment was reflected in the decline of the key Karachi
Stock Exchange (KSE)-100 index, which plunged 56 percent during 1998,
reaching a record low in July of that year.

The first vital step taken by the government to counter all these problems was the dissolution of
Corporate Law Authority in 1997 due to its total failure to manage the stock market and the
involvement of some of its bosses in financial bungling (ghaplay). Securities and Exchange
Commission of Pakistan (SECP) was established as an independent and powerful regulatory
body to cleanse rotten system, create level-playing field and bring all stakeholders under a new
regulatory framework.

SECURITIES & EXCHANGE COMMISSION PAKISTAN

The SECP was established on January 1, 1999, in pursuance of the Securities and Exchange
Commission of Pakistan Act, 1997. The establishment of the SECP was the outcome of a loan
agreement between GoP and Asian Development Bank (ADB) whereby $US 250 million was
sanctioned for the development of the capital market in Pakistan.

The establishment of the SECP was an important milestone in the evolution of the regulatory
framework for the capital market in Pakistan.
The SECP was set up as an autonomous body “for the beneficial regulation of the capital markets
supervision and control of the corporate entities and for the matters connected therewith and
incidental thereto”

SECP Vision Statement:

The development of modern and efficient corporate sector and capital market based on sound
regulatory principles, that provides impetus for high economic growth and foster social harmony
in the Country.

SECP Mission Statement:

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 “To promote an efficient and transparent capital market, develop the corporate sector and
protect the investor through responsive policy measures, effective regulation and enforcement of
best governance practices.”

Structure of SECP:

The SECP was set up as two tiered organization consisting of:

 Security & Exchange Policy Board

 Security & Exchange Commission

Security and Exchange Policy Board:

The Policy Board is entrusted with the responsibility to provide guidance to the Commission in
all matters relating to its functions and to formulate policies in consultation with the
Commission.
In addition, it is responsible for advising the Government on matters falling within the purview
of the Act and other corporate laws and to express its opinion on policy matters referred to it by
the Government or the Commission.
The Act provides that the Policy Board should consist of a maximum of nine members appointed
by the Federal Government, including five (5) ex-officio members and four from the private
sector.
The ex-officio members are:
(i) Secretary, Finance Division;
(ii) Secretary, Law, Justice and Human Rights Division;
(iii) Secretary, Commerce Division;
(iv) Chairman of the Commission; and
(v) Deputy Governor of the State Bank of Pakistan (SBP).

Security and Exchange Commission:

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 The commission has full financial, administrative and operational autonomy and comprised of
five commissioners including Chairman.
The commissioners are appointed by the Federal government and are responsible for the division
like securities exchange, investment company law and the most importantly, enforcement. Of the
five commissioners, three, including the chairman, are from the private sector and two would be
from government.
The work of the Commission has been distributed amongst its six (6) divisions, each of which is
headed by an Executive Director and divided into Wings for effective administration.
The Divisions are:
1. Company Law Division
2. Securities Market division
3. Specialized Companies division
4. Finance and Admin Division
5. HR & Training Division
6. Insurance Division
7. IS &T Division

Organizational Division

Company Security Specialized Finance HR & Insurance IS & IT

Law Market Company & Training Division Division
Division Division Division Company Division
Division

Company Law Division:

The Company Law Division (CLD) is entrusted with wide array of responsibilities that
encompass regulation, monitoring and enforcement of laws pertinent to the corporate sector. It is
headed by the Executive Director. In recent years, the CLD has brought about necessary
amendments in existing laws as well as enacted new laws to cater to the changing business needs
and scenarios. It also undertakes strict monitoring and vigilance of the corporate sector with a
view to promoting transparency, accountability and good corporate governance practices, thereby
protecting the interests of investors.

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 Company Law Division

Registration Department Enforcement Department

The CLD operates with the following departments.

Registration Department:

The Registration Department is responsible for registration of new companies and ensuring
compliance with legal and regulatory requirements through examination of statutory returns and
accounts filed by companies. It also supervises and coordinates the working of Company
Registration Offices.

The Registration Department comprises the following Wings:

 Registration and Licensing

 Investigation and Compliance

 Management Information System

Enforcement Department:

The Enforcement Department is responsible for monitoring listed companies, except NBFCs,
modarabas, and insurance companies. It examines their published accounts, monitor compliance
with applicable laws, rules and regulations and takes necessary actions against erring companies,
their directors, management and auditors, as appropriate.

The Enforcement Department consists of the following Wings:

 Enforcement – I
 Enforcement – II

 Enforcement –III

Insurance Division:

The Insurance Division (ID) regulates and monitors the insurance sector and administers the
relevant insurance laws. The Executive Director heads the ID, which consists of the following
Wings:

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  Non-Life Insurance
 Life Insurance

Finance & Admin Division:

It is responsible for directing and controlling the areas of accounting, facilitating overall
operations of the SECP and ensuring its smooth functioning.

This division has been organized into the following departments:

 Finance & Accounts Department

 Administration Department

Human Resource & Training Division:

It is responsible for various activities that include manpower planning, recruitment, selection and
capacity building of the SECP’s employees.

This division has been organized into the following departments:

 Human Resource Department

 Training Department

Specialized Companies Division:

The Specialized Companies Division (SCD) is responsible for regulation of leasing companies,
modarabas and modaraba management companies, mutual funds and other specialized
companies (except insurance companies). Its functions include licensing, monitoring, regulatory
compliance and enforcement of all applicable laws.

Pension Wing:
A separate Pensions Wing was established within the SCD for regulation of contractual savings
in the country. It would initially be implementing and administrating the Voluntary Pension
System, on a longer term, it would devise a regulatory framework for existing occupational
saving schemes.

Non-Banking Finance Companies Department

The NBFCD is responsible for licensing and regulation of entities under its purview and their
enforcement and compliance with applicable laws, rules and regulations. These include NBFCs
(companies engaged in the business of leasing, investment finance services, discounting services,

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housing finance services, venture capital investment, asset management services or investment
advisory services), mutual funds, venture capital funds, modaraba management companies and
modarabas.

The NBFCD consists of the following Wings:

 NBFC-I
 NBFC-II

 Modaraba

 Monitoring and Inspection

Securities Market Division:

The Securities Market Division (SMD) is responsible for monitoring, regulating and developing
the securities market. It is headed by the Executive Director.

The SMD regulates the primary and secondary markets as well as market intermediaries through
registration, surveillance, investigation, enforcement and rule making, with the objective of
protecting investor interest. The SMD also processes and grants approvals to prospectuses for
public offering of both debt and equity securities. In addition, it is entrusted with instituting

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appropriate regulatory reforms to develop and promote the market, engender investor confidence
and instill transparency, effective risk management and good governance at stock exchanges,
commodity exchange, central depository company and national clearing company.

Securities Market Division

Stock Policy and Monitory Capital Brokers’ Commodity

Exchange, Regulatory and Issues Registration, Exchange
Depository Surveillan Inspection and
and ce and Investor
Clearing. Beneficial Complaints
Ownershi
p

The SMD is divided into the following Wings:

 Stock Exchanges, Depository and Clearing,

 Policy and Regulation

 Monitoring and Surveillance and Beneficial Ownership

 Capital Issues

 Brokers’ Registration, Inspection and Investor Complaints

 Commodity Exchange

Securities & Exchange Commission of Pakistan Act, 1997

Authority: Power originates from government. Policy making by government
Commission: Power originates from stakeholder (persons having interest) and government.
Majority is from private side. Hence, policy making is largely shifts from government to private
sector.
Dealing in Securities u/s. 2(j): means making or offering to make, whether as principal or agent,
with any person or inducing or attempting to induce any person to enter into or to offer to enter
into-
1. Any agreement for or with a view to acquiring, disposing of, subscribing for or
underwriting securities, or

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2. Any agreement the apparent or ostensible purpose of which is to secure a profit to any of
the parties from the yield of securities or by reference to fluctuations in the value of securities.

Commissioners u/s. 5:

1. Shall not be less than 5 and more than 7

2. Majority from private sector.
3. The Commissioners, including the Chairman2, shall be paid such remuneration and
allowances as are determined by the Commission3 may with the approval of the Board4.

4. A person who is more than 62 years of age, on the date of his appointment, shall not be
appointed as a Commissioner; and
5. A Commissioner shall cease to hold office attaining the age of 65 years.

Remember, No act or proceeding of the Commission shall be invalid by reason only of the
existence of a vacancy in, or defect in the constitution of the Commission.

Terms of Commissioners u/s. 7

1. Term A Commissioners
a. Not less than three of the first appointed Commissioners
b. Excluding Chairman
c. Select at random ballot –procedures approved by Board
d. Term of two years
e. May be re-appointed for a further term of 3 years
f. At the end of each term, or at the end of the cumulative period of 5 years, the
relevant number of Commissioners shall cease to hold office.
2. Term B Commissioners
a. Commissioners appointed other than Term A commissioners
b. Include Chairman
c. Term of office 3 years
d. May be re-appointed for a further term of 3 years

e. At the end of each term, or at the end of the cumulative period of 6 years, the
relevant number of Commissioners shall cease to hold office.
The Chairman u/s. 6
• One of the commissioners is appointed Chairman of the Commission by Federal
Government
• Cannot be appointed for two consecutive terms
• Chairman shall be the CEO
• Shall have a casting vote in the event of a tie
• Responsible for Day to day administration
• Assisted by other Commissioners in carrying out functions

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 The Roles of Securities and Exchange Commission of
Pakistan
The Securities and Exchange Commission of Pakistan (SEC) is an autonomous statutory body
that is entrusted with the integrated administration and regulation of the capital markets,
corporate sector and financial (non-banking) sectors in Pakistan. SECP’s regulatory ambit
extends to the Insurance sector, NBFIs and to the significant components of capital markets such
as Stock Exchanges, Commodity exchange, CDC, NCCPL, beside the vast and growing
corporate sector. The Policy making for each of these areas also falls under SECP’s purview that
entails not only the revision of existing laws and regulations to bring them in line with best
practices but also the promulgation of new laws etc. The field is really vast and challenging.
The mandate entrusted upon the Commission has made SECP the catalyst to evolve the capital
markets of the country as progressive, transparent and efficient markets, employing best
practices and safeguarding the interests of the investors at large.
As the regulator of an emerging market the SECP’s regulatory philosophy is based on the
principle of developmental regulation. SECP, therefore, laid considerable emphasis on market
development while administering and enforcing various corporate and securities laws. SECP’s
regulations are based on:

• Consultative rule making

• Facilitating implementation
• Stringent enforcement

Now we will take just an overview of the role, the SECP plays in the capital markets of Pakistan.
We will focus on the recent developments made by the SECP but first we will discuss the
traditional role of the Securities and Exchange Commission of Pakistan.

1. Regulating the issue of Securities

The Securities and Exchange Commission of Pakistan is the regulatory authority in Pakistan and
responsible for making the various rules regarding the Capital Markets.

2. Regulating the business in Stock Exchange and Other securities markets

The SECP not only regulate the business of Stock Exchanges but also regulate the business of
other securities markets. For example; the SECP is now specially promoting the insurance sector
and formulating the various rules to protect the policy holders.

3. Monitoring the Capital Markets

SECP also monitor the capital markets working in Pakistan. By monitoring the markets the
SECP enables itself to
 Recognize various changes and problems which may occur.

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  gather the information about the reasons of the fluctuations in the markets,
 detect the flaws in the policies,
 identifying the unfair capital market practices

The Securities Market Division of the Securities & Exchange Commission of Pakistan
(SECP) has detected 22 cases of violation of laws, including insider trading and imposed
penalties on the stock exchange members and other market stakeholders. During the last
one year, the Securities Market Division had detected 22 cases of insider trading, price
manipulation, short- and blank-selling, wash trades, broker misconduct and non-
compliance of the listing regulations.
44 members of the Karachi Stock Exchange and six members of the Lahore Stock
Exchange were issued warning letters for possible violations. Two banks were also issued
warning letters for non-compliance of the securities laws. In addition, a stock exchange
was also penalized for violation of the Securities & Exchange Ordinance, 1969.

(Daily Times, Tuesday, 20th April, 2010)

4. Registering

 The SECP also register and regulate the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue,
underwriters, portfolio managers, investment advisors and such other intermediaries who
may be associated with the securities markets in any manner.
 SECP also propose regulations for the registration and regulating the working of
collective investment schemes, including unit trust schemes.
 SECP promotes and regulates self-regulatory organizations including securities industry
and related organizations such as stock exchanges and associations of mutual funds,
leasing companies and other NBFIs.
 SECP also regulate substantial acquisition of shares and the merger and take-over of the
companies.

5. Prohibiting Fraudulent and Unfair Trade Practices

 Prohibiting the fraudulent and all unfair trade practices relating to the securities markets
is the core function of the SECP.
 The SECP has formulated various rules to protect the investors and companies against the
fraudulent and unfair trade practices.
 According to the Section 29(1) of The SECP Act, 1997, “the Commission may conduct
the investigations in respect of any matter that is offence under this Act.

6. Promoting Investor’s Education and Training

For helping the capital markets of our country the SECP has

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  Designed numerous programs to educate the investors. The basic purpose of these
programs is to make the investors able to understand the nature of capital market.
 The SECP is also training the intermediaries of the securities markets. This will leads to
the better understanding between the SECP policies, investors, and the Capital Market.

7. Calling for Information and Undertaking Inspection

As we discussed above that the SECP can conduct investigation in respect of any matter that is
offence under the SECP Act, 1997. The SECP can also call for the information and undertake the
inspections, conduct inquiries and audits of the Stock Exchanges and intermediaries and self-
regulatory organizations in the securities market. For example; through the inspection of the
matters the SECP can solve the problems of the capital market with having the clearer picture of
the matter and as well as the market. By conducting the audit of the Stock Exchanges the SECP
enables itself to get the real position of its capital market and comes to know that the either the
Stock Exchanges are following the rules or not.

The commission suspended the registration of five members of the Karachi bourse on June 26,
2009 due to unresolved investors' complaints. Subsequently, to ascertain the quantum of these
complaints and other related issues, the commission initiated an inquiry against these brokerage
houses under Section 21 of the Securities & Exchange Ordinance, 1969
(Daily Times, 20th April, 2010)

8. Suggesting Reforms of Law

It’s an important role performed by the SECP. SECP consider and suggest the reforms of law
relating to the companies and bodies corporate, securities markets, including changes to the
constitution, rules and regulations of companies and bodies corporate, Stock Exchanges or
clearing houses.

9. Encouraging the Development

We discussed in previous section that in 90s, we were working with poorly regulated, inefficient,
and nontransparent capital markets. The SECP performed its role as the greatest encourager of
the development of the not only the capital markets but also for the other related markets. The
SECP did all this by making the rules and regulations relating to the markets. SECP has formed a
research wing for identifying the areas of improvement to make those areas better. The research
wing of the SECP can conduct research in any of the matters relating to markets.

10. Regulating the Insurance Business

The SECP is ensuring and monitoring compliance by insurers, insurance surveyors and insurance
intermediaries of all laws, rules and regulations pertaining to insurance for the time being in

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force. SECP is also regulating professional organizations connected with the insurance business
and encouraging the organized development of the insurance market in Pakistan.

11. Maintaining the Investor’s confidence

SECP plays an important role in maintaining the confidence of the holders of the insurance
policies by protecting the interests of the policy holders and beneficiaries of insurance policies in
all matters, including assignment of insurance policies, nominations by policy holders, insurable
interest, and surrender value of policies of life insurance, and other terms and conditions of
contracts of insurance.

12. Disclosure of Information to the Public

To protect the interests and rights of the investors, the SECP has formed various rules and
regulations. On the identification of the SECP various sections of the Companies Ordinance,
1984, has been changed. For example, it’s necessary for the companies listed at any stock
exchange in Pakistan to issue the opinion of a qualified auditor along with the financial reports.
It is also necessary to disclose all necessary matters in the financial statements and reports to
provide the best information to the public and reducing the chances of fraud.

13. Settlement of Disputes

SECP also performs its role as the authority to resolve the potential disputes between the parties
I.e. investors and companies. SECP is not only solving these matters but also is trying to improve
existing methods and advise new opinions for the expeditious settlement of claims and disputes
between the parties.

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