The plan has been on the cards for the better part of a decade, but is finally moving ahead thanks to a push from the regulator, the Securities and Exchange Commission of Pakistan (SECP), which inked a memorandum of understanding with the Islamabad, Karachi and Lahore stock exchanges on August 27.
The SECP office was a hive of activity as organisers set about preparing for the signing. “It’s a major event and everyone is busy,” said a source at the regulator. The finance minister and more than 200 delegates from the financial sector attended the ceremony. Details of the MoU were not available as GlobalCapital Asia went to press.
All this is part of the “demutualisation” exercise involving Pakistan’s bourses, which is designed to rejig the ownership of its stock exchanges. At the moment, all three are owned by brokers, but under the plan, the newly created PSE intends to sell shares to the public in an IPO, moving the exchange from being broker owned to publicly owned.
“The regulators kickstarted the process about seven to eight years ago,” said a capital markets lawyer in Pakistan. “It’s been a long time coming and the authorities have done some lengthy studies on it. There was pressure from the SECP to expedite the process as the individual bourses have been dragging their feet.”
The Stock Exchanges (Corporatisation, Demutualisation and Integration) Act 2012 was signed into law several years ago to facilitate the process. The act also calls for the sale of up to 40% of the stock exchanges to a “strategic investor”, which can be a foreign stock exchange or depository company.
“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,” the SECP said in a statement ahead of the MoU signing.
Bigger means better
“It makes sense to merge as each stock exchange is not very big,” said a senior executive with a local investment bank. “The PSE will create a single point for companies seeking a listing and we will spend less time shopping around for a bourse and paying separate listing fees if the issuer decides to list on all three.”
In the past, the motivation for an issuer seeking to float on all three stock exchanges was that they wanted to cover the entire country, although Karachi is usually the top pick, said the lawyer. Of the three bourses, Karachi holds the lion’s share of trading volumes, which means any merger will work mostly to the benefit of Lahore and Islamabad.
The Karachi stock exchange generates a daily turnover of about Prp20bn ($197m), versus Prp18m for the Lahore bourse and just Prp600,000 in Islamabad. One downside from the merger is that it could lead to fiercer competition between the three cities’ brokers, since those working in Karachi will not be happy about losing their share of the pie.
Another critical component of Pakistan’s demutualisation exercise is the introduction of a foreign investor as a 40% strategic stakeholder, which could lead to cross-border ECM activity and send a positive message about the PSE to international investors, according to market watchers.
Local bankers say the Turkish and Qatari stock exchanges have emerged as interested parties for the 40% stake, but it is not clear if they will take that interest forward. The valuation of the three Pakistani stock exchanges is also up in the air, so attaching a number to the PSE’s eventual listing size at this stage will be tricky.
In 2007, Deutsche Bank was mandated to look for a foreign buyer by the end of September 2013, according to local news reports at the time. But a spokesman for the German lender declined to comment about its involvement and if it was still managing the sale process.
Adding value
Local bankers also reckon a strategic holding in the PSE should make perfect sense to prospective foreign investors, given that Pakistan stocks are providing some of the best returns among frontier markets. For instance, the Karachi Stock Exchange 100 Index has provided gains of 29% in the past 12 months.
But the partnership is still a while away, said a vice-president of investment banking at a securities house. “It’s early days yet,” he said. “But the potential is there for cross-border issuance, for example [the foreign partner] can list their products in Pakistan and we can list our products there.”
The formation of the PSE, however, is not expected to have an immediate impact on IPOs, reckon bankers. But this was never the regulator’s main priority anyway. “We may see more IPOs as a result of the move, but the goal here is really to take equity capital markets to the next level,” said the lawyer.
ECM activity in Pakistan has surged, with five trades raising a collective $1.15bn so far this year. During the same period in 2014, just two trades had priced to raise $543m. This year too, interest has been robust among institutional and retail investors, with some transactions ending up two or three times covered, said bankers.
A unified stock exchange is not the only capital market reform the regulator has pursued in recent times, as the country seeks to shed its old image. Earlier this year Pakistan beat India to the punch with South Asia’s first-ever Reit, and also approved a new securities law that gives SECP more teeth.
The regulator is keen to make good on its new enforcement powers to stymie insider trading and other market misdemeanours, as well as curb abuses such as those politically connected brokers have been able to get away with, said the lawyer.
“This is important if we want to sell Pakistan to the world,” he said.