Critical Analyses of SECP Act 1997 and Concerned Issues

The Securities and Exchange Commission of Pakistan (SECP) is the successor of the Corporate Law Authority (CLA), which was an attached department of the Ministry of Finance. The process of restructuring the CLA was initiated in 1997 under the Capital Market Development Plan of the Asian Development Bank (ADB).

A Securities and Exchange Commission of Pakistan SECP Act 1997 was passed by the Parliament and promulgated in December 1997. In pursuance of this Act, the SECP, having autonomous status, became operational on the 1st of January 1999. The Act gave the organization the administrative authority and financial independence to carry out the reform program of Pakistan’s capital market.

The Securities and Exchange Commission of Pakistan (SECP) was set up in pursuance of the SECP Act, 1997. This Act institutionalized certain policy decisions relating to the constitution and structure, powers, and functions of the SECP, thereby giving it administrative authority and financial independence in carrying out its regulatory and statutory responsibilities.

The SECP became operational in January 1999 and has come a long way since then. It was initially concerned with the regulation of the corporate sector and the capital market. Over time, its mandate has expanded to include supervision and regulation of insurance companies, non-banking finance companies, and private pensions.

The SECP has also been entrusted with oversight of various external service providers to the corporate and financial sectors, including chartered accountants, credit rating agencies, corporate secretaries, brokers, surveyors, etc. The challenge for the SECP has amplified manifold with its increased mandate.

Critical Analyses of SECP Act 1997 and Concerned Issues

Conflict of interest

Part IV of the SECP Act, 1997, deals with the conflict of interest and the pith and substance of its provisions is that a member of the policy board, the chairman or a commissioner must not exercise any authority concerning a matter, “which could reasonably be regarded as giving rise to a conflict between his duty to honestly perform his functions under this Act and such interest”, whether pecuniary or otherwise.

Section 42 of the SECP Act 1997 a permanent employee, who is a public servant discharging regulatory functions of the state, can simply be chucked without notice, due process or assignment of any reason. The SECP has deliberately introduced a conflict of interest whereby an employee cannot exercise the public authority vested in him in a principled and unwavering manner without worrying about his job.

The HR Handbook, sanctioned in the exercise of statutory authority vested in the Commission, attempts to remove any distinction between a contractual and permanent employee, by rendering all employees subject to dismissal without the assignment of any reason.

Section 5

Of the SECP Act, 1997, which holds that “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 Section 5(5) of the SECP Act 1997, provides no statutory protection to the actions of SECP so long as it does comprise at least five commissioners.

Given that the SECP is not validly constituted it remains corum non-judice and all actions and decisions taken by it remain liable to be struck down for being without lawful authority.”[4]
The proposed amendments in the draft SECP Act 1997 from various national dailies.

The hard work and progress that has been achieved by SECP over the last 13 years seem to be coming to naught by certain elements for their vested interests it seems.

Section 3(3)

States In the performance of its functions and duties under this Act, the Commission shall be an independent and autonomous body and no person or entity shall seek to influence the Chairman, Commissioners and its officers or interfere in the working or activities of the Commission.

Chairman And Commissioners Tenure

Security of tenure is now proposed to be removed by the Government without due process and reasoning. This move alone will obliterate any possibility that the Chairmen and Commissioners will in future act independently and without submitting to under pressures.

The Commissioners and Chairmen will be beholden to the Policy Board members for their jobs, perks, and privileges and cannot be independent.

Besides, they will now have a carrot dangling in front of them that they may be reappointed for as many terms as they want till they reach 62 years of age so long as they remain good boys and toe the party line.

Powers Of The Chairman

The draft SECP Act 1997 proposes to give the Chairman SECP wide powers that trample on the Commission in no uncertain terms. The Commission has in effect been made subservient to the Chairman.

The Chairman is proposed to be vested with the powers to manage the administration and operation of the Commission including procurement of goods and services, entering into contractual commitments and obligations and appointing staff and agents.

The Chairman is also being given the powers to delegate any of his powers or functions to whom he likes. In addition to the sweeping powers proposed to be given to the Chairman, he is also being provided with emergency powers

Practical Issues

Interference of Federal Govt

SECP Act 1997, on one hand, are still professing high-sounding principles of autonomy and independence of the Commission and on the other hand, the same ideals are being systematically eroded.

It has been given the powers to approve regulations made by the Commission on functional and regulatory issues. Commissioners will be appointed by GOP on the advice of the Board.

The Chairman of the SECP Policy board should be appointed by the Federal Government from amongst the non-ex-officious members.

Ideally, the Chairman should be the Chairman of the Commission. The Policy Board which consists of five ex-officious members including three federal secretaries is now proposed to be given executive powers as well as oversight of the Commission s regulatory functions.

Furthermore, Chairman SECP is now required to report quarterly to the Policy Board on executive functions.

Interference of Finance Minister

SECP into a department of Govt. of Pakistan and in particular the Ministry of Finance. We seem to be going back in history and trying to re-establish the CLA. Incidentally, the creation of an independent SECP has always been an ADB and World Bank loan for the Govt. of Pakistan.

The SECP will be subject to unwarranted political and bureaucratic pressures which will be almost impossible to withstand and will consequently affect the performance of its duties and functions namely enforcing laws fairly, fiercely and independently.[5]

Accountability as To Utilization of funds

The regulator is not supposed to support and implement the securities’ laws, but also, at times, urge practices that go beyond the letter of the law. It is also tasked with upholding the integrity of the entire corporate system.

The Code of Corporate Governance in 2012 was a step towards greater board accountability and shareholder participation code for hundreds of Pakistani firms and their shareholders, was little short of revolutionary as it instructed the companies to make sure that they would have mechanisms to address possible conflicts of interest, to recognize and safeguard the rights of stakeholders and a framework in which internal complaints could be heard, with adequate protection for individual whistleblowers.

Relevant Case Law

Fortune Securities Limited, a private brokerage firm, Mohammad Ali, the chairman of SECP, was its largest shareholder and director of Fortune Securities Limited up until the last quarter of 2010.

He was appointed chairman SECP on December 24, 2010, and reportedly divested his shareholding in brokerage firm days before such an appointment. Time, however, was not on his side.

On April 12, 2013, his appointment both as chairman and as commissioner was set aside on the ground that it had been made without due process. A two-member bench led by Justice Jawwad S Khawaja ruled that the appointment was not under the rules of the SECP Act1997 and therefore Ghulam could not continue as head of the commission.

The federal government was directed to make a new appointment without delay and was told that it must be done under the SECP Act 1997 and should be conducted in a credible, rigorous and transparent manner, through a selection process that ensures that appointees meet all requirements.

The previous commissioner of the Securities Market Division, Sohail Dayala, owned a brokerage firm in Karachi (Invest & Finance Securities Ltd.) before his appointment to the SECP. He had also divested his shareholding to his kin before taking charge as commissioner SECP.[6]

Time is ripe for making the SECP an assertive regulator of the equity and financial markets. The government has done the right thing to appoint the Zafarul Haq Hijazi, an experienced regulatory affairs officer, as the SECP chairman. It was comforting to read that in his address to SECP employees, he has reported having said that he would not “compromise on investors’ interests”.

The new chairman is expected to review 20-month activity and uphold the signature mandate using disclosure to promote transparency. As mandatory disclosure, leverages market discipline and, in a way, are means of accountability that stand in contrast to more substantive government oversight of activities.[7]

Conclusion

The majority of the Policy Board members should be sourced from the private sector with the ex Official members being restricted to four. The Chairman of the SECP Policy board should be appointed by the Federal Government from amongst the non-ex official members.

A lot of issues will be resolved where the Chairman is made Chairman of Policy Board by law. That any person with direct or indirect interests in the capital market or associated directly or indirectly as a shareholder or partner with a regulator of the Commission should not be appointed as Commissioner or Chairman.

Similarly, there should be a one-year bar on senior management of SECP, including the Chairman and the Commissioners, from joining a regulator after leaving their employment with the SECP.

Security of tenure must be guaranteed to the Commissioners and the Chairman, and they should be debarred from being appointed in the Commission as an adviser or consultant or in any other capacity after completion of two terms as Commissioner.

Special tribunals are formed which shall have the expertise, time and single-mindedness to try such serious offenses. These Tribunals exist in many countries, including India, with satisfactory results. In my view, these Tribunals should have been set up decades ago.