Mr. Farrukh Sabzwari


1.Please give us your output on the corporate sector, especially on the capital market in Pakistan and how can it be improved?

Unfortunately in the busy metropolis of Karachi, people actually think that managing the capital market (Pakistan Stock Exchange or PSX) is the only role the SECP has. The reality is that the SECP’s mandate is spread across pretty far and wide not only is the SECP the Apex regulator to the corporate sector and the capital markets and its intermediaries i.e. PSX, Brokers, Asset Managers but also of sectors like Modarabas, Islamic Finance, Insurance and Investment Banks. The unfortunate reality is that given years of political interference – the SECP has historically punched below its weight. Take a look at the PSX
itself – only 250,000 clients are active in Pakistan’s Capital Markets – and this number is even more alarming when you consider the fact that only 5000 clients account for over 85% of the business transacted on a daily basis while this business is spread over 250 active brokers. Hence our biggest problem at the SECP is that we need to focus on the PSX from both a depth and breadth perspective. Not only does the PSX need new investors – but it also needs new listings and new products. It is a shame that some of the neighboring countries have millions of investors but we have not made much advancement in this area in the past 30 years. Lack of a savings culture is partly to blame (Pakistan’s savings rate is less than 15%) and so is the fact that majority of the savings are invested in real estate or National Savings Schemes etc. Moreover, KYC/AML compliance requirements are much higher in case of investment in the capital markets. Also, given the low financial literacy rates, I am of the concerted opinion that investor education has been a real missing link in the development of our market. The SECP is now taking a more proactive role in educating the masses. A few recent initiatives include a very active investor education program, an interactive portal and the launch of a book entitled “Savings and Capital Markets” We aim to make this book a part of course work in universities and colleges in the country. We have also launched a series of user friendly videos very aptly aimed at educating the masses on the concept of making investments.

One other leading factor why people do not invest in the nation’s capital markets is a lack of trust. If you look at our history every two or three years a broker in financial distress runs away with client custody. This is despite repeated pleas for investors to park their custody in investor accounts at the Central Depository (CDC). We are now in the process of introducing a new broker custody model – whereby the aim is to set higher benchmarks for minimum capital requirements so we can better protect client assets and in turn help to enhance client trust. Moreover, a lot needs to be done for the development of the derivatives market in Pakistan. In the past, India and Pakistan were moving in tandem on a leverage financing system called “Badla”. This was a very easy system that provided financing to the client base as well as to brokers. However it was misused in such a manner that every two years the Badla financing system would cause a systemic collapse in the
market. The collapse of the market and subsequent Pakistan downgrade by MSCI to Frontier Market status in 2008 was also the result of the badla system being misused. In order to curtail the potential abuses of this product, Badla financing was finally ring fenced and derivable stock futures introduced in the market. Now we also want to introduce cash-settled Single stock futures, Index futures and options in our capital market. India phased out Badla in 2002 and immediately introduced options and futures in order to provide investors with a viable leveraged trading substitute. So in that sense Pakistan has missed
the boat where the phase out of badla and lack of a substitute for financing shares has led to a dip in daily turnover on the exchange. But the good news is that a lot of spadework on derivatives has already been done. The immediate future includes cash futures and ETFs – both of which are due for launch in next two months.

Given our very smallish weightage of 0.04%, the bigger challenge for Pakistan will be to retain a seat on the MSCI Emerging Markets table. New listings will be needed and hence a number of steps are being taken to invigorate the non-listed sector to join the listed space. This includes a watering down of some very stringent corporate governance and listing regulations – both of which are proving to be onerous for companies considering a listing. Also looking at the SME counter; up till now we have not been able to attract SMEs to list in Pakistan. Moreover, currently we are doing a lot of work to attract FinTech companies and hopefully in the next six months our efforts will start bearing fruit. Equity crowd funding
regulations are already on the drawing board and we are seeking help from international jurisdictions to get this right. So we are trying to fire on all cylinders to get around the listings issue in Pakistan. The government’s recent drive to widen the tax net and loop in the undocumented economy also offers great tailwind to the SECP’s listing drive.

The SECP has also been very busy with the government’s recent push towards Ease of Doing Business. The SECP company registration online portal is now linked to the Federal Board of Revenue (FBR) and to the Punjab and Sindh Revenue Boards as well. Hence, not only is your company now incorporated in under 4 hours, in fact as soon as your company is incorporated, your paperwork automatically goes to FBR and to the Sindh and Punjab revenue boards which basically allows your sales tax registrations to be automatically done as well.

2. Since 2014, FDI has been on an upward trend in Pakistan reaching $3.09 Billion in 2017-2018. What is the SECP doing in order to attract foreign companies into Pakistan and how are you protecting the investors?

Pakistan continues to be one of the most open economies you will find anywhere in the world. The facilitation of foreign and local investors and the protection of their rights is one of the prime objectives of the SECP. When foreign investors come to Pakistan to either set up a business or a joint venture we are there to facilitate them, as much as possible. I know there have been some issues recently such as permissions needed from the Interior Ministry which can sometimes take time, but we have already drawn up a strategy in order to address this matter. If you are a foreign investor coming into the country and have applied to the Interior Ministry for permission, even during the period that your case is under process at the Ministry you can start your business in Pakistan. Only in case of a negative response received from the Interior Ministry you will have to wind up your operations in the country.

Regarding minority interest, there is a question of whether some regulations are too onerous for certain businesses to honor, and hence can act as a bane in their growth. We are looking into all such requirements exhaustively from an ease of doing business perspective which includes the code of corporate governance, PSX listing regulations and the Companies Act among others.

We have also started actively engaging a number of stakeholders to address the issues faced in attracting foreign companies to Pakistan. In this regard, recently, I have had meetings with the Pakistan Business Council, Overseas Investors Chamber of Commerce and Industry and also the American Business Council. Some of the issues highlighted by these business representatives require a change in Act and hence will take time to undo. All others are being addressed on an immediate basis. The big message here from the SECP is that we want to play a larger role as “facilitator and hand holder”.

3. Which marketing strategies are you currently using to promote the SECP and how would you like to develop them?

I think the best marketing strategy is to lead by example – where the SECP's current leadership continues to engage with its regulatees about their issues and concerns. No matter what business segment you are from – whether you are an NPO, in the stock market, the insurance sector or an SME – The SECP would like to hear from you. Current leadership is clearly busy engaging with its regulatees a lot more than we have in the past. While the change of culture to being more facilitative and customer friendly will take
some time, I have no doubt in my mind that with each passing day we as an organization are getting closer to achieving this goal.

On the side, I am doing a lot more on social media, we have engaged an agency that helps us prop up our presence on platforms like Twitter and all other commonly used social media platforms. The younger generations don’t know much about the SECP; I want to build an opinion around the company. It is a multifaceted strategy to market ourselves.

4. You have over 25 years of experience in capital market in Pakistan and abroad. You were previously CEO at BMA Capital Management and some of your roles include Director APAC Equities Sales at Credit Suisse Securities, CEO at KASB Securities and 8 years at CLSA. From your personal life, what do you feel most proud of?

I have been lucky to have worked with some leading names in the business both internationally and in Pakistan. However, when it comes to choosing my best assignment, I have to admit that the 5 years spent running the joint venture with Merrill Lynch in Pakistan gave me the most joy. The economy was just coming out of another bear run and timing wise it was just perfect macro tailwind. KASB was perfectly entrenched locally – one of the oldest brands in the business at that point and in need of a renewed push from a leadership perspective. Merrill Lynch had the global access we needed with clients internationally and thanks to a positive macro feed, senior management at Merrill was also of the view that a deeper dive into Pakistan was warranted. Hence after a few faulty starts, by the beginning of Year 2, we were firing on all cylinders – producing high quality research together, topping the investment banking league tables, doing Pakistan centric conferences and corporate access events in places like Singapore, London and New York. We clearly gave the competition a run for their money and in the process produced some great
analysts and sales people, who have now moved on in their careers and are now doing us proud in leadership positions at the organizations they represent.

5. What is your final message to the readers of USA Today who consider Pakistan as a potential investment destination or are looking for potential partnerships?

Naya (NEW) Pakistan is being built right here and now and if you really want to be part of it, this is the right time to be looking at Pakistan. What you read in the press and what you see on the ground is completely different – it is what we call the “information arbitrage”. I have yet to bring a single foreign investor to Pakistan who has walked away disappointed. It’s a 220 million people strong domestic market with a very young workforce and with per capita GDP still at US$1500, one that offers huge potential.