KARACHI, Dec 30: Members of the Karachi Stock Exchange (KSE) on Friday rejected a Resolution proposing changes in the Articles of Association of the stock exchanges, under a directive by the Securities & Exchange Commission of Pakistan (SECP) aimed at facilitating installation of a non-member as the chairman of the Board.

The move came at an Extraordinary General Meeting (ExGM) of the KSE members held on Friday at 4:45pm in the Exchange premises, which according to the KSE sources was attended by 90 of the 200 members of the bourse.

That brings to a climax the current rift between the apex regulator (the SECP) and the front line regulator (the stock exchanges) that started on Dec 9. Independent observers fear that the matter might now be dragged to the courts, which had the potential of driving away foreign portfolio investment which had picked up pace after many years and now climbed to handsome amount of $70 million a month. The uneasiness that would creep into the minds of local investors could also bring to a screeching halt the four-year bull run of the Pakistani bourse that had made it “one of the best performing markets in the world”.

Everyone admits that the sole reason for the ongoing ugly state of affairs was a complete lack of co-ordination and communication between the SECP and the KSE. In a situation like this, independent observers suggest that the intervention of higher authorities, as happened during the March crisis, might now be inevitable.

The loss of goodwill between the two parties started on Dec 9, when the SECP issued a directive asking the three stock exchanges of the country to amend their articles so as to incorporate a non-member as the chairman of the board. The Lahore and the Karachi Stock Exchanges did not comply, believing it to be a measure to bring to an end to their independence. But they suggested an alternative.

While the SECP in one of its communication earlier stated that “the aim (of posting a non-member chairman) was to limit the possibility of conflict of interest in the board”, the brokers are sour that the regulator is amassing authority over the bourses, stripping the latter of all its independence. Currently, four directors representing the SECP sit on the board; MD is also approved by the regulator and so owes his allegiance to the authority and all major decisions taken by the bourses are subject to approval of the regulator.

The Board of Directors of the KSE in a meeting on Thursday by a majority vote (casting vote utilized by the chairman) rejected the Wednesday’s order of the SECP, in which the regulator had announced that it had made the changes (in the articles of the stock exchanges) exercising its authority to do so and stating: “The regulations so made by the SECP are deemed to have been made by the exchanges and take effect accordingly.”

Sources privy to that meeting, observed that following a board room brawl, sense had finally prevailed and some of the non-member directors agreed to communicate the member directors’ contention in the matter to the SECP chairman Dr Tariq Hassan and report back by 4pm Friday.

Since the communication channel is completely clogged between the SECP and the KSE, deadly silence prevailed all day long and the ExGM of KSE went ahead on its time at quarter to five.

The bourse issued a press release in the evening, which quite explains what came to pass at that meeting and is reproduced: “An Extraordinary General Meeting of the Members of the Karachi Stock Exchange (Guarantee) Limited was held today at 4:45pm at the Exchange premises, which was attended by 90 members of the exchange.

Muhammad Yasin Lakhani, chairman presided. At the very outset, he asked Muhammad Yacoob Memon, Acting Managing Director, to read out the notice of EOGM and the subsequent three letters received from the SECP before the general body.

The Resolution regarding amendments in the Articles of Association of the Exchange in light of the directive received from the SECP was discussed by the general body. It was noted by the members that they are not against the induction of the non-member chairman on the Board. However, since the demutualization process has been initiated and the KSE has indicated to go ahead with the process on a fast track, there was a fear amongst the members that they might not get a fair deal vis-à-vis their assets and trading rights if majority of member directors is not retained in the Board.

Replying to the questions by a few members, the chairman informed the house that the SECP was suggested to arrive at an amicable resolution to the problem in such a way that it should be acceptable to both KSE and SECP. The Board passed a unanimous Resolution that the existing ratio/parity in voting rights of the elected members of the Board of Directors be maintained. Accordingly this alternate proposal was communicated to the SECP and as assured by some of the SECP nominated directors, the response from SECP was expected to be received before the start of the EOGM. However, the response was not received before the start of the meeting. Thereafter, the chairman put the proposed Resolution regarding amendments in the Articles of Association to vote by show of hands. There was none to favour the Resolution and accordingly the general body unanimously rejected the Resolution”.