A Report to the Operations Evaluation Department Asian Development Bank For the Country Assistance Program Evaluation for Pakistan

Pakistan Private Sector Assistance Evaluation, 1985–2004 by Jayyad Malik Lloyd Powell July 2006

CURRENCY EQUIVALENTS (as of 1 November 2005)

Currency Unit – Pakistan rupee/s (PRe/PRs)

PRe1.00 = $0.0167 $1.00 = PRs59.73

ABBREVIATIONS

ADB – Asian Development Bank BCO – Banking Companies Ordinance 1962 CSP – country strategy and program FYP – five-year plan MFI – microfinance institution NBFI – non-bank financial institution NGO – nongovernment organization PCR – project completion report PRM – Pakistan Resident Mission SBP – State Bank of Pakistan SECP – Securities and Exchange Commission of Pakistan SME – small and medium enterprise TA – technical assistance ZTBL – Zarai Tarqiati Bank Limited

NOTES

(i) In this report, “$” refers to US dollars.

CONTENTS EXECUTIVE SUMMARY iii I. INTRODUCTION 1 A. Background 1 B. Scope and Objectives of the Evaluation 2 C. Evaluation Methodology 2 D. Report Content 3 II. PRIVATE SECTOR PERFORMANCE AND CONSTRAINTS 3 A. Private Sector Overview 3 B. Private Sector Constraints 4 III. FINANCE SECTOR PERFORMANCE AND ISSUES 6 A. Introduction 6 B. Banking Sector 6 C. Non-Bank Financial Institutions 15 IV. STRATEGIES AND POLICIES 22 A. Government Strategies and Policies 23 B. ADB’s Country Strategies 25 V. DESCRIPTION OF ADB’S PRIVATE SECTOR OPERATIONS 30 A. Finance Sector Development (Public Sector Loans) 30 B. Private Sector Transactions 34 C. Other Operational Activities 37 VI. CONCLUSIONS AND RECOMMENDATIONS 38 A. Overall Conclusions 38 B. Recommendations 43 APPENDIXES 1. Pakistan Public Sector Loans 1984–2004 45 2. Pakistan Private Sector Loans/Equity 19984–2004 46 3. Securities and Exchange Commission of Pakistan Ordinance 1997 47 4. Individuals Interviewed for Private Sector Evaluation Mission 76

This report is a working paper for the Country Assistance Program Evaluation for Pakistan. OED Working Papers are an informal series to present the findings of work in progress in evaluation. They are circulated to encourage discussion and elicit comment. The views expressed in this report are those of the author(s) and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors or the governments they represent. The Asian Development Bank does not guarantee the accuracy of the data included in this report and accepts no responsibility for any consequences of their use. Use of the term “country” does not imply any judgment by the author(s) or the Asian Development Bank as to the legal or other status of any territorial entity.

EXECUTIVE SUMMARY This report evaluates 20 years (1985–2004) of Asian Development Bank’s (ADB) support to the private sector in Pakistan. During this timeframe, ADB has formulated five strategy documents to guide its operations in Pakistan (plus two annual updates) and has approved $2,241 million in public and private sector facilities of which around 79% or $1,774 million was for 16 public sector projects.1 The remainder, 21% or $467 million was allocated across 38 private sector facilities.2 Over the same period, ADB approved 18 technical assistance (TA) grants for the finance sector for a total of $7.038 million.

Pakistan has undergone significant economic changes over the last 20 years. These

changes have had (and in many cases continue to have) an immediate and far-reaching impact on the scope as well as scale of private sector activities within the country. Similarly, the nature of support provided by ADB in order to enhance private sector participation has also evolved over the last two decades. Overall, ADB pursued two main strategies for assisting private sector in Pakistan. The first strategy was followed up until the mid-1990s and involved ADB providing much needed capital to private sector entities through its private sector operations window. Under this strategy, ADB approved $467 million for 38 projects. These projects accounted for 21% of the total ADB private sector assistance and involved ADB providing loans to private sector entities and/or taking equity positions in these businesses. Such interventions made sense at the time given the difficulties the private sector faced in their attempts to access financial resources due to a highly regulated and state controlled economy. However, the main drawback with this strategy was that these interventions were not material in the context of the size of the economy and, as such, did not bring about sustainable reforms. Of the total 38 private sector transactions, 13 occurred during the 1980s, 23 during the 1990s, and 2 in 2000s. The spike in the number of transactions coincides with the time (during the 1980s and the 1990s) that Pakistan’s economy was mired in economic problems and ADB decided to step in and provide the much needed financial support directly to the private sector. Overall, these private sector interventions appear to be well intentioned, commercial, and effective.3

In the mid-1990s, after the Government signed up for the most recent Structural

Adjustment Program (macroeconomic stabilization of the International Monetary Fund and the World Bank) and committed to a broad set of reforms, ADB stepped up its efforts and quickly shifted its private sector assistance strategy by working directly with the Government in order to effect meaningful and sustainable financial sector reforms. This strategy shift was co-coordinated with the World Bank and was based on the assumption that a robust financial infrastructure was a prerequisite for establishing a thriving private sector that would enable the country to achieve both its economic growth as well as its poverty alleviation objectives. Under this strategy ADB approved $1,774 million for 16 public sector projects that were geared towards strengthening the country’s financial systems. These finance sector reform projects make up a major portion (79%) of ADB’s private sector assistance activities over the last 20 years.

Some key accomplishments associated with ADB’s private sector assistance include (i)

bringing about policy reform, (ii) developing the country’s capital markets, (iii) kick-starting the country’s microfinance sector, (iv) supporting private sector entities through ADB’s private

1 Details on ADB’s public sector interventions between 1984 and 2004 are provided as Appendix 1. 2 Details on ADB’s private sector interventions between 1984 and 2004 are provided as Appendix 2. 3 Currently, ADB’s Private sector operation is considering investing in an existing mineral sector public private

partnership venture in Balochistan.

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sector operations window, (v) delivering TA for conducting critical analysis across a broad range of finance subsectors, and (vi) assisting the Government’s efforts towards restructuring financial institutions (such as Zarai Tarqiati Bank Limited [ZTBL] and SME Bank). However, there are some finance sector development projects that are raising questions and concerns because either they are not delivering anticipated results (e.g., large amounts spent on restructuring public sector organizations—ZTBL and SME Bank), or they are seen to provide an unfair subsidy (e.g., continued ADB funding of Government-sponsored microfinance bank—Khushali Bank).

Private sector transactions undertaken under the first strategy were more effective but

were not able to bring about any meaningful reform primarily due to their (smaller) size and (narrow) focus. On the other hand, finance sector development projects carried out in the second strategy were much larger in scale and scope as well as more sustainable. However, these projects appear to be much less effective due to (i) insufficient understanding of the sector/subsector as witnessed by low levels of TA resource allocation prior to loan approval, (ii) over-reliance on ability to transform (almost bankrupt) public sector agencies into viable commercial entities, and (iii) simultaneously supporting multiple subsectors (e.g., rural finance, microfinance, small and medium enterprise, capital markets, etc.). From an operational standpoint, initial parts of these projects (project planning and approval) went smoothly, but then some projects encountered problems during implementation. These problems were caused by (i) limited capacity within the Pakistan Resident Mission (PRM) to effectively implement projects and/or maintain relationship with key stakeholders, (ii) high staff turnover (both at PRM and headquarters) which raised confusion with regards to accountability, and (iii) Government’s responsiveness in implementing reforms and/or regulatory frameworks.

More recent government plans (such as the Ten-Year Perspective Plan and the Medium

Term Development Framework 2005–2010) indicate that the Government is more confident and is taking the lead in establishing what and how it plans to develop its economy. The following principal recommendations are made:

Recommendations Responsibility For Government Consideration 1. Immediate Action. The Ministry of Finance, for the

Government, should commission an assessment that provides a “gap-analysis” (i.e., what support does the financial sector need to evolve into a mature/developed financial sector) and a series of recommendations based on international financial market standards and a fully-costed and time bound action plan to get there. It is vital that international and local financial market operators are utilized for this assignment.

Coordination by Ministry of Finance

For ADB (and Government) Consideration 2. ADB should conduct a review of its finance sector

development projects and develop an action plan for unfinished business, such as, enhancing Securities and Exchange Commission of Pakistan’s (SECP’s) capacity as a regulator, development of the bond market, etc. (as highlighted in this evaluation as well as by findings of “1” above).

South Asia Finance Division and the Pakistan Resident Mission (PRM)

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Recommendations Responsibility 3. ADB should consider reducing, if possible, the high turnover

of its finance personnel at PRM. In addition, a specialty support unit for supporting ongoing projects/programs and other Government and private sector stakeholders should be created in PRM as soon as possible.

4. ADB should be more stringent in evaluating its ongoing

projects (especially, finance sector development programs) in order to pragmatically assess their ability to achieve their stated objectives.

5. ADB should increase timely TA resource allocation, especially

for finance sector development programs. 6. ADB should maintain strategic focus (applies to both ongoing

and future projects) so as not to “spread itself too thin” by simultaneously supporting a relatively large number of sectors.

7. In the next country strategy and program (CSP),

consideration should be given to increasing the number of transactions developed through ADB’s private sector operations window.

8. In the next CSP, a more selective approach should be

adopted for new finance sector development projects given that private entities already dominate finance sector activities in Pakistan. Large-scale public finance sector development projects will continue to diminish as the financial systems in the country mature.

9. Provision should be made in the next CSP to utilize

innovative financing modalities when developing private sector assistance interventions (such as those offered under ADB’s Innovation and Efficiency Initiative).

10. ADB needs to reassess its existing strategy of supporting

institutions (e.g., ZTBL, SME Bank, Khushali Bank, etc.). If the Government wants to continue with these initiatives, then accountabilities should be documented so that ADB and the Government understand who is carrying what risks.

PRM Country Director/ South Asia Department Operations Evaluations Department/South Asia Finance Division South Asia Finance Division South Asia Finance Division/PRM Private Sector Operation/PRM South Asia Finance Division/PRM/Government South Asia Finance Division/PRM/Government South Asia Finance Division/ Operations Evaluation Department/PRM

I. INTRODUCTION A. Background 1. This report is prepared by the Operations Evaluation Department of the Asian Development Bank (ADB) and presents an evaluation of ADB’s private sector assistance in Pakistan over 1985–2004. This evaluation will contribute in preparation of a Pakistan Country Assistance Program Evaluation, which, in turn, will support the formulation of a new Pakistan Country Strategy and Program (CSP) to be approved in 2006. 2. Pakistan has undergone significant economic changes over the last 20 years. These changes have had (and in many cases continue to have) an immediate and far-reaching impact on the scope as well as scale of private sector activities within the country. Similarly, the nature of support provided by ADB in order to enhance private sector participation has also evolved over the last two decades. During this time, ADB assisted the private sector in Pakistan either by delivering support directly to the private sector (through its private sector operations window), or, by working with the Government to develop large-scale finance sector reform programs. 3. Overall, ADB approved $2,241 million in facilities to assist with the development of private sector enterprise in Pakistan and pursued two main strategies to this end. The first strategy was followed up until the mid-1990s and involved ADB providing much needed capital to private entities through its private sector operations window. Under this strategy, ADB approved $467 million for 38 projects. These projects accounted for 21% of the total ADB private sector assistance and involved ADB providing loans to private sector entities and/or taking equity positions in these businesses. Such interventions made sense at the time given the difficulties the private sector faced in their attempts to access financial resources due to a highly regulated and state controlled economy. The main drawback with this strategy was that these interventions were entity specific and, as such, did not attempt to bring about sustainable reforms.

Figure 1: Pattern of ADB’s Private Sector Assistance

0

100

200

300

400

500

600

1985-89 1990-94 1995-99 2000-04Time Period

$ M

illio

n

Finance Sector Development Programs Private Sector Transactions

4. In the mid-1990s, after the Government signed up for the Structural Adjustment Program and committed to a broad set of reforms, ADB stepped up its efforts and quickly shifted its

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private sector assistance strategy by working with the Government to catalyze more meaningful and sustainable financial sector reforms. This strategy shift was based on the assumption that a robust financial infrastructure was a prerequisite for establishing a private sector that would enable the country to achieve both its economic growth as well as its poverty alleviation objectives. Under this strategy, ADB approved $1,774 million for 16 public sector projects that were geared towards strengthening Pakistan’s financial systems. Interventions carried out under this strategy constitute a major portion (79%) of ADB’s private sector assistance to Pakistan and for this reason a major portion of this evaluation involves discussion, evaluation, and assessment of the country’s financial systems. B. Scope and Objectives of the Evaluation 5. This report provides an assessment of ADB’s activities in support of private sector assistance in Pakistan over the last two decades. It is hoped that in addition to past and present assistance flow, this report will also aid in developing recommendations for future assistance efforts. In order to develop an assessment of ADB’s support for the private sector in Pakistan, this evaluation will attempt to answer the following set of questions:

(i) How has the private sector evolved over the last 20 years and what are the primary constraints it currently faces?

(ii) What strategies and policies have successive governments pursued? (iii) How has ADB assisted the private sector as per its formal country strategies? (iv) How effective have ADB’s projects been in assisting the private sector in

Pakistan? (v) What strategies were pursued for using ADB resources? (vi) What drove these strategic choices? (vii) What was the quality of ADB’s formal country strategies? (viii) Irrespective of quality, what was the quality and performance of ADB’s program? (ix) Was the program well managed? (x) How did ADB resources contribute to sector outcomes? (xi) Was there effective synergy between ADB resources and those of others? (xii) Did ADB do the right things? (xiii) How can choice selection and decision-making processes be improved in future?

C. Evaluation Methodology 6. This report was developed by following the methodology provided below:

(i) assessment of private sector enterprise in Pakistan; (ii) description and review of finance sector and subsector performance to identify

issues and needs; (iii) description of government strategies and policies, and assessment of their

implementation and achievements; (iv) evaluation of ADB sector strategies within country strategy documents; and (v) ADB’s program was then reviewed to determine the relationship between

strategy and program. 7. In order to understand the effectiveness of ADB’s private sector assistance strategies and programs the following approach was followed:

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(i) all relevant design and evaluation/review documents for loan and TA projects were reviewed;

(ii) performance of ADB’s strategies, projects, and operations were assessed by interviewing senior officials in the Government and holding discussions with a number of private sector organizations and other development partners;1 and

(iii) performance, strategies, and (current/future) expectations of the Government were assessed by holding discussions with key decision and policy makers in Pakistan.

D. Report Content 8. Subsequent chapters cover private sector performance and constraints; finance sector performance and issues; government strategies and policies; ADB’s strategies and policies; a description and review of ADB’s operations in support of private sector; and conclusions and recommendations.

II. PRIVATE SECTOR PERFORMANCE AND CONSTRAINTS 9. This chapter aims to provide a high-level overview of Pakistan’s economic environment over the last two decades as well as information on key constraints to private sector participation in the country. A. Private Sector Overview 10. For the most part, during the 1980s, a state-led model of industrialization was followed in Pakistan. At the time, the Government was only focused on encouraging development of large scale manufacturing concerns. This fact was apparent from the way in which large firms were allowed to obtain licenses, official exchange rates for imports, and tariff rebates. Such preferential treatment was not extended to smaller firms and these firms found it much harder to secure financing2 and complying with regulatory requirements (e.g., tax regulations, labor laws, licensing and price controls, etc.). 11. During the 1990s, Pakistan committed and signed up for the macroeconomic stabilization and structural adjustment programs of the International Monetary Fund and the World Bank. The Government committed itself to these programs in order to lower macro-instability, remove distortions prevalent in trade and industry structures, and enhance economic growth. For the most part, growth rates slowed across most of the main economic sectors during this decade as the country braced for sweeping reform measures. Political instability was a mainstay and peaked towards the end of this decade when Pakistan conducted nuclear tests. Economic sanctions and other fall out from the country’s nuclear experiments also affected the country’s business climate significantly. 12. Pakistan’s economy has improved in 2000s. In 2004–2005, for the third consecutive year, the country’s economy expanded and registered a real gross domestic product (GDP) growth of 8.4%, surpassing the 6.6% target set for the year and improving upon the GDP growth for the previous year (6.4%).3 There are a number of reasons fueling the country’s economic

1 See Appendix 4 for list of individuals met for the Private Sector Assistance Evaluation Mission. 2 Due to the controlled interest rate environment banks were unable to compensate for the higher transaction costs

associated with lending to smaller businesses 3 Ministry of Finance. 2005. Economic Survey 2004–2005. Pakistan.

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recovery, such as, actualization of government reforms aimed at deregulating and liberalizing key sectors of the economy, improvements in country’s infrastructure (physical, financial, and telecommunication), increasing demand for goods and services within the domestic markets, etc. Provided in Table 1 (below) is information on average growth rates that illustrate the trends discussed in this section.

Table 1: Average (Annual) Growth Rates Indicators

1980s 1999–2000

2000–2001

2001–2002

2002– 2003 R

2003–2004 P

GDP 6.45 3.91 1.8 3.1 5.1 6.4 Agriculture 5.44 6.09 -2.2 0.1 4.1 2.6 Manufacturing 8.21 1.53 9.3 4.5 6.9 13.4 Commodity Producing Sector 6.49 3.02 0.5 1.3 4.9 7.7 Services Sector 6.65 4.79 3.1 4.8 5.3 5.2 R = Revised, P = Provisional. GDP = gross domestic product. Source: Ministry of Finance. Economic Survey of Pakistan (various issues). Pakistan. B. Private Sector Constraints 13. Provided below are some of the main issues and challenges that have (and in most cases still continue to) hampered private sector participation in the country’s economic reality.4

1. Financial Constraints 14. Access to finance is one of the main hurdles discouraging increased private sector participation in the country’s economy. Even though opportunities to secure financing have increased over the years, there is still considerable shortfall in demand and supply for credit-related resources and services. Some of the main issues and challenges faced by the private sector in this regard include:

(i) lack of access to credit, (ii) stringent collateral requirements, (iii) procedural delays in loan disbursement, (iv) corrupt system for obtaining credit, (v) high cost for securing credit, and (vi) high interest rates.

15. Detailed analysis for this topic is provided in Chapter III.

2. Regulatory Constraints 16. Uneven and unpredictable enforcement of regulations (tax laws, tariffs, and export regulations) serve as a constraint for private sector participation. 17. Some of the main tax-related constraints include:

(i) high rates of income tax, 4 The constraint-related information is based on the findings of ADB’s Pakistan Resident Mission 2005 report titled

“SME Development in Pakistan, Analyzing the Constraints to Growth.”

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(ii) high rates of sales tax, (iii) lengthy procedures for submitting income tax statements, (iv) uncertainty with regards to income and sales tax policies, and (v) slow pace and cost associated with resolving tax disputes.

18. Some of the main tariff-related constraints include

(i) high tariff rates on import of raw materials and intermediate goods, and (ii) unpredictable changes in tariff rates.

19. Some of the main export regulation-related constraints include

(i) cost of delay in obtaining duty drawbacks and sales tax refunds, and (ii) uncertainty of sales tax refund.

3. Infrastructure Constraints

20. Lack of adequate infrastructure facilities serve as a major impediment to private sector growth. Main constraints faced by the private sector in the country include

(i) high cost, poor quality of service, and unreliable supply of power; (ii) inefficient, unreliable, and costly transport network; (iii) widespread corruption within utilities providers; and (iv) high cost of establishing back up power.

4. Human Resources Constraints

21. Finding appropriate human resource capacity also serves as a constraint for the private sector. Provided below are the main human resources-related constraints faced by the private sector:

(i) workers are not educated enough; (ii) personnel are not adequately trained; (iii) lower and middle-level personnel lack requisite skills; (iv) even where workers had degrees or certificates, the quality of training and

education they had received was substandard; and (v) there is a significant mismatch between skills required by employers and the

training provided by educational/training institutions.

5. Market Constraints 22. Market constraints refer to issues and challenges faced by the private sector as a direct consequence of high degree of state control and inefficient regulation. Provided below are some of the main market constraints:

(i) lack of trust between suppliers and manufacturers/retailers significantly increase transaction costs,

(ii) high cost of contract repudiation increases cost of doing business for firms, (iii) competition from smuggled goods and the informal economy significantly affects

private sector participation for manufacturer as well as retailers, and (iv) rule of law.

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III. FINANCE SECTOR PERFORMANCE AND ISSUES A. Introduction 23. ADB’s finance sector reform interventions constitute a major portion (79%) of its private sector assistance to Pakistan over the last 20 years. This emphasis on the financial sector was based on the assumption that a robust financial infrastructure was a prerequisite for establishing a private sector that would enable the country to achieve both its economic growth as well as its poverty alleviation objectives. 24. Pakistan’s finance sector can be broadly rationalized in two main categories—the banking sector and the non-bank financial institutions (NBFIs). The banking sector refers to a number of subsectors, such as commercial and retail banking, rural finance (agricultural and microfinance), and small and medium enterprise (SME) lending. As the name suggests, NBFIs refers to financial institutions other than banks, such as stock markets, leasing companies, insurance companies, etc. The remainder of this chapter provides information and analysis on the country’s key financial sectors and subsectors. B. Banking Sector 25. Information on the regulatory framework as well as the main sub-sectors of the banking sector is provided below.

1. Regulatory Framework 26. The regulator of the banking sector is the State Bank of Pakistan (SBP). Banking Companies Ordinance (BCO) 1962 is the main law governing the establishment and operations of commercial banking institutions and is administered by SBP. This law sets out certain key requirements for those entities interested in developing and/or operating commercial banking entities in Pakistan that include:

(i) Capital and Reserve Requirements. As of December 2004, all scheduled banks operating in Pakistan are required to maintain a minimum paid up capital (net of losses) of PRs1,500 million. This requirement will increase to PRs2,000 million by December 2005. In addition, banks are also required to maintain capital and unencumbered general reserves, the value of which is not less than 8% of their risk weighted assets (on both consolidated as well as stand alone basis)

(ii) Cash Reserves. The banks are required to maintain a cash reserve of a

percentage of their demand and time liabilities excluding the paid up capital, reserves and balance in the profit and loss account with the SBP. This ratio is changed from time to time in accordance with the demands of the monetary policy. No interest and/or profit is paid by SBP on these funds.

(iii) Liquid Assets. Banks are required to maintain liquid assets of not less than 80%

of the total time and demand liabilities in Pakistan.

(iv) Annual Accounts and Audits. As per the BCO, a bank is required to maintain the calendar year as its financial year, and its financial statements are required to be audited in accordance with 2nd Schedule of the BCO. Under this ordinance,

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each bank will submit to the SBP, its audited accounts and the auditor’s report within 3 months of the financial yearend.

(v) Remittance of Profit. Foreign banks operating in Pakistan are allowed to remit

their net profit earned in Pakistan, subject to approval of SBP.

(vi) Number of Branches. As per SBP’s branch licensing policy there is no limitation on the number of branches that a bank can open in Pakistan, subject to fulfillment of SBP criteria. This policy requires that each bank will submit its annual branch expansion plan, 30 days before commencement of each calendar year during which it plans to open new branches.

27. In addition, SBP has also introduced Prudential Regulations for Corporate/Commercial Banks, SMEs, and Microfinance Institutions. These regulations are discussed in the next few sections.

2. Commercial/Retail Banking 28. The country’s banking sector has undergone a tremendous change over the last few years. The impetus for this change came about as a direct consequence of the severe financial strain Pakistan’s economy was going through in the eighties and nineties. During this time, there was a growing realization within the Government that private sector participation in the country’s financial markets would only happen once the Government started deregulating and privatizing these markets.5 29. In 1990, the country’s banking system was dominated by five commercial banks, which were all state-owned. The 1990 amendments to the BCO launched the process of financial sector reforms by allowing privatization of these state-owned banks. During the first round of reform, between 1991 and 1993, two of the state-owned banks (Muslim Commercial Bank and Allied Bank) were privatized. The reforms process was subsequently delayed for several years and resumed in early 2000s. With the privatization of the third large bank, United Bank Limited the domination of state-owned banks ended. After privatization in February 2004 of Habib Bank Limited, the share of banking system assets held by public sector commercial banks decreased to less than 25%.6 However, the privatization process is still not complete as the largest bank in the country, National Bank of Pakistan, with a market share of approximately 20%, remains state-owned and its privatization prospects are uncertain at this stage, although the Government divested approximately 25% of its capital in 2001–2003 (footnote 6). 30. The privatization of state-owned banks has been accompanied by a liberalization of the financial system and a significant increase in the number of local and foreign banks operating in the country. Worried by the health and soundness of the larger number of, and in some cases newer, banks SBP imposed a moratorium on the establishment of new banks in 1995, which still remains in force.

5 These deregulation and privatization reforms were a mandatory requirement stipulated by the International

Monetary Fund for assisting the Government out of its economic problems. 6 Technical Note: Condition of the Banking System in Pakistan. Joint IMF and World Bank Financial Sector

Assessment Paper, October 2004.

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31. Up until the recent past, the retail banks were primarily focused on delivering financial services and support to the corporate sector and the needs of the households typically went unmet. Lending to individuals was mostly done in the form of fully secured loans against tangible liquid securities (usually, government securities, bank deposits, etc.). Consumer financing was untapped until a few years ago when surplus liquidity and slow credit growth from the corporate sector forced the retail banks to seek other avenues to enhance their asset base and profitability. 32. As shown in Table 2, consumer finance has been growing at a rapid pace. The “Others” category, which accounts for the largest share of consumer finance consists of personal loans (both secured and unsecured) as well as financing for consumer durables. Auto financing accounts for the second largest share in consumer financing followed in third place by credit cards. Mortgages have not gained a foothold in Pakistan’s financial markets and it is an area that will experience significant expansion in the short to medium term.7 This rapid expansion in demand for consumer finance has resulted in banks actively entering into other financial markets, such as leasing, etc.8

Table 2: Consumer Finance (PRs Billion)

Source: State Bank of Pakistan. 2003. Pakistan Financial Sector Assessment 2003. Research Department: Pakistan.

Item Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Credit Cards 6.7 8.0 8.9 9.7 11.2 House Loans 3.8 3.4 4.1 5.5 8.3 Auto Loans 15.8 16.9 22.2 27.6 33.1 Others 18.7 25.6 30.3 40.2 50.0 Total Consumer Finance 45.0 53.9 65.5 83.0 202.6 Growth Rate (%) 69.8 19.8 21.5 26.7 23.6 Total Loans 1,043.1 1,040.2 1,152.0 1,205.4 1,350.9 Consumer Finance as % of Total 4.3 5.2 5.7 6.9 7.6

33. Another interesting development in the country’s banking system has been the rising popularity of Islamic banking. In 2002, SBP exempted Islamic commercial banks from the moratorium on the establishment of new banks, and the first full-fledged Islamic bank, Meezan Bank, was licensed. Since then, several conventional banks have also opened branches that provide only Islamic financial services. The size of these Islamic banking institutions remains very small.9 Given the present administration’s and SBP’s commitment towards encouraging Islamic mode of financing, there is likely to be a rise in the number and type of Islamic financial institutions and services in the coming few years. 34. In order to provide the required regulatory support for consumer finance, SBP has developed and put in place regulations that provide for

(i) facilities to related persons, (ii) exposure against total consumer financing, (iii) total financing facilities to be commensurate with income, (iv) general reserve against consumer finance,

7 Problems with land title records are a major hurdle that needs to be overcome in order to realize increases in

mortgage transactions in the country. 8 Existing leasing companies were of the opinion that commercial banks entering the leasing market have created a

non-level playing field because they (banks) are not subject to the same (stringent) capital adequacy requirements as are the leasing companies.

9 According to SBP estimates Islamic banking assets account for around one percent of the total bank assets.

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(v) bar on transfer of facilities from one category to another to avoid classification, (vi) margin requirements, and (vii) credit cards.

35. Additional detailed regulations have also been issued by SBP for auto loans, housing finance, and personal loans including loans for purchase of durables.

3. Rural Finance and Microfinance 36. There is widespread acceptance among decision and policy makers as to the need for developing credit products tailored for meeting the needs of the poor in Pakistan. Driving this is the fact that despite favorable macroeconomic circumstances within the country—poverty and inequality have been on the rise. For instance, 80% of the 14.3 million rural households earned less than $1 a day during 1998–1999.10 Moreover, the head count for rural and urban poverty for the same time period was 36.3% and 24.3%, respectively (footnote 13). 37. During the year ended June 2001, the formal sources jointly disbursed a total of 786,000 loans amounting to PRs56 billion ($0.94 billion), i.e., an average loan size of PRs71,246 or $1192.8 (footnote 13). Nongovernment organizations (NGOs) have disbursed about 100,000 loans. The nominal interest rates charged ranged between 13% and 22%. The outreach is merely 6% of the total rural households and the amount disbursed is 21% of the estimated demand (footnote 13). These numbers clearly suggest that the demand for micro/rural finance was not met and that a sustainable solution would need to be developed. 38. The SBP established a Rural Finance Committee (RFC) that, among other things, was tasked with coming up with a definition for rural finance. In their report, the RFC defined rural finance as

(i) credit requirements for agricultural activities, (ii) mobilization of rural savings, (iii) access to insurance services for risk mitigation, and (iv) payment systems that will allow flow of funds to and from the rural areas.

39. Realizing the importance of developing capacity to deliver rural finance support, over the last few years, the Government has been following a two-pronged strategy. The two main components of this strategy are:

a. Easing access to agricultural credit 40. According to the Government’s current development framework—the Medium Term Development Framework 2005–2010 (MTDF)—over the next 5 years, i.e., up until 2010, the agricultural credit requirements in the country has been estimated to reach PRs1,665 billion ($27.88 billion). Table 3 shows the distribution of the agricultural credit requirement.

10 ADB. 2000. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the

Islamic Republic of Pakistan for the Microfinance Sector Development Program. Manila.

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Table 3: Agricultural Credit Requirement Year Production Development Total (PRs billion)

2005–2006 205 70 275 2006–2007 220 80 300 2007–2008 240 90 330 2008–2009 260 100 360 2009–2010 290 110 400 Total 1,215 450 1,665

Source: Planning Commission. May 2005. Medium Term Development Framework 2005–2010. Pakistan.

41. According to SBP, the total agriculture credit disbursement during 2003 was PRs58.9 billion ($.99 billion) to a total of 814,737 individual borrowers. It can be inferred from the information provided here that a major portion of agricultural credit requirement demand goes unmet, especially given that amount disbursed during 2003 is less than 22% of the projected demand for agricultural credit in 2005–2006 (Table 3). More information in this regard is provided in Tables 4 and 5.

Table 4: Credit to Agriculture Sector, Disbursements (PRs billion)

ZTBL = Zarai Tarqiati Bank Limited.

Financial Institution

2000

2001

2002

2003

2004 (Jul–Dec)

Annual Growth Rate

ZTBL 24.4 27.6 29.1 29.3 13.4 6.4 Commercial Banks 9.3 12.1 17.5 22.7 15.1 34.8 New Private Commercial Banks

- - 0.6 1.4 1.3 133.3

Cooperatives 6 5.1 5.3 5.5 3.0 -2.4 Total 39.7 44.8 52.5 58.9 32.8 14.1

Source: State Bank of Pakistan. February 2004. Financial Sector Reforms and Pro-Poor Growth: Case Study of Pakistan. Pakistan.

Table 5: Total Number of Borrowers of Agricultural Credit (Excluding Cooperatives)

ZTBL = Zarai Tarqiati Bank Limited.

Financial Institution

2000

2001

2002

2003

% Increase (FY 2000–2003)

ZTBL 374,243 427,124 462,639 458,238 6.4 Commercial Banks 290,572 309,022 353,610 345,731 19.0 New Private Commercial Banks

- - 4,751 10,765 -

Total 664,815 736,146 821,000 814,737 22.5

Source: State Bank of Pakistan. February 2004. Financial Sector Reforms and Pro-Poor Growth: Case Study of Pakistan. Pakistan.

42. In order to address the growing demand for agricultural credit, the Government in its MTDF commits to enhancing agricultural productivity by taking the following measures:

(i) In addition to ZTBL and provincial cooperative banks, major commercial and private banks will also provide agricultural credit.

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(ii) Mark-up rates on agricultural credit will be reviewed by banks and reduced reasonably on the basis of market mechanisms.

(iii) One-window operation facilities will be further enhanced to make it more effective in meeting the farmer’s needs.

(iv) Special trainings will be developed for farmers and will be delivered by banks to create awareness and knowledge amongst them (farmers).

(v) Institutional credit will also be extended to rural non-farm sector including rural poor, tenants, agricultural artisans, women, and other disadvantaged groups by organizing rural communities.

43. It appears that one of the more tangible measures undertaken by the Government (and ADB) to address the shortfall in agricultural credit is the revitalization of ZTBL. The Government’s plans for ZTBL, previously known as the Agricultural Development Bank of Pakistan, involve cleaning up its balance sheet (high nonperforming loans portfolio) as well as its operations (commercializing the public sector organization) and then privatizing the institution. It appears that the Government’s continued support for ZTBL stems from its belief that ZTBL is ideally suited for serving as the key supplier of credit to the rural communities. The Government has invested quite heavily in trying to turn this organization around and the results have been mixed at best.11

b. Development of the Microfinance Industry 44. The second component of the Government’s strategy for addressing the shortfall in the country’s rural finance demand is by encouraging microfinance lending. The Government’s enthusiasm towards developing the microfinance industry lies in its belief that microfinance is a viable means for directly linking finance with poverty reduction. Currently, there are two specialized microfinance banks operating in the country (First Micro Finance Bank Limited and Khushali Bank). According to SBP, two other microfinance banks have been granted licenses and they became operational in 2005. Table 5 provides information on the microfinance sector in Pakistan. 11 ZTBL Chairman indicated that the organization was facing a number of serious problems, some of which are

discussed below: (i) ZTBL Board. As per the restructuring plan, ZTBL’s Board would be from the private sector. However, at the

moment, three members of the seven-member Board are secretaries from the federal government. Two of the remaining four are presidents of competing banks. The Chairman suggested that this situation, at the very least, poses as a conflict of interest.

(ii) Lending Rate Cap. ZTBL secures funds from SBP at 8% and it has a lending rate cap (announced by the President of Pakistan) of 8.5%. Chairman of ZTBL said that the bank will need at least a 6.5% spread in order to turn a profit.

(iii) Operational Issues. The bank faces formidable challenges such as, human resource capacity, operational inefficiency, technology, etc., and there is very little that has been done to address any of these issues.

12

Table 5: Micro Finance Sector in Pakistan (in PRs millions)

KB = Khushali Bank, FMFB = First Micro Finance Bank.

Item Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Advances Net of Provision KB 413.8 475.5 565.8 662.2 778.9 FMFB 4.38 17.61 31.0 49.8 58.2 Total Advances 418.2 493.1 596.8 712.0 837.1 % Change 17.9 21.0 19.3 17.6 Number of Borrowers KB 45,930 56,324 69,584 83,109 100,228 FMFB 169 713 1657 2,608 3,112 Total Advances 46,099 57,037 71,241 85,717 103,340 % Change 23.7 24.9 20.3 20.6 Number of New Borrowers During Quarter KB 16,827 10,394 13,260 13,525 17,119 FMFB 101 544 944 951 504 Total Advances 16,928 10,938 14,204 14,476 17,623 % Change -35.4 29.9 1.9 21.7 Average Loan Size KB 10,786.2 8,795.7 8,471.4 8,300.1 8,183.6 FMFB 25,662.7 24,697.1 20,304.8 19,406.1 16,263.2 Number of Branches KB 27 31 31 35 35 FMFB 3 8 9 10 11 Total No. of Branches 30 39 40 45 46

Source: State Bank of Pakistan. February 2004. Financial Sector Reforms and Pro-Poor Growth: Case Study of Pakistan. Pakistan.

45. In order to provide the required regulatory support to microfinance institutions (MFIs), SBP has developed and put in place legislations that provide for

(i) minimum capital requirements, (ii) exposure against contingent liabilities, (iii) maintenance of cash reserves and liquidity, (iv) statutory reserves, (v) depositor’s protection fund, (vi) restriction on certain types of transactions, (vii) maximum loan size, (viii) maximum exposure of a borrower from MFIs/other financial institutions/NGOs, (ix) rescheduling/restructuring of loans, (x) writing off of nonperforming loans, (xi) pricing of microfinance products and services, (xii) investment in shares of any body corporate, (xiii) undertaking of cash payments outside the MFI’s authorized place of business, (xiv) prevention of criminal use of MFI channels for the purposes of money laundering

and other unlawful management trade, (xv) audit and submission of accounts, (xvi) internal audit, (xvii) operational policies, and (xviii) restriction on election and appointment of directors.

46. Government’s efforts towards developing the country’s microfinance industry have yielded promising results. Initially, ADB assisted the Government in establishing the Khushali Bank—the first microfinance bank in Pakistan. Since then, microfinance has been gaining

13

ground in the country and a number of new players have started providing microfinance services. Unlike in the past when most institutions geared towards delivering rural finance relief were government owned and/or controlled, for the first time a new business model was utilized that was committed to establishing microfinance banks as commercially viable entities. However, since the microfinance industry has taken off, the Government’s (and ADB’s) continued support (financial and otherwise) for Khushali Bank is questioned and criticized by other microfinance providers.12 So far, it remains unclear whether or not developing a commercially viable microfinance business model is a sustainable proposition or not.13

4. Small and Medium Enterprise Finance 47. SME refers to those business organizations that employ no more than 250 persons or 50 persons depending on whether the organization is a manufacturing concern or a trading/service concern, respectively.14 In addition, the organization in question will also need to fulfill the following conditions:

(i) A manufacturing concern with total assets (excluding land) valued up to PRs100 million ($1.67 million) and net sales not exceeding PRs300 million ($5.02 million) as per the latest financial statement

(ii) A trading/service concern with total assets (excluding land) valued up to PRs50 million ($0.84 million) and net sales not exceeding PRs300 million ($5.02 million) as per the latest financial statement

48. Table 6 (below) provides additional information on how small and medium enterprises are defined.

Table 6: Definition of SMEs

Factor Small Enterprise Medium Enterprise Number of Employeesa

Up to 50 for manufacturing 36–99 for manufacturing

Up to 20 for services

21–50 for services

Total Asset Valueb PRs2–20 million for manufacturing Rs21–100 million for manufacturing PRs2–10 million for services

Rs11–50 million for services

Gross Salesc PRs2–20 million for manufacturing Rs21–100 million for manufacturing PRs2–10 million for services Rs11–50 million for services a Fulltime employees with at least six months employment prior to evaluation. b As per latest evaluations, and includes building and technical non-physical capital. c As per latest financial statements . Source: Medium Term Development Framework 2005–2010. 49. SMEs play a vital role in the economic reality of Pakistan as they constitute 99% of the nearly 2.3 million enterprises in the country and contribute 30% to the manufacturing sector and generate 25% of manufactured exports.15 Importance of SMEs in Pakistan is also driven by the

12 The continued support for Khushali Bank is viewed as an unfair advantage. It is interesting to note that Khushali

Bank is not a member of the apex microfinance organization in Pakistan, i.e., The Micro Finance Network. 13 According to the President of Khushali Bank results to date were on track. However, the bank needed to establish

a track record of commercial viability in the medium term. 14 SME Bank website (www.smebank.org) 15 Source: Planning Commission. May 2005. Medium Term Development Framework 2005–2010. Pakistan.

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fact that increasing the number of SMEs can increase employment more than growth in large-scale firms.16 There is a growing realization in Pakistan that SMEs can play a vital role in enabling the country’s drive towards sustainable development. Among the many issues that constrain growth of SMEs (as discussed in Chapter III) by far the greatest impediment faced by these organizations is lack of financing.17 In order to provide financing support to the SME community, the Government in its MTDF plans to facilitate SME financing by:

(i) Encouraging venture capital for new SME start-ups (especially for those engaged in export oriented contract-manufacturing and designing, or electronic services).

(ii) Offering incentive schemes in order to streamline taxation and business registration for SMEs.

(iii) Improving weightage for skill levels, technology and export potential, and linkages with prime contractor, in addition to the usual evaluation schemes that are based upon physical assets and turnover.

50. Since January 2004, SBP has enforced SME-friendly regulations so as to provide better financing opportunities and options for such entities. According to these regulations, banks do not have to require collateral and instead can take into consideration asset conversion cycle and cash flow generation as the basis for loan approval. 51. ADB has been supporting the development of the SME sector in Pakistan through its SME Sector Development program. In addition to providing capacity building support to the SME sector, this program is also providing financing for the establishment and restructuring of the SME Bank (discussed below). 52. In 2002, the SME Bank was established and its primary purpose was stated as facilitation of credit to SMEs. This bank was created by combining two state-owned DFIs that were on the brink of collapse due to exceptionally high nonperforming loans portfolios. Since its creation, the SME Bank has been primarily preoccupied with cleaning up its books and operations. It is also in the process of developing prototypes for a range of SME banking functions, such as, lending programs, credit appraisals and delivery methodologies, standardized documentation, monitoring mechanisms, etc. The next step is for the SME Bank to be privatized—however, the timing, terms, and mode of this privatization remain unclear.18

5. Other a. Human Capital

53. Availability of appropriate human capital resources is a prerequisite for establishment of mature financial markets in Pakistan. Requirements for human resources differ significantly across the different banking subsectors. Provided below is a discussion on the various aspects of the human resources situation across different aspects of Pakistan’s banking system.

16 SME Financing: Issues & Strategies. Welcome address given at the SME Conference by the Governor State Bank

of Pakistan in Lahore on 10 May 2005. 17 According to a recently conducted World Business Environment Survey that covered 4,000 firms in 54 countries

found that SMEs cited inadequate access to financing as their primary constraint to growth. 18 The President of SME Bank and the Governor of the State Bank of Pakistan were not sure when this entity would

be privatized. They both talked about 2006 but with vagueness about “what” was going to be privatized. When pressed they talked about the banking license and the Mission team got the impression that the turn around and SME Bank’s penetration into the SME sector to meet the MTDF 2005–2010 intentions was less of a focus for them.

15

(i) Regulatory. SBP enjoys a high level of confidence within the banking sector. In addition to attracting and retaining the right skill mix to carry out its regulatory responsibilities, SBP has also instituted training programs for young professionals. So far, according to Governor SBP, the organization has trained 400 Graduate students who are then either absorbed by SBP itself or else seconded to other financial institution.19

(ii) Commercial Banks. There do not appear to be any issues associated with the commercial banks sourcing talent from the local markets.

(iii) Microfinance/Rural Finance/SME. Both SME and microfinance banking are commercially untested models. These organizations are investing heavily in technology and hiring/training fresh graduates for their respective market segments.20 ZTBL, too, is investing heavily in technology; however, the organization does not appear to have a coherent strategy towards addressing all of its human resources related issues.21

C. Non-Bank Financial Institutions

1. Regulatory Framework 54. The Securities and Exchange Commission of Pakistan (SECP) Act 1997 dissolved the old corporate sector regulator the Corporate Law Authority (CLA), which was a department within the Ministry of Finance, and replaced it with the SECP. On 1 January 1999, through a gazette notification, the Securities and Exchange Commission Act was enforced making the SECP fully operational. 55. In accordance with the requirements of the SECP Act, a commission and a board (the Securities and Exchange Policy Board) were established within the SECP. The Commission consists of commissioners some of whom are appointed by the federal government. However, a majority of them are from the private sector. Likewise, the Board consists of seven members, of which four are appointed by the federal government and the rest from the private sector. 56. Power to make regulations is shared between the Board and the Commission. Whereas the Board can make regulations on its own, the Commission can only "recommend" proposed regulations to the Board for their approval. All the powers and functions previously enjoyed by

19 The Governor SBP indicated that some of these graduates had been deputed to fill human capacity gaps at other

institutions such as the SECP and ZTBL. 20 Khushali Bank has put in place an aggressive recruitment strategy whereby the organization trains Graduate

students. According to the Bank the only downside is the high rate of turnover of these new recruits. 21 Correcting its human resources problems provides an interesting window into the broader issues faced by ZTBL,

some of these are detailed below: 1. Golden Hand Shake Scheme (GHS). As part of its restructuring efforts, ZTBL implemented a GHS Scheme

before it developed an understanding of what the organization’s human resource-related needs were. The obvious unintended outcome of this exercise was that most of the competent employees left the organization. Whereas in the past, one ZTBL field officer was required to cater to 300 clients—now, after the GHS, one field officer is required to meet the demands of 1,200 clients.

2. Technology. According to ZTBL’s Chairman, there are no computers in any of the organization’s field offices. In order to correct this deficiency the organization is investing substantially in developing technologies it can use; however, it remains unclear whether the organization has thought about how its personnel will be able to utilize these technologies.

3. Management and Culture. ZTBL is having problems in recruiting a management team that can help turn this organization around. One of the main issues that the new management will grapple with is the organization-wide operational inefficiency and lack of motivation.

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CLA were transferred to the Commission with the exception of the powers to create regulations. Provided below are some of SECP’s main responsibilities:

(i) regulating issue of securities; (ii) regulating business in stock exchanges and any other securities markets; (iii) registering and regulating workings of stock brokers, sub-brokers, share transfer

agents, bankers to an issue, trustees of trust deeds, registrars to an issue, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with the securities markets in any manner;

(iv) proposing regulations for the registration and workings of collective investment schemes, including unit trust schemes;

(v) promoting and regulating self-regulatory organizations in the securities industry and related fields such as stock exchanges and associations of mutual funds, leasing companies and other non bank financial institutions;

(vi) prohibiting fraudulent and unfair trade practices relating to securities markets; and

(vii) regulating substantial acquisition of shares and the merger and takeover of companies.

57. SECP Act clearly states that the Commission will regulate the NBFIs, which include development finance institutions, insurance companies, leasing companies, housing finance companies and investment banks. Certain activities of the NBFIs are, however, regulated by the SBP. There is no clear distinction in Pakistan with regard to the scope of activity of the investment and commercial banks with the result that the investment banks can perform almost all the functions of a commercial bank and vice versa. Full text of the SECP Act 1997 is provided as Appendix 3.

2. Stock Exchanges 58. The three registered stock exchanges in Pakistan are located in Karachi, Lahore, and Islamabad. Karachi Stock Exchange (KSE) is the biggest and most liquid stock exchange in the country. As of 31 October 2004, 661 companies were listed with a market capitalization of PRs1,478.6 billion ($24.75 billion) and with a listed capital of PRs396.4 billion ($6.64 billion).22

59. Membership of KSE is capped at 200 and the only way to secure membership is to purchase a seat from an existing member. Since June 1990, corporate entities can also become members of KSE and currently there are 106 such corporate members (nine of which are publicly traded companies).23 KSE is run by a 10-member board of directors that consists of five elected directors (elected from amongst the 200 members of KSE), four non-member directors (elected from various trade and/or professional bodies), and the Managing Director of the stock exchange. The Chairman is elected by the Board from amongst the elected directors. The operational and administrative activities of the stock exchange are managed by the Managing Director who also is the full time Chief Executive of the exchange. 60. According to the KSE classification, stock market consists of 34 sectors. In terms of market capitalization, oil and gas exploration, communication, commercial banks, and oil and gas generation and distribution are the largest sectors investment-wise that between them

22 Information secured from Karachi Stock Exchange. 23 Corporate members are required to satisfy certain minimum requirements, such as minimum paid up capital of

these entities should be PRs20 million.

17

account for over PRs100 billion ($1.67 billion). Also counted among the largest sectors are power generation and fertilizers. Table 7 provides more detailed information on KSE market activity. 61. The other major stock exchange is the Lahore Stock Exchange, which accounts for around twenty percent of the transactional volume but appears to be more technologically savvy and innovative than the KSE.24

62. Regulation of the stock market and securities business in Pakistan is principally governed by the Securities and Exchange Ordinance 1969, and the rules prescribed pursuant to it. The regulatory body entrusted with the powers conferred on the government under this law is the SECP. The SECP is responsible for supervising stock exchanges and their members. It also licenses investment advisers, regulates the contents of the prospectuses and enforces legislation pertaining to companies and corporate securities. Stock exchanges are also expected to self-regulate and to establish standards for listing and dealing in securities, regulating the conduct of stock exchange members, and organizing the smooth clearing and settlement of trades executed.

24 According to LSE management they have plans to open stock exchange field offices in various major cities of

Punjab. They believe that having access to trading floors will go along way in winning over investors from those cities to invest and trade on the LSE.

Table 7: Karachi Stock Exchange Market Activity

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Year Ended 31 December 5 August Item 2000 20022001 2003 2004 2005

KSE – 100 Indexa 1,508

1,273 2,701 4,472 6,218 7,325Year-wise Increase 99 (235)

1,428 1,770 1,747 1,106

Cumulative Increase/Decrease Since 2001 n.a. n.a. 1,194 2,964 4,711 5,817

Dividend Yield of KSE – 100 Index Companies 7 15 9 6 6 5 Price Earnings Ratio of KSE – 100 Index Companies 10 7 13 11 12 11 KSE All Share Indexb 946 820 1,671 2,833 4,105 4,811Year-Wise Increase 71 (125) 851 1,162 1,272 707 Cumulative Increase/Decrease Since 2001 Total Number of Listed Companies 762 747 711 701 661 659 Total Listed Capital 236,459 235,683 291,241 313,267 405,646 447,150 Total Market Capitalization 382,730 296,144

595,206

951,447

1,723,454

2,082,660

New Companies Listed During the Year 3 3 4 6 17 10 Listed Capital of New Companies 2,035 2,885 6,318 4,563 66,837 17,783Number of Companies Listed Under: Voluntary Delisting and Buy Back of Shares 3 5 9 8 15 8 Due to Merger 1 7 16 8 39 3 Involuntary Delisting 2 7 15 0 3 1 New Debt Instruments Listed During the Year 3 5 16 6 5 6 Listed Capital of New Debt Instruments 648 5,658 8,656 2,749 4,775 8,125

Average Daily Turnover (T+3) YTDc 187 97 171 309 344 387Average Value of Daily Turnover (YTD) 7,130 3,134 5,963 15,686 17,409 35,557

Average Daily Turnover (Future) YTDd n.a. 15 35 54 70 129Average Value of Daily Turnover (YTD) n.a.

314

1,721

3,907

4,914

17,440

n.a. = not available, KSE = Karachi Stock Exchange, YTD = year-to-date. a The KSE Exchange was rolled out in November 1991. b KSE All Share was introduced in September 1995. c Includes March 2005 T+3 average turnover of 513 million shares with average trade value of PRs53,265 million (excluding which the average daily T+3 turnover

is 365 million shares and average trade value of PRs32,402 million). d Includes March 2005 Future average turnover of 315 million shares with average trade value of PRs50,749 million (excluding which the average daily Future

turnover is 96 million shares with the average trade value of PRs11,624 million).

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3. Insurance 63. Pakistan’s insurance industry is relatively small as compared with the insurance markets of other countries with more developed and/or mature financial markets. As is the case in the insurance markets of other developing countries, Pakistan’s insurance industry is small in proportion to its gross domestic product (Table 8).

Table 8: Cross-Country Comparison of Insurance Sectors (% Insurance Contributions to GDP)

Countries Non-Life Life Total

USA 4.3 4.5 8.8 Brazil 1.8 0.4 2.2 Mexico 0.9 0.9 1.8 UK 3.1 12.7 15.8 China 0.7 1.1 1.8 India 0.6 1.7 2.3 Malaysia 1.6 2.1 3.7 Indonesia 0.6 0.6 1.2 Nigeria 0.6 0.1 0.7 Kenya 1.9 0.7 2.6 Pakistan 0.3 0.2 0.5

Source: Pakistan Financial Sector Assessment 2003, State Bank of Pakistan. 64. The largest influence and activities generated within Pakistan’s insurance market (both life and non-life) are by the state-owned companies. The state-owned companies National Insurance Company Limited (NICL), Pakistan Reinsurance Company Limited (PRCL) and State Life Insurance Company (SLIC) are, like private sector insurers, subject to the provisions of the Insurance Ordinance and therefore to the jurisdiction of the SECP. 65. The insurance sector in Pakistan can broadly be rationalized into two main classes—life insurance and non-life insurance. The country only has one reinsurance company that carries out reinsurance activity. Details for the two main classes are provided below.

4. The Life Insurance Sector

66. Life insurance sector activity in Pakistan currently accounts for approximately 0.2% of GDP, which is far below any expected saturation level, and appears to have great scope for expansion. 67. Even though a major portion—i.e., 76% of the premium income—of the sector is dominated by the state owned/run SLIC there are also four private sector companies.28 In addition, life insurance is also provided by Postal Life, a service under the control of the Ministry of Communications, and short term life insurance may be offered by non-life companies.

28 Ernst & Young. 2005. Pakistan Insurance Sector—A Report to the Asian Development Bank under TA 4033-PAK.

United Kingdom.

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68. According to the Insurance Ordinance, effective 31 December 2004, the minimum paid-up capital requirement for life insurance providers was set at PRs150 million ($2.51 million). Failure of any insurer in complying with these requirements would lead to the insurer in question being prevented from operating in this sector. 69. The overall structure of this sector is such that the activities appear to be concentrated within the public sector. There appears to be a significant role that the private sector can play in shaping the future of this market, considering that there are plans to privatize the state owned corporations, such as SLIC, etc.

5. The Non-Life Insurance Sector

70. The non-life insurance sector activity in Pakistan currently represents 0.3% of the country’s GDP. This represents a level of penetration that is, as for life insurance, well below levels that would be considered as saturation; this has been estimated at approximately 5% (footnote 32). 71. An increasing popularity of leased motor vehicles explains this sector’s dependence on motor insurance—this type of insurance accounted for 35% of net premium revenue in 2002 and 42% in 2003 (footnote 32). However, this class of business generated underwriting losses in both years. Profit was mostly generated in the two other largest classes (after motor insurance), such as fire and marine, and aviation and transport (mostly marine cargo) business. 72. An important aspect of the sector to consider involves the difficulties faced by market participants due to the aftermath of 11 September 2001. The reinsurance rates increased as a consequence of these events and in some cases terrorism cover was only available on a selective basis.29

73. Overall, the non-life sector has undergone significant growth and consolidation over the past few years. Consolidation has been driven in part by the increased capital requirements introduced by the Insurance Ordinance, which reached their most recent minimum equity level of PRs80 million ($1.34 million) with effect from 31 December 2004. Further important developments within this sector involve aggressive strategies by banks to provide these insurance services. Such strategies can involve banks either acquiring insurance companies or establishing separate in-house departments. Some examples of this trend include Adamjee Insurance being acquired by Muslim Commercial Bank, and Agha Khan Foundation for Economic Development, the owner of New Jubilee Insurance and New Jubilee Life, has acquired Habib Bank Limited. Another established retailer, Pakistan Industrial Credit & Investment Corporation, has established a non-life insurer and is in the process of trying to set up a life insurance company.

6. Leasing 74. Since the creation of the first leasing company in Pakistan in the mid-80s, leasing has remained an important segment within the country’s financial markets. As was the case with retail banks, initially, the focus of these leasing companies was on catering to the needs of the 29 Under the Financial (Non-Bank) Markets and Governance Programme Loan, ADB will provide a political risk

guarantee with counter-guarantee from the Government of Pakistan for political violence related risks (including terrorism and sabotage) for which insurance in Pakistan is not readily available. The counter guarantee has yet to be signed by the Government.

21

corporate sector. However, slow economic growth and a slump in profitability forced these leasing organizations to broaden their business focus and offer services to individual consumers. 75. As of December 2003, the leasing industry was made up of 27 companies and their total assets stood at PRs45.8 billion ($0.77 billion). Table 9 provides a breakdown of the leasing industry assets in 2003.

Table 9: Breakout of Lease Finance

Asset Type 2002 2003 Plant and Machinery 54% 54% Vehicles 32% 35% Equipment 10% 8% Other 4% 3% Total 100% 100% Source: State Bank of Pakistan.

76. The comparison for the 2 years (Table 9) suggests that the asset composition over this time frame remained largely unchanged. Plant and machinery was unchanged and accounted for the largest share of the leasing industry assets. The 3% rise in vehicles can be attributed to the intense competition between commercial banks and leasing companies to deliver leasing services for vehicles.30 77. Since the development of the SECP, leasing companies have been categorized as non-bank financial companies and are regulated by the SECP in accordance with the 2003 Non-Banking Finance (Establishment and Regulations) Rules. Last 3 years have witnessed increased consolidation across the industry as smaller companies merge their resources in order to satisfy the increased minimum paid-up capital requirements prescribed by the SECP.

7. Other 78. Provided in this section are important issues as they relate to the development of the NBFI sector.

a. Badla Phaseout 79. “Badla” is a facility for financing share purchases and is extended by brokerages and banks, which allows buyers to obtain highly leveraged positions in the market. The extent of leverage through such non-bank financing is not transparent and underlying security transactions are typically speculative. This directly results in market manipulation and increases systemic risk. The need to phase out Badla is obvious and is seen as a growing pain that many other financial markets in different countries have also had to overcome in order to realize mature and well-functioning capital markets. However, so far SECP failed in its efforts to phase

30 The leasing companies interviewed during the Evaluation Mission stated that provision of leasing services by

commercial banks was a major cause for concern for them as it gave the commercial banks an unfair advantage, stemming from the fact that leasing companies, as non-bank financial intermediaries, have to comply with more stringent requirements of the SECP; whereas, the commercial banks are regulated by the State Bank of Pakistan and are not subject to any such restrictive requirements.

22

out Badla trading.31 The drop in liquidity that occurred as a result of the proposed phase out served as the deterrent for the regulator (SECP) and it quickly reversed its decision.32 The unavailability of a viable alternative to replace Badla has been identified as the primary deficiency of the failed phaseout plan.33 The Badla debacle contains interesting insight into the effectiveness of SECP as the regulator for the NBFI market.

b. Futures and Commodities Market 80. Developing the futures and commodities markets in Pakistan appear to be a prerequisite for the Badla phase out, as well as for broadening and deepening the country’s financial markets. Progress in developing these markets has so far been limited. Currently, the only solution available for futures trading is a 30-day forward contract. On the other hand, the development of the commodities market in Pakistan is currently on hold pending the drafting and implementation of the Futures Act. According to the National Commodities Exchange Limited, the company has been ready to go live since mid-2004; however, it has been told to wait till the Futures Act is instituted.34

8. Human Capital 81. Unlike the banking sector institutions, the non-bank side of the financial industry faces an uphill task as it tries to develop its human resource capacity. This matter is further complicated by the fact that most of these institutions are relatively new and they have to constantly adjust to the changing regulatory and other requirements of a growing market. This appears to ring true for both the regulator as well as the market players. There is broad-based consensus in the market that SECP is finding it hard to effectively regulate the NBFI market. Many attribute SECP’s deficiency in enforcement powers to it (SECP) not having the breadth of expertise that an effective regulator is required to have. On the other hand, market players suggested that it would be useful to develop certification and training modules that will educate market players and investors about the risks associated with their investments.

IV. STRATEGIES AND POLICIES 82. This chapter discusses Government and ADB strategies and policies that were geared towards enhancing private sector participation in the country’s economy.35

31 According to the SECP Chairman, he had worked on the proposed Badla phase out for over a year and had

secured agreement from all the key stakeholders. 32 India has also undergone a similar exercise whereby plans to phase out speculative trading were rolled back and

then later implemented. 33 Stock Market Review Task Force. June 2005. Report on the Review of Stock Market Situation, March 2005.

Pakistan. 34 According to the Managing Director of the National Commodities Exchange Limited, instead of drafting and

implementing a new Futures Act, a more effective option would be to modify and/or amend the existing Securities Act and pointed to efforts in India, where an existing Securities Act was modified and implemented. He also added that Pakistan’s rural farmers would benefit much like the farmers in India, where the farmers can get indicative prices for their commodities off of monitors placed in rural post offices.

35 As is the case with most public sector planning documents, the Governments’ planning documents represent political aspirations more than the operational realities. The articulated “what” is planned tends to be tuned to current political and donor themes while the “how” is most often not stated.

23

A. Government Strategies and Policies 83. Table 10 gives the highlights from the strategies and policies followed by the Government from 1985–2004.

Table 10: Government of Pakistan’s Strategy Documents Title Period Covered

Sixth Five-Year Plan 1983–1988

Seventh Five-Year Plan 1988–1993

Eighth Five-Year Plan 1993–1998

Ninth Five-Year Plan 1998–2003 Ten-Year Perspective Development Plan (2001 – 11) 2001–2011

Medium Term Development Framework 2005–2010 Source: Ministry of Planning & Development, Government of Pakistan

1. Sixth Five-Year Plan (1983–1988)

84. The main objective of this development plan was to achieve equitable development within the country, i.e., development should be shared amongst the masses. The plan employed the following strategy in order to achieve its primary objective:

(i) Establish and maintain high growth rates by increasing productivity within the

agricultural sector and by developing the service sector. (ii) Encourage rural transformation by providing infrastructure facilities to the rural

farmers. (iii) Create four million new jobs in small-scale production sectors in agriculture and

industry. (iv) Increase share of provincial governments in public sector development programs (v) Allocate funds for the development of economic backwards areas such as

Balochistan. (vi) Continue import substitution and export promotion in order to decrease reliance

on foreign aid.

2. Seventh Five-Year Plan (1988–1993) 85. This plan focused on some of the same issues highlighted in the sixth five-year plan. The main national objectives, as stated, were:

(i) Promote national solidarity through fundamental restructuring of education and information policy, which should be based on a well-defined concept of natural culture.

(ii) Implement a concrete program of poverty alleviation, especially in the rural areas, to attain full employment and to ensure continued growth and stability.

(iii) Prepare uplift programs for advancement of all sections of the society. (iv) Formulate specific, monitorable targets for increasing economic self-reliance,

supported by legislative safeguards.

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86. An interesting development that took place during this plan period was that sectors that used to be reserved for the public sector were opened to the private sector. During this plan period two banks and 63 industrial units were privatized.

3. Eighth Five-Year Plan (1993–1998) 87. This plan was released by the Government in June 1994. Unlike the previous plans, this plan outlined private sector led investment as a priority. Provided below are some of the main objectives as stated in this plan.

(i) Improve enabling environment by a. providing adequate services and physical infrastructure, b. providing education and training, c. providing better health coverage, d. strengthening capital markets, and e. deregulation and privatization.

(ii) Develop supportive policies for fiscal, monetary, foreign exchange, and trade

regimes. 88. The development and articulation of a private sector led investment agenda by the Government constituted an important milestone in the Government’s planning process. Also, this signaled the public sectors continued commitment to deregulating and liberalizing the country’s financial sector.

4. Ninth Five-Year Plan (1998–2003) 89. This plan was not officially announced and/or implemented by the Government. The reason for this was because the Government was dealing with the fallout from its nuclear testing (e.g., international sanctions, etc.). During this timeframe, the Government was mostly concentrating on achieving short term economic stabilization by tightening its fiscal and monetary policies.

5. Ten-Year Perspective Development Plan (2001–2011) 90. This plan laid out Government’s intentions to bolster the country’s financial sector by articulating a wide variety of measures. Provided below is information on the Government’s stated intentions as per this plan.

(i) New financial products will be introduced in order to cater to the varying needs of depositors.

(ii) Continue to auction investment bonds for those institutional investors who are interested in investing in government securities.

(iii) Forge ahead with privatization plans for commercial banks, and Corporate Industrial Restructuring Corporation was set up to deal with nonperforming loans.

(iv) Promulgate bankruptcy laws in order to streamline dispute resolution mechanism.

(v) Strengthen capital markets by supporting development of regulatory frameworks for different financial products (such as pensions) by the SECP.

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(vi) Microfinance initiatives, such as Khushali Bank, would encourage savings at the grassroots level (i.e., microfinance banks would only lend if the applicant has already been saving).

(vii) Special measures were being taken to extend credit to SMEs—credit of PRs2 billion ($0.03 billion) would be made available for development of SMEs in priority sectors.

91. This plan was the first time that the Government realized and articulated reforms not just for the financial markets but also for the various subsectors (both banking sector and NBFIs). This was a significant departure from past practices, when the financial markets were state controlled/run and financial sector priorities were either left out of the planning process and/or ignored.

6. Medium Term Development Framework (2005–2010) 92. The MTDF reflects the adoption of a new approach towards planning by the Government. For the first time, the Government has developed a “framework,” rather than a “plan,” for establishing and articulating its economic and other priorities. This framework is built over a collaborative system that assumes extensive consultations across different ministries. Moreover, this level of inclusiveness reflects a maturing government capability that could be used to drive the donor community rather than the Government being driven by donors. 93. The MTDF outlines a range of financial sector issues and opportunities that the Government plans to consider during the current planning cycle. Included here are:

(i) Recommendations that the Government plans to follow in order to develop the country’s capital markets, such as strengthening capital markets by increasing market capitalization, developing bond markets, and encouraging institutional investments

(ii) Develop an enabling environment for the private sector by encouraging banks and other organizations to deliver financial and other support required by the SMEs. The MTDF also states that specialized technical and financial capacity building support will be provided to those evaluating SME financing opportunities.

(iii) Encourage Micro Finance for Poverty Alleviation—MTDF underscores the Government’s commitment to encourage provision of micro finance services to the poor. According to the plan, the Government will support establishment of an extensive rural network for microfinance services provision through ZTBL, Khushali Bank, etc.

B. ADB’s Country Strategies 94. Discussed in this section are ADB’s country strategies and, more importantly, their relevance towards assisting the private sector in Pakistan over the last two decades. Since 1985, ADB has produced five main strategy documents to guide its operations in Pakistan—in 1985, 1990, 1995, 1999 and 2002—two CSP updates, and an interim operational framework. Nuclear tests carried out by Pakistan triggered international sanctions in 1998, effectively suspending implementation of the 1995 strategy. A country operational framework was prepared to cover a reduced level of operations over 1999–2000. Preparation of a new country strategy was somewhat delayed due, in part, to the need to take into account dramatically changed circumstances following the 11 September 2001 terrorist attack on the United States. A country assistance plan for 2001–2003 (approved in December 2000) provided some

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strategic direction pending preparation of a new strategy. Table 11 lists the various strategies followed by ADB from 1985–2004.

Table 11: ADB’s Country Strategy Documents for Pakistan Operations

Title Period Covered Strategies for Economic Growth and Development: The Bank’s Role in Pakistan 1985–1989

The Bank’s Operational Strategy in Pakistan 1990–1994

Country Operational Strategy Study for Pakistan 1995–1998

Country Operational Framework 1999–2000

Country Strategy and Program: Pakistan 2002–2006

Country Strategy and Program Update 2004–2006

Country Strategy and Program Update 2005–2006 Source: Asian Development Bank database.

1. Strategies for Economic Growth and Development (1985–1989)

95. According to this strategy document, ADB’s primary objective in its support to Pakistan would be balanced growth through policies that can bring about structural change. The strategy does not directly address financial sector development. The strategy discusses providing support to private sector entities as well as those public sector entities that can be privatized. Realizing difficulties associated with conventional lending the strategy proposes to diversify financial support ADB offers to the private sector, such as equity investment, leasing, direct lending, etc.

2. ADB’s Operational Strategy in Pakistan (1990–1994) 96. This strategy document states that ADB will (i) promote growth of exports and/or conserve foreign exchange; (ii) mobilize domestic resources; (iii) increase private sector participation; (iv) improve efficiency of existing investment and optimize resource mobilization; and (v) satisfy basic needs, poverty alleviation, and human resource mobilization. In order to enhance private sector participation (as in [ii]), ADB would support reforms to increase domestic resource mobilization through financial sector (with special emphasis on reducing segmentation in financial markets and developing capital markets). In addition, the strategy documents states that ADB will develop an expanding portfolio of private sector investments in order to play a catalytic role in increasing private sector’s role in the country’s economy.

3. Country Operational Strategy for Pakistan (1995–1998) 97. During this time, Pakistan’s economy was suffering low growth, high macroeconomic imbalances, growing public sector indebtedness, high inflation rates, and underlying structural weaknesses that aggravated socioeconomic stability. Given these adverse circumstances, ADB’s priorities were to assist the country to increase capital accumulation, upgrade human capital development, enhance economic efficiency, improve social/macroeconomic stability, and protect environment and natural resources. However, details on how ADB actually planned to provide this assistance were not included in this document.

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4. Country Assistance Plan (1999–2001) 98. Human development (including education, health, population welfare, and water supply and sanitation) was the primary focus of this ADB’s Country Operational Framework. For finance, strategy discussed its ongoing program—Capital Market Development Program—which was aimed at development of a diversified and competitive capital market in the country. The strategy suggested that in view of the high magnitude of ADB’s ongoing investments in this sector, no new investment was being considered and/or proposed for that operational cycle.

5. Country Strategy and Program (2002–2006) 99. Poverty reduction, pro-poor growth, social development, and governance emerge as the over-riding concerns for this strategy. According to this strategy, ADB planned to support private sector development by supporting initiatives for development of SMEs, rural finance, and agribusiness; and assisting in capital market development, and restructuring and privatizing selected state-owned financial institutions. Further, ADB’s efforts will provide assistance to complete its capital markets reform agenda to (i) develop bond and sound contractual saving institutions and instruments, and (ii) restructuring and privatizing of selected state-owned financial institutions.

6. Country Strategy and Program Update (2004–2006) 100. This strategy update discusses the ongoing assistance that was being provided for the development of the MF sector (primarily to Khushali Bank). The document also highlighted the planned assistance for development of the SME sector.

7. Country Strategy and Program Update (2005–2006) 101. The overarching concerns (as articulated in the CSP 2002 Strategy) remained unchanged i.e., poverty alleviation. ADB’s assistance within the financial sector included its ongoing assistance for microfinance and rural finance entities such as Khushali Bank and ZTBL. The strategy also highlighted ADB’s commitment to developing SME sector in the country (as SME growth could serve to catalyze pro-poor growth) by supporting Government’s efforts aimed at privatizing SME bank. 102. Table 12 summarizes information and analysis presented in this chapter with regards to strategies and policies pursued by GOP and ADB in order to aid private sector activity.

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Table 12: Summary of the Government’s and ADB’s Private Sector Assistance-Related Strategies and Policies

Government Strategies Year ADB Strategies 1983 1984 1985 1986

Sixth Five-Year Plan (1983–1988). As per this plan, Government’s strategy was to (i) increase productivity within the agricultural sector and develop the service sector (ii) Encourage rural transformation (iii) Create four million new jobs in small scale production sectors (vi) develop economic backwards areas, and (vi) encourage import substitution and export promotion. 1987

1988 1989

Strategies for Economic Growth and Development (1985–1989). ADB’s primary objective in its support to Pakistan would be balanced growth through policies that could bring about structural change. The strategy does not directly address financial sector development. The strategy discusses providing support directly to private sector entities through equity investment, leasing, direct lending, etc.

1990 1991

Seventh Five-Year Plan (1988–1993). This plan focused on some of the same issues highlighted in the sixth five-year plan. An interesting development that took place during this plan period was that sectors that used to be reserved for the public sector were opened to the private sector. During this plan period, two banks and 63 industrial units were privatized. 1992

1993

1994

ADB’s Operational Strategy in Pakistan (1990–1994). The strategy states that ADB will (i) promote exports, (ii) mobilize domestic resources, (iii) increase private sector participation, and (iv) improve efficiency of existing investment and optimize resource mobilization. In order to enhance private sector participation (as in [ii]), ADB would support reforms to increase domestic resource mobilization through the financial sector. The strategy also states that ADB will develop an expanding portfolio of private sector investments in order to increase the private sector’s role in the country’s economy.

1995

1996

Eighth Five-Year Plan (1993–1998). Unlike the previous plans this plan outlined private sector led investment as a priority. The main objectives specified of this plan were to improve business climate in the country and develop supportive policies for fiscal, monetary, foreign exchange, and trade regimes. The development and articulation of a private sector led investment agenda by the Government constituted an important milestone in the Government’s planning process. Also, this signaled the public sectors continued commitment to deregulating and liberalizing the country’s financial sector. 1997

1998

Country Operational Strategy for Pakistan (1995–1998). During this time, ADB’s priorities were to assist the country to increase capital accumulation, upgrade human capital development, enhance economic efficiency, improve social/macroeconomic stability and protect environment and natural resources. However, details on how ADB actually planned to provide this assistance were not included in this document.

1999

Ninth Five-Year Plan (1998–2003). This plan was not officially announced and/or implemented by the Government.

2000

Country Assistance Plan (1999–2001). Human development (including education, health, population welfare, and water supply and sanitation) was

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Government Strategies Year ADB Strategies Ten-Year Perspective Development Plan (2001–2011). This plan laid out the Government’s intentions to bolster the country’s financial sector by articulating a wide variety of measures, such as (i) introducing new financial products, (ii) continuing auction investment, (iii) forging ahead with privatization plans, (iv) promulgating bankruptcy laws, (v) strengthening capital markets, (vi) supporting microfinance initiatives, and (vii) developing SMEs as a priority sector. This plan was the first time that the Government realized and articulated reforms not just for the financial markets but also for the various subsectors (both banking sector and NBFIs).

2001

the primary focus of this ADB’s Country Operational Framework. For finance, strategy discussed its ongoing program—Capital Market Development Program—which was aimed at development of a diversified and competitive capital market in the country. The strategy suggested that in view of the high magnitude of ADB’s ongoing investments in this sector, no new investment was being considered and/or proposed for that operational cycle.

2002

2003

Country Strategy and Program (2002–2006). Poverty reduction, pro-poor growth, social development, and governance emerge as the over-riding concerns for this strategy. ADB planned to support private sector development by supporting initiatives for development of SMEs, rural finance, and agribusiness; and assisting in capital market development, and restructuring and privatizing selected state-owned financial institutions.

2004

Country Strategy and Program Update (2004–2006). This strategy update discusses the ongoing assistance that was being provided for the development of the MF sector (primarily to Khushali Bank). The document also highlighted the planned assistance for development of the SME sector.

2005

Country Strategy and Program Update (2005–2006). The overarching concerns (as articulated in the CSP 2002 Strategy) remained unchanged, i.e., poverty alleviation. ADB’s assistance within the financial sector included its ongoing assistance for microfinance and rural finance entities such as Khushali Bank and ZTBL. The strategy also highlighted ADB’s commitment to developing SME sector in the country (as SME growth could serve to catalyze pro-poor growth) by supporting Government’s efforts aimed at privatizing SME bank.

2006 2007 2008 2009

Medium Term Development Framework (2005–2010). The MTDF outlines the Government’s plans, which are to (i) strengthen capital markets, (ii) develop an enabling environment for the private sector by encouraging banks and other organizations to deliver financial and other support required by SMEs, and (iii) encourage microfinance for poverty alleviation. 2010

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V. DESCRIPTION OF ADB’S PRIVATE SECTOR OPERATIONS 103. This chapter provides information and analysis on ADB’s assistance to the private sector in Pakistan over the last two decades. As mentioned earlier, ADB assisted the private sector in Pakistan either through finance sector reform programs or through direct private sector transactions. Whereas the finance sector reform projects involve large-scale programs developed to strengthen the financial systems and regulatory framework in the country, the private sector transactions refers to those projects undertaken by ADB’s private sector operations window. The remainder of this chapter will be dedicated to discussing these types of modalities employed by ADB to further the private sector in Pakistan. A. Finance Sector Development (Public Sector Loans) 104. Over the last two decades, two thirds of ADB’s assistance to the private sector in Pakistan was provided in the form of finance sector development projects and delivered through a series of large-scale public sector loans. Next, provided below is information and analysis on each of these finance sector development projects.

1. Financial Sector Intermediation Loan 105. In June 1995, ADB approved the $100 million Financial Sector Intermediation Loan (FSIL) in order to promote development of Pakistan’s capital markets. FSIL’s primary objectives included (i) supporting the Government’s financial sector and capital market reforms, (ii) providing an efficient and broader range of services to the private sector, and (iii) supporting private sector development. The FSIL was designed to provide funds that could then be re-lent to qualified public and private financial institutions in order to finance private sector investments. In addition, FSIL was also accompanied by relevant policy reform measures for the financial and capital market sectors1 as well as a TA component worth $865,000. 106. According to FSIL’s Project Completion Report (PCR) and Project Performance Audit Report, the project received an overall rating of “partly successful” and “unsuccessful,” respectively. The Evaluation Mission agrees with FSIL’s PCR’s rating because the project has had a minimal impact on private sector development2 and its contribution to financial sector and capital market reform has also been limited primarily due to project design deficiencies.3 Inconsistency between the project rationale and objective, excessively broad project objectives, weak linkages among expected project outputs, and lack of a viable monitoring mechanism were cited as the main reasons for the underperformance of this project.4

2. Capital Markets Development Program 107. In November 1997, ADB approved the Capital Markets Development Program (CMDP) for $250 million from ADB’s ordinary capital resources and a TA loan amounting to $5 million

1 To make FSIL more effective, the FSIL was cofinanced by the World Bank’s Financial Sector Deepening and

Intermediation Project (FSDIP). However, after 4 years, the loan remained unused, and the FSDIP was canceled and reformulated as a TA project for $28 million. The cancellation was due to (i) lack of long-term foreign exchange risk cover, (ii) uncertainties and high cost of short-term risk cover available through the National Bank of Pakistan, (iii) weak investment climate, and (iv) difficulties of subborrowers in meeting World Bank procurement guidelines.

2 Only $24.5 million of the available $100 million had been disbursed when FSDIP was cancelled. 3 The program’s overt-reliance on the Government to deliver credit lines to the private sector was one of the main

deficiencies in the loan design. 4 Project Performance Audit Report. July 2005. Financial Sector Intermediation Loan (Loan 1371-PAK). Pakistan.

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from ADB’s Special Funds resources to the Government. The program aimed to augment the mobilization of long-term resources and improve the efficiency of their allocation through a diversified and competitive capital market that would encourage broad-based participation of issuers and investors. In order to achieve this objective the regulatory and institutional frameworks were to be strengthened to improve investor confidence, eliminate market distortions, modernize and upgrade the securities market infrastructure, improve investment alternatives, and enhance the efficiency of market participants.5 According to CMDP’s PCR, the overall rating of the Program was successful. The PCR document explained that the program brought an important package of reforms to Pakistan by initiating the process of developing a sound and efficient capital market and at the time of the program closing (31 October 2001) the Government achieved full compliance with 51 (out of a total of 56) policy actions. Similarly, findings from the performance audit of CMDP’s TA suggest that these interventions were valuable and received a rating of “successful.”6 108. There is little doubt that CMDP played a vital role in setting the wheel for capital markets development in Pakistan in motion. The program’s main accomplishments include establishment of the SECP and development of a regulatory framework and support for the establishment of a T+3 clearing house and the central depository. However, the regulatory framework put in place by CDMP is not complete and needs to be strengthened until a full tool set of financial instruments is in place and working. The rapid pace of expansion of the financial markets over the last few years have had the unintended consequence of bringing into focus the ill-preparedness of SECP to regulate the country’s capital markets. The SECP’s inability to implement an alternative for “Badla” transactions is one example that highlights SECP’s fragile regulatory capacity. In addition to institutional strengthening of the SECP, there is also an immediate need to develop and implement regulations within which a fully internationally integrated market can broaden and deepen (e.g., there is a need to put in place appropriate legislation for setting up commodities markets in the country, etc.). The Evaluation Mission assigns a rating of “potentially successful,” to what has been done to date however, unless ADB further strengthens the institutional and regulatory framework of the country’s capital markets, there exists a risk that CMDP’s accomplishments might be unraveled and/or rolled back.

3. Microfinance Sector Development Program 109. In November 2000, ADB approved the proposed Microfinance Sector Development Program (MSDP) that included two loans from ADB’s Special Funds resources: (i) a policy loan of $70 million equivalent to support a reform program for the MF sector, including social capital enhancement; and (ii) an investment loan of $80 million equivalent to provide microfinance services to the poor and institutional strengthening. Poverty reduction was cited as the primary motivation for MSDP, which would be achieved as a direct consequence of developing the microfinance market within the country. The implementation timeframe for this program is 6 years and ends on 31 December 2006. 110. According to its design, MSDP relied on a combination of policy reform measures and institutional development, e.g., setting up a microfinance bank, Khushali Bank, in order to

5 The key components of CMDP included (i) creating a policy environment to enhance competition, and a level

playing field; (ii) strengthening governance, institutions, regulations, and supervision of the securities market; (iii) improving and modernizing securities market infrastructure and its integration; (iv) developing the corporate debt market; (v) introducing reforms in the mutual fund industry; (vi) developing the leasing industry; and (vii) promoting contractual savings through reforms of the insurance sector and pension and provident funds.

6 ADB. 2003. Technical Assistance Performance Audit Report on Selected Technical Advisory Assistance for Capital Market Development in Pakistan. Manila.

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develop a viable microfinance industry in the country. Most of the key stakeholders (i.e., microfinance banks, public sector, etc.) agree that MSDP has played an instrumental role in kick starting the microfinance sector in Pakistan. For this reason, the Evaluation Mission believes that MSDP deserves an overall rating of “potentially successful.” However, the continued support of Khushali Bank’s operations by the Government and ADB has a negative impact on this program in two ways. First, this support to Khushali Bank is seen to create a non-level playing field especially when there are increasing numbers of micrfofinance institutions entering the industry. Second, ADB is seen as supporting the development of a government-sponsored bank, which is at odds with the Government’s strategy of privatizing its interests within the country’s banking sector.

4. Rural Financial Sector Development Program 111. In November 2002, ADB approved the $225 million Rural Financial Sector Development Program (RFSDP), which was a loan designed to assist the Government in accelerating rural economic growth by addressing key constraints in rural finance. This program’s goals are to ease/ensure access to institutional financial services for a majority of rural households at minimal transaction cost and to encourage private sector participation in rural finance sector. The program loan consists of four components: (i) creating a favorable policy environment, (ii) institutional restructuring and reforms, (iii) new bank fund (NBF), and (iv) product and process innovations. The policy reforms introduce a new RF paradigm whereby the Government will complement, facilitate, and improve the functioning of the RF markets and limit its direct intervention only to identifiable market failures. The program focuses on fundamentally altering the governance and operations of ZTBL, the key rural finance institution. 112. As discussed earlier in this document (footnote 14 and 24), the project has, so far, not been able to achieve most of its program goals and has had a minimal impact on facilitating flow of financial resources to rural populations. The focal point of this program, ZTBL, is mired in internal management strife and operational issues and has not made much progress towards its restructuring goals. In addition, it seems unlikely that this organization will be able to stage an effective turnaround in the short to medium term. The decision to turn this entity around does not appear to be commercially viable. Instead, liquidation and vigorous pursuit of defaulters would have been a more pragmatic course to follow. The Evaluation Mission believes that there is a need for ADB to reassess and question the reasons for its involvement in this project and considers RFSDP as a “potentially unsuccessful” effort.

5. Financial (Non-Bank) Markets and Governance Program 113. In November 2002, ADB approved the Financial (Non-Bank) Markets and Governance Program (FMGP) as a $260 million loan from ADB’s ordinary capital resources. The FMGP was geared towards facilitating private sector-led productivity growth by supporting the Government’s financial sector reform agenda, and development of capital markets and other nonbank financial services. FMGP’s reform agenda was structured around five components: (i) improvement in the fiscal, interest rate, and investment policy environment; (ii) improvement in governance of market participants and transparency in information disclosure; (iii) increase in supply of financial instruments and improvements in market infrastructure; (iv) increase in demand for financial instruments through development of contractual savings and institutional investment; and (v) development of related financial services and institutions. The closing date for this program loan is 30 June 2006. The loan design also included two TA loans ($6 million) to support FMGP’s reform agenda: one for strengthening of pension, insurance, and savings systems; and the other for strengthening regulation, enforcement, and governance of nonbank

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financial markets. In addition, FMGP also utilizes ADB’s guarantee products to enhance integration of Pakistan’s financial markets with international capital flows; and to ensure continued access to cover for selected noncommercial risks, which was withdrawn by the international insurance industry following the terrorist events in the US on 11 September 2001. 114. Despite substantial delays, a progress report developed for the project in August 2005 suggested that the program was on track.7 The Government has made significant progress in undertaking regulatory and institutional enhancements as per the terms of the FMGP. So far, The Government has complied with 9 out of 18 conditions and has satisfied the requirement for the incentive release under the second tranche of $80 million.8 Based on the progress realized as a result of FMGP, the Evaluation Mission believes that this project deserves an overall rating of “potentially successful.”

6. Small and Medium Enterprise Development Program (SDP) 115. In November 2003, ADB approved the $152 million Small and Medium Enterprise Development Program (SDP) loan, which was meant to enable the Government to enhance competitiveness of the SME sector and assist with the restructuring and privatization of SME Bank.9 The SDP consists of four parts: (i) a program loan supporting policy reforms, (ii) a project loan supporting participatory policy development and building institutions and markets for BDS and credit for SMEs, (iii) a PCG through ADB’s private sector operations to leverage market-based credit to SMEs, and (iv) a TA grant of $315,000 that would assist the public and private sector stakeholders in the coordination of the reforms. This loan program ends in 31 December 2007. 116. SME banking and finance is an untested concept in the country. The program assumes that the SME Bank would be the primary driver of SME-related reforms in the country. The ground reality, however, does not suggest that SME Bank is equipped to be a leading innovator in the field of SME finance. For the time being, SME bank is mostly preoccupied with restructuring its balance sheet and once that is done then it will contemplate privatization

7 ADB’s August 2005 report titled “Progress Report on Financial (Nonbank) Markets and Governance Program in

Pakistan.” 8 The conditionalities met for the incentive release under the second tranche include

(i) Improving governance, transparency, and professional standards: a. enhance SECP’s capacity for market surveillance, and regulation, and supervision; b. enhance corporate governance code; c. improve quality in information disclosure; d. improve efficiency in trading and operational risk management practices; and e. develop professional standards, qualifications, and continued education.

(ii) Increasing supply of financial instruments and improve market structure: a. improve supply of equity issues through privatization, b. improve secondary debt market activity, and c. further develop money market.

(iii) Increasing demand for financial instruments by developing contractual savings and institutional investment: a. promote private pensions.

9 According to SDP’s RRP the goals of the loan were cited as to improve SMEs’ contribution to economic growth, employment, and poverty reduction. The objective is to improve SMEs' competitiveness. The SDP will support (i) policy reforms to improve the business climate with an emphasis on leveraging private sector interventions; (ii) private financial institutions and business development services (BDS) intermediaries in building up capabilities to serve SMEs; (iii) market-based outreach of FIs through a partial credit guarantee (PCG) facility under ADB’s private sector operations; (iv) the State Bank of Pakistan (SBP), Pakistan’s central bank, in assuming the unambiguous lender of last resort function vis-à-vis SME Bank; and (v) the Government in disengaging from ownership of SME Bank through privatization.

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plans.10 This program appears to be quite similar to RFSDP in that both programs rely heavily on transforming underperforming state-owned banks. The Evaluation Mission believes that based on the progress so far achieved by the SME Bank, the SDP deserves an overall rating of “potentially partly successful.” B. Private Sector Transactions 117. ADB’s private sector transactions are those interventions where it has directly provided support to private sector entities. This support was mostly in the form of an equity investment or a loan. Since 1985, ADB has been involved in 38 private sector transactions amounting to $467 million. Of these 38 transactions, 13 occurred during the 1980s, 23 during the 1990s, and 2 in the 2000s. The economic circumstances of Pakistan over the last 20 years, perhaps, provide the best explanation for the changes in the private sector transaction volume. The spike in the number of transactions coincides with the time (during the 1980s and the 1990s) that Pakistan’s economy was mired in economic problems. At the time, the economy was mostly state run/controlled and under-developed. These circumstances made it hard for private sector enterprises to secure financial support and/or raise capital (especially in foreign exchange). It was clear, even at the time, to the Government and multilateral agencies that the only sustainable path to economic prosperity was to encourage private sector business activity. In order to support the private sector entities, ADB entered into a number of transactions spanning a range of industries. One of the key features of private sector operations is that they are tightly focused and have a mandatory exit strategy. Details for these interventions are provided below and a comprehensive list for ADB’s private sector transactions is provided in Appendix 2.

1. Finance Sector 118. Five of the six finance facilities were developed during the 1980s and 1990s when the finance sector in Pakistan was nationalized and tightly regulated. Most of these finance sector transaction involved ADB lending support to the development of financial institutions, which would then facilitate flow of much needed funds to the private sector in Pakistan. Table 13 provides additional information on these finance sector transactions.

Table 13: ADB’s Private Sector Operations Facilities—Finance

Approval Subsector

Facility Name $ Million Date

Capital Markets and Funds Pakistan Investment Fund Inc. 4.3 Sep 1990 Capital Markets and Funds International Asset Management Company 0.0 Sep 1990 Capital Markets and Funds Pakistan Venture Capital Ltd. 1.2 Dec 1990 Finance Sector Development Bankers Equity Ltd. (BEL) 2.0 Dec 1983 Finance Sector Development National Development Finance Corporation and BEL 5.0 Dec 1986 Finance Sector Development SME PCG Facility 65.0 Dec 2003 Total 77.5

Source: Asian Development Bank documents. 119. Since the 1990s and up until now, the only finance sector transaction undertaken was the SME Partial Credit Guarantee (PCG) Facility for $65 million in 2003. The scale and structure of this transaction makes it stand apart from the other transactions. In addition to being the largest transaction (accounts for over 84% of all finance sector transactions), the SME PCG Facility employed a new structure whereby resources from the private sector operations window were utilized to support a larger public sector program (in this case, the SDP).

10 SME Bank was created by merging two failed DFIs with substantial nonperforming loans portfolios.

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2. Industry and Trade 120. This sector accounts for the major portion of assistance provided by ADB through its private sector operations window. Within this sector, ADB developed 28 transactions (73%) of the total 38 private sector transactions undertaken over the last two decades. The $251 million invested in these transactions accounted for over 53% of the total amount ADB invested in all private sector transactions. The objectives for these transactions varied depending on the type of industry as well as the type of investment. However, it appears that ADB extended support to the industry and trade sector in two ways. First, ADB assisted industrial units so that they could enhance their capacity and increase their competitiveness. Second, ADB dedicated a large number of these transactions to channel funds to a variety of leasing companies. ADB’s support for leasing companies in Pakistan can be explained by the Government’s support for lease financing as they were (and still are) viewed as an Islamic (and therefore acceptable) mode of financing.11 Another important reason behind ADB’s support of leasing companies was also to provide much-needed resources to private sector enterprises (especially those that were small to medium scale enterprises).

Table 14: ADB’s Private Sector Operations Facilities—Industry and Trade Subsector Facility Name $ Million Approval Date Industry Cherat Cement 0.0 Dec-86 Industry National Dev. Leasing Corp. Ltd. 5.0 Dec-86 Industry National Dev. Leasing Corp. Ltd. II 15.0 Oct-88 Industry Pakistan Synthetics Ltd. 5.5 Apr-89 Industry Pioneer Cement Limited 36.1 Nov-89 Industry Fauji Fertilizer Co. Ltd. 50.0 Dec-89 Industry Asian Leasing Corp. Ltd. 3.0 Apr-90 Industry Orix Leasing Pakistan Ltd. 5.0 Dec-89 Industry Orix Leasing Pakistan Ltd. 5.0 Apr-90 Industry Asian Leasing Corp. Ltd. 2.0 Dec-90 Industry Asian Leasing Corp. Ltd. II 7.0 Nov-91 Industry Atlas BOT Lease Co. Ltd. 5.0 Nov-91 Industry Crescent Investment Bank 10.0 Nov-91 Industry National Dev. Leasing Corp. Ltd. III 10.0 Nov-91 Industry Orix Leasing Pakistan Ltd. II 10.0 Nov-91 Industry Pakistan Industrial and Commercial Leasing 5.0 Nov-91 Industry Pakistan Industrial Leasing Corp. Ltd. II 8.0 Nov-91 SME National DevelopmentLeasing Corp. Ltd. 0.0 Dec-84 SME Pakistan Industrial Leasing Corp. Ltd. 3.0 Nov-87 SME National Dev. Leasing Corp. Ltd. 0.4 Dec-84 SME Pakistan Industrial Leasing Corp. Ltd. 0.2 Sep-88 SME National Development Leasing Corporation Ltd. II 5.0 Mar-90 SME Atlas BOT Investment Bank Ltd. 0.9 Dec-90 SME Pakistan Industrial Leasing Corp. Ltd. 0.2 Aug-90 SME Atlas BOT Lease Co. Ltd. II 10.0 Oct-95 SME National Development Leasing Corp. Ltd. IV 15.0 Oct-95 SME Orix Leasing Pakistan Ltd. III 20.0 Oct-95 SME Pakistan Industrial Leasing Corp. Ltd. III 15.0 Oct-95 Total 251.3 BOT = build-operate-transfer, SME = small and medium scale enterprise. Source: Asian Development Bank documents.

11 In 1984, the Government of Pakistan decided to Islamize the financial system and outlawed all interest bearing

transactions in the domestic markets.

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3. Transportation and Communications 121. The $31.8 million investment made by ADB in Fauji Oil Terminal and Distribution Company was the only infrastructure project financed by ADB in Pakistan through its private sector operations window. ADB’s two main objectives for undertaking this project were to increase private sector participation in infrastructure projects and to assist the Government in developing critical infrastructure.

Table 15: ADB’s Private Sector Operations Facilities—Transport and Communication

Subsector Facility Name $ Million Approval Date Ports, Waterways, and

Shipping Fauji Oil Terminal and Distribution

Co. Ltd. 31.8 Sep-93

Total 31.8 Source: Asian Development Bank documents.

4. Energy Sector

122. The $102 million investment made by ADB in Fauji Kabirwala Power Company was the only one made in the energy sector of Pakistan through its private sector operations window. The main objectives were (i) to encourage private sector participation in the country’s energy sector, (ii) provide confidence to the financial institutions to lend to power generation projects, and (iii) enable the country to utilize indigenous low Btu gas and lessen its dependence on imported energy resources.

Table 16: ADB’s Private Sector Operations Facilities—Energy

Subsector Facility Name $ Million Approval Date Energy Fauji Kabirwala Power Co. Ltd. 102.3 Apr-96

Total 102.3 Source: Asian Development Bank documents.

5. Not Categorized

123. PAK Asian Fund and Pakistan Export Finance Guarantee were the only two transactions that did not “fit” into any of the other categories.

Table 17: ADB’s Private Sector Operations—Not Categorized

Subsector Facility Name $ Million Approval Date Not Categorized PAK Asia Fund 3.0 Aug-92 Not Categorized Pakistan Export Finance Guarantee 2.6 Dec-00

Total 5.6 Source: Asian Development Bank documents.

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C. Other Operational Activities 1. Technical Assistance

124. ADB has funded 18 finance sector TA projects at a cost of $7.038 million over the last two decades. The distribution of TA investment during the 1980s, 1990s, and 2000s was $1.57 million (22.35%), $3.77 million (53.50%), and $1.7 million (24.15%), respectively. In general, TA has played an important role in developing a broader and deeper understanding of the financial sector (and subsectors) in the country. Whereas the quality and intentions of the TA projects undertaken was satisfactory their effectiveness in guiding ADB’s resource allocation towards finance sector development programs leaves a lot to be desired. Only four TA projects amounting to $0.91 million, or 12.9% of total TA projects, were allocated for providing project preparatory assistance. This is exceptionally low considering the volume of finance sector development programs approved by ADB during this timeframe. Also, SDP provides an interesting example of a program to which no TA was allocated prior to its approval. Most of the TA projects involved delivering advisory support to the financial institutions in the country.

Table 18: ADB’s Finance Sector Technical Assistance Projects

A&O = advisory and operational, PP = project preparatory, TA = technical assistance.

TA Year Amount Project Name Type Approved ($) Pakistan Venture Capital Limited PP 1987 60,000 Low-Income Housing PP 1988 100,000 House Building Finance Corporation A&O 1988 318,000 Study of the Federal Bank for Cooperatives A&O 1988 350,000 Rationalization of Development Financing Institutions A&O 1989 259,000 Study on Development of a Secondary Market for Fixed-Income Securities A&O 1989 176,000 Institutional Building of the Corporate Law Authority and Study of the Mutual

Fund Industry A&O 1989 310,000 Subtotal 1,573,000 Capital Market Development A&O 1995 865,000 Rural Microfinance PP 1997 600,000 Interest Rate Management of National Saving Scheme A&O 1997 100,000 Capital Market and Insurance Law Reform A&O 1997 100,000 Restructuring of Public Sector Mutual Funds A&O 1997 800,000 Reform of the Insurance Industry A&O 1997 700,000 Reform of Pension and Provident Funds A&O 1997 600,000 Subtotal 3,765,000 Enhancing Capital Market Depth for Preparing Capital Market Development

Program II PP 2000 150,000 Institutional Strengthening of the State Bank of Pakistan A&O 2001 450,000 Capacity Building for Capital Market Development and Corporate

Governance A&O 2001 600,000 Strengthening Secured Transactions A&O 2003 500,000 Subtotal 1,700,000 Total 7,038,000

Source: Asian Development Bank documents.

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2. Policy Dialogue 125. The quantity and quality of policy dialogue is difficult to determine. Typically, the main times when dialogue occurs is during loan processing (particularly for program loans) and leading up to program loan tranche releases. The Mission for this evaluation interviewed a range of senior government officials to determine perceptions of ADB as a source of policy advice and some of the main findings are listed below.

(i) ADB’s finance sector operations have made a significant contribution to policy changes that enabled the country to develop capital market and microfinance capacity.

(ii) The Government officers expressed an inability to establish a continuous dialogue with ADB given the high turnover of finance specialist at the PRM.12

(iii) The Government officers expressed a desire for ADB to complete the strengthening of the SECP and regulatory framework for the country’s capital markets.

126. Notwithstanding the above perceptions, government officers felt that ADB had substantially engaged in policy dialogue and that it was important to continue such dialogue.

VI. CONCLUSIONS AND RECOMMENDATIONS 127. Provided in this section is a discussion of some key questions as well as recommendations that will assist in enhancing ADB’s assistance to the private sector in Pakistan. A. Overall Conclusions

1. What strategies were pursued for using ADB’s resources?

128. Over the last 20 years, ADB has employed two separate strategies for assisting the private sector in Pakistan. Details for these strategies are provided below.

(i) In the 1980s and up until the mid-1990s, private sector assistance (especially for small and medium enterprises) was not seen as a priority by the Government. During that time, ADB tried to indirectly support the private sector by providing much needed capital to a number of private companies and/or development finance institutions through its private sector operations window.

(ii) In the mid-1990s, after the Government signed up for the Structural Adjustment

Program and committed to a broad set of reforms, ADB shifted its private sector assistance strategy by working with the Government and bringing about meaningful and sustainable financial sector reforms. This strategy was based on the assumption that a robust financial infrastructure was a prerequisite for establishing a private sector that would allow the country to achieve both its economic growth as well as its poverty alleviation objectives.

12 Government officers mentioned that it was easier for them to develop a working relationship with the World Bank,

as they do not have a high rate of staff turnover as ADB. According to them, the World Bank staff person in-charge of private sector assistance projects had been working with the Government for over 7 years.

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2. What drove the strategic choices made? 129. Main drivers that have influenced ADB’s strategic choices in decisions relating to provision of assistance to the private sector include:

(i) Public Sector Priorities. Public sector priorities and objectives have played an

important role in determining the scale, scope, and nature of private sector assistance provided by ADB. During the 1980s and half way through the 1990s, allocation of ADB’s funds to such projects was limited because the Government, at the time, did not have a clear agenda for developing the private sector. Things changed and ADB started investing heavily only after the Government expressed its commitment to strengthening the country’s financial markets.

(ii) Unplanned Opportunities. Unplanned opportunities (unplanned in the sense of

having arisen outside the process of ADB’s formal strategy preparation) have been a significant driver for most of the private sector transactions. During the 1980s and 1990s, these transactions were utilized as a vehicle to deliver much needed credit-related support to private sector entities.

(iii) Past Program Decisions. Past program decisions play a guiding role but do not appear to be the main drivers of strategic choices. The changing economic and political circumstances of the country are the reasons for not relying too heavily on past program decisions.

(iv) Informal Agreement Between Donors. This only applies to public finance sector development projects and involves an informal agreement between the World Bank and ADB. Under this informal agreement, the two multilaterals would dedicate their efforts and resources towards developing different aspects of Pakistan’s financial systems—World Bank would address development of the banking sector, whereas ADB would tackle the development of capital markets. However, things have changed since 2000 as ADB has started heavily supporting development of rural finance, microfinance, and SME banking sector capacity in Pakistan.

3. What was the quality of ADB’s formal country strategies?

130. Overall the quality of ADB’s formal country strategies as they relate to delivering private sector assistance has been satisfactory. The following observations can be made in this regard:

(i) Project Planning and Design. ADB’s intentions in developing these private and

public finance sector development projects (as reflected in project RRPs) have been consistently good and these projects were designed in coordination with the Government (as well as other multi and bilateral organizations). However, there are discrepancies in the rationale for developing certain public finance sector development programs. For instance, in the microfinance, rural finance, and SME-related interventions there are references to “market failures” that seem to be clear market signals that these sectors have historically proved to be commercially non-viable. While there is a definite need to promote these sectors, ADB needs to recognize that by developing programs for these sectors it is operating in high risk banking territory. To assume that consultants can

40

outperform the banking sector in commerciality and territorial spread is a big assumption.

(ii) Project Implementation. Some of ADB’s projects ran into problems during the implementation cycle primarily due to turnover of its personnel and/or delays encountered in mobilizing the Government to undertake reform. It appears that in future the Government will look for more implementation support and assistance from financiers (i.e., ADB, World Bank).

4. Irrespective of strategy what was the quality and performance of ADB’s

program? 131. In order to deliver assistance to the private sector, ADB has used private and public finance sector development projects. Performance of these two project types is discussed below. 132. Determining performance of transactions undertaken by ADB’s private sector operations window is a challenging task, given that the reasons and assumptions for developing these transactions have, for the most part, become irrelevant. For instance, one of the main reasons for developing these transactions was because in a highly regulated and state controlled economy the private sector found it hard to access much needed financial resources. Overall, the performance of these transactions was satisfactory. This was because these projects were commercial in nature, smaller in size, narrowly focused (i.e., transactions involved very few firms) and all had an exit strategy built in. 133. The performance of the public finance sector development projects has, at best, been mixed. Development of the capital markets and MF industry are some key contributions made by these large-scale projects. However, not all projects appear to be making a positive impact. Provided below are some observations in this regard:

(i) Projects such as RFSPD and SDP are investing excessively large sums in

trying to transform and commercialize failed state-owned banks, i.e., ZTBL and SME Bank, with limited progress.

(ii) MSDP’s support to Khushali Bank is viewed as an unfair subsidy where ADB

is funding the development of a government-sponsored bank. Moreover, it remains unclear how successful Khushali Bank has been in establishing itself as a “commercial” microfinance lender given that it has been supported by TA for all of its existence.

(iii) The regulatory framework implemented under CMDP is incomplete and

needs further development. Additional support is required to introduce a framework that would encourage/support the broadening and deepening of the capital markets.

5. Was the program well managed?

134. For the most part, ADB’s interventions in support of the private sector in Pakistan were well managed. Initial parts of the project approval typically went smoothly, but certain operational issues were encountered during implementation. Some of these issues are listed below:

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(i) Deviation from implementation schedule caused by a variety of reasons, such as

delays encountered in loan effectiveness, delays in meeting loan conditionalities, etc.

(ii) Limited finance sector capacity in PRM to effectively implement projects and/or maintain relationship with key stakeholders.

(iii) High staff turnover (both at PRM and headquarters) raises issues related with accountability.

6. How did ADB resources contribute to sector outcomes?

135. ADB’s resources played a substantial role in delivering much needed assistance to the private sector in Pakistan. Of course, outcomes varied depending on the scale/scope as well as type (public or private) of intervention. Some of these contributions are listed below:

(i) used loan conditionalities as a means to recommend and implement policy reforms,

(ii) played a role in the development of capital markets in the country, (iii) may have kick-started MF industry in Pakistan, (iv) supported private sector financial entities through ADB’s private sector window, (v) delivered TA on conducting critical analysis across a broad range of finance

subsectors, and (vi) assisted the Government’s efforts towards restructuring critical financial

institutions (such as ZTBL and SME Bank).

7. Was there effective synergy in the use of ADB resources? 136. The answer to this question appears to be in the affirmative based on the following:

(i) Synergy Between ADB Resources and the Public Sector. ADB’s public

finance sector development programs were designed such that the release of funds by ADB was contingent upon the Government undertaking a series of policy and/or institutional reform measures. This approach significantly enhanced effectiveness as well as sustainability of ADB’s programs.

(ii) Synergy as a Result of Donor Coordination. The division of labor between the

World Bank and ADB ensured that resources from the two main donors were utilized for addressing critical gaps within Pakistan’s economy. Development of the Pakistan’s financial system serves as an example of how the two multilaterals simultaneously and synergistically addressed the development needs within different financial sectors.

8. Did ADB do the right things?

137. Yes. At a time when the country had a centralized state-owned finance sector ADB used its private sector facilities to successfully support private sector growth. During the turbulent macroeconomic circumstances in the mid-1990s, the Government was forced to review its strategy and, with the help of the international financial institutions, set off on the private sector lead economy path where the state serves as a regulator for market failures. During this period, ADB supported the development of the non-bank regulatory framework and

42

then tackled the substantial rural poverty and provided support for various government initiatives, such as rural finance, microfinance, and SME banking. 138. ADB can continue to contribute in the public finance sector so that Pakistan has the full tool set of financial instruments required for participating in the international capital markets and mobilizing domestic savings.13 Instead of developing large-scale projects, ADB should focus its efforts on developing TA projects that will assist and advise the public and the private sectors in Pakistan on how to develop a full tool set of financial instruments. Once this tool set is complete and regulatory framework is in place, ADB’s private sector assistance focus will need to turn back to its private sector operations, which can then lead the way so that the private sector can serve as Pakistan’s engine of growth.

9. How can choice selection be improved? 139. Provided below are suggestions for improving ADB’s choice selection for future assistance efforts:

(i) Stringently Evaluate and Research Projects. The mixed performance of ADB’s

portfolio of public finance sector development projects suggests that ADB should carefully evaluate its ongoing interventions. In addition, ADB should be selective in approving any new finance sector development projects given that the private sector already dominates the country’s financial markets. It is also important that TA resources should be allocated to projects prior to their approval so that ADB (as well as the Government) clearly understand what they are signing up for.

(ii) Focus on Market Level Support. ADB should consider projects that are not focused on supporting institutions (such as RFSDP, MSDP, and SDP). Instead, it should develop those opportunities that can provide benefit across industries and/or markets. Support for strengthening regulatory frameworks and developing human resources capacity are examples of types of interventions that ADB might consider in this regard.

(iii) Maintain Strategic Focus. ADB should limit the number of financial subsectors it supports so that it can allocate its resources more effectively. Currently, ADB is simultaneously supporting a relatively large number of financial subsectors (e.g., capital markets, rural finance, microfinace, SME finance, insurance, etc.). This has resulted in ADB spreading “itself too thin” and lowering effectiveness and sustainability of its projects.

(iv) Innovative Financing Modalities. In order to be more responsive and client-

focused, ADB should consider utilizing some of the new financing instruments and modalities that are being rolled out under ADB’s Innovation and Efficiency Initiative (IEI).14 In addition, given the Government’s devolution intentions, ADB will need to find ways to innovatively work at the subsovereign level.

13 A full tool kit can include futures, commodities, mutual funds, contractual savings (Insurance, pensions, and

provident funds), Islamic banking, capital markets, and synthetic instruments. 14 The IEI was launched on a pilot basis in November 2003. The program will enable ADB to (i) improve service to

existing and new clients; (ii) be more programmatic; (iii) mobilize other resources more efficiently, including domestic savings and international finance; (iv) minimize currency mismatches at the project and client level; (v) reduce transaction costs; and (vi) provide refinancing to fundamentally sound projects with high development impact but weak financing plans.

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(v) Private Sector Transactions. ADB should consider investing in more projects

through its private sector operations window. Unlike the private sector operations transactions undertaken in the past that were limited in scale and scope, there is an opportunity for ADB to undertake larger investments in sectors, such as energy, transport and communication, and power.15 However, further investigation and analysis is required in order to understand the viability of such investments.

(vi) Project Planning and Design. The Government has demonstrated with its

MTDF that it has the capacity to articulate its plans and strategies rather than doing what the IFI’s tell it to do. ADB needs to reinforce this by working within the Government’s plans and processes to help the Government achieve its objectives. This will, at the very least, ensure greater ownership of interventions by the Government.

(vii) Project Implementation. Care should be exercised in project documents (such as RRPs) so that the promises (implicit and/or explicit) are achievable and implementation accountabilities are clearly spelled out. In addition, ADB should also ensure that there is enough capacity on the ground (e.g., resources at PRM, TA, etc.) so that its project accountabilities can be implemented effectively.

B. Recommendations 140. In light of this evaluation’s findings, the following recommendations are made for the Government’s and ADB’s consideration. These recommendations are based on information and analysis presented in this report and are aimed at enhancing effectiveness of ADB’s private sector assistance. Recommendations Responsibility

For Government Consideration 1. Immediate Action. The Ministry of Finance, for the

Government, should commission an assessment that provides a “gap-analysis” (i.e., what support does the financial sector need to evolve into a mature/developed financial sector) and a series of recommendations based on international financial market standards and a fully-costed and time bound action plan to get there. It is vital that international and local financial market operators are utilized for this assignment.

Coordination by Ministry of Finance.

For ADB (and Government) Consideration 2. ADB should conduct a review of its finance sector

development projects and develop an action plan for South Asia Finance Division and PRM

15 There is a window at the margin where ADB can lead the way for international capital markets by structuring

syndicated financing packages while contributing credibility and risk management facilities. Unless ADB operates at the risk premium margin, it will be crowding out private sector market players and not complying with its charter mandate.

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Recommendations Responsibility unfinished business, such as, enhancing SECP’s capacity as a regulator, development of Bond market, etc. (as highlighted in this evaluation as well as by findings of [1] above).

3. ADB should consider reducing, if possible, the high turnover

of its finance personnel at the Pakistan Resident Mission. In addition, a specialty support unit for supporting ongoing projects/programs and other Government and private sector stakeholders should be created in the Pakistan Resident Mission as soon as possible.

4. ADB should be more stringent in evaluating its ongoing

projects (especially, finance sector development programs) in order to pragmatically assess their ability to achieve their stated objectives.

5. ADB should increase timely TA resource allocation,

especially for finance sector development programs. 6. ADB should maintain strategic focus (applies to both

ongoing and future projects) so as not to “spread itself too thin” by simultaneously supporting a relatively large number of sectors.

7. In the next CSP, consideration should be given to increasing

the number of transactions developed through ADB’s private sector operations window.

8. In the next CSP, a more selective approach should be

adopted for new finance sector development projects given that private entities already dominate finance sector activities in Pakistan. Large-scale public finance sector development projects will continue to diminish as the financial systems in the country mature.

9. Provision should be made in the next CSP to utilize

innovative financing modalities when developing private sector assistance interventions (such as those offered under ADB’s Innovation and Efficiency Initiative).

10. ADB needs to reassess its existing strategy of supporting

institutions (e.g., ZTBL, SME Bank, Khushali Bank, etc.). If the Government wants to continue with these initiatives, then accountabilities should be documented so that ADB and GOP understand who is carrying what risks.

PRM Country Director/South Asia Department Operations Evaluations Department/South Asia Finance Division South Asia Finance Division South Asia Finance Division/PRM Private Sector Operation/PRM South Asia Finance Division/PRM/Government South Asia Finance Division/PRM/Government South Asia Finance Division/ Operations Evaluation Department/PRM

Appendix 1 45

PAKISTAN PUBLIC SECTOR LOANS, 1984–2004

Facility Amount No. number Finance Sector Facility Name ($ million) Approval Date 1 1371 Financial Sector Intermediation Loan 100 7 Sep 1995 2 1576 Capital Market Development Program 250 6 Nov 1997

3 1577(SF) Capacity Building of the Securities Market 5 6 Nov 1997

4 1955 Financial (Nonbank) Markets and Governance Program

260 5 Dec 2002

5 1956(SF) Strengthening Pension, Insurance and Savings Systems

3 5 Dec 2002

6 1957(SF) Strengthening Regulation, Enforcement, and Governance of Nonbank Financial Markets

3 5 Dec 2002

7 2066 Small and Medium Enterprise Sector Development Program

152 19 Dec 2003

8 2067(SF) Small and Medium Enterprise Sector Development Program (Project Loan)

18 19 Dec 2003

9 775(SF)/776 Second Development Financing 100 19 Dec 1985

10 878/879(SF) Third Development Financing 200 17 Dec 1987 11 902 Small-Scale Industry 50 22 Sep 1988 12 996 Fourth Development Financing 250 12 Dec 1989

13 1987 Rural Finance Sector Development Program (Program Loan)

225 20 Dec 2002

14 1988 Rural Finance Sector Development Program (Project Loan)

25 20 Dec 2002

15 2107/2108(SF) Balochistan Resource Management (Program Loan) 130 25 Nov 2004

16 2109(SF) Balochistan Resource Management (TA Loan) 3 25 Nov 2004

Sector Total 1,774

46 Appendix 2

PAKISTAN PRIVATE SECTOR LOANS/EQUITY, 1984–2004

Facility Amount No. Number Facility Name ($ Million) Approval

Date 1 7126/1434 Fauji Kabirwala Power Co. Ltd. 102 23 Apr 1996 2 7056 Pakistan Investment Fund Inc. 4 13 Sep 1990 3 7057 International Asset Management Co. 0 13 Sep 1990 4 7062 Pakistan Venture Capital Ltd. 1 4 Dec 1990 5 7002 Bankers Equity Ltd. (BEL) 2 20 Dec 1983 6 7009 National Dev. Finance Corp. and BEL 5 9 Dec 1986 7 7190/3709 SME PCG Facility 65 19 Dec 2003 8 7010/0809 Cherat Cement 0 4 Dec 1986 9 7011/0814 National Dev. Leasing Corp. Ltd. 5 9 Dec 1986

10 7027/0913 National Dev. Leasing Corp. Ltd. II 15 27 Oct 1988 11 7034/0958 Pakistan Synthetics Ltd. 6 25 Apr 1989 12 7042/0989 Pioneer Cement Limited 36 21 Nov 1989 13 7047/1003 Fauji Fertilizer Co. Ltd. 50 19 Dec 1989 14 7049-C/1007 Orix Leasing Pakistan Ltd. 5 26 Apr 1990 15 7049/1007 Orix Leasing Pakistan Ltd. 5 21 Dec 1989 16 7050-C/1008 Asian Leasing Corp. Ltd. 2 26 Dec 1990 17 7050/1008 Asian Leasing Corp. Ltd. 3 21 Dec 1989 18 7074/1129 Asian Leasing Corp. Ltd. II 7 26 Nov 1991 19 7075/1130 Atlas BOT Lease Co. Ltd. 5 26 Nov 1991 20 7076/1131 Crescent Investment Bank 10 26 Nov 1991 21 7077/1132 National Dev. Leasing Corp. Ltd. III 10 26 Nov 1991 22 7078/1133 Orix Leasing Pakistan Ltd. II 10 26 Nov 1991 23 7079/1134 Pakistan Industrial and Commercial Leasing 5 26 Nov 1991 24 7080/1135 Pakistan Industrial Leasing Corp. Ltd. II 8 26 Nov 1991 25 7003/1393 National Dev. Leasing Corp. Ltd. 0 29 Sep 1988 26 7003/1393 National DevelopmentLeasing Corp. Ltd. 0 13 Dec 1984 27 7017/0856 Pakistan Industrial Leasing Corp. Ltd. 0 28 Jun 1991 28 7017/0856 Pakistan Industrial Leasing Corp. Ltd. 0 27 Aug 1990 29 7017/0856 Pakistan Industrial Leasing Corp. Ltd. 3 10 Nov 1987 30 7027-C National Development Leasing Corporation

Ltd. II 5 8 Mar 1990

31 7066 Atlas BOT Investment Bank Ltd. 1 13 Dec 1990 32 7111/1392 Atlas BOT Lease Co. Ltd. II 10 10 Oct 1995 33 7112/1393 National Development Leasing Corp. Ltd. IV 15 10 Oct 1995 34 7113/1394 Orix Leasing Pakistan Ltd. III 20 10 Oct 1995 35 7114/1395 Pakistan Industrial Leasing Corp. Ltd. III 15 10 Oct 1995 36 7093/1255 Fauji Oil Terminal and Distribution Co. Ltd. 32 30 Sep 1993 37 7086 PAK Asian Fund 3 13 Aug 1992 38 7166 Pakistan Export Finance Guarantee 2 7 Dec 2000

Total 467

Appendix 3 47

SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN ORDINANCE 19971

No. F.9(51)/97-Legis.- The following Act of Majilis-e-Shoora (Parliament) received the assent of the Acting President on the 19th December, 1997, is hereby published for general information: Act No. XLII of 1997 An Act to provide for the establishment of the Securities and Exchange Commission of Pakistan and to provide for matters connected therewith and incidental thereto. WHERE AS it is expedient to provide for the establishment of the Securities and Exchange Commission of Pakistan for the beneficial regulation of the capital markets, superintendence and control of corporate entities and for matters connected therewith and incidental there to; It is hereby enacted as follows: CONTENTS PART I: PRELIMINARY 1. Short title and commencement. (1) This Act may be called as the Securities and Exchange Commission of Pakistan Act,

1997. (2) It extends to the whole of Pakistan. (3) Save for section 43, the Act shall come into force at once and section 43 shall come into

force on such date as the Federal Government may, by notification in the official Gazette, appoint.

2. Definitions. In this Act, unless there is anything repugnant in the subject or context,- (a) “appointed day” means the day on which section 43 comes into force; (b) “Authority” means the Corporate Law Authority constituted under the Companies

Ordinance, 1984 (XLVII of 1984); (c) “Board” means the Securities and Exchange Policy Board established under section 12; (d) “Chairman” means the Chairman of the Commission; (e) “civil servant” means a civil servant as defined in section 2 of the Civil Servants Act,

1973 (LXXI of 1973); (f) “clearing house” means a clearing house by whatever name or designation established

or arranged to be established by a Stock Exchange for the registration of dealing in securities or settlement of trading in futures contracts;

(g) “Commission” means the Securities and Exchange Commission of Pakistan established under section 3;

(h) “Commissioner” means a Commissioner of the Commission and shall include the Chairman thereof;

(i) “committee” means a committee of the Board constituted under section 15;

1 The Gazette of Pakistan Extraordinary.1997. Securities and Exchange Commission of Pakistan Ordinance 1997. 26

December.

48 Appendix 3

(j) “dealing in securities” 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- (i) any agreement for or with a view to acquiring, disposing of, subscribing for or

underwriting securities, or (ii) 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;

(k) “employee” means any officer or servant of the Commission; (l) “Fund” means the fund established under section 23;

(la)[1] "Law of Insurance" means the Insurance Ordinance, 2000 (XXXIX of 2000) or any other law in relation to insurance, the administration of which is vested in the Commission by the Federal Government by notification in the official Gazette."

(m) “Member” means a Member of the Board; (n) “NBFI” means a non-banking financial institution and includes a development finance

institution, a modaraba, a leasing company, a housing finance company and an investment bank but shall not include a banking company as defined in clause (c) of section 5 of the Banking Companies Ordinance, 1962 (LVII of 1962);

(o) “Ordinance” means the Companies Ordinance, 1984 (XLVII of 1984); (p) “private sector person” means a person who is not in the service of Pakistan or of any

statutory body or any body which is owned or controlled by the Federal Government or a Provincial Government not including a University or an educational institution;

(q) “regulations” means the regulations made by the Board or the Commission; and (r) “rules” means the rules made by the Federal Government. [1] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 PART II: THE COMMISSION 3. Establishment of the Commission. (1) There is hereby established a Commission to be called the Securities and Exchange

Commission of Pakistan. (2) The Commission shall be a body corporate with perpetual succession and a common

seal, and may sue and be sued in its own name and, subject to and for the purposes of this Act, may enter into contracts and may acquire, purchase, take, hold and enjoy movable and immovable property of every description and may convey, assign, surrender, yield up, charge, mortgage, demise, reassign, transfer or otherwise dispose of or deal with, any movable or immovable property or any interest vested in it, upon such terms as it deems fit.

4. Head Office. The head office of the Commission shall be in Islamabad. The Commission may establish and close down offices at such other places in Pakistan as it considers necessary. 5. The Commissioners. (1) Subject to sub-section (2), the Commission shall consist of such number of Commissioners, including the Chairman, appointed by the Federal Government as may be fixed by the Federal

Appendix 3 49

Government but such number shall not be less than five and more than seven. A Commissioner shall be a person who is known for his integrity, expertise, experience and eminence in any relevant field, including the securities market, law, accountancy, economics, finance[, insurance][2] and industry. (2) The majority of the Commissioners shall always be of private sector persons. (3) Subject to the provisions of this Act, the Commission shall, in discharge of its functions and exercise of its powers, conduct its proceedings in accordance with the regulations made by the [Commission][3]. [(4)][4] The Commissioners, including the Chairman, shall be paid such remuneration and allowances as the Commission may, with the approval of the Board, determine. 6. The Chairman. (1) The Federal Government shall appoint one of the Commissioners to be the Chairman of the Commission, and no Commissioner shall be appointed Chairman for more than two consecutive terms. (2) The Chairman shall be the chief executive officer of the Commission and shall, together with the other Commissioners, be responsible for the day to day administration of the affairs of the Commission and shall, subject to the regulations made by the Commission, be assisted by the other Commissioners in carrying out the functions of the Commission. 7. Term of office of the Commissioners. (1) Not less than three of the Commissioners (excluding the Chairman) first appointed under this Act, to be selected at random ballot in accordance with such procedure as may be approved by the Board (the “Term A Commissioners”) shall hold office for a term of two years, shall retire on the expiration of that term and may be re-appointed for a further term of three years. The Commissioners, other than the Term A Commissioners (including the Chairman, the “Term B Commissioners”) shall hold office for a term of three years, shall retire on the expiration of that term and may be re-appointed for a further term of three years. (2) At the end of each term, (initial or further) or at the end of the cumulative period of five years, in the case of the Term A Commissioners, or six years, in the case of the Term B Commissioners, as provided for under sub-section (1), the relevant number of Commissioners shall cease to hold office and any vacancy thus arising shall in each case be filled by the appointment of the requisite number of qualified persons as Commissioners, each for a term of three years reckoned from the date the vacancy being filled occurred. At the end of each such three-year term, a Commissioner whose term has expired shall retire (unless being eligible for re-appointment he is duly re-appointed). 8. Appointment of employees of the Commission. (1) The Commission may, from time to time, employ persons to be employees of the Commission who shall be paid such remuneration and allowances and shall hold their employment on such terms and conditions as may be determined by the Commission with the approval of the Board. (2) The employees of the Commission shall hold office during the pleasure of the Commission and shall be liable to disciplinary action in accordance with the procedure laid down by the Commission with the approval of the Board. 9. Appointment of advisers and consultants. (1) Subject to sub-section (2), the Commission may, employ and pay consultants and agents and technical, professional and other advisers including, without limitation, bankers, stock-brokers, surveyors, valuers, actuaries, accountants, lawyers and other persons to transact any business or to do any act required to be transacted or done in the exercise of its powers, the

50 Appendix 3

performance of its functions or for the better implementation of the purposes of this Act. (2) The decision to employ and the terms of employment of external advisers and consultants shall be made by the Commission in accordance with such policy guidelines as the Commission may, in consultation with the Board, establish from time to time. 10. Delegation of the Commission’s functions or powers. (1) The Commission may, subject to such conditions and limitations as it may deem fit to impose, delegate any of its functions or powers to one or more Commissioners or any officer of the Commission. (2) A delegation under this section shall not prevent the concurrent performance or exercise by the Commission of the functions or powers so delegated. 11. The Commission to furnish information. The Commission shall furnish to the Federal Government or the Board such information with respect to the policy it is pursuing or proposes to pursue in the performance of any of its functions under this Act as the Federal Government or the Board may, from time to time, require. [2] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [3] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [4] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 PART III: THE BOARD 12. The Securities and Exchange Policy Board. (1) The Federal Government shall appoint a Securities and Exchange Policy Board consisting of [nine][5] Members. (2) Of the Members

(a) [five][6] shall be-

(i) ex officio the Secretary to the Government of Pakistan, Finance Division; (ii) ex officio the Secretary to the Government of Pakistan, Law Division; (iia) ex officio Secretary to the Government of Pakistan, Commerce

Division;][7] (iii) ex officio the Chairman of the Commission; and (iv) a Deputy Governor of the State Bank of Pakistan nominated by the

Governor of the State Bank of Pakistan; and (b) [four][8] appointed by the Federal Government from private sector each of whom

is well-known for his integrity, expertise and experience in the spheres of commerce and industry (including in particular the securities industry), corporate law, accountancy, financial services, investment[, insurance][9], banking, academia or other related relevant fields of expertise.

Appendix 3 51

(3) A Member, not being an ex-officio Member, shall hold office for a term of four years and shall be eligible for re-appointment for one further four-year term but not more: [Provided that a Member shall cease to hold office on attaining the age of sixty-five years.][10] (4) An ex-officio Member shall hold office as Member till such time as he holds the office by virtue of which he is a Member and upon his transfer therefrom or retirement, resignation or removal from office, the person appointed in such Member’s place shall be the Member. (5) If an ex-officio Member is absent from Pakistan or is unable to attend a meeting of the Board he may authorize an officer, not below the rank of Additional Secretary, of his Division, to act as Member and such officer, if approved by the Board, may act as Member. (6) If an ex-officio Member is disqualified to be a Member or resigns his office, the Federal Government shall,-

(a) in case he is a person referred to in sub-clause (i) or sub-clause (ii) of clause (a) of sub-section (2), appoint another Secretary as Member, so long such person holds the post; and

(b) in case of a Deputy Governor appoint another Deputy Governor as Member.

(7) The Federal Government shall designate one of the Members to be the Chairman of the Board who shall, in the event of a tie, have a casting vote. 13. Procedure of the Board. (1) The Board shall meet as often as may be necessary for the performance of its functions but not less than four times in a calendar year. (2) The quorum for a meeting of the Board shall be four Members, including the Chairman. (3) Subject to the provisions of this Act, the procedure and conduct of business of the Board shall be regulated by the regulations made by the Board. 14. Board may invite others to meetings. The Board may invite any person to attend any of its meetings or deliberations (including any of its committees) for the purpose of advising it on any matter under discussion but any person so attending shall have no right to participate in any decision or vote at the said meeting or deliberation. 15. Committees of the Board. (1) The Board may constitute such number of its committees as it considers necessary or expedient to assist it in the performance of its functions under this Act. (2) A committee constituted under this section shall act in accordance with the regulations made by the Board.

52 Appendix 3

(3) Except as otherwise provided in the regulations made by the Board, the meetings of a committee shall be held at such times and places as the chairman of the committee may determine. (4) The Members, other than ex-officio Members, Commissioners or employees, and any other person invited to attend any meeting of the Board or a committee shall be entitled to such compensation and reimbursement of expenses as the Board may from time to time determine by regulations. [5] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [6] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [7] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [8] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [9] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 PART IV: CONFLICT OF INTEREST 16. Disclosure of interest by Commissioners and Members. (1) For the purpose of this and the next following section, a person shall be deemed to have an interest in a matter if he has any interest, pecuniary or otherwise, in such 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, so that his ability to consider and decide any question impartially or to give any advice without bias, may reasonably be regarded as impaired. (2) A Commissioner or a Member having any interest in any matter to be discussed or decided by the Commission or the Board or a committee shall, prior to any discussion of the matter, disclose in writing, respectively, to the Commission, the Board or a committee, as the case may be, the fact of his interest and the nature thereof. (3) A disclosure of interest under sub-section (2) shall be recorded in the minutes of the Commission, the Board, or a committee, as the case may be, prior to any discussion of, or decision on, the matter and, after the disclosure, the Commissioner or, as the case may be, the Member-

(a) shall not, save, in the case of Commissioners, as provided in sub-sections (7) to (9), take part nor be present in any deliberation or decision of the Commission, the Board or a committee, as the case may be, and

(b) shall be disregarded for the purpose of constitution of a quorum of the Board, the Commission or a committee, as the case may be.

(4) Any Commissioner, Member or the member of a committee who fails to disclose his interest as required by this section shall be guilty of an offence and shall on conviction be liable to imprisonment for a term which may extend to one year, or a fine not exceeding one million rupees, or both. (5) It shall be a valid defence for a person charged with an offence under sub-section (4), if he proves that he was not aware of the facts constituting the offence and that he exercised due care and diligence in discovering those facts which he ought reasonably to have known in the circumstances.

Appendix 3 53

(6) Each Commissioner shall give written notice to the Federal Government of all direct or indirect pecuniary interests that he has or acquires in a body corporate carrying on a business in Pakistan. The nature of such interests and the particulars thereof shall be disclosed in the annual report of the Commission made under section 25. (7) If a Commissioner is not the Chairman and the Chairman becomes aware that a Commissioner has the interest, the Chairman shall,-

(a) if the Chairman considers that the Commissioner should not take part, or continue to take part, as the case may require, in determining the matter, direct the Commissioner accordingly, or

(b) in any other case, cause the Commissioner’s interest to be disclosed to the persons concerned in the matter (including any person whose application is pending decision or adjudication by the Commission).

(8) The Commissioner in respect of whom a direction has been given under clause (a) of sub-section (7) shall comply with the direction. (10) Subject to sub-section (7), the Chairman or the Commissioner who has any interest in any matter referred to in this section shall not take part, or continue to take part, as the case may require, in determining the matter unless everyone concerned in it consents to the Chairman or, as the case may be, the Commissioner so taking part. 17. Notification of interest by others. (1) Where a person who, in the course of

(a) performing a function, or exercising a power, as a delegate of the Commission, (b) performing functions or service as an employee, or (c) performing a function or services in any capacity by way of assisting or advising

the Commission, the Board, any committee or any delegate of the Commission, is required to consider a matter in which he has an interest, such person shall forthwith give to the Commission a written notice stating that he is required to consider the matter and has an interest in it and setting out particulars of the interest

(2) The person referred to in sub-section (1) shall also declare his interest in accordance with the said sub-section whenever it is necessary to avoid the conflict of interest. PART V: DISQUALIFICATION, REMOVAL, RESIGNATION AND VACANCIES 18. Disqualification of Members and Commissioners.- No person shall be appointed or continue as a Member or Commissioner if he-

(a) has been convicted of an offence involving moral turpitude; (b) has been or is adjudged insolvent; (c) is incapable of discharging his duties by reasons of physical, physiological or

mental unfitness and has been so declared by a registered medical practitioner appointed by the Federal Government;

(d) being a Member, absents himself from three consecutive meetings of the Board, without leave of the Board and, in the case of a Member ex-officio, or fails to appoint another person to act as member under sub-section (5) of section 12, or

54 Appendix 3

(e) fails to disclose any conflict of interest at or within the time provided for such disclosure by or under this Act or contravenes any of the provisions of this Act pertaining to unauthorized disclosure of information.

19. Removal, resignation and vacancies.- (1) Subject to sub-section (2), appointment of any Member or Commissioner may, at any time, be revoked and he may be removed from his office by order of the Federal Government if it is found that such person stands disqualified under section 18. (2) Unless a disqualification referred to in section 18 arises from the judgment or order of a court or tribunal of competent jurisdiction under any relevant provision of applicable law, a Member or Commissioner shall not be removed or his appointment revoked without an enquiry by an impartial person or body of persons constituted in accordance with such procedure, as may be prescribed by rules made by the Federal Government, and such rules shall provide for a reasonable opportunity for him to be heard in his defence. (3) A Member or a Commissioner may at any time resign his office by a written notice addressed to the Federal Government. (4) The office of a Member or Commissioner shall ipso facto be vacated if he dies. PART VI: POWERS AND FUNCTIONS 20. Powers and functions of the Commission.- (1) The Commission shall have all such powers as may be necessary to perform its duties and functions under this Act. (2) The Commission may, having regard to its functions and to exercise its powers efficiently, organize itself into divisions, wings or such other sub-divisions as it may consider expedient. (3) The Commission may, from time to time, identify the matters requiring the Board to make policy decisions and may also make recommendations regarding policy to the Board for its consideration. (4) The Commission shall be responsible for the performance of the following functions:

(a) regulating the issue of securities; (b) regulating the business in Stock Exchanges and any other securities markets; (c) supervising and monitoring the activities of any central depository and Stock

Exchange clearing house; (d) registering and regulating 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 advisers and such other intermediaries who may be associated with the securities markets in any manner;

(e) proposing regulations for the registration and regulating the working of collective investment schemes, including unit trust schemes;

(f) promoting and regulating self-regulatory organizations including securities industry and related organizations such as Stock Exchanges and associations of mutual funds, leasing companies and other NBFIs;

(g) prohibiting fraudulent and unfair trade practices relating to securities markets;

Appendix 3 55

(h) promoting investors’ education and training of intermediaries of securities markets;

(i) conducting investigations in respect of matters related to this Act and the Ordinance and in particular for the purpose of investigating insider trading in securities and prosecuting offenders;

(j) regulating substantial acquisition of shares and the merger and take-over of companies;

(k) calling for information from and undertaking inspections, conducting inquiries and audits of the Stock Exchanges and intermediaries and self-regulatory organizations in the securities market;

(l) considering and suggesting reforms of the law relating to companies and bodies corporate, securities markets, including changes to the constitution, rules and regulations of companies and bodies corporate, Stock Exchanges or clearing houses;

(m) encouraging the organized development of the capital market and the corporate sector in Pakistan;

(n) conducting research in respect of any of the matters set out in this sub-section; (o) performing such functions and exercising such powers of the Authority, including

any powers of the Federal Government delegated to the Authority, (other than the power to make any rules or regulations) under the provisions of the Ordinance, the Securities and Exchange Ordinance, 1969 (XVII of 1969), the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980) and under any other law for the time being in force under which any function or power has been conferred on the Authority including, but not limited to, the functions and powers set out in the Schedule to this Act;[Omitted][11]

(p) performing such functions and exercising such powers (other than the power to make any rules or regulations) under the Ordinance or any other law for the time being in force as may, after the commencement of this Act, be delegated to it by the Federal Government and exercising any power or performing any functions conferred on it by or under any other law for the time being in force;

(q) proposing regulations in respect of all or any of the aforesaid matters for the consideration and approval of the Board[; and][12]

(r) exercising all powers, discharging all duties and performing all functions assigned to the Commission under, and generally administering, the Law of Insurance;

(s) 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 force;

(t) regulating professional organizations connected with the insurance business; and (u) encouraging the organized development of the insurance market in Pakistan.][13]

(5) Without prejudice to the provisions of sub-section (4), the approval of the Commission shall be required by-

(a) all public companies incorporated in Pakistan which intend to issue or offer for sale securities in markets outside Pakistan or to list such securities on a Stock Exchange outside Pakistan, in each case, whether directly or through an intermediary;

56 Appendix 3

(b) all bodies corporate incorporated outside Pakistan which or persons who intend to issue or offer for sale, securities to the public in Pakistan or to list such securities on a Stock Exchange; and

(c) all bodies corporate incorporated outside Pakistan which are already listed on a Stock Exchange, for the listing of and quotation for any additional securities.

(6) In performing its functions and exercising its powers, the Commission shall strive-

(a) to maintain facilities and improve the performance of companies and of securities markets, in the interest of commercial certainty, reducing business costs, and efficiency and development of the economy;

(b) to maintain the confidence of investors in the securities markets by ensuring adequate protection for such investors;

(c) to achieve uniformity in how it performs those functions and exercise those powers;

(d) to administer laws effectively but with a minimum of procedural requirements; (e) to receive, process, and store, efficiently and quickly, the documents lodged with,

and the information given to, it under this Act, the Ordinance or any other law; (f) to ensure that the documents, and the information referred to in clause (e) are

available as soon as possible for access by the public; [Omitted][14] (fa) to maintain the confidence of holders of insurance policies by protecting the

interests of policy holders and beneficiaries of insurance policies in all matters, including assignment of insurance policies, nomination by policy holders, insurable interest, surrender value of policies of life insurance, and other terms and conditions of contracts of insurance;

(fb) to improve existing methods and devise new options for the expeditious settlement of claims and disputes between insurers and policy holders and between insurers and intermediaries;

(fc) to promote efficiency in the conduct of insurance business; (fd) to promote the establishment and development of professional and educational

organizations connected with insurance business with a view to improving the quality of insurance services in the country;

(fe) to promote awareness among consumers with respect to the benefits of insurance and the existence of measures to safeguard the interests of mortgagers, mortgagees and potential policy holders; and][15]

(g) to take whatever action it can take, and is necessary, in order to enforce and give effect to the Act[, the Ordinance, the Law of Insurance][16] or any other law.

(7) The Commission, and the Commissioner or officer to whom any of the functions or powers have been delegated under section 10 may, for the purposes of a proceeding or enquiry, require anyone-

(a) to produce before, and to allow to be examined and kept by, an officer of the Commission specified in this behalf, any books, accounts or other documents in the custody or under the control of the person so required, being documents relating to any matter the examination of which may be considered necessary by the Commission or such Commissioner or officer; and

(b) to furnish to an officer of the Commission specified in this behalf such information and documents in his possession relating to any matter as may be necessary for the purposes of the proceeding or enquiry.

Appendix 3 57

21. Functions and powers of the Board.- (1) Subject to the provisions of this Act, the Board shall-

(a) when so asked to do and after consultation with the Commission, advise the Federal Government on all matters relating to-

(i) the securities industry [and insurance industry][17]; (ii) regulation of companies and corporate sector and protection of the interests of

investors; (iia) regulation of the insurance sector and protection of the interests of insurance

policy holders;][18] (iii) measures to encourage self-regulation by the Stock Exchanges[, insurers,

insurance intermediaries, insurance surveyors][19] and NBFIs by specifying the standards for such self regulatory organizations;

(iv) measures to promote the development of and to regulate the securities market

[and the insurance market][20]; and (v) other related matters; (b) consider and approve (with or without modification) any regulations with respect

to implementation of policy decisions, proposed to be made by the Commission under the Act;][21]

(c) consider and approve (with or without modification) the budget for each financial

year of the Commission prepared and submitted to it pursuant to the provisions of sub-section (2) of section 24;

(d) express its opinion in writing on any policy matter referred to it by the Federal

Government or the Commission; (e) oversee the performance of the Commission to the extent that the purposes of

this Act are achieved; (f) exercise all such powers and perform all such functions as are conferred or

assigned to it under this Act; and (g) specify fees, penalties and other charges chargeable by the Commission for

carrying out the purposes of this Act. (2) All policy decisions, including any change in previously established policy, in respect of all and any matters within the jurisdiction of the Commission shall be made only by the Board. The Board may make policy decisions suo motu or adopt such policy recommendations of the Commission, with or without modification, as the Board may deem fit in its sole discretion. 22. Supplementary provisions.- (1) All guidelines, decisions and directives whether of the Board or the Commission shall be in writing expressed by resolutions, orders or in such other form as may be appropriate in the circumstances and shall be authenticated in the manner

58 Appendix 3

prescribed by the regulations and where so provided by regulations, also sealed with the seal of the Commission. (2) All policy decisions and directives of the Board and the Commission respectively shall be published in the official Gazette and the Board and the Commission shall make such publications available to the public. (3) The Commission shall, in adjudicating upon the rights of any person whose application on any matter it is required to consider in the exercise of any power or function under this Act, give the reasons for its decision after giving the person concerned a personal hearing, in addition to any written applications or submission which may be required to be made. (4) The Commission when exercising its powers under this Act shall have regard, so far as relevant to the circumstances of the particular case, to-

(a) the viability of the company or body corporate; (b) the quality and capability of the management of the company or body corporate; (c) the suitability for listing of the company or body corporate on a Stock Exchange

where applicable; (d) the interest of public investors, existing or potential, in the company or body

corporate; (da) the professional competence and capability of persons engaged in the provision

of services in the insurance industry; (db) the interest of insurance policy holders, existing or potential, where

applicable;][22](e) any policy decision or directives of the Board; and (f) the general public interest.

(5) Subject to the compliance of the provisions of sub-section (3), section 24A of the General Clauses Act, 1897 ( X of 1897), shall apply to any order made or direction given under this Act. [11] [Omitted] Omitted vide S & E Commission of Pakistan (Amend) Ord., 2000 [12] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [13] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [14] [Omitted] Omitted vide S & E Commission of Pakistan (Amend) Ord., 2000 [15] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [16] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [17] Added by S & E Commission of Pakistan (Amend) Ord., 2000 [18] Added by S & E Commission of Pakistan (Amend) Ord., 2000 [19] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [20] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [21] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [22] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 PART VII: FINANCE 23. The Fund. (1) There is hereby established, for the purposes of this Act, a Fund to be administered and controlled by the Commission.

Appendix 3 59

(2) The Fund shall consist of-

(a) such sums as the Federal Government may from time to time, grant; (b) grants of money and sums borrowed or raised by the Commission for the

purposes of meeting any of its obligations or discharging any of its duties; (c) taxes, fees, penalties or other charges levied under this Act, the Ordinance, the

Securities and Exchange Ordinance, 1969 (XVII of 1969), the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), [Law of Insurance][23] and under any other law for the time being administered by the Commission; and

(d) all other sums or property which may in any manner become payable to or vested in the Commission in respect of any matter incidental to the exercise of its functions and powers.

(3) It shall be the duty of the Commission to conserve the Fund by performing its functions and exercising its powers under this Act so as to ensure that the total revenues of the Commission are sufficient to meet all sums properly chargeable to its revenue account. 24. Expenditure to be charged on the Fund.- (1) The Fund shall be expended for the purpose of-

(a) paying any expenditure lawfully incurred by the Commission, including the remuneration of Commissioners and employees appointed and employed by the Commission, including provident fund contributions, superannuating allowances or gratuities and legal fees and costs and other fees and costs;

(b) paying any other expenses, costs or expenditure properly incurred or accepted by the Commission in the performance of its functions or the exercise of its powers under this Act;

(c) purchasing or hiring equipment, machinery and any other materials, acquiring land and erecting buildings, and carrying out any other work and undertakings in the performance of its functions or the exercise of its powers under this Act;

(d) repaying any financial accommodation received or moneys borrowed under this Act and the profit, return, mark-up or interest due thereon (howsoever called); and

(e) generally, paying any expenses for carrying into effect the provisions of this Act. (2) Within ninety days of its establishment, the Commission shall prepare and submit to the Board for its approval, a budget for the period up to and including the end of the then current financial year and thereafter it shall, not later than thirty days [before the expiry][24] of each financial year, submit to the Board for approval a budget for the next financial year. (3) No expenditure shall be made for which provision has not been made in any approved budget except if made from any previously approved contingency funds, unless further approval is sought and obtained from the Board. (4) The Commission shall act as the secretariat of the Board and provide all the necessary facilities to enable the Board to exercise its powers and perform its functions under this Act and the necessary and proper expenses in that connection shall form part of the budget of the Commission.

60 Appendix 3

25. Annual report and accounts.- (1) Within ninety days from the end of each financial year, the Commission shall, in consultation with the Board, cause a report to be prepared on the activities of the Commission (including investigations and enquiries made by the Commission under this Act or the Ordinance [or the Law of Insurance][25]) during that financial year and release to the public and simultaneously send a copy of the report to the Federal Government. (2) The Commission shall cause proper accounts to be kept and shall as soon as practicable after the end of each financial year cause to be prepared for that financial year a statement of accounts of the Commission which shall include a balance sheet and an account of income and expenditure. (3) The Commission shall cause the statement of accounts to be audited by auditors, appointed by the Commission with the approval of the Federal Government, who shall be a firm of chartered accountants. Any casual vacancy in the office of auditor appointed under this section may be filled in by the Commission.][26] (4) The auditors shall make a report to the Federal Government, upon the annual balance sheet and accounts, and in any such report they shall state whether in their opinion the balance sheet is a full and fair balance sheet containing all necessary particulars and properly drawn up so as to exhibit a true and correct view of the affairs of the Commission and, in case they have called for any explanation or information from the Commission, whether it has been given and whether it is satisfactory. (5) The Federal Government may if it deems fit also require the accounts of the Commission for any financial year to be audited by the Auditor General of Pakistan. (6) The Board shall, within one hundred and twenty days of the end of each financial year, together with the annual report of the Commission under sub-section (2), send a copy of the statement of accounts of the Commission certified by the auditors and a copy of the auditors' report to the Federal Government which shall cause them to be published in the official Gazette and laid before both Houses of the Majlis-e-Shoora (Parliament) within two months of their receipt. 26. Power to obtain finance, borrow money and receive grants.- (1) The Commission may, from time to time, and with the approval of the Federal Government, obtain finance or borrow money from sources within Pakistan or from abroad, as the case may be, with such rate of return, profit, mark-up or interest payable thereon, as the case may be, and for such period and upon such terms as to the time and method of repayment and otherwise, in respect of any sums required by the Commission for meeting any of its obligations or performing any of its functions. (2) The Commission may also accept [Omitted][27] with the approval of the Federal Government, grants from entities both domestic and international, including multilateral agencies. 27. Investment.- (1) Subject to sub-section (2), the Commission may, in so far as its moneys are not required to be expended under this Act, invest in such manner as set out in section 20 of the Trusts Act, 1882 (11 of 1882). (2) The Commission shall not invest its money in listed securities or any derivative thereof whether listed or not.

Appendix 3 61

28. Bank Accounts.- The Commission may, with the approval of the Board, open and maintain it’s accounts in rupees or in any foreign currency at such scheduled banks as it may from time to time determine.][28] [23]Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [24]Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [25]Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [26]Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [27][Omitted] Omitted vide S & E Commission of Pakistan (Amend) Ord., 2000 [28]Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 20. Powers and functions of the Commission.- (1) The Commission shall have all such powers as may be necessary to perform its duties and functions under this Act. (2) The Commission may, having regard to its functions and to exercise its powers efficiently, organize itself into divisions, wings or such other sub-divisions as it may consider expedient. (3) The Commission may, from time to time, identify the matters requiring the Board to make policy decisions and may also make recommendations regarding policy to the Board for its consideration. (4) The Commission shall be responsible for the performance of the following functions:

(a) regulating the issue of securities; (b) regulating the business in Stock Exchanges and any other securities markets; (c) supervising and monitoring the activities of any central depository and Stock

Exchange clearing house; (d) registering and regulating 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 advisers and such other intermediaries who may be associated with the securities markets in any manner;

(e) proposing regulations for the registration and regulating the working of collective investment schemes, including unit trust schemes;

(f) promoting and regulating self-regulatory organizations including securities industry and related organizations such as Stock Exchanges and associations of mutual funds, leasing companies and other NBFIs;

(g) prohibiting fraudulent and unfair trade practices relating to securities markets; (h) promoting investors’ education and training of intermediaries of securities

markets; (i) conducting investigations in respect of matters related to this Act and the

Ordinance and in particular for the purpose of investigating insider trading in securities and prosecuting offenders;

(j) regulating substantial acquisition of shares and the merger and take-over of companies;

(k) calling for information from and undertaking inspections, conducting inquiries and audits of the Stock Exchanges and intermediaries and self-regulatory organizations in the securities market;

(l) considering and suggesting reforms of the law relating to companies and bodies corporate, securities markets, including changes to the constitution, rules and

62 Appendix 3

regulations of companies and bodies corporate, Stock Exchanges or clearing houses;

(m) encouraging the organized development of the capital market and the corporate sector in Pakistan;

(n) conducting research in respect of any of the matters set out in this sub-section; (o) performing such functions and exercising such powers of the Authority, including

any powers of the Federal Government delegated to the Authority, (other than the power to make any rules or regulations) under the provisions of the Ordinance, the Securities and Exchange Ordinance, 1969 (XVII of 1969), the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980) and under any other law for the time being in force under which any function or power has been conferred on the Authority including, but not limited to, the functions and powers set out in the Schedule to this Act;[Omitted][11]

(p) performing such functions and exercising such powers (other than the power to make any rules or regulations) under the Ordinance or any other law for the time being in force as may, after the commencement of this Act, be delegated to it by the Federal Government and exercising any power or performing any functions conferred on it by or under any other law for the time being in force;

(q) proposing regulations in respect of all or any of the aforesaid matters for the consideration and approval of the Board[; and][12]

(r) exercising all powers, discharging all duties and performing all functions assigned to the Commission under, and generally administering, the Law of Insurance;

(s) 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 force;

(t) regulating professional organizations connected with the insurance business; and (u) encouraging the organized development of the insurance market in Pakistan.][13]

(5) Without prejudice to the provisions of sub-section (4), the approval of the Commission shall be required by-

(a) all public companies incorporated in Pakistan which intend to issue or offer for sale securities in markets outside Pakistan or to list such securities on a Stock Exchange outside Pakistan, in each case, whether directly or through an intermediary;

(b) all bodies corporate incorporated outside Pakistan which or persons who intend to issue or offer for sale, securities to the public in Pakistan or to list such securities on a Stock Exchange; and

(c) all bodies corporate incorporated outside Pakistan which are already listed on a Stock Exchange, for the listing of and quotation for any additional securities.

(6) In performing its functions and exercising its powers, the Commission shall strive-

(a) to maintain facilities and improve the performance of companies and of securities markets, in the interest of commercial certainty, reducing business costs, and efficiency and development of the economy;

(b) to maintain the confidence of investors in the securities markets by ensuring adequate protection for such investors;

Appendix 3 63

(c) to achieve uniformity in how it performs those functions and exercise those powers;

(d) to administer laws effectively but with a minimum of procedural requirements; (e) to receive, process, and store, efficiently and quickly, the documents lodged with,

and the information given to, it under this Act, the Ordinance or any other law; (f) to ensure that the documents, and the information referred to in clause (e) are

available as soon as possible for access by the public; [Omitted][14] (fa) to maintain the confidence of holders of insurance policies by protecting the

interests of policy holders and beneficiaries of insurance policies in all matters, including assignment of insurance policies, nomination by policy holders, insurable interest, surrender value of policies of life insurance, and other terms and conditions of contracts of insurance;

(fb) to improve existing methods and devise new options for the expeditious settlement of claims and disputes between insurers and policy holders and between insurers and intermediaries;

(fc) to promote efficiency in the conduct of insurance business; (fd) to promote the establishment and development of professional and educational

organizations connected with insurance business with a view to improving the quality of insurance services in the country;

(fe) to promote awareness among consumers with respect to the benefits of insurance and the existence of measures to safeguard the interests of mortgagers, mortgagees and potential policy holders; and][15]

(g) to take whatever action it can take, and is necessary, in order to enforce and give effect to the Act[, the Ordinance, the Law of Insurance][16] or any other law.

(7) The Commission, and the Commissioner or officer to whom any of the functions or powers have been delegated under section 10 may, for the purposes of a proceeding or enquiry, require anyone-

(a) to produce before, and to allow to be examined and kept by, an officer of the

Commission specified in this behalf, any books, accounts or other documents in the custody or under the control of the person so required, being documents relating to any matter the examination of which may be considered necessary by the Commission or such Commissioner or officer; and

(b) to furnish to an officer of the Commission specified in this behalf such information and documents in his possession relating to any matter as may be necessary for the purposes of the proceeding or enquiry.

21. Functions and powers of the Board.- (1) Subject to the provisions of this Act, the Board shall-

(a) when so asked to do and after consultation with the Commission, advise the Federal Government on all matters relating to-

(i) the securities industry [and insurance industry][17]; (ii) regulation of companies and corporate sector and protection of the interests of

investors; (iia) regulation of the insurance sector and protection of the interests of insurance

policy holders;][18]

64 Appendix 3

(iii) measures to encourage self-regulation by the Stock Exchanges[, insurers, insurance intermediaries, insurance surveyors][19] and NBFIs by specifying the standards for such self regulatory organizations;

(iv) measures to promote the development of and to regulate the securities market

[and the insurance market][20]; and (v) other related matters; (b) consider and approve (with or without modification) any regulations with respect

to implementation of policy decisions, proposed to be made by the Commission under the Act;][21]

(c) consider and approve (with or without modification) the budget for each financial year of the Commission prepared and submitted to it pursuant to the provisions of sub-section (2) of section 24;

(d) express its opinion in writing on any policy matter referred to it by the Federal

Government or the Commission; (e) oversee the performance of the Commission to the extent that the purposes of

this Act are achieved; (f) exercise all such powers and perform all such functions as are conferred or

assigned to it under this Act; and (g) specify fees, penalties and other charges chargeable by the Commission for

carrying out the purposes of this Act. (2) All policy decisions, including any change in previously established policy, in respect of all and any matters within the jurisdiction of the Commission shall be made only by the Board. The Board may make policy decisions suo motu or adopt such policy recommendations of the Commission, with or without modification, as the Board may deem fit in its sole discretion. 22. Supplementary provisions.- (1) All guidelines, decisions and directives whether of the Board or the Commission shall be in writing expressed by resolutions, orders or in such other form as may be appropriate in the circumstances and shall be authenticated in the manner prescribed by the regulations and where so provided by regulations, also sealed with the seal of the Commission. (2) All policy decisions and directives of the Board and the Commission respectively shall be published in the official Gazette and the Board and the Commission shall make such publications available to the public. (3) The Commission shall, in adjudicating upon the rights of any person whose application on any matter it is required to consider in the exercise of any power or function under this Act, give the reasons for its decision after giving the person concerned a personal hearing, in addition to any written applications or submission which may be required to be made. (4) The Commission when exercising its powers under this Act shall have regard, so far as relevant to the circumstances of the particular case, to-

Appendix 3 65

(a) the viability of the company or body corporate; (b) the quality and capability of the management of the company or body corporate; (c) the suitability for listing of the company or body corporate on a Stock Exchange

where applicable; (d) the interest of public investors, existing or potential, in the company or body

corporate; (da) the professional competence and capability of persons engaged in the provision

of services in the insurance industry; (db) the interest of insurance policy holders, existing or potential, where

applicable;][22](e) any policy decision or directives of the Board; and (f) the general public interest.

(5) Subject to the compliance of the provisions of sub-section (3), section 24A of the General Clauses Act, 1897 ( X of 1897), shall apply to any order made or direction given under this Act. [11] [Omitted] Omitted vide S & E Commission of Pakistan (Amend) Ord., 2000 [12] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [13] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [14] [Omitted] Omitted vide S & E Commission of Pakistan (Amend) Ord., 2000 [15] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [16] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [17] Added by S & E Commission of Pakistan (Amend) Ord., 2000 [18] Added by S & E Commission of Pakistan (Amend) Ord., 2000 [19] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [20] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 [21] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [22] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 PART VIII: ENFORCEMENT AND INVESTIGATION 29. Investigation and proceedings by the Commission.-(1) The Commission may suo motu conduct investigations in respect of any matter that is an offence under this Act. (2) The Commission may appoint such number of investigating officers to be known as investigating officers of the Commission as it considers necessary for the purposes of carrying out investigation of any offence or inspection under this Act, the Ordinance or any other law in respect of which it has been empowered to exercise the powers of the Authority and such investigating officer shall have all the powers given to any person for the purposes of carrying out investigation of any offence under this Act, the Ordinance and any other law. 30. Powers of the investigating officers of the Commission.- (1) An investigating officer carrying out an investigation or inspection may, only after the written order of the Commission signed by any two Commissioners, enter any place or building-

(a) to inspect and make copies of or take extracts from any book, minute book, register or document; and

(b) where he has reason to believe that an offence has been committed under this Act or the Ordinance or any other law in respect of which the Commission has power to make investigation or inspection, to search for, seize, take possession of and detain any object, article, material, thing, accounts book or other

66 Appendix 3

document, including any travel or other personal document which may be used as evidence.

(2) When an order has been made under sub-section (1) an investigating officer of the Commission may, by notice in writing, require any person to produce before him such books, registers or documents as are in the custody or under the control of that person. (3) A person who-

(a) fails deliberately to produce any such books, registers or documents as are required by the Commission or an investigating officer; or

(b) obstructs or hinders an investigating officer while exercising any of the powers under this section; shall be guilty of an offence and shall be liable on conviction to a fine which may extend to one million rupees or to imprisonment for a term not exceeding one month, or to both.

(4) Any accounts, book or other document seized and taken possession of by the investigating officer of the Commission under sub-section (1) may be inspected by any person if such person is entitled to inspect such accounts, book or document under this Act, and if so authorized to do in writing by the Commission. (5) Sub-section (1) shall not be construed as limiting or affecting any similar powers conferred on any person under any other law. (6) Any person aggrieved by the conduct of an investigating officer may lodge a complaint in respect thereof to the Commission. (7) The Commission shall, within fifteen days of receipt of the complaint under sub-section (6) commence a hearing to determine the veracity of such complaint in accordance with such procedure as may be prescribed by rules made by the Federal Government. 31. Forcible entry.- (1) For the purpose of exercising his powers under sub-sections (1) and (2) of section 30, an investigating officer of the Commission may enter any place or building by force, if necessary. (2) Notwithstanding anything contained in sub-section (1), no investigating officer of the Commission shall enter any premises by the use of force without a written order of the Commission signed by any two Commissioners. (3) If, on enquiry conducted in accordance with the rules it is found that the exercise by an investigating officer of his power under sub-section (2) was vexatious, excessive or with mala fide intent such officer shall be dismissed from service, and shall be guilty of an offence punishable with fine which may extend to five hundred thousand rupees and imprisonment for a term not exceeding one year. (4) Whenever a criminal court imposes a fine under sub-section (3) it shall, when passing judgment, order that a sum equal to the whole or any part of the fine recovered, be paid to the person on whose complaint the investigating officer was convicted, and in case the fine is not recovered the sum shall be paid out of the Fund. (5) Any sum paid under sub-section (4) shall be without prejudice to the right of the aggrieved person to avail any other remedies available to him under the law but at the time of

Appendix 3 67

awarding compensation in any subsequent proceedings relating to the same matter the court shall take into account any sum recovered from the convict and paid to the aggrieved person. 32. Power to call for examination.- (1) For the purpose of sub-section (1) of section 29, the Commission may by notice in writing require any person acquainted with the facts and circumstances of the case to appear before an investigating officer authorized by it in this regard. Such person shall be examined orally and any statement made by such person during the course of the examination shall be reduced into writing. (2) Such person shall be bound to answer all questions relating to such case put to him by the investigating officer, as the case may be, and to state the truth, whether or not the statement is made wholly or partly in answer to questions. (3) Subject to sub-section (4), a statement made by any person under this section shall be taken down in writing and signed by the person making it or affixed with his signature and thumb print, as the case may be, after it has been read to him and after he had been given an opportunity to make any correction he may wish. (4) Where the person examined refuses to sign and affix his thumb print on the statement, the investigating officer of the Commission shall endorse thereon under his hand the fact of such refusal and the reason therefore, if any, stated by the person examined. (5) Any person who:-

(a) fails to appear before an investigating officer of the Commission as required under sub-section (1);

(b) refuses to answer any question put to him by an investigating officer of the Commission as required under sub-section (2); or

(c) knowingly furnishes to an investigating officer of the Commission information or statement that is false or misleading in any material particular;

(d) willfully refuses to obey or disregards any lawful order of the Commission; shall be guilty of an offence and shall be liable on conviction to a fine not exceeding one hundred thousand rupees or to imprisonment for a term not exceeding one year, or to both.

33. Appeal to the Appellate Bench of the Commission.- (1) An appeal shall lie to an Appellate Bench of the Commission in respect of an order of the Commission made by one Commissioner. The person aggrieved by such order may within thirty days of the passing of the order prefer an appeal to the Appellate Bench of the Commission. (2) The Commission shall constitute an Appellate Bench of the Commission comprising not less than two Commissioners to hear appeals under sub-section (1). (3) If any Commissioner who is included in the Appellate Bench has participated or been concerned in the decision being appealed against the Chairman shall nominate an other Commissioner to sit in the Bench to hear that appeal. (4) The form in which an appeal is to be filed and the fees to be paid therefor and other related matters shall be prescribed by rules. 34. Appeal to the Court.- (1) An appeal shall lie to the Court referred to in Part II of the Ordinance in respect of an order of the Commission comprising two or more Commissioners or the Appellate Bench.

68 Appendix 3

(2) The appeal under sub-section (1) shall be filed within sixty days of the date of the decision and shall by accompanied by a fee of one hundred rupees. PART IX: CONFIDENTIALITY OF INFORMATION 35. Obligation of confidentiality.- (1) Subject to this section, any person who is or was at any time-

(a) acting as a Member of the Board, or (b) engaged as a Commissioner or employee of the Commission, or (c) authorized to perform or exercise any function or power of the Commission or

any function or power on behalf of the Commission or to render services to the Commission in the capacity of a consultant or adviser;

shall not, except to the extent necessary to perform his official duties, or in performance or exercise of such a function or power, either directly or indirectly, make a record of, or disclose to any person, any information that is or was acquired by him because of having been so appointed, engaged or authorized, or make use of any such information, for any purpose other than the performance of his official duties or the performance or exercise of that function or power. (2) Any person who contravenes sub-section (1) shall be guilty of an offence and shall be liable on conviction to a fine not exceeding one million rupees or to imprisonment for a term not exceeding one year or, to both. (3) The Commission shall take all reasonable measures to protect from unauthorized use or disclosure the information given to it in confidence in or in connection with the performance of its functions or the exercise of its powers. (4) For the purpose of sub-section (1) the disclosure of information as required or permitted by any law for the time being in force in Pakistan or any other jurisdiction shall be taken to be authorized use and disclosure of the information. (5) For the purposes of sub-section (1), the disclosure of information by a person for the purposes of-

(a) performing his functions as- (i) a Commissioner or employee of the Commission, or (ii) a person who is acting as a Commissioner or employee or who is authorized to

perform or exercise a function or power of, or on behalf of, the Commission, or (b) the performance of functions or service by the person by way of assisting a

Commissioner or a delegate of the Commission, shall be taken to be authorized use and disclosure of the information.

(6) Where the Chairman is satisfied that particular information-

(a) will enable or assist the Board to perform or exercise any of its functions or

powers; (b) will enable or assist the government, or an agency of the government to perform

a function or exercise a power; or

Appendix 3 69

(c) will enable or assist the government, or an agency of the government, of a foreign country to perform a function, or exercise a power, conferred by a law in force in that foreign country; the disclosure of the information to such persons by a person whom the Chairman authorizes for the purpose shall be taken to be authorized use and disclosure of the information.

(7) The Chairman may impose conditions to be complied with in relation to information disclosed under sub-section (6). (8) The disclosure of information to a body specified in sub-section (9) is authorized use and disclosure of the information if:

(a) the Chairman is satisfied that the information will enable or assist the body to

monitor compliance with, enforce, or perform functions or exercise powers under- (i) any law for the time being in force; (ii) the rules and regulations (including the listing rules if any), of the body; and (b) the disclosure is made by a person authorized by the Chairman for the purpose.

(9) A body to whom disclosure of information under sub-section (8) may be authorized is-

(a) a Stock Exchange; or (b) a clearing house; or (c) a central depository; or (d) such other body corporate as the Federal Government may by notification in the

official Gazette specify for the purposes of this sub-section. (10) The Chairman may impose conditions to be complied with by the body and its officers, employees and agents in relation to the information disclosed to it under sub-section (8) and persons in respect of whom conditions are imposed shall be bound to comply with them. (11) If information is disclosed to a body under sub-section (8) the body, or any officer, employee or agent of the body shall not, without the written consent of the Chairman:

(a) disclose the information to a person who is not an officer, employee, professional

adviser or agent of the body corporate; or (b) use the information otherwise than for the purpose of monitoring compliance

with, enforcing, or performing functions or exercising powers under: (i) the Ordinance and any other law for the time being in force; or (ii) the rules and regulations (including the listing rules, if any), of the body

corporate. (12) The Chairman may delegate all or any of his functions and powers under sub-sections (6), (7), (8), (10), or (11) to a Commissioner or an employee. (13) Nothing in any of sub-sections (4), (5), (7) and (8) shall limit:

(a) anything else in any of those sub-sections; or (b) what may otherwise constitute, for the purposes of sub-section (1), authorized

use or disclosure of information.

70 Appendix 3

36. Permitted disclosure.- Nothing in section 35 shall preclude a person from:

(a) producing a document to a court in the course of criminal proceedings or in the course of any proceedings under this Act, the Ordinance or any other law for the time being in force.

(b) disclosing to a court in the course of any proceedings referred to in clause (a) any matter or thing, that came under his notice in the performance of official duties or in the performance of a function or the exercise of a power referred to in that section; or

(c) producing a document or disclosing information to a person to whom, in the opinion of the Commission, it is in the public interest that the document be produced or the information be disclosed; or

(d) producing a document or disclosing information that is required or permitted by any law for the time being in force in Pakistan or any other jurisdiction to be produced or disclosed, as the case may be; or

(e) producing a document or disclosing information to the Commission. PART X: COGNIZANCE AND PROSECUTION OF OFFENCES 37. Cognizance of offences.- Notwithstanding anything contained in the Code of Criminal Procedure, 1898 (Act No. V of 1898) no court other than the court of session shall have jurisdiction to try any offence under this Act. 38. Conduct of prosecution.- (1) No prosecution for any offence under this Act against any person shall be instituted except with the consent in writing of the Commission signed by any two Commissioners. (2) Prosecution of any offence under this Act shall be conducted by any officer of the Commission authorized in writing by the Commission. PART XI: RULES AND REGULATIONS 39. Power to make rules.- (1) Subject to sub-section (2), the Federal Government may, by notification in the official Gazette, make rules for all or any of the matters in respect of which it is required to make rules to carry out the purposes of this Act. (2) The power to make rules conferred by this section shall be subject to the condition of previous publication and before making any rules the draft thereof shall be published in the official Gazette for eliciting public opinion thereon within a period of not less than [thirty][29] days from the date of publication. 40. Power to make regulations.- (1) Subject to sub-section (2),- (i) the Board [Omitted][30] on the recommendation of the Commission and in consultation with the Federal Government; and (ii) the Commission [in consultation with][31] the Board, may make such regulations as may be required to carry out the purposes of this Act. (2) The power to make regulations conferred by this section shall be subject to the condition of previous publication and before making any regulations the draft thereof shall be published in two newspapers of wide circulation for eliciting public opinion thereon within a period of not less than [thirty][32] days from the date of publication.

Appendix 3 71

[29] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [30] [Omitted] Omitted vide S & E Commission of Pakistan (Amend) Ord., 2000 [31] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [32] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 PART XII: GENERAL 41. Common seal.- The Commission shall have a common seal and such seal shall be kept in the custody of the Chairman or such other person as may be authorized by the regulations made by the Commission. Documents required or permitted to be executed under seal shall be specified in and authenticated in such manner as shall be authorized by regulations made by the Board. 42. Public servants.- (1) The Members, Commissioners, employees and other persons authorized to perform or exercise any function or power under this Act or rendering services to Commission as consultant or adviser shall be deemed to be public servants within the meaning of section 21 of the Pakistan Penal Code, 1860 (Act XLV of 1860). (2) Save as otherwise provided by this Act and only for the purposes so provided, nothing herein contained shall be construed to mean that any person referred to in sub-section (1) is or shall be deemed to be in the service of Pakistan or is to be regarded or treated as a civil servant. 43. Dissolution of the Authority.- The Authority is hereby dissolved and at all times thereafter,-

(a) section 11 and sub-section (3) to (7) (inclusive) of section 12 of the Ordinance shall stand repealed and except as hereinafter provided, all references to the Authority appearing in the Ordinance and any other law for the time being in force shall be deemed to mean and refer to the Commission;

(b) the rules under the Ordinance or under any other law for the time being in force being administered by the Commission shall be made by the Commission with the approval of the Federal Government][33];

(c) save as otherwise provided in clause (b), all powers exercisable by the Federal Government under any provisions of the Ordinance or any other law for the time being in force, which immediately before the appointed day had been delegated to the Authority, shall be exercised by the Commission;

(d) all assets, rights, powers, authorities and privileges and all property, movable and immovable, cash and bank balance, reserve funds, investments and all other interests and rights in, or arising out of, such property and all debts, liabilities and obligations of whatever kind of the Authority subsisting immediately before its dissolution shall stand transferred to and vest in the Commission;

(e) no officer, employee, servant, or any other person holding any post in connection with the affairs of the Authority, shall have any right or lien to appointment to any post in the Commission;

(f) any person referred to in clause (e) who is appointed by the Commission shall have the option either to remain a civil servant or to be an employee of the Commission. The option once exercised shall be irrevocable;

(g) in the event of a person referred to in clause (e) opting to be an employee of the Commission, he shall cease to be a civil servant for all purpose and shall be

72 Appendix 3

entitled to such remuneration, allowances and other terms and conditions of employment as are applicable to the employees of the Commission. For the service rendered in the Authority such person shall be entitled to such benefits including the transfer of benefits to the Commission as may be prescribed by the rules. But, in the event of such a person opting to remain as a civil servant, he shall be entitled to the same remuneration, allowances and other rights and privileges as are admissible to civil servants but, in other respects such as organizational structure, right to promotion and discipline, he shall be subject to the regulations made by the Commission, and for the period he served the Commission, the Commission shall contribute to the pension, gratuity and final payment of provident fund in accordance with the rules.

(h) a person referred to in clause (e) who is not appointed by the Commission shall continue to draw his pay, allowances privileges or other benefits as he was drawing while holding the post in the Authority and unless sooner he is appointed by the Federal Government to another post or otherwise ceases to remain in Government service on account of retirement, dismissal, removal, discharge from service or in any other manner applicable to a civil servant, the cost for paying salary, allowance and other benefits to such person shall be borne by the Commission.

(i) save as otherwise provided in clauses (e) and (h), all debts and obligations incurred or contracts entered into or rights acquired and all matters and things engaged to be done by, with or for the Authority before the appointed day shall be deemed to have been incurred, entered into, acquired or engaged to be done by, with or for the Commission, as the case may be; and

(j) all suits and other legal proceedings instituted by or against the Authority before the appointed day shall be deemed to be suits and proceedings by or against the Commission as the case may be and may proceed and be dealt with accordingly.

43A. Abolition of Department of Insurance.- (1) As from the appointed date-

(a) the Department of Insurance shall stand abolished; (b) no officer, employee, servant, or any other person holding any post in connection

with the affairs of the Department of Insurance, shall have any right or lien to appointment to any post in the Commission.

(c) any person referred to in clause (b) who is appointed by the Commission shall have the option either to remain a civil servant or to be an employee of the commission and the option once exercised shall be irrevocable.

(d) in the event of a person referred to in clause (b) opting to be an employee of the commission, he shall cease to be a civil servant for purposes and shall be entitled to such remuneration, allowance and other terms and conditions of employment as are applicable to the employees of the Commission. For the service rendered in the Department of Insurance such person shall be entitled to such benefits including the transfer of benefits to the Commission as may be prescribed by the rules. But, in the event of such a person opting to remain as a civil servant, he shall be entitled to the same remuneration, allowances and other rights and privileges as are admissible to civil servants but, in other respects such as organizational structure, right to seniority, promotion and discipline, he shall be subject to the regulations made by the Commission, the Commission shall contribute to the pension, gratuity and final payment of provident fund in accordance with the rules;

Appendix 3 73

(e) a person referred to in clause (b) who is not appointed by the commission shall continue to draw his pay, allowances privileges or other benefits as he was drawing while holding the post in the Department of Insurance and unless sooner he is appointed by the Federal Government to another post or otherwise ceases to remain in Government service on account of retirement, dismissal, removal, discharge from service or in any other manner applicable to a civil servant, the cost for paying salary, allowances and other benefits to such person shall be borne by the Commission;

(f) save as otherwise provided in this Act, all debts and obligations incurred or contracts entered into or rights acquired and all matters and things engaged to be done by, with or for the Federal Government under or pursuant to the Law of Insurance before the appointed date shall be deemed to have been incurred, entered into acquired or engaged to be done by, with or for the Commission, as the case may be; and

(g) all suits and other legal proceedings instituted by or against the Federal Government under, or pursuant to, the Law of Insurance before the appointed date shall be deemed to be suits and proceedings by, or against, the commission as the case may be and may be proceeded with and be dealt with accordingly.][34]

44. Savings.- Save as otherwise provided in this Act, nothing in this Act shall affect or be deemed to affect any thing done, action taken, investigation or proceedings commenced, order, rule, regulation, appointment, document, or agreement made, fee directed, resolution passed, direction given, proceedings taken, or instrument executed or issued under or pursuant to any law amended or repealed by this Act and any such thing, action, investigation, proceedings, order, rule, regulation, appointment, document, agreement, fee, resolution, direction, proceedings or instrument shall, if in force at the commencement date and not inconsistent with any of the provisions of this Act, continue in force and have effect as if it had been respectively done, taken, commenced, made, directed, passed, given, executed or issued under this Act or the law as amended by this Act. [33] Substituted by S & E Commission of Pakistan (Amend) Ord., 2000 [34] Inserted by S & E Commission of Pakistan (Amend) Ord., 2000 THE SCHEDULEPOWERS AND FUNCTIONS CONFERRED ON THE AUTHORITY UNDER THE ORDINANCE TO BE EXERCISED BY THE COMMISSION (See clause (o) of sub-section (4) of section 20) 1. To call for any information, document etc. for purposes of any proceeding or inquiry

(section 12(4) of the Ordinance). 2. To allow alteration in the Memorandum of Association (section 21 of the Ordinance). 3. To decide whether a name of a company is appropriate and permissible (section 37 of

the Ordinance). 4. To grant licence to an association not for profit to be registered as a company (section 42

of the Ordinance). 5. To accord approval for conversion of a public company into a private company (section

44 of the Ordinance). 6. Approval of prospectus (section 57 of the Ordinance).

74 Appendix 3

7. To allow issue of securities outside Pakistan (section 62A of the Ordinance). 8. To specify minimum amount of shares to be applied for and the form of application for

shares (section 67 of the Ordinance). 9. To prescribe maximum rate of commission on issue of shares (section 82 of the

Ordinance). 10. To sanction issue of shares at discount (section 84 of the Ordinance). 11. To grant extension in time for holding AGM in the case of listed companies (section 158

of the Ordinance). 12. To allow a company to make a loan to a director (section 195 of the Ordinance). 13. To grant exemption for appointment of managing agent and to approve appointment of

sole sale/purchase/distribution agents (section 206 of the Ordinance). 14. To recover tenderable gains (section 224 of the Ordinance). 15. To prescribe cost accounting records for manufacturing companies (section 230 of the

Ordinance). 16. To extend period for laying annual accounts in the AGM by listed companies (section

233 of the Ordinance). 17. To direct a change in financial year of holding companies and their subsidiaries (section

238 of the Ordinance). 18. To call for additional statements of accounts from companies (section 246 of the

Ordinance). 19. To appoint auditors in certain cases (section 252(6) of the Ordinance). 20. To conduct investigation into the affairs of the companies (sections 263 and 265 of the

Ordinance). 21. To prosecute a company or person found guilty as a consequence of investigation

(sections 270 and 271 of the Ordinance). 22. To appoint administrator (section 295 of the Ordinance). 23. To make application to the Court for winding up a company (section 309 of the

Ordinance). 24. To recommend a panel of persons to the Court for appointment as official liquidator

(section 321 of the Ordinance). 25. To order restoration of the names of defunct companies (section 439(9) of the

Ordinance). 26. To exercise similar powers in the case of foreign companies (section 457 of the

Ordinance). 27. To accord special permission to take over original documents from custody of Registrar

(section 467 of the Ordinance). 28. To prescribe additional fees for filing of documents (section 469 of the Ordinance). 29. To force companies to comply with the provisions of the Ordinance (section 472 of the

Ordinance). 30. To impose fine as penalty (section 476 of the Ordinance). 31. To hear appeals against the orders of Registrar (section 477 of the Ordinance).

Appendix 3 75

32. To exercise powers of court in relation to enquiries and proceedings (section 478 of the Ordinance).

33. To direct appearance of officers of companies (section 479 of the Ordinance). 34. To apply amount of fine towards payments of costs, compensations, etc. (section 483 of

the Ordinance). 35. To hear revision petition against the orders of Registrar, etc. (section 484 of the

Ordinance). 36. To grant relief in certain cases (section 488 of the Ordinance). 37. To impose penalty for wrongful withholding of company profit (section 493 of the

Ordinance). 38. To impose penalty for non-compliance with directions (section 495 of the Ordinance).

------------------------- ABDUL QAYYUM KHAN Secretary

76 Appendix 4

INDIVIDUALS INTERVIEWED FOR PRIVATE SECTOR EVALUATION MISSION Organization Name Title Adamjee Insurance Company Limited

Syad Jawad Gillani Managing Director and Chief Executive

Abdul Hamid

General Manager

Muhammad Ali Zeb

Chief Financial Officer (CFO)

Samir Omer

Institutional sales

Aqeel Karim Dhedhi Securities (Pvt) Ltd.

Nadeem Naqvi Chief Executive Officer

Agriculture and Livestock Products marketing and Grading Department. GOP

Sikandar Shah Project Director

Mick Lloyd Consultant working with project. Arif Habib Securities Arif Habib Chairman & Chief Executive Azam Chaudhry Law Associates Dr. Mohammad Azam

Chaudhry Partner

Habib Bank Limited R. Zakir Mahmood President & CEO KASB Securities Farrukh H. Sabzwari Chief Executive Khushali Bank M. Ghalib Nishtar President. Lahore Stock Exchange (Guarantee) Ltd.

Hamid M. Imtiazi Managing Director & CEO

Group Captain (Retd.) Naeem A Khan

Member Lahore Stock Exchange

Dr. Yasir Mahmood

Member Lahore Stock Exchange

Ministry of Commerce Imtiaz Kazi, Joint Secretary Ministry of Finance Nazrat Bashir Joint Secretary

Omar Ayub Khan Minister of State for Finance

Dr Salman Shah

Advisor to the Prime Minister on Finance

Naveed Ehsan

Secretary Finance

National Commodity Exchange Limited

Assim Jang Managing Director

New Jubilee Insurance Co. Ltd. Tahir Ahmed Managing Director

Mirza Ali Mahmood Engineering Advisor

Appendix 4 77

Organization Name Title

Atiq Anwar Mahmudi Executive Vice president (Finance 0 & Company Secretary

Akber D. Vasir

Executive Vice President

ORIX Leasing Pakistan Limited Humayun Murad Chief Executive PACRA Javed Masud Managing Director Pakistan International Airlines Capt. Javed Khan Director Quality Assurance Planning Commission Parvaiz Tahir Chief Economist

Malik Muhammad Saeed Khan

Member/Addl. Secretary

Privatization Commission Abdul Ahad Effendi Consultant/Transition Manager

S. Faiz Jalal Consultant/Transition Manager

Securities and Exchange Commission Pakistan

Dr Tariq Hassan Chairman

SME Bank Ltd Mansur Khan President & CEO

Junaid Mohmand Vice President

The First Micro FinanceBank Ltd Inshan Ali Nawaz Chief Operations Officer The Karachi Exchange (Guarantee) Limited

Moin M. Fudda Managing Director

Zafar Abdullah Head of Operations

Muhammed Yacoob Memon

General Manager

World Bank Mudassir H. Khan Sr. Financial Sector Specialist Finance

and Private Sector Development. Zafar Securities (Pvt) Ltd Syed Asim Zafar Chief Executive Officer