SOHAIL SARFRAZ

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has conveyed its serious reservations to the leading consultants, who failed to play their due role in getting approval of the prospectus, on “Initial Public Offering (IPO)” of securities under Securities Act, 2015.

Sources told Business Recorder here on Tuesday that an in-house exercise carried out by the commission with regard to prospectuses approved during the recent years revealed that both - the consultants and Pakistan Stock Exchange (PSX) - did not play their required role in the public offering process. The material disclosures were not part of the prospectus cleared by PSX and the same were incorporated afterward, on the instructions of the Commission.

Therefore, the Commission felt it necessary to reinvigorate these important players of the public offering process. In this regard, the Commission advised PSX to strengthen its prospectus approval process by constituting a committee on the pattern of the erstwhile Companies Affairs Committees comprising independent market participants, professionals with accounting, legal & business background and members of its regulatory affairs committee. The Commission has also required PSX to improve its existing criteria for clearance of prospectuses by carrying out necessary improvements therein in the light of the Securities Act, 2015 and put in place a system for subsequent monitoring of compliance with the commitments made by issuer in the prospectus and conditions imposed at the time of approval.

Moreover, PSX has also been advised to make a comprehensive set of regulations for delisting of securities providing therein a mechanism for safeguarding shareholders interest. In order to strengthen the role of Consultants, the commission has issued the draft regulatory framework for the Consultants which prescribes detailed duties and responsibilities of a Consultant to the issue. The final regulatory framework is expected to be in place by the end of July 2016.

In order to improve decision making process in respect of listing applications, the Commission has constituted an in-house cross functional Committee, comprising of head of functions, to examine listing applications in details and furnish recommendations to the Commission for its consideration, sources further said.

The commission believes in the due role of market forces with regard to the public offering and is fully cognizant of the fact that any imbalance approach would not only undermine the fundamental role of market forces but would also be detrimental to the interest of issuers as well as the general public. PSX must play its part as front line regulator to promote quality listings and balance the role being envisaged by the Commission with regard to the listing process. This dichotomy of role and responsibility can accrue substantial benefits, if properly harnessed. The Commission has recently disposed of a review application in respect of an IPO through a bench mark Order which is available on commission’s website and must be consulted by the issuers of upcoming IPOs and their consultants.

Sources explained that any company can list its securities on an exchange through “Initial Public Offering (IPO)” which means the first allocation of newly issued stocks or shares, to the public. The companies with good track record, credible sponsors, experienced management and operating in a strong industry with potential for growth can easily tap the capital markets for generating the resources required for growth. Generally, such companies are willingly accepted by capital markets.

The consultants prepare the draft prospectus, arrange for the requisite documents and submit the application to the Pakistan Stock Exchange (the “PSX”) for seeking its approval. Once the prospectus is cleared by PSX, the Consultants submit the same to the regulator i.e. SECP for seeking its approval under the Securities Act, 2015. After approval of the Commission, the issuing company, through its consultants, approaches PSX for the dates for publication of prospectus.

The consultants being capital market experts are duty bound to ensure that the listing application is complete and all the material facts have been adequately disclosed in the prospectus. The consultants must conduct due diligence of each listing application and if required, specific additional disclosures may be made with respect to any particular project. This is essential to help the investors in making a well informed decision as well as assist PSX and the Commission in granting timely approvals. Being the front line regulator, PSX has the responsibility to promote quality listing considering the interest of all the stakeholders including general public and the issuers. PSX is duty bound to carry out its due care prior to approving any prospectus, not only encompassing the eligibility aspects but also considering its suitability for general public. As part of its scrutiny process, PSX is expected to carefully examine the contents of prospectus along with relevant contracts, purpose of the issue and utilization of proceeds, track record of the issuer & its group companies, default history, financial projections and their analysis, restriction, if any on distribution of profits or transfer of securities, record of corporate compliance by the companies and entities wherein the sponsors of the issuing company have any interest, etc.

The enhanced disclosures, cannot absolve the Commission of its responsibilities. In terms of the assigned mandate, the Commission is under obligation to duly consider the suitability of any IPO for public investors. Mere approval of any prospectus by PSX, would not obligate the Commission to grant its approval for the same. Therefore, in addition to relying upon the enhanced disclosures and fulfilment of eligibility requirements as prescribed by PSX, the Commission has started taking into account the apparent risks involved vis-à-vis expected returns to the general public to ascertain suitability aspects of an IPO. Almost for the last one and half year, this practice has been implemented by the regulator to promote quality listings and maintain investors’ confidence in the capital markets. The Consultants and PSX are supposed to augment this initiative of the Commission. Recently, a visible change has been witnessed with regard to the role of the Commission in the IPOs approval process. The Commission has not only assumed a more vigilant role but has also forced PSX and Consultants to play their due role on their part as well, sources added.