ISLAMABAD, December 27, 2024:
The Securities and Exchange Commission of Pakistan (SECP) has granted approval to the Pakistan Stock Exchange Limited (PSX) for issuing detailed guidelines on stock splits by listed companies. This move is expected to invigorate Pakistan’s capital markets by enhancing liquidity and broadening investor access. On the same day, the State Bank of Pakistan (SBP) issued a consolidated Regulatory Framework for Exchange Companies (RFEC) to strengthen governance and streamline regulatory oversight for exchange companies.
SECP’s Guidelines on Stock Splits
The newly issued guidelines by SECP aim to encourage stock splits as a strategic financial tool for companies with high share prices. The guidelines include:
- Legal and Procedural Details: Step-by-step process flow, legal obligations, and requirements for implementing stock splits.
- Cost and Tax Implications: Clarifying that stock splits do not immediately trigger tax liabilities, as no ownership transfer occurs.
- Accounting Treatments and Case Studies: Highlighting real-world examples of successful stock splits globally and locally.
A stock split reduces the share price by dividing existing shares into multiple new shares while increasing the total number of outstanding shares. This enhances liquidity, facilitates price discovery, and makes shares more accessible to retail investors. Additionally, it positions companies to attract further investments through secondary public offerings or issuing more shares.
Globally, companies like Amazon, Apple, and Tesla have effectively utilized stock splits to increase trading volumes and adjust market pricing. In Pakistan, stock splits are permissible under Section 85(1)(c) of the Companies Act, 2017. However, only three companies have leveraged this strategy in recent years, underscoring the need for broader adoption.
The SECP and PSX developed these guidelines in consultation with stakeholders such as the Central Depository Company (CDC), Institute of Chartered Accountants of Pakistan (ICAP), and listed companies. To promote awareness, SECP has urged PSX to initiate campaigns and conduct sessions highlighting the benefits of stock splits.
SBP’s Regulatory Framework for Exchange Companies
Simultaneously, the State Bank of Pakistan (SBP) unveiled a comprehensive Regulatory Framework for Exchange Companies (RFEC), replacing the existing Exchange Companies Manual (ECM).
Key highlights of the RFEC include:
- Enhanced Governance: Strengthened corporate governance requirements and internal controls.
- Streamlined Reporting: Unified reporting guidelines to simplify compliance.
- IT Systems and Supervisory Mechanisms: Modernized IT requirements to bolster operational efficiency.
The new framework will take effect on January 1, 2025, and exchange companies must fully comply by June 30, 2025. This transition period allows entities to align their policies, systems, and procedures with the updated regulations.
These regulatory advancements mark a significant step in modernizing Pakistan’s financial markets. While SECP’s guidelines on stock splits aim to improve market liquidity and attract diverse investors, SBP’s regulatory overhaul enhances the governance of exchange companies. Together, these measures strengthen the foundation for sustainable growth in Pakistan’s capital and financial sectors.