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Critical factors of Energy Crises in Pakistan

Khan (2007) did a research on ‘Energy Demand in Pakistan’. The research question of this article is; what is the energy demand at disaggregate level? We employ Johansen (1988) and Johansen and Juselius (1990) multivariate cointegration method to examine the cointegration between various components of energy, real output per capita and price level. We will not offering a detailed explanation of Johansen’s methodology because it has well documented in the existing literature. If the null of no cointegation is rejected, then we estimate the dynamic energy demand model by using the following error-correction model Thus, this study examines the demand for energy at disaggregate level (gas, electricity and coal) for Pakistan over the period 1972-2007. Over main results suggest that electricity and coal consumption responds positively to changes in real income per capita and negatively to changes in domestic price level. The gas consumption responds negatively to real income and price changes in the short run, however, in the long-run real income exerts positive effect on gas consumption, while domestic price remains insignificant. Furthermore, in the short-run the average elasticities of price and real income for gas consumption (in absolute terms) are greater than that of electricity and coal consumption. The differences in elasticities of each component of energy have significant policy implications for income and revenue generation. To design appropriate energy pricing policy, up to date estimates of price and income elasticities of gas, electricity and coal demand that this study provides, will prove useful.
Shah and Bhatti (2010) performed their research on ‘Crises of Electricity in Pakistan and Future guideline for Policy makers’. The article has answer to the question of what is the shortfall in supply of electricity energy faced in Pakistan. The root causes of the shortfall in supply are mentioned. Share of different kind of power generating plants in Pakistan is presented in Figure 2. Historical peak demands of Pakistan from year 2002-2007 are presented in Table 2. A forecast of demand and generation for the years 2009-2020 is given in Table 3. A careful examination of the tables 2 and 3 clearly indicates that although Pakistan’s installed generating capacity will increase, the shortfall will continue to exist [Federal Bureau of Statistics 1998]. The government must take steps to overcome this situation. A forecast for next 10-12 years has been made using empirical data and preliminary calculations. A brief review is given about the potential of Pakistan to produce electricity and energy sources it has. Importance of utilizing coal resources of Pakistan also discussed in it. Also potential of water resource for construction of hydro-electric power station is described with mentioning the importance of run of river power station. Short and long term solutions to overcome this crisis are also given. Importance of renewable energy sources such as solar and wind power is discussed in this article. This article provides a brief review of energy crisis in Pakistan and the main area to be focused to minimize shortfall of electricity in Pakistan.
Fraser (2005) did a research on ‘Lessons from the Independent Private Power Experience in Pakistan’. He is senior financial analyst in the South Asia Energy and Infrastructure Unit of the World Bank. The discussion paper answers the question; describe the “orderly framework” developed by the World Bank Group for the IPP workout, and conclude with several lessons learned. The immediate step was to conclude voluntary standstill agreements valid for a period of 30 to 45 days so that a meaningful dialogue could commence on all relevant issues without the IPP companies and the lenders being under a threat of termination of the agreements and without government notices giving rise to further defaults and legal proceedings. The second step was to ensure a fair and just implementation of the IPP contracts. The third step was to set a negotiating strategy for different groups of IPPs. The 1292 MW, $1.6 billion Hub Power Project was hailed as a landmark in the field of infrastructure finance at the time of financial close in 1995. It set an important precedent for the viability of private finance for a major infrastructure project in a developing country. The complex suite of documentation developed together with experience gained by Pakistan officials and institutions during its six years of project development led to the adoption of a Private Power Policy in 1994. Under this policy, 19 independent private power projects (IPPs) reached financial close in record time for an additional 3400 MW. (Four projects, totalling 435 MW were subsequently terminated.) Pakistan earned high praise amongst international developers and financiers and was a model for private sector development in the power sector in the mid 1990s. It was described as “the best energy policy in the whole world” by the US Secretary of Energy following a trip to Karachi in September 1994. That same year, the Hub Power Project was named project finance “Deal of the Year” by Euromoney Institutional Investor. However, by 1998 the Government had issued notices of intent to terminate 11 IPPs, representing two thirds of private power capacity contracted, on alleged corruption and/or technical grounds. Perceptions by the project sponsors of excessive coercion, harassment and heavy-handed legal and other actions have initiated by the Government to renegotiate tariffs or cancel contracts contributed to Pakistan’s fall from grace in the eyes of the international private sector community. A turbulent three year work-out period followed where most contracts were ultimately re-negotiated which coincided with the period when Pakistan was brought to the brink of financial collapse. The World Bank Group played a pro-active role in facilitating the resolution of the IPP disputes, necessitated by its large financial role in the IPP program, and assisted in preventing the crisis from exploding further. The work-out strategy called for the Government to separate criminal allegations from commercial disputes with the former to be resolved through the legal system and the latter through amicable negotiation. Several important lessons can be drawn from the Pakistan experience. Setting a bulk tariff ceiling allowed Pakistan to alleviate its power shortage through private generation in record time; however, too much power was contracted with little regard for least cost expansion. The scale of private investment in generation should be aligned with the country’s state of development with respect to sector reforms and also social, economic, political and institutional governance. In addition, solicitation of IPPs should be on a competitive basis and staggered over a few years so that changes in international investors’ assessment of country and contract risks could lead to declining bid prices. Staggering IPP solicitation and scaling down large IPP capacity would also allow the utility to re-assess demand/supply conditions and adjust the contracted capacity and completion timing for subsequent IPPs accordingly. Since assumed future country conditions at appraisal can be substantially different from what actually emerges, it is important that a transparent bidding process is followed to be more politically sustainable. Finally, while the risk of renegotiation can be minimized by competitive bidding and transparent contracts, this risk cannot be wholly avoided. All parties have to recognize that renegotiation is reasonable provided it is done in a mutually acceptable manner.
Saleem (2003) did a research article on ‘Technical Efficiency in Electricity Generation Sector of Pakistan’, where he aims to answer the question; what is the impact of Private and Public Ownership in Pakistan? This paper aims to test the null hypothesis of the existence of technical efficiency in publicly owned firms. This is achieved by using the annual reports of the companies and collecting data during field visit to electricity sector of Pakistan. This paper conducts a comparative technical efficiency analysis of 21electricity generation plants (12 private and 9 public) using panel data of 6 years (1998-2003), and two stat-of-the art methodologies: Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA). The results show a mixed technical and scale efficiency scores for the public and private generation plants. There are some public and private firms, which have high technical efficiency scores. However the results also suggest that the public ownership has a negative impact on the technical efficiency of the firms. Due to less apparent differences in production structure between, public and private plants, it is suggested that benchmarking of public firms using private plants as a comparators, is feasible and desirable. On a more empirical basis, our study bridges an important gap in research on the technical efficiency of private and public electricity generation sector. The analysis also shows that there is not a big difference in the production structure of public and private plants, therefore, after adjusting the inefficiency factors like load factor, system losses, maximum demand and per capita consumption of electricity sector could effectively be benchmarked against each other.
Basharat (2010) wrote an article basically based on the question that ‘Where has all the power gone?’ He is the member of centre council institution of electrical

Depository System In India Security System For Investors Economics Essay

Close to sixty three years of Independence, India has emerged to be one of the driving forces of the World Economy. However, with the recent setback of the Global Recession of 2007, a need had been felt to look into the existing structures of the Financial Institutions present. Consequently, a Committee was established by Securities and Exchange Board of India (SEBI), under the chairmanship of Bimal Jalan, former Reserve Bank of India (RBI) governor, in February 2010. It was setup with the view to underscore an important distinction between regulation and control, and to ensure that the former does not degenerate into the latter. The committee has also instituted an interesting term called the Market Infrastructure Institutions. The term ‘marker infrastructure’ denotes such fundamental facilities and systems serving the market.
As per the Report [1] , Stock exchanges, depositories and clearing corporations are collectively referred to as securities Market Infrastructure Institutions (MIIs). They can be defined to be institutions providing basic, underlying framework or features for the market. Well functioning MIIs are the backbone of any economy, which in turn is directly proportional to the well-being of the economy. Infrastructure Institutions can be characterized by provision of essential services, offering networking services, exhibiting economies of scale, presenting sunk costs and operating natural monopolies. [2]
Introduction
Depositories form an important part of the securities Market Infrastructure Institutions in India.
As per section 2(e) of the Depositories Act, 1996, a ‘depository’ means a company formed and registered under the Companies Act, 1956 and which has been granted a Certificate of Registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).
In simple words, a Depository is an organization which is similar to a bank. It holds the securities of investors in an electronic book entry form at their request and provides services related to transactions in securities with speed, accuracy and safety. It interacts with its clients through a `Depository Participant’ with whom the client is required to open a Demat Account.
A depository participant is defined in section 2(g) of the Depositories Act, 1996 as ‘participant means a person registered as such under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).’
An application for the grant of certificate of registration as Depository Participant is made to the Board Form E along with application fee as specified in Part A of the second schedule of the Depository Participant Regulations.
Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as Depository Participants.
Evolution of Depository System in India
The growth in the Indian capital market both in number of transactions and the value of trade and resultant settlement of securities exposed the limitation of handling securities in the paper mode. Physical (paper) mode of holding securities was not only cumbersome and inefficient but also held numerous risks for the participant and led to dissatisfaction of issuers and investors alike. Due to limitations and problems associated it necessitated the setting up of depositories to move away from paper based holding of securities. Thus, Depository system was established to eliminate the inconvenience and confusion caused by the paper based trading and a scripless trading system came to be recognized.
The enactment of Depositories Act in August 1996 paved the way for introduction of Depository system in India. Following the notification of the SEBI (Depositories and Participants) Regulations, 1996, National Securities Depository Ltd (NSDL), a company sponsored by the NSE, IDBI and UTI was granted a certificate of registration as a depository on June 7,1996. Some of the other shareholders are State Bank of India, HDFC Bank Limited, Deutsche Bank A.G., Axis Bank Limited, Citibank N.A.Standard Chartered Bank, The Hongkong and Shanghai Banking Corporation Limited, Oriental Bank of Commerce etc.
The higher shareholding (of at least 51%) by sponsors, including stock exchanges in depositories was permitted in the initial stages for facilitating the setting up of depositories.
Central Depository Services (India) Ltd (CDSL), the second depository, was promoted by Bombay Stock Exchange Limited (BSE) in association with Bank of India, Bank of Baroda, State Bank of India and HDFC Bank. BSE has been involved with this venture right from the inception and has contributed overwhelmingly to the fruition of the project. The initial capital of the company is Rs.104.50 crores. The list of major shareholders with effect from 5th July, 2010 is [3] :
Name of shareholders
Value of holding (in Rupees Lacs)
% Terms to total equity
Bombay Stock Exchange Limited
5,663.46
54.20
Bank of India
582.00
5.57
Bank of Baroda
530.00
5.07
State Bank of India
1,000.00
9.57
HDFC Bank Limited
750.00
7.18
Standard Chartered Bank
750.00
7.18
Canara Bank
674.46
6.45
Inter-depository transfer through on-line connectivity between CDSL and NSDL was established in 1999. [4]
Benefits of the Depository System
The main objective of the depository system is to maintain and safeguard the ownership and transfer records of securities in an electronic form. Depository system eliminates the inconvenience and confusion caused by the paper based trading. It is a safe and convenient way of holding securities and reduces the risks associated with certificates. In a depository system, the investors have the advantages like efficient settlements, lower costs and lower risks of theft.
It also facilitates immediate transfer of securities and no stamp duty is required on transfer of shares. Change in address recorded with Depository Participant gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately.
Also there is automatic credit into demat account of shares, arising out of bonus/split/consolidation/merger etc.A natural guardian is not required to take court approval for selling Demat securities on behalf of a minor.
Ease in portfolio monitoring since statement of account gives a consolidated position of investments in all instruments. Holding investments in equity and debt instruments in a single account is also another advantage of the depository system.
Features of Indian Depository System:
Dematerialization: There are two models for depository system across the world-dematerialization and immobilization. India has adopted the dematerialization model. India provides for a competitive multi-depository system. There can be various entities providing depository services.eg (NSDL and CDSL).The model adopted in India provides only for Dematerialization of securities. Dematerialization is the process of converting the physical form of shares into an electronic form and in short called Demat. Dematerialization of securities occurs when securities issued in physical form is destroyed and an equivalent number of securities are credited into the beneficiary owner’s account.
The depositories can provide their services to investors through their agents called Depository Participants. These agents are appointed subject to the conditions prescribed under Securities and Exchange Board of India (Depositories and Participants) Regulations,1996 and other applicable conditions. The participants and investors get their respective ID’s which has a unique identification in the depository system. Any number of depository accounts can be opened.
After opening an account with the Depository Participant the investor should surrender the physical certificates held in his name to a depository participant. These certificates will be sent to the respective companies where they will be cancelled after dematerialization and will credit the investors account with the Depository Participant. The securities on dematerialization will appear as balances in the depository account. These balances can be transferred like the shares held in physical form. The securities in the Demat can again be converted into physical form which is called as dematerialization.
Dematerialization of shares is optional and the investor can hold shares in the physical form, however the investor will have to demat the shares if he wishes to sell or purchase the shares through stock exchanges.
Immobilization of securities is done by storing or lodging the physical security certificates with an organization that acts as a custodian – a securities depository. All subsequent transactions in such immobilized securities take place through book entries. The actual owners have the right to withdraw the physical securities from the custodial agent whenever required by them. In the case of IPO, a jumbo certificate is issued in the name of the beneficiary owners based on which the depository gives credit to the account of beneficiary owners.
Fungibility: Section 9 of the Depositories Act, 1996 states that securities in depositories should be in fungible form. In the depository system, the securities dematerialized are not identified by distinctive numbers or certificate numbers as in the physical environment. Thus all securities in the same class are identical and interchangeable. For example, all equity shares in the class of fully paid up shares are interchangeable.
Registered Owner/ Beneficial Owner: In the depository system, the ownership of securities dematerialized is bifurcated between Registered Owner and Beneficial Owner. For the securities dematerialized, NSDL is the Registered Owner in the books of the issuer, but ownership rights and liabilities rest with Beneficial Owner. All the rights, duties and liabilities underlying the security are on the beneficial owner of the security.
Free Transferability of shares: Transfer of shares held in dematerialized form takes place freely through electronic book-entry system.
Legal Framework
The depository business in India is regulated by:
a. The Depositories Act, 1996
It was enacted to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto. It came into force from 20th September, 1995. It provides for the establishment of single and multiple depositories. Anybody to be eligible needs to be formed and registered as a company under the Companies Act, 1956 and seek registration with SEBI and obtain a Certificate of Commencement of Business from SEBI on fulfillment of the prescribed conditions.
b. The SEBI (Depositories and Participants) Regulations, 1996
SEBI on 6th May, 1996 issued SEBI (Depositories and Participants) Regulations, 1996 which apply to depositories and its participants. The Depositories Act requires that the registration of the depository, depository participant and custodian, is mandatory with SEBI. [5] These regulations also contain provisions for operations and functioning of depositories, for application and certificates used and schedule of fees for participants etc.
c. Bye-Laws of Depository
Depository is required to frame its bye-laws [6] with the prior approval of SEBI, consistent with the provisions of the Act and the regulations made by SEBI thereunder. However on non-compliance SEBI has the power to amend or revoke the bye-laws on its own.
d. Other Laws
Apart from the above, Depositories are also governed by certain provisions of Companies Act, 1956, The Indian Stamp Act, 1899, SEBI Act,1956, SCRA,1956, Benami Transaction Prohibition Act,1988, Income Tax Act,1961, Bankers Book Evidence Act,1891.
Ownership Norms
Setting up of a Depository:
An application for the grant of a certificate of registration as a depository shall be made to the Board by the sponsor in Form A. A Sponsor (anchor investor), as per section 2 (g), SEBI (Depositories and Participants) Regulations, 1996, means any person or persons who, acting alone or in combination with another proposes to establish a depository and undertakes to perform the obligations of a sponsor under these regulations.
It is to be accompanied by the fee [7] and be paid in the manner specified thereof. [8]
The application should be accompanied by draft bye-laws of the depository that is proposed to be set up. The sponsor is to be from one of the mentioned categories:
(i) A public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);
(ii) A bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
(iii) A foreign bank operating in India with the approval of the Reserve Bank of India;
(iv) A recognized stock exchange within the meaning of clause (j) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(v) A body corporate engaged in providing financial services where not less than seventy-five per cent of the equity capital is held by any of Securities and Exchange Board of India the institutions mentioned in sub-clause (i), (ii), (iii) or (iv) jointly or severally;
(vi) A body corporate constituted or recognized under any law for the time being in force in a foreign country for providing custodial, clearing or settlement services in the securities market and approved by the Central Government;
(vii) An institution engaged in providing financial services established outside India and approved by the Central Government;
The applicant is supposed to be a fit and proper person. [9]
Presently, sponsors are required to hold at least 51% of the equity share capital in the depository, either alone or together. [10] Also, no participant shall at any time, hold more than 5% of the equity capital of the depository [11]
No person other than a sponsor, whether ‘resident in India’, or not, shall at any time, either individually or together with persons acting in concert, hold more than 5% of the equity share capital in the depository. [12]
The expression “person resident in India” shall have the meaning assigned to it in clause (v) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).
The expression “Persons acting in concert” shall have the meaning derived from clause (e) of sub-regulation (1) of Regulation 2 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
The combined holding of all persons resident outside India in the equity share capital of the depository shall not exceed, at any time, 49% of its total equity share capital, subject further to the following: ‘the sponsor shall, at all times, hold at least 51% of the equity capital of the depository and the balance of the equity capital of the depository shall be held by its participants.’ [13]
At present, the combined holding of all persons residing outside India in the equity share capital of an MII is capped at 49% subject to the following:
The combined holding through FDI [14] and FII [15] routes are capped at 26% and 23%, respectively.
FIIs can acquire the equity shares of an MII only through the secondary market. [16]
An FII cannot have representation on the board of an MII. [17]
After considering the application, if the Board is satisfied that the company established by the sponsor is eligible to act as a depository it may grant a certificate of registration in Form B to the depository subject to the prescribed conditions like registration fee, redressing of grievances etc. A depository is required to make an application to the Board for commencement of business in Form C within one year from the date of issue of certificate of registration.
The SEBI (Depositories and Participants) Regulations, 1996, provides that: “the depository shall not carry on any activity other than that of a depository unless the activity is incidental to the activity of the depository” [18]
It is provided that a depository may carry out such activity not incidental to its activities as a depository, as may be assigned to the depository, by the Central Government or by a regulator in the financial sector, through the establishment of Strategic Business Unit(s), and by complying with other conditions specified by the Board. [19]
A ‘Strategic Business Unit’ shall be an organizational unit of a company with its own mission, objectives and business strategy that is given the responsibility to serve the particular demands of one business area with appropriate technological, financial and other segregations.
It is provided that for the purposes of clause (d) and (e) no foreign entity, [20] individually and collectively either as a sponsor or as a participant or as a sponsor and participant together shall hold more than 20% of the equity capital of a depository.
Board Composition
The Board composition for the two main depositories in India can be summarized as follows:
a. National Securities Depository Ltd (NSDL)
Independent Directors: 5
Shareholder Directors: 5
MD/CEO: 1
b. Central Depository Services (India) Ltd (CDSL)
Independent Directors: 2
Shareholder Directors: 5
Whole time Directors: 1
The board structure for depositories is not subject to stringent norms. Only financial institutions/banks/stock exchanges, etc. can be sponsors of a depository and these are mostly nominated as shareholder directors. Further there have been no requirements for appointment of MD/CEO that have been prescribed for depositories.
Net Worth of Depositories
The net worth requirement for Depositories is 100 crores.
Disadvantages:
Prior to dematerialization there was almost a gap of three months between application date and listing of shares. Dematerialization has reduced this gap to a great extent. Current regulations prohibit multiple bids or applications by a single person. But the investors open multiple demat accounts and make multiple applications to subscribe to IPO’s in the hope of getting allotment.
The recent IPO allotment scam proves that even a highly automated system is not the solution to prevent malpractices, if there is laxity. The scam of Yes bank and IDFC reveal the defect that investor banker fail to weed out multiple applications either direct or benami.eg. In the Yes Bank scandal thirteen investors had manipulated the allotment of shares by opening 7500 benami accounts and made profit in 1.7crores. Eventually all the thirteen investors were banned from trading in bank shares immediately.
Lack of coordination between banks, DP’s, brokers depositories, registrars and investment bankers and clarity of their roles has given rise to such problems. The depository system is complex and in need of greater supervision and control.
Thus is the working of the Depository system in India. The advantages of the depository system outweigh the disadvantages. Few changes in the complex system and specifications regarding the appointment of Board of directors need to be specified.

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