Unfortunately, the capital market regulators are not represented on this important forum and even capital market activities are not included in the scope of its work.

A draft Regional Agreement on Promotion and Protection of Investment within the SAARC Region is also under consideration of Member States and is meant to create conditions favourable for promoting and protecting investments in Member States by investors from other Member States of the Region. The objective is to finalize the Regional Investment (Promotion and Protection) Agreement prior to the commencement of the implementation of SAFTA. Linked to the Regional Investment Agreement is the setting up of SAARC Arbitration Council for which proposals are also under examination by Member States. Discussions have also commenced on harmonizing tax laws within the region to assess the possibility of having a Regional Agreement for the Avoidance of Double Taxation. While the realization of these goals may have begun to appear on the distant horizon, the integration of capital markets in the SAARC region is not even in sight.

Ladies and Gentlemen:

Many barriers impede integration of capital markets in the SAARC region, particularly the different levels of economic development. Asymmetries in economic development in terms of market depth, business volumes and other such fundamentals between countries are not conducive for integration. Within the SAARC region, fundamental asymmetries exist among the member states - their varied levels of development, including administrative procedures and rules, give rise to greater complexities and thus thwart greater economic cooperation in terms of capital market integration. However, concerted efforts have to be made to overcome such obstacles and there is need to address fundamental issues in order to accelerate the process of capital market integration. The essential first steps in this regard are: (i) increased co-operation amongst regulators; and (ii) harmonization of regulatory framework and development of common standards for greater cross border investment activity.

Increased co-operation amongst regulators

Globalization poses a significant challenge to the regulation of capital markets and necessitates the bolstering of regulatory regimes, particularly by emerging markets. The proliferation of cross border trading has given rise to newer challenges for regulatory oversight. Misconduct, such as fraud, market manipulation, insider trading and other illegal activities, aided by modern telecommunication, frequently crosses jurisdictional boundaries in a global market. Markets especially emerging markets are prone to such effects of cross border trading.

It is, therefore, necessary that emerging market regulators are in a position to assess the nature of cross border transactions and are equipped to take action against any possible misconduct. Cross-jurisdictional cooperation and information sharing mechanism is essential to ensure efficient and transparent markets while at the same time leading to reduction of potential systemic risk. Prevailing legislation and enforcement capacity of the regulator should be sufficient to ensure that cases of cross-border misconduct can be effectively dealt with.

In order to ensure that capital market integration becomes a reality in South Asia, greater co-ordination and effort is required. The following endeavors/initiatives merit consideration:

1. capital market regulators - apex as well as front line - within the region should sign formal agreements of understanding to achieve cooperation, information sharing and mutual assistance.
   
   

2. Further, SAARC may consider the proposal of recognizing the well renowned South Asian Federation of Stock Exchanges (SAFE) as an association of SAARC. It is noteworthy to mention that SAFE has done invaluable work in the field of regional harmonization and therefore collaboration with SAFE may be highly useful when mapping the process for capital market integration in South Asia.
   
   

3. Also, the idea of establishing an association or network of regulators of the SAARC region, which I propose to refer to as the SAARC Association of Financial Regulators, should be examined. The Association would provide a vision outlining the aims and objectives of the regional capital markets. In this regard, I would like to mention that the establishment of such an association has been discussed between the Securities and Exchange Board of India (SEBI), SEC Sri Lanka and SEC Pakistan. The mandate or charter of this association would include the development and implementation of a well formed strategy for achieving regional harmonization and regional capital market integration in order to achieve a coordinated and high-quality application of accounting standards, to harmonize methods of supervision and exchange of information.

Harmonization of regulatory framework and development of common standards:

Increased international capital flow leads to regulatory problems that are not solely market-based, such as, foreign exchange control, taxation treatment of foreign holdings and governmental attitudes towards foreign investment generally. As a result, the establishment of a regional capital market requires a plethora of reforms, primarily to remove restrictions on capital movement and on dividends and profits together with the harmonization of general taxation, regulatory and legal requirements. Solutions in the European Union (EU) include common approaches to exchange controls, internal markets, and prudential regulations within the region. The greater integration of EU exchanges compared to other multi-country regions suggests the value of common regulatory standards.

Regulatory differences create significant barriers to integration of capital markets. In this regard, harmonization of listing regulations is an important step towards regional market development and integration. As a prerequisite, it is essential to have some sort of equivalence in criteria that would allow investors to gauge the prospects of investing in a particular country.

Moreover, the implementation of uniform accounting and corporate governance standards, as well as the enactment of disclosure and documentation standards in line with international best practices will undoubtedly facilitate convergence of markets in the South Asia region. It is relevant to point to the fact that International Accounting Standards (IAS) have been endorsed by the securities regulators of Euronext to be used by companies listed on it, thus resulting in convergence of accounting practices. It is apparent that harmonizing financial information must be made a top priority since accounting rules, prospectuses and permanent disclosures are key factors for harmonizing market rules. In this regard, SAFA can be instrumental in developing or adopting a common set of accounting standards - be they IAS - for the regional markets.

Ladies and Gentlemen:

In conclusion, what we are talking about is creating a borderless capital market, which will have far reaching consequences for the regional economies as a whole. Since an integrated securities market requires an integrated regulatory and enforcement approach, we in South Asia would have to overcome several barriers such as differing domestic legal systems, different sized markets, regulatory philosophies and different market cultures. I am of the firm belief that increased dialogue and cooperation between member states as provided by this prestigious forum will lead to improved securities regulation and the promotion of vibrant capital markets in the region.

I would also like to emphasize that the countries of the South Asian region should carefully analyze issues arising from integrated markets and cross-border financial activities. The members of SAARC should work towards the implementation of a three-pronged approach to achieve regional capital market integration:

1. Enhanced collaboration amongst SAARC capital market regulators through MoUs and other such bilateral accords/agreements that allow flexibility in networking, coordination, cooperation and exchange of information as well as the establishment of associations/bodies with the specific purpose of removing barriers to capital market integration in the region.
   
   

2. Harmonization of laws regulations, accounting and governance standards and development of a regulatory framework with regard to enforcement, compliance, investor protection and information sharing co-operation etc. Concerted efforts would be essential to preempt financial crises and prevent regulatory failures.
   
   

3. Facilitation of cross border transactions within the region, to be evidenced by investors acquiring stakes in companies within other countries or issuers appearing on markets in other countries and mutual funds being sold regionally. In this regard, member states need to develop the necessary enabling laws and regulatory framework in order to cater for cross border transactions.

Institutional support to undertake these activities could be provided by the proposed SAARC Association of Financial Regulators.

Ladies and Gentlemen:

In the end, I would like to thank SAFA and our hosts - the Institute of Chartered Accountants of India - for inviting me to this forum and would like to felicitate them on organizing a successful event like this. I thank you all for your time.

Thank you.