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Badla financing: PAC demands details of investors

ISLAMABAD (April 03 2005): Taking serious notice of the recent crisis in the stock market, Public Accounts Committee (PAC) has directed the Securities and Exchange Commission of Pakistan (SECP) and Karachi Stock Exchange (KSE) to give the names of brokers and financial institutions involved in making investment in Badla financing.

Heads of SECP and all three stock exchanges explained the reasons behind the recent crash on the Karachi Stock Exchange to PAC on Saturday. SECP Chairman Dr Tariq Hasan patiently responded to all questions and apprehensions raised by committee members and assured them that the a special task force would investigate the betting and over-speculation and would subsequently take strict action against those found guilty.

In a special session on the “crises in the stock exchanges”, the committee also directed the SECP and KSE to submit names of those brokers, or institutions, who operated in the 'ready market' and subsequently sold the shares at a huge differential price in the 'futures' market'.

This created a crisis-like situation, as small investors were unable to square or clear their positions, whereas the institutions not only made huge profits, but also pressurised the market by blank selling of the scrips.

The PAC directed the SECP to take practical steps for identifying forces and big players who are suffocating small investors and causing loss of billions of rupees, and ensure measures to prevent such happenings in future.

The SECP said, “It came to our knowledge that some major operators, banks, non-banking financial institutions (NBFCs) and development finance institutions (DFIs) had purchased shares in the 'ready' market and subsequently sold in the 'futures' market. Majority of these sellers was big operators and institutions whereas the buyers were small brokerage houses.

The bearishness in the market reduced the liquidity and, as a result, the buying institutions decided not to square their sale position but to settle.”

The PAC also directed the Commission and KSE to give names of parities who invested in OGDC, PTC, POL, NBP and PPL, as major downfall in the index was witnessed due to the substantial decline in shares prices of these scrips.

The SECP gave five major reasons of decline in the market to the PAC, which need full investigation.

First, excessive buying by several brokers in the futures market, which did not give them an exit opportunity due to the continuous decline in the market.

Second, sellers in the March futures contract were carrying hedged position from ready market. Sellers decided not to square up their positions in March futures contract.

Third, downward 'circuit breakers' blocked the opportunity of exist from the market.

Fourth, withdrawal of funds by financiers. SECP officials boldly admitted that it was also possible that the market participants deliberately sold shares in the market to create a bearish sentiment and to put pressure on SECP with regard to its reforms agenda covering phase out of COT (badla financing) and abolishment of group account in CDC.

One committee member also demanded to give the name of the director who was paid a cheque of Rs 1 billion. Representatives of stock exchanges said that cheques of huge amounts were issued during the process of clearing settlement “and we will disclose the name after consulting the relevant record”.

Dr Tariq said that OGDC was the major scrip which distorted the index during the crisis and SECP was also investigating any possibility of investment by a specific party in this stock.

He said that if the risk management measures were not timely implemented, the market could face a total collapse. The market did not close for a single day and no settlement problem was witnessed at the stock exchanges. In the absence of 'circuit breakers', the situation could be entirely different creating real crash in the market.

The SECP Chairman said, “I do not want to call it a conspiracy by certain monopolies who are against the reform process and demutualization, but we will go to the bottom of this problem and remove flaws in the existing system.”

Responding to the bulk of questions on regulatory role of SCEP during the crises, Tariq said, “At the outset, let me state that SECP regulates the market, but it has no control over irrational behaviour of the market participants. SECP is responsible for maintaining the transparency and integrity of the trade transactions, but not concerned with the outcome of the trade.”

He said that the over-speculation has been termed as betting by certain quarters. If any event of gambling is brought to the notice of SECP, the Commission would take strict action. Moreover, the culprits would be taken to task, who committed fraud with the small investors.

“The facts would not be hidden from the committee, and legal lacunas, if any, will be removed”, he added.

The PAC members termed the presentation made by SECP Joint Director as technical, as the committee was more interested in the reasons behind the steep fall of KSE instead of understanding the technical language used in the stock exchanges. Some PAC members also pinpointed that the SECP presentation reflected that no crash-like situation had taken place. “If SECP thinks no such situation has arisen then what are the regulators going to investigate?”

Later, the Managing Director of Karachi Stock Exchange (KSE), Moin Fudda, explained the whole situation in simple language in minimum time and managed to calm down the situation.

The KSE MD said: “We have always informed the investors to adopt cautious approach before buying of scrips and should confirm the news about any scrips to ensure that the news is genuine and not rumour.” He said that two major proposals for controlling the risk at the KSE were deferred by its Board. First, he proposed that 'pre-trade verification' should be introduced at the KSE to secure margins, but the proposal was deferred by the board of directors. Secondly, proposal was that the settlement of ready market and 'futures markets' should be separated. This proposal was also deferred by the KSE board.

Fudda said that the Prime Minister had never directed the banks and financial institutions to invest in the stock exchanges for supporting the market, but had only asked them to invest on merit.

Lahore Stock Exchange (LSE) Chairman Asim Zafar said that the Badla rate in Lahore went as high as 200 percent. This astonished the PAC members that how Badla rate could go so high for the small investors.

ISE Chairman Abdul Waheed Jan invited PAC to attend the weekly investors' education session, which was appreciated by the committee.

KSE Chairman Yaseen Lakhani said that speculation in stock exchanges is taking place everywhere in the world, “but we always inform the people to distinguish between speculation and investment” and should not be greedy for making overnight huge profits. For this reason, I have barred students from making investment in the stock exchanges”.

PAC Chairman Allah Yar Khan expressed apprehension that there should definitely be some reasons behind this situation, as it happened in the presence of experts handling the market. The market crashed at a time when foreign investors are looking towards Pakistan for bringing new investment.

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