LAHORE, Sept 4: The Securities and Exchange Commission of Pakistan (SECP) has failed to take even a single measure proposed in December last year to completely abolish the badla or carryover trade from the country’s capital markets and replace it with margin financing.

The proposal was mooted back in Dec 2002 at a meeting of Stock Exchanges Coordination Committee (SECC), comprising the officials of the three bourses and the SECP. The committee had decided that the carryover trade would be abolished in nine months in a phased programme by implementing such measures as limiting the number of companies in which badla trade is allowed.

“The enforcement of the roadmap was to be completed by the end of this month. However, no step decided at the meeting has so far been actually implemented by the SECP,” the Lahore Stock Exchange managing director, Samir Ahmad, told this reporter when contacted on Thursday. “The LSE has, however, limited the number of companies in which the carryover trade is allowed to 36,” he said. However, he said, there was no denying the fact that the steps proposed at the SECC meeting must be implemented.

Total badla market at the LSE is approximately Rs2.50 billion, only 10 per cent of the badla trade at the Karachi Stock Exchange (KSE). The badla rates at the LSE have generally been higher than the KSE, though not always. “This is because we haven’t capped the badla rates like the KSE. The KSE has imposed a cap of 18 per cent per annum on 30 companies and 24 per cent on the rest of the companies,” Samir said.

The average value of the badla market at the LSE in 2003 (till Sept 4) is stated to be around Rs1.5 billion a day. Financing for the carryover trade is available at an average of about 16.97 per cent per annum.

It may be mentioned that the cost of financing for badla trade at the LSE plunged from as high as 118 per cent on Jan 21 to just two per cent on April 14. At no stage did the LSE management took the decision to cap the rate, and let the market forces determine the rate.

Defending the decision not to cap the badla rates, he said the issue of capping of the badla rates was frequently deliberated at the LSE management and board of directors level. “There is strong consensus that we should let the market forces operate freely and come up with a market-determined badla rate. The capping of badla rate would distort market signal and provide wrong and misleading information to market players,” he insisted.

He was of the opinion that the “important thing was that there must be full disclosure at all times regarding the state of badla market to enable the market players to make informed decisions on their investments.” He maintained that the capping of badla rates may promote undue leveraging by providing financing at lower than market-determined rates from time to time.

“The LSE provides full disclosures on its website of detail of badla including the number of badla trades, the volume, and value of badla and average cost of badla in minutes of the close of the badla session each day,” he claimed. “It’s important that neither borrowers nor lenders get a favourable treatment,” Samir said.