ISLAMABAD, April 10: Pakistan's market regulator said on Friday it had rejected the Karachi Stock Exchange's proposal to relax exposure rules for leveraged equity investors.
Tariq Hassan, chairman of the Securities and Exchange Commission of Pakistan, said investors were still required to fulfil their margin requirements according to the previous rules.
"We didn't accept the stock exchange proposal because its implementation might increase market risk," Mr Hassan told Dow Jones Newswires.
Pakistan's stock market is highly leveraged through badla, which allows investors to purchase stock with borrowed money and defer final payment for as long as they pay the daily financing cost.
Last month, the KSE introduced a new rule waiving the requirement for investors who had borrowed funds from the carryover market to deposit margins to the clearing house.
This means lenders and borrowers in the Badla market would deal with each other directly, thereby minimizing the role of the stock exchange. Currently, investors, who borrow from the badla market, have to deposit with the exchange an average of 20 per cent of their shareholdings with value based on the average price over the preceding 52 weeks.
The SECP chief said the original rules must stay to ensure risk management. "I think there is no need to change this method, especially when we are about to introduce a new system of borrowing for investment in shares."
Pakistan is trying to replace badla with margin financing, a more globally accepted credit facility to finance stock purchases against a portfolio of collateral, to be run by commercial banks.
In a separate letter to the Karachi Stock Exchange, the regulator said the stock exchange could not implement or amend any regulation without the approval of the SECP.
It said carryover trade financing and overexposure by weak investors were the main reasons for many of the crises that hit the market in the past.
"We have examined the measures in detail and have noted the measures introduced...would not only constitute violation of exchange regulations, but also undermine the risk management of the exchange," the letter said.
The SECP said it was taking steps to replace carryover trade financing or badla finance with margin financing.
Analysts said the regulator's rejection of the proposed change was expected to reduce leveraged investment in the market.
"We believe that this development will bring in a much-needed correction in the market. We expect a 5-7pc downturn to the 5,000 level as a result," Elixir Securities wrote in its research note.
But Mohammed Sohail, research head at Investcap Securities, said the market was unlikely to face a drastic correction because there were many new funds in the market that did not borrow to invest in the market.
The key index has risen by 15pc since the start of the year, extending gains from the last year when it rose 65pc due to strong corporate profits, low interest rates and an easing of tensions between India and Pakistan.- Dow Jones Newswires
