June 04, 2006	Sunday	Jumadi-ul-Awwal 7, 1427

KARACHI, June 3: The Securities and Exchange Commission of Pakistan (the apex regulator) and the Karachi Stock Exchange (the frontline regulator) stood clear, as the stocks fell by nearly 20 per cent in the last six weeks between April 17 and May 31, posting a loss of over Rs600 billion in market capitalisation.

But should the regulators have intervened? SECP Chairman Razi-ur-Rehman Khan says it was all very well for him not to have interfered. He was talking to Dawn on the sidelines of an informal meeting between him and stockbrokers on the issues relating to the market held on Friday.

When his attention was drawn to a different approach adopted by the Securities and Exchange Board of India which intervened to cool the market on the occasion of mid-May Mumbai market crash, the SECP chief reasoned: “The SEBI had reduced margins, whereas in our market netting of position was already allowed.” He observes that the market usually falls back on a bearish trend around the time of budget announcement and that unlike the March 2005 crisis, the decline this time was gradual with exit mechanism available to investors.

A member director on the board of the Karachi Stock Exchange agreed that there was not much that the chief regulator could have done to stem the rot, but “a visit to the exchange and some comforting words to stockbrokers and investors would have done a great deal of good,” he says.

The SECP is known to be starved of staff. For months now, the regulators at Islamabad have been unable to find the right people for the right place. Even the seat of the commissioner securities — the division that deals with the capital market matters — lies vacant after former commissioner Shahid Ghaffar left for greener pastures.

The Board of Directors of the KSE did not meet even once during the time of the crisis; it has actually not got together in a meeting for more than a couple of times in the previous six months. Under the second generation capital market reforms, broker and non-member (also called outside) directors in equal numbers now sit on the board. Also, a non-member director now holds the post of chairman of the board, but do the brokers still hold the sway? A caricature appearing in Financial Times, London (not necessary alluding to our system) shows a bourse’s meeting in progress with the non-member directors looking eagerly into the board room through glass windows and a broker director sitting at the table commenting: “I’m quite happy with the concept of outside directors -— provided they stay outside!”

But it is all well that ends well. And after touching well below the 9,800-level, the market showed healthy recovery of 546 points in the next two days (Thursday and Friday). The upturn was believed to be on assurances by the prime minister that the government stood by its commitment of exempting tax from capital gains up to June 2007 and granting of four licences to OGDCL for exploration and production (of oil and gas) and the possibility of a waiver of five per cent duty on import of textile machinery.

But was that all? If the prices had hit the bottom, should they have necessarily rebounded? A cardinal principal while tracking share prices is to note that there is no known bottom for a falling share prices. There were whisperings of mid-night meetings of a few powerful members between Wednesday and Thursday to bail out at least two brokers in distress.

In a falling market everyone is a loser, but he who trades on borrowed money loses the most. In the early part of last week, due to depressing market sentiments and depreciating stock prices, weak-holders in order to meet their margin calls disposed of their holdings as the index broke its crucial 10,000-point barrier. Many a retail traders, speculators and punters are known to have turned paupers. One of the lessons that the recent stocks fall teaches is that he who cannot hold for at least six weeks, need not dabble in shares.

A stock brokerage firm, NACL, presents an interesting study, showing that once a year, every year the market takes a dip, incidentally around the months of May-June. During nine years since 1998, the market had recorded a massive fall in the month of May in five years: 1998 (33.4pc); 2000 (19.2pc); 2002 (12.4pc) 2005 (3.5pc) and 2006 (13.6pc).