KARACHI, June 9: The Security and Exchange Commission of Pakistan (SECP) said on Friday it was carrying out a probe into the recent plunge in the share market which saw the KSE-100 shares index dip by 622 points in two days (Wednesday and Thursday), wiping out Rs204 billion from the aggregate market capitalisation of Rs2,968 billion.
As the market opened on Friday in the red by 275 points, investors began panic selling and it could have been the worst day of bloodbath at the bourse, but the apex regulator (SECP) and the frontline regulator (KSE) intervened.
SECP Chairman Raziur Rehman Khan, who flew into Karachi with a 15-member team, issued a stern statement, saying: “The SECP has been monitoring the stock market movement and trading data for the past two weeks.”
It went on to say that the preliminary evidence indicated that some brokers might have manipulated the market.
The statement said: “Manipulation could be on account of blank selling and short-selling (both meaning selling shares that they do not possess) beyond permitted limits, misuse of CFS-financed shares and wash trades (meaning buying and selling shares at the same price to bulge trade volumes) designed to drive prices down”.
Furthermore, the capital market regulator expressed serious concern over the situation and said that such practices would not be tolerated and delinquent brokers would be brought to book.
Investigations on ‘market manipulation’ were immediately initiated by the SECP team.
The statement said: “It is strongly advised that brokers should review their positions and if any inadvertent malpractice has slipped through their normally tight internal control procedures, these should be rectified immediately. The SECP shall take a lenient view of any remedial action taken voluntarily by the broker till close of trading on Friday 9th June 2006”.
That in effect meant that if some brokers had been surreptitiously indulging in blank- and short-selling, they should square up their positions by the end of trading on Friday. The term ‘lenient view’ needed to be defined which, the chairman SECP said in a teletalk, meant transactions that might have cropped up “by mistake”.
On its part, the KSE came forward with two circulars in succession. A press release from the management said that the KSE regulations for short-selling required members not to carry out blank-selling and short-selling unless they already had “pre-existing interest” in the trading scrips. The KSE went on to say: “It has come to the notice of the exchange that some brokerage houses are disregarding these regulations”. The bourse warned that penalties would be imposed on members violating those regulations.
The other statement, from the KSE’s Board of Directors, said that the entire situation was reviewed in detail and that “market volatility is the normal feature of any stock market and the KSE is not an exception”.
The board said it “showed its full confidence in the surveillance and risk management systems in place at the exchange level and ensured that the KSE will look into unfair or undesirable market practice, if being observed by any market participant”.
The KSE’s managing director M.A. Lodhi told Dawn that he was satisfied with the risk management systems at the market. “There has been no default and we recover margins on hourly basis,” he claimed.
He said that the membership card sold by two stock brokers on Thursday had nothing to do with default. “Members keep buying and selling cards for any reason when they need cash”, the KSE MD claimed. Most investors who had been losing money since April 17, when the stocks took the downward turn from its year’s highest level of 12,278 points thought that the chief regulator had done well to step in, but they believed it was a delayed action.
Many eyebrows were also raised on the regulator’s decision to “take a lenient view “of those who square their positions by the close of market on Friday. “A manipulation is a manipulation and there should be no leniency”, said a dealer.
But the KSE dismissed any allegations of misdoing by its members and a director on the board pointed to global slump in stocks. “If the KSE has lost Rs677 billion ($11bn) in about 35 trading sessions, there have been pre- and post-budget reasons,” said a member director who asked not to be named.
He claimed that the main reason for the stock plunge in the past two days was the doubling of Capital Value Tax (CVT) on stock purchases, from 0.01 to 0.02 per cent proposed in the federal budget.
But many people disagreed, including the chief executive of a well-known stock brokerage firm affiliated with a big commercial bank. They alleged that some of the big brokers and financial institutions that had interest in the privatisation of the National Investment Trust (NIT) were making a deliberate attempt to depress prices. NIT is the largest mutual fund in Pakistan with around Rs85 billion under management. The prime minister recently reiterated that the fund would be sold out by the end of June.
Nineteen parties are in the run to buy out NIT in six parts.
“It suits those competing to bid for NIT to suppress share values, so as to decrease Net Asset Value (NAV) and therefore the ‘reserve price’ on which NIT would be offered for sale,” says this asset manager.
Even some of the veteran brokers subscribe to this view.
But in all those allegations and counter-allegations, there is hardly any thought for small investors who ought to have turned paupers. They have little faith in an outcome of investigations.
