March 30, 2007	Friday	Rabi-ul-Awwal 10, 1428

KARACHI, March 29: The Securities and Exchange Commission of Pakistan (SECP) has grilled 36 of the 88 brokers, who were served (show-cause) notices after the release of forensic report on the stock market crash of March 2005.

“We are doing everything in accordance with the law,” says chairman of the apex regulatory body, Razi-ur-Rehman Khan, in answer to members’ criticism. But the stock brokers are up in arms. They believe that the entire process is aimed at creating more of a hassle for the community.

The brokers are sending SOS to the prime minister and have threatened to knock at the doors of the powerful judiciary.

When the notices were first served by the SECP to 88 stock brokers at the end of November last year, they were thought to be more of a bark than a bite. And they would have been just that but for the dogged determination of some ‘pretty’ faces in the National Assembly’s Standing Committee on Finance to get to the bottom of the matter.

“The members of the committee, who are largely unaware of how markets perform are searching for something which even the exorbitantly paid foreign forensic investigators failed to find,” says a stock strategist.

“Summoned twice by the Committee, the SECP chairman has to have ‘something’ to show to the Committee, when he stands before it the next time,” a broker in the line of fire said on condition of anonymity.

He said that all that the apex regulator was doing was to pass on his ‘tension’ to the broker community, and the latter in turn was more engrossed in preparing for SECP hearings than in trading. The shrinkage of volume and the current lacklustre performance of the market, he thought, were largely due to that factor.

The 88 brokers, who form 59 per cent of the active broker community of 150 members scarcely, shook in their shoes when the notices were first served to them. And neither are they now.

“There is nothing in the notices to prove any ‘wrongdoing’ by the brokers,” says one member. He stressed that ‘short selling’ rules (which are at the heart of the problem) were not violated.

He claims that all members were in physical possession of the shares or in the Central Depository Accounts (CDC) in case they crossed 50 million shares limit in “short-selling” and that the SECP was misinterpreting rule (3B) in case of “short-selling”.

The notice asks for the brokers to provide “documentary evidence” to prove compliance of Regulation 3(b) of the Regulations Governing Futures Contract.

The Regulation states: “No member shall have a sale position in a particular scrip of more than Rs50 million, unless the actual shares sold over and above the aforesaid limit, are deposited with the Exchange or the broker gives documentary evidence that the shares are lying in CDC or with some banks or DFI, to satisfaction of the KSE management”.

Did all those members violate the rule? The SECP has asked the brokerage houses to provide “explanatory reply along with documentary proof”.

An irate broker who was in receipt of the notice said that what that purported was to stick the blame first and ask questions latter. From independent sources and some of the members questioned by the SECP, it emerges that the issue has now boiled down to “Reporting format”.

Did the members comply with the reporting requirement in vogue at the time? Brokers believe they did; apparently SECP thinks otherwise.

Interestingly in a direct tussle between the brokers and SECP, the KSE management — which is recognised to be the front line regulator — comes nowhere in the picture. Why were the notices not passed on to the brokers by the SECP through the via media of KSE?

The chairman of the apex regulatory body hesitatingly states that the KSE management was slow in performing its duties and the SECP had therefore to seek direct explanations from members.

Whatever turns the tussle takes, the market at the moment is surely taking the brunt. It reveals the full face of a complete lack of co-ordination between the SECP (the apex regulator); Karachi Stock Exchange (the front line regulator) and the stock brokers.