KARACHI, May 5: The Securities and Exchange Commission of Pakistan (SECP) has asked the board of directors of the Karachi Stock Exchange (KSE) to give convincing reasons why its request for an increase in the Continuous Funding System (CFS) limit be accepted.
The CFS is currently capped at Rs55 billion and would remain so for the moment.
A meeting between the SECP and the KSE board was held in Karachi on Saturday. The important item on the agenda was to discuss upward revision of CFS limit from Rs55 billion. The SECP team was led by its chairman Mr Razi-ur-Rehman, while member directors sat across the table to represent the KSE board.
The apex regulator was told that since the CFS (realised and unrealised) had climbed to Rs54.68 billion by the end of last trading session on Friday, there was a need to raise the cap on CFS or remove it altogether for the market to move forward.
The Pakistani capital market was currently outperforming regional markets with the KSE-100 index touching an all-time high of 12,512 points on Friday.
The impression that member directors drew from the discussions with the apex regulator on Saturday was that their request may have been “delayed but not denied.”
A director present at the meeting, Shehzad Chamdia said the SECP gave a patient hearing to the KSE request. “The Regulator assured that the KSE proposal would be carefully considered, but asked for convincing reasons to justify the raise,” he said. The board, he observed, was directed to provide SECP some other information, including an analysis of the CFS utilised.
“Such an analysis should include the impact of volume and value in the already utilised amount and other scrip-wise details,” he explained.
Sources privy to the meeting thought that it was possible for the board to provide necessary information required by the SECP within a week or 10 days following which there was a strong possibility that the Regulator might allow the increase in CFS upper limit.
CFS had touched all-time high of Rs54.78 billion on Monday, April 30, this year. On Friday last about a half of the CFS amount (Rs26.5 billion) was in just five stocks: PPL, OGDC, NBP, POL and DGKC.
An analyst figured out that the share of institutional investors in CFS had grown to around 70 per cent, leaving little room for money-less and speculative investors.
Earlier on Nov 2, 2006, the SECP had raised the limit of CFS financing from Rs25 to Rs 55 billion on the plea of the stock broker fraternity, which had complained of shortage of liquidity.
Siddiq Dalal, former director of KSE, thought that this time around ample liquidity was available in the market, which was evidenced from the badla rate which stood at an average of 11.80 per cent on Friday, compared to the cap of 18 per cent the last time Index had seen the level of 12,000 points on April 17, 2006.
A stock strategist commented that since 'in-house' badla was banned, the option left for investor short of fund was to go for 'future trading' or 'margin financing'.
In essence, CFS is the purchase of shares on borrowed money or ‘leveraged buying’ of shares at interest, now capped at 18 per cent. It represents slightly modified form of what previously was known as ‘badla’ -- the practice peculiar only to the sub-continent.
India, nonetheless, scrapped the system a couple of years ago. But in the absence of alternative sources of funding, such as ‘margin financing’; CFS has continued to be the major source of financing share purchase, particularly for general public which has scarce money of their own to invest.
