SINCE August 27, 2008, the Karachi Stock Exchange 100 index is under floor by majority decisions. Though a bit late, it was a wise decision and judiciously implemented too. The blank and short-selling in future constraints followed.

Both the regulatory steps taken by the Securities and Exchange Commission of Pakistan (SECP) on the advice of the KSE high-ups to stop further price erosion in the share value may not have been welcomed by a few - mainly foreign investors - they were timely and in the interest of the investors at large.

After the failure of circuit-breakers and other measures to check the share value slide, the freeze was applied to stem the rot, and to protect the interest of small as well as large market players.

“In the recession, which overtook the market in the current fiscal, the KSE 100 share index had shed well over 40 per cent eroding about $39 billion from the market capital from its peak level of $75 billion,” said a leading stock analyst Ashraf Zakaria.

It was massive erosion, judged by any standard for an emerging market, known till very recently as a best performing market in the world ensuring a return of over 20 per cent on both local and foreign investment.

The freeze at 9,144 points may have taken steam out of the market since its imposition as is well-reflected in the daily share volume, but it has certainly saved the market from a possible crash leaving behind a long list of terrible financial casualties and brokers in default.

Opinions are divided over fixing the floor. Some say it should be removed without further delay.

While others say it should stay until sanity returns to the international financial markets.

“The investor confidence is considered the lifeline of any capital or financial market,” analyst Tabish H. Rajabali says adding, “both the economy and the current law and order situation do not warrant the removal of floor and would not do any good for the market at this stage.”

But some others are of the opinion that the index will be on its way to a sustained recovery after having shed 150 to 200 points more when the floor is removed, though it may not attain its all-time highs of 15,674 points.

Investors’confidence is now badly shaken and they may think twice before opting for fresh commitments in the share business. The continued weakness of the rupee, higher fiscal deficit and a massive rise in the cost of borrowing may not allow them to ride the bandwagon again at least in the very near future.

Already the stock market has witnessed a huge outflow of funds, notably towards gold and the commodity markets where it is said to be safe on higher profit margins. The investors may not be back in the share business until there is a big rebound.

Owing to the floor, there is some whispering in the KSE corridors that some foreign funds are liquidating their long position in certain blue chips in off-the-floor transactions, through their local agents. One of them is said to be the chief exponent of the removal of the floor.

Finance Minister Naveed Qamar seemed to be seized with the issue. In his recent meeting with a KSE delegation he gave a clear message that the entire floor will stay until money is raised through the new fund of Rs20 billion to be shared by the banks and financial institutions. So. the KSE has to wait till it gets a signal from the government.

“ In September 2008, one witnessed, how a single session volume of 0.985 million shares, as compared to 1.122 billion shares recorded in 2004, effects the current health of the Karachi bourses,” analyst Ahsan Mehanti says.

Whether or not the floor is removed during the current month as the rumours go, one thing is clear that it has judiciously averted a major market plunge, that could surpass those of March 2005 and 2006 crashes. Another favourable impact of this decision was that it did stop the flight of hot money when its foreign exchange reserves were dwindling.