KARACHI, Dec 5: The Securities and Exchange Commission of Pakistan (SECP) plans to remove the ‘floor’ from under the stock index on Dec 15, Chairman Razi-ur-Rahman told Dawn on Friday.

He said the plan was subject to existence of all arrangements for orderly market.

The apex regulator’s proposal came after the shock announcement on Wednesday intimating the three stock exchanges to begin normal function of the market as the expected ‘market support funds’ were not forthcoming.

After many months of wait in which several people in high places had assured the bourses of a Rs50 billion bailout package, the markets were left high and dry, following IMF’s explicit intimation that the ‘public money’ would not be used to support stock markets.

The board of directors went into marathon meetings on Friday, in search of a safe route for ‘soft landing’ of the KSE. “The sticking point was the amount of Rs11 billion in the ‘badla’, said most brokers. Various proposals, including the one to invoke regulation that allows the use of ‘force majeure’ were considered.

Market participants in the knowledge of those feverish talks in the board rooms said that in the absence of the government support, the fear was of a large-scale default as an avalanche of sell orders of around Rs15 billion worth of stocks could drown the market. That amount comprised Rs11 billion in ‘badla’ and around Rs3.5 billion in margin shares.

The general feeling was that the ‘floor’ had been unwisely placed and the problems were compounded by keeping the market in that standstill mode for more than 100 days since Aug 28, which spelled the longest ever peacetime closure of a stock market in the world.

Many participants suspected that the ‘floor’ was meant to protect few big brokers and it was their weight, which still prevented the ‘floor’ from moving from its place, but signals emanating from Islamabad were that it wasn’t the question of protecting 70 to 80 stock brokers. “The borrowers in the COT are as many as 6,890”, said a person who asked not to be named.

He thought that it was essential to safeguard market’s systemic risk in the face of a heavy offloading.

“The feared foreign selling is in addition to the Rs15 billion,” he said. No one could figure out what the quantum of outflow of foreign portfolio investment on removal of the floor was likely to be, but most brokers thought it could range between $ 500 to 800 million.

Evidently, the troubles that could surround the market were multifaceted. Engrossed in the method of dealing with the ‘badla’, the participants were still to look up to other looming problems: What of the Rs45 billion borrowed from the banks against share financing; the overwhelming investment of mutual funds and financial institutions in the ‘badla’ and the impact that any change in regulation could have on their strength of meeting ‘redemptions’ and so on. The board of directors of the KSE was scheduled to continue with their deliberations on Saturday.

‘Floor illegal’

The Competition Commission of Pakistan (CCP) was believed to have issued show-cause notices to the three stock exchanges, saying that placing of index to stop prices from falling violated laws on restrictive trading.

The notices directed the bourses to respond within two weeks.

The CCP view was that the imposition of the ‘floor’ was tantamount to “discrimination against those investors who have bearish view on the market or those who hold short positions”.