KARACHI: The assets of three brokerage houses suspended by the Karachi Stock Exchange would be placed on the auction block on June 24 (Tuesday).

The bourse has put the ‘floor’ or ‘reserve’ price at Rs42.5m for ‘bundle’ of assets of each of the suspended broker.

No names were named by the Karachi Stock Exchange on Wednesday, but people familiar with the affair asserted that they included: ZHV Securities; Moosa Noor Mohammad Securities and Pearl Capital Management.

Between October 2012 and 2013, the bourse had forfeited the Trading Right Entitlement Certificate (TREC) of the brokerages mainly for their inability to resolve admitted investors’ complaints/claims arising out of trades/transactions, registered with the KSE, due to financial distress.

A person familiar with the affairs stated that the claims against each party ranged between Rs350 million and 400m. The bourse was able to raise substantial sums from ZHV and Pearl. However, to settle all claims, the KSE’s ‘Investor Protection Fund’ account would have to be tapped for up to Rs130m to augment payments of claims of brokerages; the KSE has ample sum of Rs800m in ‘Investor Protection Fund’ account.

A senior broker explained that prior to the demutualization of the exchange, it was simple for the bourse to raise money by the sale of membership card of the defaulter/suspended broker to pay off his liabilities. But since that option was closed, the exchange would auction three sets of assets of the suspended broker: One, the TRE Certificate; two, the 1.602m shares of the Karachi Stock Exchange Limited (KSEL) having face value of Rs10 each, and three, the assignment of proceeds of 1.404m shares of KSEL, having face value of Rs10 each held in the CDC blocked account under the custody of the KSEL. Those are to be sold later to the strategic investors and others in accordance with the relevant laws/acts.

“The sale proceeds of the above shall be utilised for settlement of registered and approved claims against concerned forfeited TREC holders,” the bourse announced on Wednesday.

It clarified that the eligible parties to participate in a bidding process for purchase of above assets as a ‘bundle’ were required to be a private or public company having minimum paid-up capital of Rs50m.

The reserve price of the bundle of (above specified assets) has been set at Rs42.5m. Yet, person or firm interested in participating in bidding process for purchase of assets in first and second category would also be considered eligible.

Investors familiar with the affair say that at least one of the three suspended houses used the old trick: obtained loans against pledge of clients’ shares with banks and then took the money and ran, perhaps out of the country.

Yet members said that the situation was not scary and it had nothing to do with the steep fall in stock prices in the first three days of the current week.

The bourse seems to be putting the house in order as the August 2014 — the date stipulated by the chief regulator Securities and Exchange Commission of Pakistan, to find strategic buyer of 40pc controlling shares in KSEL -- draws near. However, the timing was understood to be extendable by one year after which the initiative of locating a buyer of stock exchange would vest with the SECP.

A person in the knowledge of things admitted that it was difficult to find a strategic buyer as the regulators had set strict criteria for the party to qualify as a strategic buyer, all for good reason. On the mention of the ‘reserve price’ of assets of suspended brokers to be auctioned on Tuesday fixed at Rs42.5m, a veteran member at the market lamented that the price of the membership card prior to demutualization was considerably higher at Rs55m.

Published in Dawn, June 19th, 2014