ONLY half-way through the month, the shares on the Karachi stock market have lost 4pc of their value. Small investors who entered the market late last month in search of wealth have come to grief.

The sell-off by foreign fund managers of $18.2m worth of equities during the fortnight has taken the brunt of the blame. Yet the foreigners’ exodus is not Pakistan-specific and has been visible across regional markets following the chaos and uncertainty surrounding China’s stock market and economy.

Market participants also talk of local political uncertainty and the volatility in crude prices, which has impacted the heavyweight oil and gas sector.

But most brokerage houses tend to sweep under the carpet a matter that has been at the heart of the institutional and individual investors’ panicked response: the proactive role of the apex regulator, Securities and Exchange Commission of Pakistan (SECP).

Most market strategists say it is not the notices by the SECP that is causing panic in the market, but the fear of scrutiny by an outside agency — NAB

Following the questioning of some powerful personalities in high places — those who were thought to be ‘untouchables’ until now — rumours have been thick in the air of an imminent joint action by the SECP and the National Accountability Bureau (NAB) against some big stockbrokers.

With no clarification coming out of the chief regulator’s office in Islamabad, a selling frenzy has been sparked in the market, sending share prices reeling down. But does the regulator need to calm the market by either confirming or denying the reports?

“It is not the duty of the regulator to comment on rumours,” said a SECP official on condition of anonymity as he was not authorised to speak by his organisation. “If we were to do that, we would be doing just that and nothing else.”

When Dawn asked Akif Saeed, commissioner of the SECP’s securities markets division, he was diplomatic in his answer. “The SECP continues to monitor the capital markets and wherever misconduct surfaces, investigations are taken up.” He added that it was all in the normal course of a day’s work.

Enforcement and surveillance actions for non-compliance with the regulatory framework is the business of the regulator, he said, but dodged the question over whether notices had been served to around 10 brokerage houses for suspected wrongdoing. “Even if it were so, the brokers who have their hands clean need nothing to worry about.”

Some reliable market participants admitted that the regulator is hounding the brokers with a flurry of notices and demands for explanations.

“There are skeletons in every cupboard and if the regulator were to dig deeper, unsavoury matters may come on the surface,” said one observer familiar with the events.

Others even believed that some of the big brokers had sidelined and halted their trading for the time being, which is why the trading volumes have dipped to months’ lows.

Former KSE chairman Arif Habib dispelled the rumours of any evil eye on the brokers. He said the SECP and the NAB had quickened their efforts to apprehend defaulter brokers who had misappropriated their clients’ securities and escaped. He also agreed that plans were being devised for a closer monitoring of clients’ margins.

“Both these steps are healthy for the market.” He also emphasised the role of Karachi Stock Exchange as a frontline regulator. “The KSE should play a proactive role, being a self-regulatory organisation,” he said.

In case of losses, the investors will also be guilty of negligence if they failed to monitor their own accounts. The Central Depository Company of Pakistan sends an auto-generated SMS to a client whenever a movement takes place in his account. And it is the duty of the investor to monitor and reconcile his account with his trading activities, the former KSE chairman said.

Such rumours bring a bad name to the entire broker fraternity and jeopardise investors’ confidence in the market, Habib complained.

But for all that, many investors are ill at ease. They believe that if there is smoke, there must be fire. No one denies that the SECP has put the greatest emphasis on the segregation of clients’ assets from those of the brokers.

A market participant recalled that misappropriation of clients’ securities by some fraudulent brokers was at the heart of the stock market crisis of 2008. Several brokers at the time had sold shares of their clients, took the money and ran out of the country to Dubai, Canada and Australia. The SECP and the NAB are understood to be in hot pursuit of these brokers.

Meanwhile, through a beeline of notices, the apex regulator is believed to have also forced brokerages to abolish ‘in-house badla’ — or allowing clients to buy shares on borrowed money that is several times their invested amounts.

But most market strategists say it is not the notices by the regulator that is causing panic in the market, but the fear of scrutiny by an outside agency — NAB.

Former SECP chairman Khalid Mirza does not believe that the market is ‘over-regulated’. But he showed distaste for outside agencies’ interference. He also observed that he was slightly concerned over the SECP’s excessive association, over the years, with outside agencies.

“It is the apex regulator who should be the patron of the market, with its benign hand protecting the investors and the market, without having to seek assistance from outside agencies, as it is only the regulator who understands the market.”

Several market participants and fund managers also subscribed to that view, saying that to calm investors and shrug off rumours, the regulators must itself police the market and distance itself from the dreaded NAB.

Published in Dawn, Business & Finance weekly, September 21st, 2015

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