KARACHI: The Securities and Exchange Commission of Pakistan (SECP) proposes to set up ‘Securities Investor Protection Corporation’ (SIPC). The purported objective is “to address investors’ complaints in case of default by a brokerage house”.

As the stocks continue to climb on a vertical limit with the KSE-100 index nearing the 30,000-level, the inevitable blizzards have forced regulators to beef up the protective measure, lest the roof comes crashing down.

Zafar Abdullah, Commissioner Securities Market Division at the SECP, told Dawn that the purpose of SIPC - to be established on the models of those in US, China and Malaysia - was to “protect investors against unfair trade practices and misappropriation of clients’ assets by a broker”. India was also in the process of introducing the SIPC in near future.

The SECP Commissioner pointed out that following the stock market crisis of 2008, the securities markets were seized with two new phenomenons, not seen before: Misappropriation of clients’ money/securities by the stock brokers and their tendency to take the money and run. The latest in the link is the recent Highlink Capital (Pvt) Ltd brokerage, a Lahore-based broker firm, against which clients’ have already filed complaints to the tune of Rs200m.

While the proprietor of the Highlink was nabbed by NAB, several defaulters had managed to flee in the chaos of the 2008 crisis, one big absconder broker, Munir Ladha of Eastern Capital brokerage is believed to be enjoying lavish lifestyle in Canada funded by the stolen money of hundreds of ruined account holders in his firm.

Zafar Abdullah stated that the SIPC would be a statutory set-up under the second generation reform fully supported by the government. All stakeholders were expected to chip in seed money in the SIPC, but the structure was not yet quite clear.

A senior KSE official claimed that currently, the KSE holds a comfortable sum of over Rs4bn under two funds: “The Clearing House Protection Fund” and the “Investor Protection Fund”. The first relates to payment by the Exchange in case of ‘default’ by a broker while the second relates to compensate losses of investors in case of broker ‘suspension’.

Every broker can avail up to Rs50m from each of the two funds. In the crisis of 2008, almost 10 brokers went broke and all were ‘suspended’; none however turned ‘defaulter’, according to a broker familiar with the affair.

Following the demutualisation of the exchange, the older methods of recovery from distressed broker through the sales of his membership card was no more, which was replaced by the Basic Minimum Capital (BMC) to compensate clients. Where the recovered sum was not enough to satisfy claims of all clients against a broker in 2008, the distribution was made pro-rata.

“The then managing director of KSE sat across the table of the grumbling investor and gave him the Hobson’s choice: accept what is offered or nothing at all”, a small investor who had to forego substantial sum in claim says.

However, a senior official of the exchange pointed out that investors’ claims to the tune of Rs1.5bn had been cleared, by settling clients’ claims to 100pc where amount under Rs0.5m was involved; 70-80pc on claims of sums between Rs0.5 to Rs1m and 30-40pc for claims above Rs1m.

The KSE official could not give the aggregate sum in claims against all brokers, but the senior official at SECP thought it was in the range of Rs4bn.

The SIPC, when in place, would take away the right now enjoyed by the exchange to be the jury, judge and executioner in case of losses suffered by investors at the hands of brokers. “SIPC will be a sovereign institution to be run by carrier professionals, senior judges, bureaucrats and professionals,” the SECP official explained.

Published in Dawn, May 25th, 2014