ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has started taking strict measures to curb illegal financing in the wake of recent defaults by brokers.

Though in-house badla financing was banned by the SECP in 2006, the practice has continued unabated in one form or another due to its unregulated nature and because the use of two legal options — margin trading and margin financing, whose rules were promulgated in 2011 — remains limited.

“The main reason that badla financing remains in practice is that margin trading and margin financing have remained limited to first-tier stocks, and even the second-tier stocks could not get the financial support from the banking sector,” said an official of the SECP

To seek a solution to fill the financing gap, the SECP formed a committee headed by Commissioner (Securities Markets Division) Akif Saeed; it is expected to submit its report to the commission soon.

Mr Saeed declined to comment on the recent actions against the stockbrokers involved in badla financing.

But an official of the Pakistan Stock Exchange (PSX) told Dawn that recent ‘bull runs’ and the surge in the benchmark KSE-100 index has largely been fueled through badla. The official, however, said the committee has reported that in-house badla posed risks of unregulated market and could lead to misuse of client assets by brokers if they are in distress.

“Although a mix of genuine developments have attributed to the increase in KSE-100 index too, but the substantial rise of the market from November 2016 has led the index breach the 50,000 points level,” the PSX official said, adding that the practice often brings exorbitant profits to the broker but it could erode investors’ money.

The official said the key reason badla could not be eradicated completely was because the market was not performing very well up to July 2016, and that is why the issue remained out of regulators’ sight.

The PSX management has estimated that the current volume of badla financing in the stock market was around Rs10 billion, while that of margin trading system financing was Rs14bn.

At the same time, there is a strong resistance against the SECP’s current drive against badla, as the regulator maintain that investors’ amount is not recoverable in case of broker default.

As expected, the move has created unrest among brokers, who have a history of locking horns with the regulator.

An SECP official said that in the wake of rise in badla financing, show-causes were issued to 27 brokers in January this year.

“Those brokers whose hearing dates are close are the ones creating hue and cry against the SECP and they ignore the fact that badla itself is illegal,” the official added.

Published in Dawn, March 7th, 2017