For the third year in a row, equity investors have been left to fend for themselves.

There is despondency in the air. One finds sullen faces in the trading hall, narrating tales of their never-ending losses.

Mukhtar Ali, a man in his late 50s, has been living off capital gains and dividends for years. He put his faith as well as entire early-retirement settlement money in stocks many years ago. “Half of my savings, roughly Rs6.4 million, have been wiped off in the market meltdown that knows no end,” he says.

Brokers and traders also sit idle as the average daily traded value of shares has dipped to just around Rs3 billion. “Three years ago, this was a vibrant place producing (the daily) traded value of over Rs20bn,” said a veteran broker.

As earnings evaporate and regulations intensify, several brokers have closed down their businesses. A market watcher said that under the previous Companies Ordinance, no one except banks was allowed to accept cash deposits. However, under the new rules introduced a little while ago, Central Depository Company (CDC) and National Clearing Company of Pakistan (NCCPL) are empowered to carry out cash collection and shares settlement under the Direct Settlement Services and National Custodial Services.

The PSX stock price is Rs14.50, meaning 40pc of the original price paid by the consortium has already been wiped off

“The whole idea was to prevent the misuse of investors’ money and shares for margin utilisation and default payments... and to ensure that no broker took away and fled with investors’ money,” he added.

He noted that the new regulation enjoyed ceremonial presence only. According to a broker, brokerages are now required to follow the ‘impractical rule’ of know your client (KYC) to comply with the requirements of the Financial Action Task Force (FATF). This has drastically reduced the number of new accounts.

Stockbrokers hold a 20 per cent stake in the total issued capital of the Pakistan Stock Exchange (PSX) while 10pc shares vest with the general public. But it is the majority 40pc strategic or ‘anchor’ investment that is under the investors’ glare.

It was in the winter of 2016 that the PSX sold 40pc strategic ‘anchor’ shares to a Chinese consortium at Rs28 apiece. In essence, the consortium paid Rs8.96bn for 320m shares.

Last Friday, the PSX stock price stood at Rs14.50, meaning 40pc or Rs3.54bn has been wiped off from the price paid by the consortium a little over two years ago.

But do the Chinese stakeholders fret over the loss? “The strategic investors have entered with a vision of 20 years. They are not fixated on the daily change in stock prices,” said one stock strategist. According to an enraged fund manager, “If the anchor investors have lost money, so be it.” He complained that the foreign investors were expected to bring in investment, experience, technological assistance and new products like options and futures. But all that is still a dream.

Early last month, the Securities and Exchange Commission of Pakistan (SECP) allowed an increase in the limit on foreign persons or institutions to acquire PXS shares up to 20pc of share capital from 10pc applicable under the Stock Exchange (Corporatisation, Demutualisation and Integration) Regulations 2012. The exchange stated that as per the SECP requirement, it was mandatory for foreign persons to disclose if they hold 1pc or foreign institutions if they hold 2.5pc of PSX shares.

On Dec 23, 2017, the SECP made amendments to the Stock Exchange (Corporatisation, Demutualisation and Integration) Regulations 2012, removing the ban on foreign investors to trade in the PSX stock. Yet, foreign persons, other than the foreign anchor investor, could not collectively – directly or indirectly – acquire or hold more than 10pc of the total issued share capital of the exchange. The amendment also provided that the commission could, if it deemed fit in the interest of the capital market, increase the limit of shareholding for foreign persons, other than foreign anchor investor, to 20pc of the total issued capital of the exchange.

A person privy to the affairs affirmed that the PSX board had discussed and recommended to the SECP that it should raise the ceiling of foreign holding to 20pc a while ago. But with no response from the regulator, the PSX had set the matter aside.

PSX CEO Richard Morin declined to comment on the increase in the limit, saying it is the prerogative of the apex regulator and the government.

A member of the divestment committee that oversaw the sale of strategic shares in 2016 said former finance minister Ishaq Dar was averse to giving a nod to the sale of 40pc PSX shares to a single party. This was why 30pc shares were offered to the Chinese consortium comprising three Chinese exchanges — China Financial Futures Exchange Company Ltd (lead bidder), Shanghai Stock Exchange and Shenzhen Stock Exchange — while two local financial institutions received 5pc shares each.

A veteran investor said that it was possible for the anchor investor to surreptitiously raise its stake to 50pc by an indirect acquisition of 10pc shares now offered to foreign investors. But he added that there was little inclination for the strategic investors to do that because the Stock Exchange (Corporatisation, Demutualisation and Integration) Regulations 2012 contained a provision that allows the anchor investor to raise its equity stake to 51pc after three years of the first offer. “A little over two years have already gone by and the Chinese strategic investors will be at liberty to accumulate shares up to 51pc of the capital after a few months if they so wish,” said the high-net-worth individual.

Some market watchers say that the regulator’s intention in raising the bar of foreign shareholding to 20pc was to encourage foreign inflows. Foreign investors have continued to seek an exit from the stock market for the fourth year in a row. Portfolio outflows in 2018 amounted to $534m. The sell-off continues in 2019 to date.

Market strategists calculate that the current foreign investment in equities stands at $6bn, of which $1.6bn relates to portfolio investment while the rest is strategic holdings mainly in multinationals.

Published in Dawn, The Business and Finance Weekly, April 1st, 2019