KARACHI, Sept 20: The Securities and Exchange Commission of Pakistan (SECP) on Wednesday revised dates of ban on ‘in-house’ badla and re-start of short sale in futures contracts.

In-house badla would now be abolished from October 30 and short sale would be allowed from the November Futures Contract.

In two separate letters addressed to Karachi Stock Exchange Managing Director M.A. Lodhi, the apex regulator stated that its response was in reply to the earlier letters written to it by the front-line regulator.

On Sept 11, the SECP had proclaimed that it proposed to raise Continuous Funding System (CFS) limit to Rs55 billion for the KSE, from Rs25 billion. The limit for Lahore Stock Exchange had been raised to Rs10 billion and Rs5 billion for the Islamabad Stock Exchange.

The chief regulator had at the same time announced that a ban on ‘in-house’ badla would be clamped. The dates for implementation of both those measures were set as October 2. No time frame was announced for restart of short sales in futures contracts.

The ‘in-house badla’ refers to unrecorded amount of leveraged financing by brokers to their clients. The SECP had earlier observed that ‘it was non-transparent, and scrips financed under that system were more risky and prone to market manipulation besides having excessive rates of financing’.

But a sudden ban on in-house badla had become a matter of prime concern for investors and stock brokers, resulting in drop in equity values and very low turnover of shares. Many market participants had demanded parallel run of the legal Continuous Funding System (CFS) and the in-house badla and a gradual phase out of the latter.

“We were expecting a three-month extension in the in-house badla,” said a senior broker, adding that a month’s extension would nonetheless provide some immediate relief. October Futures Contract are about to start, but a short sale would not be allowed until the November Futures Contract.

In their letters to the KSE, the SECP placed the blame for not keeping up to the dates earlier agreed upon, squarely at the door of the stock exchange. It stated that in a meeting on Sept 16 with managements of KSE, CDC and NCCPL, it was agreed that the in-house badla would be completely abolished by Oct 20.

“We were consequently surprised to receive KSE letter dated Sept 18 wherein KSE requested for an extension of minimum one month to enable an orderly phasing out of in-house badla,” the chief regulator wrote.

“While we cannot understand the u-turn taken by KSE management, having agreed the deadline to be Oct 20, we nevertheless agree to KSE’s request and confirm that in view of the reasons detailed by the KSE management, in-house badla shall be totally abolished with effect from Oct 30,” it added.

In regard to the Futures contract the SECP was equally critical of the KSE. The regulator observed that matter regarding short sale in futures market based on free float limit was earlier communicated vide letters dated Aug 30 and Sept 13.

“Consequently, we are concerned that KSE has now shown its inability to bring about requisite changes in the KATs to allow for short sale under the new system”, the SECP said, arguing that KSE was already monitoring the 5 per cent of the free-float position limit imposed on the brokers in the Future’s market and was also monitoring short sale in excess of Rs50 million.

The apex regulator went on to say: “In view of the above and given the fact that KSE is not ready to allow short sale under the new system, we have no option but to continue the ban on short sale for the October Futures Contract” and it noted that short sale would therefore be allowed from November Futures Contract, after the KSE brings about necessary changes in its system and adopts the new system.

While blaming the stock exchange, it is difficult not to notice a slight bit of apologetic tone in the SECP letters. But a source at the KSE said that the chief regulator had forwarded directives spanning over 42 pages, which the bourse was making efforts to comply and follow.

The matters of in-house badla and short sale in Futures had come under earlier discussions with the Board of directors of the KSE. But the latest letters between the KSE management and SECP had flown over the heads of the Board members.

A couple of member directors were sore that they were not taken into confidence, but Siddique Dalal a senior broker and member on the Board thought that it was right way to go about for it prevented passing of ‘privileged information’ into some hands before others.

A small investor nonetheless pointed out that the market had started to show signs of good recovery from a day earlier — on Tuesday, which meant that some people knew what others did not.

The forensic detectives from US are currently in the country, sniffing out the scent of March 2005 stock crisis. It might perhaps be a good idea to put them on this new trail as well!