KARACHI, Dec 13: The Sindh High Court stayed the removal of the floor placed on trading in the Karachi Stock Exchange (KSE) on Aug 27 till Dec 16 when an application moved by two brokerage houses for an interim injunction against the Securities and Exchange Commission of Pakistan (SECP) decision for normal functioning of the exchange would come up for hearing.

A suit has been instituted by M/s Al Hoqani Securities and Investment Corporation (Pvt) Limited and M/s Creative Capital Securities (Pvt) Limited, seeking cancellation of contracts and transactions executed under the Continuous Funding System-MK II as defined in regulations framed by the National Clearing Company of Pakistan Limited (NCCPL). An urgent application against the removal of floor without notice was moved in the suit.

Issuing notices of the application to the three defendants, the NCCPL, the KSE and the SECP, for Dec 16, Justice Gulzar Ahmed stayed the impugned removal of the floor in the meantime. Advocate Ejaz Ahmed waived notice on behalf of the NCCPL. Advocates Abdul Hafeez Pirzada, Muneer A. Malik, Abdus Sattar Pirzada, Usman Hadi and Adnan Chaudhry represented the plaintiffs.

Narrating the events that led to erosion of the investors’ confidence in the capital market, the plaintiffs said the government functionaries had repeatedly promised to inject liquidity into the market by to the tune of Rs20 billion by setting up an ‘opportunity fund’. The assurances never materialised and the market continued to slide.

On Aug 27 the KSE board of directors decided to place a floor on the market at prices prevailing at the close of business on Aug 26. The board, acting under the rules and with the approval of the SECP, declared that the market conditions constituted a ‘force majeure’.

The market remained virtually closed, as a result of which CFS-MK II participants could not make an exit from in order to close their open positions.

They maintained that authorised financiers have failed to live up to their irrevocable financial commitments. On the opening of market, the consequences for the CFS-MK II scheme would be grave. The CFS contracts stood frustrated under Section 56 of the Contract Act. The agreement to perform the transactions has become impossible, they said, seeking rescission of the contracts. The plaintiffs sought to sue on behalf of all other ‘financees’ and their clients.

The plaintiffs said they had entered into CFS transactions with the NCCPL for repurchase of security in terms of the company’s regulations. If the floor, which was imposed in the interest of stock market stability and subsisted for about 102 days, was removed without notice, ‘the market may crash’ and the CFS-MK-II facilities availed by them would be adversely affected. They said under NCCPL regulations, there has to be a 90-day notice for canceling irrevocable financial commitments. Until the necessary measures were taken by the NCCPL, status quo in respect of the plaintiffs’ contracts should be maintained.

According to them, the net open position under the CFS scheme is about Rs11 billion of which Rs9.8 billion pertains to CFS transactions of the 6,980 investors, all of whom were their clients, and the remaining Rs1.2 billion to proprietary accounts of the ‘financees’ who registered brokers.

They requested the court to declare void the CFS-MK II transactions and direct the NCCPL to deliver up all the open contracts containing open positions to the court for cancellation.