THE Pakistan equity markets produced a negative return of six per cent in 2011 and already into the first month of the New Year, the shares are still sinking. Stock brokers and traders pin the blame on Capital Gains Tax and the methodology of its calculation that, they say, has driven investors away, resulting in a dip in average trading volume to 80 million shares a day.

“In good times a few years ago, the average daily volume stood at 400 million shares and at times it even crossed one billion shares in a single day”, says a market pundit.

So many believe there must be more to the loss of investor confidence than the CGT. The pundit asks to look back and peer into the year 2008.

“That was the most disastrous year in the history of financial markets in Pakistan,” Yasin Lakhani, a six-time president and chairman of Karachi Stock Exchange, says. In that fateful year, the Karachi stock market index of 100 shares had galloped to touch its all-time high level of 15,760 points on April 20, 2008.

And then the stock prices collapsed with index plunging by almost 55 per cent or by 5,600 points in four months. As panic was thick in the air, an entirely insane act was performed. On August 20, 2008, a “floor” was fixed at the level of 9144 points below which the index was not allowed to fall. All investors, including foreigners who wanted to seek an exit were trapped.

Sim Cox of Emerging Markets Stock Fund (Hong Kong) says: “I have gone through the record of stock exchanges and never since the oldest stock exchange in the world at Amsterdam was established in 1602, I could locate one example where a stock exchange had ever blocked the exit in violation of basic principles of free market mechanism”. Every Dick and Harry who had anything to do with the Pakistan capital market—the regulators, brokers and traders now fall over each other in condemning the ‘floor’ as an unforgivable blunder. It turned the catastrophe into calamity. The ‘floor’ remained in place for as many as 108 days. When it was finally lifted on December 14, the market, as was feared, came crashing down to the level of 4782 points in fewer than fifteen sessions.

No one has ever figured out the loss caused to investors, but an idea can be had from the evaporation of paper value of corporate Pakistan. As much Rs1.4 trillion were swept off the market capitalisation, which dipped from Rs2.881 trillion on August 8 to Rs1.578 trillion on January 24, 2009, when the market started to show first sign of recovery.

Most investors and brokers would want to shake the memory of that dreadful year out of their minds, which was why the greatest financial crisis went uninvestigated. “No accountability or even the identification of perpetrators of the 2008 crisis has been a big blow to investor confidence,” says a former official of the regulatory body, who recalled that the earlier stock crisis of 2000 was put to investigation that brought out the ‘Etrat Rizvi Report’. The task to conduct enquiry into 2005 crisis was given to Justice Saleem Akhtar as well as a firm of US forensic investigators.

Many market participants admit that to boost small investors confidence in the market, which could cure the market of its major sickness of low volumes, cupboards ought to be unlocked and skeletons allowed to fall. Who gave order to fix the ‘floor’ that did all the damage? A veteran stock broker and a member of the board of directors of the KSE for 2008, on condition of anonymity, pointed to Islamabad.

“Former Finance Minister Shaukat Tarin in cohort with the then chairman Razi-ur-Rehman of the apex regulatory body, the Securities and Exchange Commission of Pakistan did it”, says he.

“They did not allow the ‘floor’ to be lifted, helping the ‘big boys’ to make billions in ‘off-market transactions’, while the public was ruined”, the broker insists. But Shaukat Tarin termed such suggestion as absurd. He told this scribe that the “The ‘floor’ was fixed in August and he had taken the office of finance minister in October. Could he have immediately removed the ‘floor’ on assuming office? Tarin reminded that the global economy was in turmoil.

“We had around $1.5 to $2 billion of foreign portfolio investment. On the other hand we were scrapping the barrel for the last dollar of foreign exchange reserves,” he says and argues that he ordered the end to insanity and lifting of ‘floor’ just as soon as the first tranche of $4 billion was received from the IMF. Tarin argues that he was instrumental in creating Rs20 billion worth Equity Market Opportunity Fund (EMOF) under aegis of National Investment Trust (NIT) that eventually bailed out the market. So who has to be blamed for fixing the ‘floor’? “It ought to be SECP or KSE or both”, says Tarin.

But the then chief of SECP Razi-ur-Rehman also brushes aside finger pointing at him. “I had allowed the ‘floor’ for just three weeks to stabilise the market”, he says and contends that the KSE itself was responsible for prolonging it to four months. But charitably he argues that everybody was falsely assured that a Rs50 billion Market stabilisation fund was on its way. That never came.

Mr Razi contends and the then chairman of NIT Tariq Iqbal Khan concurs that the popular form of ‘badla’ financing that provided ease of entry and exit was more workable than its replacement, the Margin Financing System. They admit that the product had its faults but those could be removed. Even Khalid Mirza, who headed two institutions, the SECP and the Competition Commission of Pakistan, speaks well of a “fine-tuned”, long prevalent indigenous leverage product, ‘badla’. The end of it, those experts believe, has been a big contributory factor in suppressing and depressing volumes.

The great crash of 2008 swept over trillion rupees from the market and no participant including stock brokers could escape the damage. Eight brokers were expelled and two directors on the 2008 KSE board were declared as defaulters. One Munir Ladha fled the country without settling investor claims in billions, only hours before his name was put on the Exit Control List. To date, the man remains untraceable. But can stock brokers distance themselves from the decision to impose the ‘floor’?

History suggests otherwise.

Fast backwards to August 27, 2008. All voices were drowned amid shrieks and screams of brokers and traders as the KSE-100 index that day breached the 9000 level for a short time to touch 8999 points and finally claw back to close at 9144 points. The decision to freeze stock prices came after 121 of the 123 brokers present at an emergent general body meeting that afternoon, voted in favour of freeze on prices and the directors endorsed the members’ proposal and passed it over to the SECP.

Market gurus therefore recommend that it is for that reason that the government must form an independent investigative commission, which should re-open the 2008 market crash, pin the blame on the party that put the ‘floor’ and caused the market irretrievable loss in money and investor confidence.