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Stock exchange: Imprudent investment haunts CDA

February 04, 2012

ISLAMABAD, Feb 4: An imprudent hefty investment in stocks made way back in 2007 continues to haunt the capital’s civic agency with the market value of the shares purchased for over Rs1.108 billion dropping to as low as Rs409 million.

The Capital Development Authority (CDA) had initially invested Rs1.220 billion into the shares purchased at Karachi Stock Exchange (KSE) mainly in the prime scrip which ultimately increased to Rs1.510 billion. However, the investment was reduced to Rs1.108 billion after disinvestment of Rs402 million during the period from August 2007 to September 2008.

A CDA official, when contacted, told Dawn that things were different when the decision to invest in browses was taken. He said the initial investment of Rs1.220 billion was seven per cent of the surplus funds available with the authority at that time. The decision had been taken in pursuance of the guidelines given by the Ministry of Finance in its new policy on deposit of working balances and investment of surplus funds belonging to public sector enterprises and autonomous bodies under the federal government followed by approval of an investment policy by the board of directors of the civic body.

When contacted, prominent legal expert Senator S. M. Zafar, who recently raised the matter in the upper house, said the guidelines given by the Ministry of Finance had not been followed in letter and spirit. He observed that undue advantage of the policy had been taken to make a long-term investment in stocks for nothing. He said there was a strong possibility of corruption in the entire episode which showed sheer negligence, anyway. “It cannot be simply ignored and thorough probe must be carried out into the matter,” he remarked.

A limit of five per cent of the total funds managed by the public sector entities had been set for investment in the shares of a company which was exceeded in a number of cases. The investment in the shares of National Bank (Rs159.43 million), Engro Chemicals (Rs156.69 million), Pakistan State Oil (Rs105.85 million), Bank of Punjab (Rs100.94 million), UBL (Rs88.84 million) and D.G. Khan Cement (Rs62.77 million) are the obvious instances.

According to documents available with Dawn, the equity portfolio of CDA spread to over 24 companies dominated by shares in the financial sector, including banks, insurance and mutual funds, followed by the petroleum, auto, chemicals, textile and telecom sectors. The CDA made an investment of Rs159.43 million to purchase shares of National Bank which has now reduced to Rs68.09 million.

The civic agency’s investment of Rs100.94 million in the Bank of Punjab has now reduced to the value of Rs10.04 million. Likewise, the investment of Rs88.84 million in the UBL now stands at Rs40.19 million; Rs43.29 million in NIB shrank came to Rs3.87 million, Rs45.33 million in MCB now valued at Rs26.27 million; the investment in HBL totalling Rs45.82 million decreased to Rs31.15 million; shares in Bank Al-Falah purchased for Rs28.11 million are now valued at Rs6.76 million, that with Askari Bank bought for Rs9.25 million now dropped to Rs2.14 million and shares of Allied Bank worth Rs20.96 million down to Rs15.08 million.

The investments of CDA in other financial sectors like insurances are: Arif Habib Securities Rs45.57 million which has now plunged to Rs6.92 million; Adamjee Insurance Rs6.08 million, now at Rs1.21 million; First National Equity Rs7.79 million, currently at Rs0.25 million; Jahangir Siddiqui and Co.’s Rs49.33 million have declined to Rs1.35 million, Javed Omer Vohra Company’s Rs10.31 million are now valued at Rs0.15 million, Jehangir Siddiqui Investment Rs14.05 million are now at Rs0.40 million and Rs198,726 with Pakistan Reinsurance are down to Rs32,880.

The development agency purchased shares of Engro Chemicals worth Rs156.69 million which are now valued at Rs83.34 million, investment of Rs62.77 million in D.G. Khan Cement is now Rs13.54 million, Nishat Mills Rs36.70 million is down to Rs18.24 million, shares of Pak-Suzuki Motors Rs43.34 million are now valued at Rs10.93 million, Pakistan State Oil shares of Rs105.85 million are at Rs57.08 million, PTCL’s Rs15.74 million declined to Rs3.90 million, Attock Refinery’s Rs9.74 million plummeted to Rs5.24 million and PACE’s Rs1.99 million is now valued at Rs93,000.

The Finance Ministry through a memorandum on July 2, 2003, had allowed the public sector entities to invest their surplus funds in non-government securities; term finance certificates (TFCs) and shares up to a 20 per cent of the total fund under management. But experts believe it was not mandatory for them to go for it. Under the eligibility criterion for non-government investment laid down by the ministry, it was mandatory for public sector enterprises to set up an in-house professional treasury management system. Specifically, they were required to have an investment committee with defined investment approval authority. The committees were to be assisted by an investment management unit employing qualified staff with at least three to five years of experience of managing investment in debt and equity instruments. It was also necessary for the public sector enterprises to use the services of professional fund managers approved by the Securities and Exchange Commission of Pakistan (SECP).

More than four years after the policy was unveiled, the CDA board of directors approved an investment policy on July 18, 2007. The aim was optimum utilisation of the surplus liquidity through short and long-term investment strategies pursuing minimum and quantifiable risk for increased profitability of CDA.

Interestingly, the decision of the board of directors continues to be flouted which had placed investment in shares under short-term investment. “An investment activity which is undertaken in anticipation of capital gain within one year time horizon with the room for squaring the position at any desirable price any time during the year was defined as short-term investment in the policy.