IF the proposed ABAMCO-30 Index of the Karachi Stock Exchange (KSE) as an alternative to the KSE-100 index delivers on any of its promises, if not all, that will be of great help to the investors on KSE.
Investors on KSE have been pleading for distinct improvements in the KSE-100 share index, devoid of many of its distortions, but the exchange has not been helpful because of the insistence of powerful pressure groups or the big fish on it.
Now ABAMCO- 30 sponsored by the Jehangir Siddiqui and his group of investment companies propose an index devoid of many of the distortions and inadequacies of KSE-100. And that is to come publicly operational in September, after receiving adequate inputs from various relevant sources.
Like the ABAMCO-30 Index, the sensitive Bombay Index - the Sensex - has also 30 shares against the general index of all shares listed on the exchange and there has been little of complaints against that index despite many other controversies on the exchange. The SENSEX is to peak to 7000 for the first time now, unlike the KSE-100 which hit 10,030 in mid-March before its decline and shuffling around to touch 7000 again.
Although it is called KSE-100 shares, PSO, PTCL and OGDC form around 50 per cent of the index. Other energy shares too dominate the index. Adverse fortunes of any of these companies or negative speculation can affect the index unduly. The KSE-100 is far from a healthy or truly reliable index.
Another feature of the market capitalization of the shares quoted on the KSE is that it includes all shares of the companies quoted on the KSE and not only the shares open to public trading. For example, while only 12 per cent of the shares of the PTCL had been sold by the government earlier, all the shares of the PTCL, including those in the hands of the government, were shown as a part of the market capitalization of the company which was totally misleading. As a result, the market capitalisation of the quoted companies became three or four times actual amount.
That seemed to enhance the importance or value of the KSE, but was far from the reality. The same is true of the market capitalization of the shares of the National Bank of Pakistan whose majority shares will continue to be held by the government as the lone government commercial bank.
The ideal investor is the one who buys shares with his own money plus what he can borrow from the banks according to his financial worth and the value the shares he trades on.
But what we saw on the KSE was the speculators gradually ousting the investors or the investors turning out to be speculators using Badla money at high interest rates to buy shares, and add to their wealth.
As a result, the Badla rates went up to 18 per cent and even 24 per cent, and in Lahore during the peak period of the share prices it rose to 1,000 per cent for short- term lending which proved to be the long-term destruction of such speculators intent on a big kill with borrowed funds.
Some of the abuses on the KSE were checked when T-3 was introduced for making payment. That means payment for shares bought had to be made on the transaction day plus three days instead of that being delayed for long and the sellers waiting for prices of shares to fall before delivering the shares.
The other key step to prevent abuses on the exchange was setting up the Central Depository company which verified the authenticity of the shares and prevented trade in duplicate shares by the sponsors of companies. The CDC also held the stock on behalf of the share-holders which made quick transaction easy.
A third reform is to come now. And that is margin financing by banks of share buying according to the strength of the shares and the financial resilience of the borrowers in place of Badla. Margin financing is far more healthy.
The Securities and Exchange Commission has approved margin financing and formulated the rules. And the State Bank of Pakistan has asked the banks to provide the funds. And the PICIC Commercial Bank has set apart Rs2 billion for the purpose.
It is certainly better for the buyers of shares to rely on banks to provide credit for purchase of good shares than be goaded by the brokers.
Some of the smart brokers were always in business either they were making money by buying and selling shares or by providing Badla funds at high interest rates. But now the banks will take over the second task. But will Badla disappear altogether or stay on in some informal farm as the banks become choosy about the share they back? Rules are not always diligently followed on the KSE and on many other exchanges.
Now the number of mutual funds is on the rise fast. More and more investment companies are coming up with new mutual funds and some of them are doing exceedingly well.
Meanwhile, the NIT is eventually to be privatized to which the unit-holders are opposed. Its net assets are valued at a record of Rs66.616 billion and its dividend income at Rs2.707 billion and a net profit Rs4.248. It is natural for the unit holders to oppose privatization of the NIT whose price had gone down far below the face value in the late 1990s.
Yet another of the listed entities of KSE has become a causality of a fraud by its top officials and arrest warrants have been issued against the senior officials of the Islamic Investment Bank.
It is more like the case of another KSE entity, the UNICAP Modaraba whose new management vanished into Dubai with its entire assets and defrauded the Modaraba holders. It is indeed extraordinary that people who set up Islamic finance institutions behave in such a total un-Islamic manner.
Whether the banks are generous with their margin finance facility or not, plenty of money is available with the banks. During the last 11 months ending May, bank deposits rose by Rs327 billion which can be drawn by interested persons to buy shares and speculate in them when very profitable.
The KSE is interested in its futures trade while those involved in the cotton trade are not interested in future trading in cotton. Earlier, the All Pakistan Textile Mills Association was very keen on that because of its varied benefits, but is now opposed to that. Here too the speculators want to gain by their short-term play instead of long term planned development.
Slowly, the KSE is moving towards maturity. The brokers and members of the exchange are forced to accept the reforms, one by one slowly. The investors are now awaiting the report of the inquiry set up on the exchange in respect of the debacle of March 15 and the fast build-up towards that.
Meanwhile the culprits are on the air waves to explain what happened, and who was responsible for that, absolving themselves of all responsibility. The victims of the transactions did not get much of a time to be on TV to explain what happened.
We need a countervailing force in the KSE to check the big fish on the rampage. Mr Moin Fudda as the managing director of the KSE brought a sane or rational voice to the KSE but his authority to check the rot is limited.
What remedies the SECP committee suggests and whom it pinpoints for the follies of March 15, may show the way in which the KSE may move in future months, and years avoiding yet another March-line debacle.