KARACHI, Aug 2: “We must sort out the issues”, Prime Minister Shaukat Aziz said at a meeting with Dr Salman Shah, adviser to the prime minister on finance, and chairman Securities and Exchange Commission of Pakistan, Dr Tariq Hasan on Monday. Credible sources said that the meeting held with the prime minister did not propose any concrete, immediate measures so desperately needed to pull the stock exchanges out of the current crisis.
The inconclusiveness of the talks gets further credence from the fact that no official announcement came up from either the government, the SECP or the KSE. Until late in the evening, officials at the Karachi Stock Exchange (KSE) were going back and forth to the fax machine to see if a communiqué from the Securities and Exchange Commission of Pakistan (SECP) was rolling out. But none was. Earlier, in anticipation of a positive announcement from the KSE, investors resorted to massive buying “on rumours” that lifted the KSE-100 index by 129.81 points on Tuesday. But well past the 48 hours (both clockwise and working hours) that were promised by Dr Salman Shah, a decision on standing issues seemed still to be resolved. The extension of time and cap on ‘badla’ financing is at the heart of the problems.
A meeting was set to be held on Wednesday between the adviser and Shaukat Tarin, the senior banker who heads the committee formed to propose measures to restore the market to health. Members of the committee told Dawn that the Tarin Committee had made two fundamental suggestions: First to relax the elimination of ‘badla’ or COT financing for a short period of time, until the alternative products, including margin financing were fully developed. “Currently, margin financing exists just in name. There is lack of use, modalities, understanding and acceptance”, said one member. In such a case to block badla, with no alternative means of financing in the hands of investors has choked the flow of funds into the market, the member contended. He said that it was suggested that for the time being Continuous Financing System (CFS) be introduced in place of ‘badla’ after addressing the regulatory concerns of the SECP associated with ‘badla’. It was also proposed to raise the cap on COT from Rs12 to Rs20-25 billion.
Despite repeated attempts, communication could not be established with the bigwigs of the SECP: chairman, Dr Tariq Hasan or Commissioner, Shahid Ghaffar. But the reservations of the SECP on ‘badla’ are well known. Sources at the KSE said that an emergent meeting of the board of directors was held on Saturday and its single item agenda was approved and passed on to the SECP the same day: amendment to eliminate brokers’ margin from margin financing. The KSE source said that the software had been put in place by Monday evening.
As the stock brokers’ livelihood depends on selling optimism most of them naturally thought that the issue would be resolved in a day or two. Many analysts believed that the Tarin Committee’s recommendations were the most likely way as an intermediate solution. A stock broker said that nobody was up against margin financing and that it must replace badla, but the introduction of CFS looked proper, for if badla was soiled it needed to be cleaned up.
“Abolition of badla just like that is throwing the baby out with the bath water”, said one analyst. He contended that margin financing was just a speck in the stock market financing in India, where most of the cash came from futures and options. A member argued that there was no dearth of liquidity, but absence of alternative products that could be an immediate replacement of badla. He suggested that Futures market may be encouraged by removing restrictions such as heavy cash margin required to be deposited. That could be another alternative to badla.
It has to be seen if the government, the SECP and the Tarin Committee can be brought together to an acceptable solution. Or another committee would be formed to ‘sort out’ the issues raised by the Tarin Committee: “The government must take a quick decision, one way or the other”, said a senior member, adding “uncertainty is always the worst enemy of a capital market”.