Given the importance that the March crisis has assumed in our stock market, the strengths and weaknesses of this report needs to be examined to judge whether or not it has served a meaningful purpose.
Let’s look at the strengths of the report. First, it displays two rare virtues, integrity and courage. Directly or indirectly, most commentators have acknowledged it provides facts and considered opinions of seasoned professionals who were not subject to conflicts of interest or unable to withstand pressures. It gives its views in clear terms without ifs and buts and criticizes without fear. This is no mean achievement by any standard.
Second, it has not disappointed the investor who wanted to know the truth behind the March crisis. It candidly states that it cannot pin point any one manipulator or group of manipulators for the March crisis but makes available information that allow readers to draw their conclusions.
Any one familiar with the intangible nature of market abuse, lack of transparency in trading and custody, and our weak legal framework would not have expected any pin pointing from the report.
Had it tried to pin point, the move would have back fired. The accused, through their resources and connections, would have easily obtained a favourable verdict from the relevant legal forum, thus diluting the value of the report. Most recently, this was seen in the case of a financial institution which was fined for rather blatantly manipulating prices of securities in violation of Section 17 of the Securities and Exchange Ordinance 1969 but later managed to get a favourable order from the Appellate Bench of SECP by cleverly exploiting legal technicalities.
Third, it strikes the right balance between the broad terms of reference given to the task force and the limited time and resources available. Investigations take a very long time and the report does well to cover the core issues and leave the rest to the SECP and exchanges.
The report also has its weaknesses. First, it does not bring out that it was the political stakes that some government high ups had taken in the stock market that precluded timely corrective action in the run up to the March crisis. It could have clearly stated that a rapid rise or fall in KSE-100 has little, if anything, to do with economic realities of the country and it is wrong to cite this index as evidence of success or failure of macroeconomic policies.
In its recommendations, it should have added that the capital market is going to face issues on an ongoing basis and that each time government functionaries should not try to step in the shoes of the institution that the government itself has given the mandate of regulating the market.
Second, it has given more emphasis and space on operational issues and less on governance. It is true that intra day price limits can block exit from open positions, exchanges have limited surveillance capacity, there is lack of systematic audit trail in stock market trades etc, but these things do not represent the real problem. This is because time and again such operational problems and their solutions had been highlighted.
The real problem is lack of good governance in concerned institutions that did not allow the operational problems to be solved. It was back in November 2002 that a report was prepared, and later made public, on circuit breakers that identified the weaknesses in the present system and suggested solutions which were not implemented. It was in March 2003 that exchanges had been directed to establish effective surveillance wings and implement universal client identification system but that too was not implemented. The report should have given more emphasis on the issues of governance.
Third, it has some technical deficiencies. Some observers have identified that some of the intra-broker wash trades mentioned in the report could be legitimate trades that happened due to execution of an already entered limit order with a new order placed by the same person.
Moreover, quantities involved in alleged wash trades should have been reviewed for materiality. The report recommends gross margining but is silent about its pre-requisites and implications. Gross margining would inevitably require substantial changes in the present systems of stock exchanges, particularly implementation of universal client identification system.
Gross margining would also substantially increase working capital requirement for brokerage business and adversely affect trading volumes. It has also used some spicy terminology, like “nightmare,” “unholy nexus,” “graveyard market,” which is best avoided in such a sensitive report.
The report has disappointed those who, like a mob, wanted to see a hanging after it was made public. Not surprisingly, some have termed it a “chronology” even though it has made public confidential information and provides critical evaluation of all the key institutions involved.
Some observers have focused on the missing data of bids and offers assuming that this missing piece of information would have led to some “master mind” or “evil genius.” They choose to ignore the obvious that even if that data were available, it would not have been able to serve as conclusive evidence due to the same reasons that apply to the data that is available.
To the informed observer, the report has failed to bring out something new and rightly so. If our market is still struggling to deal with issues that should have been long resolved, then any such report ought to bring out the same issues. It has also shocked those who look at the market in isolation from the rest of the country.
Given the grave governance problems plaguing the country, a prudent person would not have expected that the capital market would be any different. Investors should have known the grim conclusion: “the repeated crises have shown that presently, this is not a place where small savers can invest their life long savings on the strength of fundamentals.”
On the whole, the strengths of the report outweigh its weaknesses and it has served a meaningful purpose of bringing out the truth about the March crisis and set a healthy precedent for future investigative reports.
For the investors, the best aspect of the report is the impact it is making on the stock market. Before it was made public, one could hardly listen to anything in the stock market but the controversy about margin financing and badla phase-out.
After it was made public, the overall attention has shifted to accountability and reform of institutions. With the tremendous media coverage given to the report, the stage is being set to do things that previously did not look feasible.
The apex regulator is sending show cause notices to even the most influential brokers and the top management of the regulator is seen answering difficult questions being asked by the members of the parliament. This wave of transparency and accountability, even though unsustainable, is a reason for the capital market to celebrate - a much better reason than the KSE-100 hitting 10500.