That amount of bank lending will take care of 14 major shares seven hot-selling shares like OGDC and PTCL and seven new shares which are the next best favourites with the market.
The prime minister has said that if the stock market leaders has better ideas or other suggestion, they were welcome within ten days. Anyway he will be seized with the issue as he wants a lively capital market and a buoyant stock exchange.
While the much-abused Badla transactions have gone, and been replaced by the CFS, the margin financing of other shares will continue.
The list of shares to be covers by the CFS will be reviewed every six months.
The brokers were so thrilled by the new financial facility and the KSE index-100 jumped up by 278 points on Monday the first full trading day after CSF began, to reach 7590 and the volume of shares rose to 327 million. After two days of sharp rise on the index, it softened on Tuesday by 32.23 points and on Wednesday by 45 points under the pressure of profit taking.
The CFS funding for each share will be available for a month. The banks love such short- term lending at high rates at a time of low interest rates. The lending took place at 16.91 per cent which is pretty high but is not meant for more than a month. So that may not seem burdensome to investors.
Step by step, the exchanges are being regulated and brought on the right path. The first step was restricting the share delivery after purchase to three days after the transaction - T + 3, instead of delaying the delivery unduly.
A great deal of cleaning up of the system was done under Moin Fudda as the first managing director of the KSE. He tried to bring in systems and methods to the raucous exchange.
But the big brokers with their vast vested interests are determined to have their own way and that brought about the mid- March collapse in the stock exchange. So, he has left after his three-year term has ended.
It remains to be seen whether they get the right man and how much elbow space in the policy and practices he will have. But now the Securities and Exchange Commission (SECP) will have to be a lot more alert than before to set things right. The SECP says, the dominance of the big brokers forbids upholding clean practice on the exchange.
The image of the KSE has, after being soiled in the late 1990s, improved so much that the foreign portfolio investment began flowing in recent months. Foreign portfolio investment in last July lone rose to $41.8 million out of which $32.9 billion were from the US.
The KSE index-100 is now around 7500. And efforts are being made for another index reflecting the price of 30 shares, like the Bombay Sensex. That KSE-30 will include the 14 shares now favoured by the CFS plus an equal number of shares in demand.
If anyone thinks the KSE index at 7500 is low and must be pushed up to the March level of over 10,000, he is wrong. The stock exchange is not for one-way trade of the index going up and up with artificial air pumped into it and then going burst.
The stock exchange is not a one-way street. What goes up too high has to come down. In 1994 even the peak of 2661 was regarded too high and it came down crashing all took a long time to resume the climb.
So any euphoric talk like, the sky is the limit for the KSE index to rise should be discouraged, if not forbidden. Stock exchange officials should be more restrained and responsible.
Pakistan does not have a large and variegated economy for the profits of companies to go up and up and the share market index keep on rising on that basis. Instead some of the companies are making very large profits, sometimes because they are quasi- monopolies. Some of them are foreign companies like the Unilever Pakistan who repatriate most of their profits to the headquarters.
When the profits are very large and prices are high should not the companies reduce their profits and give a breathing space to the consumers as well? POL prices in Pakistan have been pushed up following the rise in world oil prices. Share holders of the oil and gas companies are reaping the profits and consumers are not receiving serious consideration.
And the government is not interested in persuading the companies to reduce their prices.
At the same time, some of these companies are complaining of heavy smuggling by their competitors and others. When products made in Pakistan are very high priced, smuggling inevitably follows. The solution lies in reducing their prices first.
Now, that the members of the stock exchange and the brokers have got what they wanted-continuous support of the banks - will the share of the official revenues from the stock market rise? That is all the more essential now when the economy is expanding and the growth rate has touched 8.4 per cent.
The World Bank wants the government to raise larger revenues, reflecting the growth in the economy.
More revenues cannot be raised by tinkering with the measure as done last year and then watering it down. The Central Board of Revenue wants to levy the capital gains tax on stock trading profits as they have in the US or India.
The government has been wanting to levy the capital gains tax for a long time. But resistance from the stock exchange and its pressure on the finance minister have stood in the way. So the nemesis has been postponed year after year. But in the past the capital gains were not so high nor the companies listed on the stock exchanges so large as PTCL and OGDC. So, the net gain of the government would have been small.
The situation is far different now with large listed companies and so many of them declaring high profits. The government has a great deal to gain. But capitals gain tax is a veritable horror for the stock exchange members who will resist it tooth and nail.
Capital gains tax usually comes with a holding period for shares during which selling the shares is taxable. There can be lower level of taxation after the deadline expires and for some holding period as well.
But in Pakistan, companies are already complaining of double taxation of the same income-first in the hands of the company and then the 10 per cent withholding tax before it reaches the hand of the share holder. And in the case of share holders who do not want to misdeclare their sect, payment of Zakat, more of a wealth tax of 2.5 per cent, reduces the capital.
If in such a context, capital gains tax too comes that will be a third or fourth tax on a share holder and that will be regarded grossly iniquitous. So the government will have a problems in hand.
We have a situation in which we have too many taxes and too little revenue. 9 to 10 per cent of the GDP which has been rising along with the high economic growth and lowering the tax rate.
But the holding period for shares will bring in a measure of stability to the stock exchange and far less speculation.
We don’t need a stock exchange which is a punters’ paradise or a play field of the bulls but a place meant to promote investment with marginal gambling. But if the stock exchanges become more of a betters’ beehive and less of an institution which promotes investment, it will have defeated its primary purpose.
In a developing country like Pakistan, the focus should be on saving and investment rather than on gambling wild manipulation of shares.