KARACHI, June 10: Investigations into stock market manipulation (if any) would be carried out as long as it takes to get to the bottom of the matter, chairman Securities and Exchange Commission of Pakistan (SECP) Razi-ur-Rehman Khan told Dawn on Saturday.
A 15-member team of SECP officials led by chairman had swooped on the Karachi and Lahore stock exchanges on Friday, to investigate, what the regulator thought provided ‘preliminary evidence’ of market manipulation by some brokers.
Now, such manipulation was not “all in a day’s work” kind of thing but had wiped out as much as Rs677bn ($11bn) from the paper value of corporate Pakistan. That was represented by the dip in market capitalisation of country’s premier stock exchange at Karachi, from Rs3,460bn to Rs2,783 billion in just about 35 trading sessions. Between April 17 and June 8, the KSE index of 100 shares plunged by 2,428 points (20pc).
The SECP did not mince words in identifying what kind of manipulations could be suspected to have taken place: “blank selling and short-selling beyond permitted limits, misuse of CFS-financed shares and wash trades”. All those, the regulator said were “designed to drive prices down”.
Interestingly, on Friday, the SECP left a door ajar: “It is strongly advised that brokers should review their positions and if any inadvertent malpractice has slipped through, these should be rectified immediately. The SECP shall take a lenient view of any remedial action taken voluntarily by the broker till close of trading on Friday (June 9),” the regulator said in his order.
It really is a mystery why the SECP should have allowed positions to be squared up. If the delinquent brokers were given the time and opportunity to put their house in order, what does the regulator hope to find? Mr Razi, when queried, said that he did not mean that all transactions could be straightened out but if by a mistake some small disallowed trade of say 5,000 shares had passed through, the broker should rectify that error.
Regarding the delayed action by the SECP, Mr Razi observed that as front line regulator it was the responsibility of KSE to monitor such irregularities (if any). “But when the index slipped by 622 points in two days (Wednesday and Thursday), we had to intervene”. On Friday the market had opened in the red by over 300 points, suggesting that it would end up as the blackest day in the history of the stock exchange. But after that stern statement from SECP and two press releases one by the board of directors of KSE and the other by the management, the market suddenly took a u-turn to the north, gaining all that it had lost that day and finishing 75 points in the positive at the close of trading.
On Saturday, the team of SECP officials was looking around the KSE record rooms and had not entered any of the brokerage houses.
The ordinary small and medium-sized investor, who could not hold on to his portfolio for over a month, must have lost his last rupee as the stocks plummeted by 20 per cent. Do they have faith in the investigations? The general sentiment on Saturday was one of despondency. “Three previous investigation reports, one on the March 2005 crisis; the second on May 2000 market manipulations and the third that was prepared in early 1950s, had all come to nothing”, said Mohammad Farooq, a small investor who had to sell a shop and three room flat in settlement of his margin calls.
The ray of hope in all that gloom and doom was that the market would perhaps take its path to the North. That was warranted by the fundamental values of shares, many of which were ‘blue chips’, but had bottomed out to an attractive levels of single digit multiples. The big question mark however was: How much volume of trade would the market be able to generate, given the drop after the imposition of double the Capital Value Tax (CVT) to 0.02 per cent and more importantly the hugely shaken confidence of the general investors?