KARACHI, Aug 21: The Securities and Exchange Commission of Pakistan (SECP) on Monday issued a directive to the Board of directors of Karachi Stock Exchange (KSE) seeking “a comprehensive rationale” of the decisions taken by the Board in its meeting held on Aug 17.
The principal decision in that meeting was the lifting of ban on short sale in future contracts from September.
Over the years, investors at the bourse have been given to run about in panic first and read the contents of any communication from the chief regulator at Islamabad, latter.
So was the case on Monday, when the KSE-100 index dived by 81 points. Corporate results were not to be blamed for companies including National Bank of Pakistan posted healthy earnings growth.
Ironically, Monday was the first day of the beginning of short sale in September future contracts. And investors ought to have taken positions in the morning, until the arrival of the notice of SECP at mid-day. Does it speaks volumes about the efficiency of Regulators?
A member said that confusion prevailed throughout the day on whether the SECP had given its nod to the Aug 17 change of certain rules or it had outrightly rejected them. A director on the Board, who asked not to be named, said that it was neither.
The board on Aug 17 had notified certain steps that included the continuation of the mechanism of lower circuit breaker at 5 per cent or Re1, whichever was higher and the withdrawal of prohibition on short selling in futures contracts from Sept 2006.
“The board had specifically mentioned that the implementation of the decisions were subject to approval of the SECP,” the member said and the SECP had now conveyed that the Board’s decisions should not be implemented prior to the approval of the Commission.
The SECP was well within its right to ask for clarification and rationale for quick changes in the rules.
It was on June 14 that the board had put a temporary ban on short sale in future contracts together with limiting the lower circuit breaker mechanism at 5 per cent or Re 1, whichever was higher, when it sensed a complete collapse of the market.
That day the index had dipped by 548 points, representing the biggest ever single day decline in the history of the exchange.
The board’s apprehension of a complete crash of the market the next day was genuinely founded for according to the circuit mechanism in place then, the stocks would have dipped by as much as 20 per cent in one day on June 15.
Through a late night emergency meeting the board took the wise decision of limiting the loss to 5 per cent and the ban on short sale in future contracts. That worked and helped to stem the rot.
But since on Aug 17, the board had again reverted to allowing short sale in futures, the chief regulator had now requested the board to present to it a “comprehensive rationale” on the quick change in decisions.
A member director explained that the SECP had asked the board to study the models in other countries, such as India, Malaysia, Singapore and Middle East and support its decisions with steps taken by those markets under those unusual situations.
The SECP may not have rejected the KSE board’s decisions of Aug 17, but the confusion on Monday does show the extent of communication gap between the apex regulator (SECP) and the front-line regulator (KSE).
At the current moment an equal number of SECP nominated directors sit on the KSE board with a non-member chairman.
Should it have taken five days for the SECP to react to the board’s decisions? Doesn’t the market efficiency dictate that the notice issued by SECP on Monday, Aug 21, over the steps announced by the Board on Thursday, Aug 17, should have come to public notice the very next day i.e. on Friday, Aug 18.