Some have questioned the credibility of rising KSE-100 because it has persisted despite the ongoing judicial crisis, May 12 Karachi carnage, devastating rains, storms and floods, power shortages, suicide bombings including those against military targets, unrest in tribal areas, bloodshed in Islamabad’s Lal Masjid, and a worsening law and order situation in general - all of which are bound to have an adverse impact on the economy.
They point out that this is the same index, which not so long ago used to shed hundreds of points in case SECP requested any data from stock brokers to investigate market abuse. It also plunged by 25 per cent in eight trading sessions in March 2005 and 17 per cent in six trading sessions in June 2006 without any adverse economic development. How can it now brave all bad news?
They suspect that KSE-100 is opened with a jump and often a sharp recovery is staged near the close to influence sentiments. They support their views by saying that most of the trading is done by brokers on their own accounts, market has a history of manipulation and crises, the number of individual investors is extremely small, market’s contribution to real economy is minimal, and there is an unholy alliance of country’s economic managers, heads of some public sectors financial institutions, and big brokers to keep KSE-100 rising to extract political mileage at the cost of funds supplied by depositors and unit holders.
Bullish market participants, on the other hand, insist that the rise in KSE-100 is genuine and it is not affected by the way KSE-100 is constructed as KSE-30, a superior index by design, has also risen by 40 per cent during first half of 2007. They attribute market performance to reasons like country’s improved economic indicators, attractive price to earning multiples of listed companies, and foreign portfolio investment.
The impact of political turmoil and other disasters, they argue, may not be significant and this would be reflected in the upcoming quarterly corporate results. Regarding the past market crises, it is said that had they been real, market would not have attained its current levels. The rising KSE-100 is on their side but so troubled is the perception of stock market that there is an obvious lack of credibility. For its performance to gain credibility in the eyes of the average investors that stock market needs greater transparency in both trading and holdings.
First, investing public needs to know more about foreign portfolio investment, which is said to be the most important factor behind this bull run. According to Special Convertible Rupees Accounts (SCRA) data provided by SBP, there was a net inflow of $978 million during FY2006-07. SCRA figures are available by country but there is no public information available about identity of foreign investors. This lack of transparency is fuelling conspiracy theories that some of these SCRA investments could also be politically (and not just economically) motivated and or are actually made by stock market billionaires who want to cover their footsteps.
In any case, people ought to have access to periodic disclosure of identity of each and every foreign investor, investments, and disinvestments made by that investor, and the proportion of free float of each security held, be it through SCRA investments or GDR. At the same time, a delayed post-trade disclosure should not hurt the confidentiality of investment decisions. If a majority of foreign investors turn out to be mutual funds with a track record of longer term investment horizons, as claimed by some stock brokers, then this information would prove the conspiracies theories wrong.
Second, full details of trading done in regular and futures segment should be disclosed after corresponding settlement date instead of keeping trading data endlessly anonymous. At the level of brokers, security-wise and time-wise purchases and sales on proprietary accounts and client-accounts for each broker should be disclosed.
At the level of clients, security-wise and time-wise dealings should be disclosed for every client who is investing public money in listed securities, most notably, mutual funds, banks, insurance companies etc. This disclosure would clarify various issues such as the extent of broker’s proprietary dealings and the role of those investing public money. At this stage, identity of local clients investing their own money may not be disclosed to protect their privacy.
Third, there should be more information available about ‘badla’ or CFS financed positions. On-system ‘badla’ financing remains close to its cap of Rs55 billion. Due to lack of any mechanism to enforce ban on in-house ‘badla’, possibility of off-system financing cannot be ruled out. Thus total outstanding ‘badla’ financing could be in excess of $1 billion. Past crises have amply shown the dirty role of ‘badla’ financing. It would be appropriate that through the UIN system, security-wise ‘badla’ financing provided by all banks, mutual funds, and any other entity that deals with public money should be disclosed on a daily basis.
To enable public scrutiny, this information should also include the brokerage houses from which these institutions are channeling funds to the market. Due to sensitivity of financed positions, disclosure of identity of financee brokers and their clients may not be appropriate, however, it should be possible to give a security-wise break-up of aggregate proprietary positions and client positions.
Fourth, off-system trades should be made illegal. According to a news report, on July 2, 2007, the board of directors of KSE has made reporting of off-market trades mandatory with immediate effect but this is not enough. Trading system of KSE can be readily modified to enable on-system execution of large orders without exposing them to the market; therefore, there is little, if any justification, for off-market trading. It is common knowledge that off-system trades facilitate market abuse and these should be simply done away with.
Similarly, inter-exchange trading should be brought into the ambit of the UIN system in the same way as intra-exchange trading. Further, all movements of securities in the Central Depository System should be backed by an underlying trade. Free movement of securities across brokers without any requirement of an underlying trade, which is the current practice, is another way of facilitating market manipulation.
The Securities Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan (SBP) have at their disposal both the legal powers and the IT infrastructure of stock exchanges, CDC, NCC and banks to provide such disclosure in a matter of weeks. They should be aware if and when things go wrong and market finds itself in another crisis – the third in three consecutive years – there would be a thousand critics in news media, condemning all concerned, particularly the regulators.
Given that SECP has been unable to protect the investors in the past and one of the economic managers has now assumed the office of the Chairman of SECP’s policy board, come next crisis, there could be a suo moto action by the Supreme Court and some heads might have to roll. If the market performance is justified, no one should fear greater and timely disclosure in trading and holdings. Let transparency bring credibility, for nothing else would.