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Capital Market Update

  1. Interview with Regional Commissioner Income Tax
  2. Shell a beneficiary of rising oil prices
  3. Credit cards become more expensive
  4. Capital market update
  5. Need to boost national savings
  6. Is WAPDA out of crisis?
  7. IPPs to pay 4% withholding tax
  8. Pakistan poverty alleviation fund project

The need for better self-regulatory system

SECP must also keep a watch on erring brokers

Sep 20 - 26, 1999

Trading volumes and index movement at Karachi Stock Exchange (KSE) has been directionless for quite some time. Bulk of the buying continued to come from institutions, which make selective purchases at dips. Large retail investors remained entangled in payment issue, causing general speculation about another bout of distress sales. Falling retail activity has taken a major toll on volumes which came down by 30 to 40 per cent since August. With much of the speculation gone, prices are again becoming range-bound and also drifting downwards. Most players are wondering which segment of investors will give a fresh push to the market. This uncertainty is pushing many investors to the sidelines, forcing them to adopt a wait and see approach.

While many analysts subscribe to the above mentioned point of view, some analysts say that local market is not efficient. They say that technically the flow of information disseminated to all participants should be around the same time. However, some select groups have access to inside information. These groups have also emerged to be big retail investors and market is led by them. These analysts even go to the extent of saying that had there been an active participation by foreign investors the surges would have not been there.

The market efficiency had improved a lot with the emergence of research sections in almost all the brokerage houses. However, these groups, having inside information, have bulldozed the efforts of these brokerage houses. These large-scale retail investors are the key players at Lahore and Islamabad and also make purchases through their selected brokers from Karachi. The level of their holding can be gauged from a fact that they recently bought 25 to 30 million shares of Fauji Fertilizer, besides purchasing large number of shares of other blue chip companies.

It is said that some of these businessmen were originally from Karachi and have shifted their base to Faisalabad, Lahore and Islamabad now. They have entered into equities trading lately as they enjoy ample and low cost funding from commercial banks. These groups also have contacts in Islamabad and managed to get inside information rather easily. It was also said that they are actively involved in huge trading in HUBCO shares. If one can recollect contrary news, used to be published in a section of the press. In this confusion some made millions and many burnt their fingers, but small investors were hurt most profoundly.

Some of the analysts say that another large retail investor from Lahore, who has access to the details of negotiations and court proceedings has been the source of contradictory news regarding HUBCO. It is estimated that this individual, at any given time, buys and sells HUBCO shares in lots of millions of shares. This raises two basic questions: 1) What is the source of funds of this individual? and 2) Who are his brokers. Apparently he should not have funds in such a quantum. Therefore, he may be taking the advantage of lag in buying and settlement.

This raises question regarding exposure limit of brokers, the self regulatory procedure of Lahore and Islamabad stock exchanges and the responsibility of the Securities and Exchange Commission of Pakistan (SECP). Many of the analysts believe that Lahore and Islamabad stock exchanges and SECP are not discharging their due duty. Whereas, Karachi Stock Exchange has been more active and efficient. Therefore some of the investors prefer to trade through two Punjab based exchanges.

Some of the analysts also say that KSE-100 index movement is also a reflection of the perception of the investors about Pakistan's economy. For a considerably long time interest of foreign investors in Pakistan's equities market has been very low. The market is driven by large-scale retail investors. The philosophy of these two types of investors is 'poles apart'. While foreign investors used to invest for short to medium terms, local investors buy when price go down by 50 paisa and sell when price go up by 50 paisa. Since the ultimate objective is to make quick buck they rely more on inside information rather than economic fundamentals for the company.

Other reasons forcing the serious investors to sideline are: Pakistan-IMF relationship, precarious foreign exchange reserves position of the country and the inability of the government to boost economic activities. Persistent fear of strikes has further dampened the prospects for revival of the economy. The stock market is driven by sentiments but one cannot ignore economic fundamentals. Since the confidence of small investors has been badly shaken in the recent past, only institutional investors and large retail investors drive the market. The lower trading volume is also the result of preoccupation of large retail investors in settlement.

To bring back the serious investors into the capital markets, it is necessary that SECP and the two stock exchanges located in the up-country should improve self-regulatory system. There is also a need to adhere to the exposure limits of brokers and impose heavy penalties for violation of code of conduct.