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Need to find out the reasons why stock exchanges have agreed to bring all the listed companies under T+3 system despite initial resistance

By SHABBIR H. KAZMI
June 11 - 17, 2001

The equities market has continued to display its erratic behaviour this quarter. Index shooting up suddenly followed by quick profit taking which brings the index to around 1300 level. The market has remained range bound, between 1300 to 1400 points, over the last four to five months. With no fresh positive news on the economic or company fronts, it is possible that the market may remain range bound during July-September quarter also.

Some players are pinning their hopes on the federal budget 2001-2002 to move the market. However, some analysts say that the pre-budget rally has lost steam. Within one month index gained 40 points and took the nose dive. These analysts say, "This movement had nothing to do with serious investment and possibly everything to do with another attempt at price manipulation."

If one looks at the index movement during last three or four years, it is evident that in certain periods, the speculative activity was in full swing with large difference between the index highs and lows, while in other periods the index remained largely range bound or even dropped. It appears that this behaviour may be linked to which group has more dominance during any given period. For example, it may be noted that when 'Badla ' providing group has dominance, the market is generally less volatile and trading volumes are more normal as this group prefers steady income from its 'Badla ' activity. The price manipulating group thrives on high volatility and volumes as this allows it to indulge in short selling and depress the prices across the board according to their own positions. Once they have built up sizable lots and taken long positions, they tend to create rumours and sudden buying activity to pull in other investors. They use the bullish sentiments to liquidate their positions and make handsome gains in the process. It will be interesting to see what happens once T+3 system comes into play. How will the market manipulators behave then?

It may be a coincidence but the very scrips open to price manipulation in the past, i.e. large, liquid, high volume scrips, have been chosen by the stock exchanges for inclusion in the proposed Futures trading. May be the big players see a chance to continue their activity under the rehashed 'Wada' arrangement. Of course, a lot depends on how the Securities and Exchange Commission of Pakistan (SECP) responds to exchanges proposal. It may also be noted that while in Karachi only two scrips are currently under the T+3 system in Lahore a larger number of scrips fall under the System. One may wonder why this is so?

RESISTANCE AGAINST T+3

At this juncture it is also necessary to understand the reasons for resistance against T+3 system. Members were against inclusion of certain companies under the System but have now agreed to bring all the listed companies under the T+3 system according to a time frame, proposed by themselves. Does it prove some commentators' theory that the sole reason for delaying the SECP's original time table for the T+3 system was to protect a group of powerful players who have historically been identified as possible market manipulators of some of the large liquid scrips? By delaying the T+3 system, they have gotten the chance to liquidate their positions and redefine their speculative strategy.

The SECP is involved in a very important decision making regarding the T+3 system and Futures. Investors expect the regulators to stand firm in the face of unreasonable resistance by vested interest. The backing off by the SECP on the T+3 issue made it look like a 'sleeping watch dog'. It is hoped that the same story will not be repeated regarding Futures trading and the Commission will ensure that Futures is really exchange traded Futures and not some other speculative vehicle in the disguise of Futures.

The SECP also needs to gear up its corporate governance function after having hired high profile professionals. One has yet to see any significant case of the Commission going after erring companies or those where disclosure has been inadequate or where the rights of minority shareholders have not been looked after. Although, new ordinance regarding full disclosure of investment/lending to associate undertakings is a good step, but the real test is whether the SECP ensures its implementation and enforcement of these regulations while also taking swift action where companies do not follow the same.

These issues are not academic but have a direct influence on investors' confidence. If people see a strong regulatory system which is creating a fair ground for minority shareholders and corporate governance is improving, then automatically the reputation of stock market investments will improve. If not, the general perception of stock market being a gamblers den will continue.