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The muddle at capital market

Is Karachi Stock Exchange heading towards a head-on collision with the Securities and Exchange Commission of Pakistan?

Jan 22 - 28, 2001

Members of Karachi Stock Exchange (KSE) have opposite views on the recent directive of the Securities and Exchange Commission of Pakistan (SECP) regarding amendments in the Articles of Association of the Exchange. One group suggests negotiation with the SECP to convince the Commission to soften its stance. The other group consider the directive an assault on the sovereignty of the Exchange. Whatever course the KSE may decide to follow, it is necessary to understand the circumstances which are leading towards the legal battle.

According to some analysts, apparently the SECP was forced to take such a harsh step due to delaying tactics/paying no attention to the apprehensions of the Commission. It may be unfortunate that since Khalid Mirza has takenover as the Chairman of the Commission, capital market has witnessed a crisis like situation. These analysts say that the May crisis was the result of poor governance and self regulatory system. The Etrat Rizvi report also pointed out certain weaknesses in the regulatory system. The immediate reaction of the KSE, to this report, forced the regulators to read the report again and again. Every time they read the report, the conviction for the need for better regulatory system strengthened.

In a democratic society regulators are not desired to issue directives and instructions. Both the regulators and players have to look into problems and the players themselves have to take remedial measures. Till recently it was believed that the stock exchanges have appropriate self-regulatory system. However, the May crisis opened the Pandora's box. According to some brokers the SECP initially applied the persuasive approach. The KSE, despite making promises, did not take the measures suggested by the Commission. One of the brokers said, "The suggestions made by the SECP were hardly discussed at board meetings." If one assumes this statement a fact then the credibility of not only the KSE members but the SECP officials also becomes questionable. The first step would be to find out who was talking on behalf of the KSE and the SECP, why no minutes of meetings were recorded and what was the reason for taking such important meetings so casually.

One may get a clue from the fact that Arif Habib, the then chairman of KSE, agreed to the appointment of SECP nominee as chairman of the Central Depository Company (CDC). The Etrat Rizvi report had suggested that the KSE chairman should not be the chairman of the CDC. According to the Articles and Memorandum of the CDC, the KSE chairman was to act as chairman of the Depository and the same has been followed since CDC was established. Surprisingly, members of the KSE either did not note the change or were told not to talk about this for any unknown promise made with the SECP.

According to an investor, "I am amazed why the SECP nominated members on the board of directors of KSE don't act prudently. Is their duty is to attend board meetings only? They must act as eyes and ears of the SECP and should also take initiative if they observe any deviation from the laid-down regulatory mechanism. I have my rationalization: either they do give enough time to look into the affairs of the stock exchanges and the reports being published, or they are also the active players/have interest in equities market and try to drive benefit from the inefficiency and lack of transparency of the market."

Assuming that the KSE opts, for which the probability is the highest , to go to the court of law, the court may allow status quo. This may allow the erring brokers to continue their assault. However, it will also provide an opportunity to the SECP to examine the day to day operations of the stock exchanges microscopically. While the element of speculation is the driving force of the stock trade, the probability of manipulation has to be minimized for the protection of investors.

Saying this much the statement of a broker must be read carefully by every investor. He said, "The investors should not term brokers to be solely responsible for their losses. One needs either specialized skills to invest and to make profit in equities business or has to depend on the advice of brokerage house. However, he/she has to make the final decision and to bear the responsibility. Unfortunately, many people consider investing in equities market the best way for making a quick buck or a fortune, but they completely ignore the highest probability of losing life-savings."

To conclude one should remember the words of an investor who made a fortune and also lost his entire savings. He said, "The equities market in Pakistan grossly lack transparency and efficiency. Brokers are on the board of directors of listed company who also indulge in insiders (a person have the undue advantage of information) trading. The regulators not only lack skills but also fail in discharging their duty. Therefore, the investors, who are not able to understand the intricacies they have the highest probability of losing their life savings.