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Rs. 5 billion financing facility for stock market         

It is about time that SECP is allowed to have its way for protecting the investors.

Oct 01 - 07, 2001

Reopening on Monday after a week long suspension of business in the aftermath of recent international turmoil and fear of US attack on Afghanistan stock markets in Pakistan refused to cheerup despite best efforts of the authorities. During the last week when the 3 stock markets remained closed, the Security & Exchange Commission of Pakistan (SECP), the Ministry of Finance and the management of the 3 bourses remained busy in devising measures to save country's stock market from a crash.

The Finance Minister, Shaukat Aziz, has assured the members of the Karachi Stock Exchange (KSE) that the nationalized banks and financial institutions would arrange a financing facility of Rs.5 billion in the badla or carryover trading to salvage the local bourses after receiving a heavy backlash after the worst terrorist acts of terrorism on the US soil.

The finance minister, on Tuesday, held a meeting at the State Bank of Pakistan (SBP) where presidents of all the nationalised commercial banks, development finance institutions (DFIs) and non-banking financial institutions were present. The main motive of the meeting was to support the market out from the current depression. After the twin towers was razed in New York, all the stock markets of the world plunged. The KSE also fell drastically and needed liquidity to restore the confidence of the investors.

The State Bank of Pakistan's decision to allow a 5 per cent relaxation in the margin requirement for bank credit and the finance minister's pledge for a rupees 5 billion facility from banks for Badla trading are aimed at providing buying support to equities in the stock markets of the country.

The sagging trend in equity values had assumed alarming dimensions following the terrorist attacks on the World Trade Centre in New York which crumbled to the ground on September 11. Another attack was made on the US defence establishment, the Pentagon. Following this heart rending development, the financial centres in USA including the Wall Street were shut down for five days. In consequence, the major stock markets in the world including London, Europe, Japan and South East Asian countries have reported unabated crashes in equity values. The stock market in Karachi shed off 116 points in the 100-share index in three days, when the office bearers of the 3 stock exchanges in a meeting with the Chairman of SECP, Mr. Khalid A. Mirza unanimously decided to observe closure of activity for 3 days beginning Monday Sept.17 which was later extended for the full working week up to Friday.

Seen against this backdrop, the SBP's decision to lower margin requirement in respect of bank credit against shares is undoubtedly a time to move to stem the downhill movement in equity values. The policy conforms to the government's emphasis on the need to devise measures to counteract the pervading instability in the capital market, which if left unattended to, is likely to obstruct the process of revival of capital formation and investment activity specially in the industrial sector of the country. It may be recalled here that President General Pervez Musharraf had expressed his concern over the persistent bearish outlook in the stock market about two weeks ago. It was under his instructions that the finance ministry chalked out plans for the promotion of buying support to leading shares in the stock market so that a revival of buoyancy in the investment outlook could be initiated. For this purpose, the leading banks under the leadership of National Bank of Pakistan were advised to form a consortium with a view to injecting liquid funds into the stock markets through purchase orders for blue chips both as direct investments from banks and public sector institutions like the SLIC, ICP, NIT etc., and also by supporting important investment companies and fund managers in the private sector through offer of liberal credit facility. This programme was put into effect about two weeks ago, but as things turned out, the market failed to produce a favourable response. At the same time, after the recent closure of financial markets in the USA following the terrorist attacks, the expected recovery in equity values in the local market did not materialise.

The market had almost reached the verge of collapse on Friday when the Badla margin had increased by 200 to 300 per cent, indicating that dealers offering Badla financing were no more able to offer their services to operations in the share market except at exceptionally high mark-up rates. At this juncture the SECP and KSE reportedly intervened and fixed the Badla rate which would be charged at a maximum or 24 per cent.

As look at the world stock markets reveals that they had also been jolted by the recent events but most of them started showing signs of recovery although it appears somewhat slow but sure. The Wall Street was back in business only after three days and the European and Far Eastern markets had started shedding their bearish mode. The factors which seem to have combined to help in their recovery were that their economies have been more resilient and their governments quick in responding with supportive measures. But sectors like aviation, insurance, reinsurance and tourism qualify for special support. This should have a salutary impact on equity markets around the world. However, the panic created by the war hysteria is still there and, as market analysts believe, investors will think twice before re-entering the market as they think that the situation is fraught with high risk.

By all appearance, since Pakistan is going to be the centre of action against Afghanistan, the resultant climate for investors in Pakistan is going to be highly fluid.

However we would like to also point out that the boards running the exchanges have not stood up to the challenges. Restricting badla rate rates to 2% in a free market has resulted in individual lenders pulling out. Secondly, it is quite apparent that the so called 'Safety valves" i.e. margin requirements, exposure limits and market-to-market deals are neither being monitored nor adhered to properly. This is the precise reason why banks are risk averse in their dealings with exchange members. It is about time that SECP is allowed to have its way for protecting the investors instead of the Ministry of Finance intervening time and again in the disputes between the bourses and regulators.