It is true that any thing that goes up also comes
down and the KSE-100 index cannot be an exception. It is also true
that correction in the index was overdue but no one expected such
massive and successive fall without any change in economic
fundamentals. Now efforts are being made to justify the decline by
putting forward many rationalizations, i.e. political uncertainty,
delay in privatization of Pakistan State Oil Company, non-declaration
of bonus shares by Pakistan Oilfields and registry of HUBCO shares
owned by International Power in Central Depository System. Some
equities analysts are holding investors responsible for making
imprudent investment decisions leading to unceremonious fall of index.
However, a probe into the market behaviour does not help in finding
any plausible reason for the fall but tells us an entirely different
It appears that prevailing Badla system, rivalry
among some the largest brokers and massive short selling are
responsible for loss of billions of rupees to investors. Not only that
retail investors have lost the money but it is also feared that some
of the brokers, who have been used as 'cover', may default. The number
of brokers facing potential default may go as high as six. The rivalry
has attained such a level that these brokers may face 'financial
assassination' at the hands of the traditional saviours or Messiahs.
The popular scuttlebutt at the Karachi Stock
Exchange is that some of the large brokers created and heated up
bullish sentiments. Some of them are considered 'good guys' mainly
because their clients regularly earn good money on their inklings. The
others also join the bandwagon but this time some of the followers not
only started taking positions. As long as the big and small had the
common objective the market thrived. Incidentally, the chief operating
officer of a corporate member started playing mischievously. Since has
been earning handsome amounts for the brokerage house, no effort was
made to stop him from playing in the grey area. By the time, the
member realized the gravity of situation, the water had already gone
above the head.
The picks of 'movers and shakers' were HUBCO,
Pakistan State Oil Company, Pakistan Oilfields, Bosicar, D. G. Khan
Cement and some second tier scrips. However, the speculation was most
wild in Pakistan Oilfields. Its share prices were taken to new highs.
Since most of the leading brokers are also the Badla providers, they
also provided the fuel for the jet-flight. Though, short selling is
not allowed officially, it was common and blatant under the cover of
It is a well-known fact that people belonging to
one particular ethnic group play a very dominating role at the Karachi
Stock Exchange. If any of the members belonging to this group is in
troubled water or face a potential default all others try to rescue
him. However, the situation has turned entirely different this time.
Since the interest of saviours has been hurt default by a few look
eminent. The disarray may have caused temporary loss to the giants but
chances of their getting broke are very little. However, those who are
fragile but tried to cause dent in the domain of giants, at the
instigation of some one else, may not only loose whatever they had
earned during the hay days but also their entire life savings. The
name of a corporate member, also listed at Karachi Stock Exchange, is
also being associated with the present muddle. Its share prices has
been eroding substantially over the last couple of weeks.
Many investors are getting jittery about the future
direction of the market. Till the bout is over the scene may remain
blurred. Therefore, they should stay away from taking long-term
positions and follow wait and see policy. Since the economic
fundamentals have not gone obscure, corporate earnings are not being
adversely affected. Once prices come down dividend yield will become
attractive. The market has the potential to take a U-turn but not
before touching the low level of around 3,500 points.
The regulators, Securities and Exchange Commission
of Pakistan and the three stock exchanges have been playing a major
role in bringing efficiency and transparency in the equities market.
However, a lot has to done particularly to streamline the prevailing
Badla system. Replacement of the prevailing system with margin
financing may not help in achieving the desired results. The change in
settlement schedule under Badla system, if implemented, can help in
curbing short selling — the mother of all evils.
Last but not the least, the brokers must stick to
their mandate and abstain from taking positions. It is being alleged
that they maintain fictitious accounts and take positions through
these accounts. Since they are blessed with funds from all and sundry
they have also attained the power to determine direction of the
market. Some of the leading brokers have also floated mutual funds and
it is feared that they may park the bad investments in these funds.