CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- COT WEEKLY REVIEW

3- FINEX WEEK

4. STOCK WATCH
5. STOCK MARKET AT A GLANCE
6. BADLA SYSTEM GETTING OUTDATED?


BADLA SYSTEM GETTING OUTDATED?


COT curtain will be finally drawn on August 26, 2005

 

By SHABBIR H. KAZMI
Updated Apr 23, 2005
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The crisis in the stock exchange, which began as a correction, came near to a default has been prolonged by the administrative crisis between the nexus of Karachi Stock Exchange management, the Board and the Securities and Exchange Commission of Pakistan (SECP). The regulator has been trying to use its influence and authority to implement the phase out of Badla (COT), which is currently the main source of credit to the market. However, the members of the stock exchange, and indeed anyone who has a fair bit of idea about the working of the stock market, believe that the termination of the credit facility through Badla in the absence of any margin-financing product would lead to a tight liquidity crunch. The two parties, the members and the SECP are at loggerheads with each other on the issue, and the market remained unstable on the fluctuating news of the negotiations. The interest rates hike last month is further putting pressure on the market, more so by amplifying negative sentiments than on fundamentals.

It is unfortunate that due to an administrative and power struggle, the working of the capital market has been disrupted. The Prime Minister once again has to intervene and direct the Minister of State for Finance, Omar Ayub Khan to meet the stakeholders and resolve the dispute. The issues relating to COT were resolved on Thursday when the Minister accompanied by the Chairman, SECP, Dr. Tariq Hassan and Commissioner Securities, Shahid Ghaffar met the Board of Directors of the Karachi Stock Exchange at SECP's regional office in Karachi.

The Minister in his opening address said that the government under the leadership of President General Pervez Musharraf and Prime Minister Shaukat Aziz will continue to take steps towards providing enabling business environment and as a result all the macro-economic indicators are positive which is reflected by the growing GDP rate. He particularly referred to the capital market reforms which have been successfully carried out over the last five years and emphasized the need for the expeditious implementation of second generation reform in the capital market.

Keeping in view the current market situation, following decisions were taken during the meeting:

1) The freezing date of April 29, 2005 for COT positions, stands withdrawn in pursuant to the request made by the Board, management and members of the KSE.

2) The extended date for COT phasing out shall be August 26, 2005 instead of August 3, 2005 as notified earlier.

3) The weekly reduction of outstanding COT positions shall be 8.25% instead of 12.5% w.e.f. June 8, 2005.

4) The revised list of eligible securities for May 2005 future contracts would be announced the same evening.

The Board of Directors of the Karachi Stock Exchange and present on the occasion, former chairman KSE Board, Arif Habib, on behalf of the brokers community at large, assured the SECP and Government of Pakistan that there would be no further request for COT extension and COT would no longer be dependent on margin financing. However, all parties would make concerted efforts to promote margin financing.

While the resolution offers a silver lining, it is also important to point out that SECP and KSE Board as well KSE management need better coordination. At times investors got a perception, from the acts of SECP, that members were interpreting the rules to suit their business. However, the news alleging one of the nominee directors of the SECP of insiders trading raised question about the conduct of nominee directors.

One also tends to get a feeling that there is nothing like 'small investor' in Pakistan. The shares of listed companies are mostly owned by sponsors, financial institutions, mutual funds, other portfolio managers and high net-worth investors. Bulk of the daily trading volume also pertains to these groups. Therefore, the SECP and KSE management must try to contain 'market abuse' by these groups.

PHASING OUT OF COT SCHEDULE

S. NO.

SHARES

EXISTING PHASE-OUT DATE

EXTENDED PERIOD FOR PHASING OUT W.E.F. 03-06-2005

PERIOD DURING WHICH COT POSITION WILL BE REDUCED

WEEKLY REDUCTION OF OUTSTANDING POSITION (SHARES)

1

2

3

4

5

6

1

PTC

April 22, 2005

August 26, 2005

June 8 to August 26, 2005

8.25%

2

HUBCO

April 29, 2005

August 26, 2005

June 8 to August 26, 2005

8.25%

3

NBP

May 6, 2005

August 26, 2005

June 8 to August 26, 2005

8.25%

4

POL

May 13, 2005

August 26, 2005

June 8 to August 26, 2005

8.25%

5

DGKC

May 20, 2005

August 26, 2005

June 8 to August 26, 2005

8.25%

6

OGDC

May 27, 2005

August 26, 2005

June 8 to August 26, 2005

8.25%

7

PSO

June 3, 2005

August 26, 2005

June 8 to August 26, 2005

8.25%

Source: Karachi Stock Exchange