The shock waves of the stock market crash are
still giving sleepless nights to the investors after the recent jolt
to the high flying KSE-100 index, which caved in from soaring 10,000
points to creep below 7000 points.
The apparent reasons for the crash, which has
become the talking point from a house wife to a big business houses,
are attributed to the amendments in stock exchange regulations
including phasing out of badla financing and amendments in future
trade rules, some of the market players were, however, of the view
that there was more than what it meets the eye in the capital
In a bid to find out the real factors behind the
whole scenario PAGE has tried to find out answers of the
various queries and inquisitiveness which continues to perturb the
mind of the investors in the context of recent crash.
Dr Tariq Hasan, Chairman Securities and Exchange
Commission of Pakistan (SECP) while explaining the causes of the
crash in the stock market and how the SECP, with all its vigilance
and monitoring set-up, could not foresee it? says: "I would say
that the market experienced abnormal volatility during the period of
January-March 2005. There could be several causes for irritant
market behavior such as over leverage positions by certain operators
in ready and future market, privatization news and over weightage of
certain shares in index and certain brokers which blocked exit of
panic sellers. However, the market remained open throughout the
period in spite of increase of 65% during the period January 1 to
March 15, 2005 and decline of 30% during the period March 16 to 31,
2005. There was no systemic failure in the market and the integrity
of the system remained intact in spite of wild fluctuations in
prices of certain shares. This was possible only due to vigilant
market monitoring by the SECP and the reforms introduced by it
during the past few years which worked well".
Replying to a question whether he was satisfied
with the role played by the SECP as a regulatory authority to
control or contain the crash and save the small investors, Dr. Tariq
Hasan said "I am fully satisfied with the role of SECP and the
reforms introduced by it. The risk management system in place at the
exchanges worked well. All trades were well settled and marked to
market losses were collected in accordance with the relevant
regulations. There were no defaults. Their system remained intact.
In order to provide immediate relief to investors, the Commission
has established a special on-line investor complaint cell on its
official website. The Commission is committed to take all reasonable
measures to ensure that complaint is responded within a single
How you will defend yourself against the general
criticism of the performance of the SECP as voiced in the national
press such as: (i) The SECP has failed to prevent the stock market
crash. The SECP was sitting smugly and watching the stock market
blooming artificially. (ii) Why the SECP did not raise the red flag
when a heavy-weight like OGDC was under intense market rumors and
going up and down, without any reason.
"We have a free press and I would not
comment on their role. Investment in stocks is a risky investment.
Our market is characterized by abnormal volatility, concentration in
a few scrips and Badla (Carry Over Trades) factor. In spite of all
these, the market integrity remained intact. In stock markets share
prices keep going up and down. SECP is the apex regulator of the
capital market and does not interfere with the movement of the
market, irrespective of its rise and fall. This is a normal feature
of any market and is solely determined by market forces. SECP
regulates the market and not the market sentiments."
Answering to a question that though it is not the
SECP's duty to fix share prices, but at the same time, it was their
responsibility to have acted in time. They should have investigated
much earlier and identified who was behind the possible
manipulation. But the SECP just closed its eyes and let it happen.
The SECP Chairman conceded "I agree that it
is the responsibility of the SECP to take enforcement action against
cases of possible market abuse such as market manipulation or
insider trading. SECP has the power to take action against market
abuses. However, white collar crimes like manipulation or insider
trading are complex and take considerable time and effort to detect.
Let me also add that in recent months SECP has taken action against
quite a few cases of market abuse.
To a question that the SECP moved to amend
exposure rules and putting bar to open group accounts in the CDC
from 31st of this month is the actual factor responsible for the
constant equity fall. And the new risk management regulations put
forth by the SECP which were not well received by the brokerage
community triggered the market's collapse?
The Chairman said the decision to abolish Group
Account was taken on January 6, 2005 and market sentiments remained
bullish from January 1, 2005 till March 15, 2005. Similarly, the
SECP directive dated March 4, 2005, for further strengthening risk
management had hardly any bearing on the bullish trend and the
market continued to move upward till March 15, 2005.
When asked to give remarks that the SECP
insisting to phase out badla with margin financing without ensuring
that margin financing facilities from commercial banks are available
which led to the crisis in the stock market, Dr Tariq said: "I
don't think that phasing out of COT led to the fall of the market.
The decline in the market was due to excessive leverage position in
the ready and future market in few shares and other factors.
When this scribe invited his attention towards
the current situation where market seems to have stabilized during
the current week. What steps SECP intended to initiate to avoid
recurrence of such crisis and to ensure sustainable growth and
development of stock market?
The Chairman came out with the remarks"
"No body can claim that a similar crisis cannot occur again.
What is important is effective risk management. SECP has recently
taken certain steps for further strengthening risk management. Also
the second generation reforms such as demutualization of exchanges,
the replacement of COT by margin financing and closure of Group
Account will go a long way towards the development of a fair,
transparent and efficient market.
Has the task force constituted by the SECP to
investigate into the crisis of last month crash in the stock market
completed its task? When its final report is expected?
The Chairman said: "The task force is
presently working on the report and the question may be directed to
the Chairman of the Task Force who is the relevant authority in the