The Task Force report only identifies the problem but does not suggest the remedial measures

Updated Aug 06, 2005



The Securities and Exchange Commission of Pakistan (SECP) has released the much-awaited report of Task Force on the March Crisis. This Task Force was constituted by the SECP in April and the time given was one month. First there was a delay in finalizing the report and then the Commission sat on the report for nearly one month. It was made public only when Standing Committee of National Assembly conducted a public hearing. The general impression is that the report would have not been public had the Committee not suggested to undertake fresh investigation. The SECP was also prompt in issuing notices to some brokers for indulging in activities, which it did not consider permissible under the rules and regulations.

There is a mixed reaction about the report. Some people term it a bold step of the Commission to put itself under the scrutiny. They also appreciate the work done by the committee headed by justice (Retired) Saleem Akhtar. However, others say, "There is nothing new in the report because most of the facts were already known. Bringing it on record does not serve the purpose. The Task Force, besides identifying the people/institutions responsible for the crisis, should also have suggested punitive action against those found guilty. The suggestions for capacity building of the stock exchanges in general and the Karachi Stock Exchange in particular are mere rhetoric."

It is important to recall that when the KSE-100 index was moving up and creating new records on the daily basis, many analysts had hinted towards the emerging balloon. Certain weaknesses in the regulatory and risk management systems were also pointed out but hardly any attention was paid. Rather it was often said that the index was touching new highs due to improving economic fundamentals. The euphoria was also linked with the ongoing process of privatization. But one day the inevitable happened. Since March the market has remained in the grip of bearish sentiments, despite further improvement in the economic fundamentals.

However, some of the points highlighted in the report need further deliberation, simply because unless the long existing weaknesses are removed investors' base in the country cannot be expanded. Speculation is the driving force of equities market, but it had attained the level of manipulation. It is often alleged that some of the brokers and high net worth investors have attained the power to move the market in a desired direction. On top of this, insiders' trading, though prohibited by law, is common.

The Task Force has suggested constituting index based on free float. The demand had been there for many years and it became more pronounced after the listing of large cap companies, also enjoying heavy weightage in the KSE-100 index. Many analysts have been saying that the KSE-100 index does not depict true market sentiments and often give a distorted picture of the market. This also became more than obvious when the index was moving up and also when it experienced a nosedive.

It is also pertinent to point out that there is hardly any free float available in Pakistan. Bulk of the shares is held by the sponsors, financial institutions and mutual funds. The general perception is that the free float of listed companies ranges from 15 to 20 percent. However, some of the analysts are of the view that free float is as low as 5 percent. Keeping these percentages in mind one may say that daily trading volume often exceeds the free float. This point can be substantiated if one looks at the daily trading figures of some of the volume leaders when the market was excessively bullish.

The report has also hinted about the rescue move pertaining to OGDC. There are two points of view: 1) that the market would have crashed had this move not made and led to massive defaults and 2) that it was not the best move but it was one of the possible moves to provide the immediate support to the market. Though it was said that the move was aimed at saving small investors, one cannot resist from saying that the move was aimed at saving some of the brokers from eminent default. The consortium had bought OGDC share around Rs 117 per share. Therefore, anyone holding more than 5,000 shares could not be called a small investor.

After the debacle it also became evident that the KSE board and SECP did not enjoy cordial relations, rather they faced draggers drawn situation. It was also said that the SECP was following arm-twisting policy and the KSE board was trying to influence the regulators by getting sympathies of the Prime Minister. The impression was supported by the acts of both the sides.



The SECP as well as the Standing Committee of National Assembly seem to agree on a point that further probe was needed to find out the real reasons for market crash and to identify those responsible for the debacle. A lot of moves have been suggested by the brokers as well the regulators to protect the interest of small investors. However, brokers and large net worth investors have always emerged to be the ultimate beneficiary.

The government has emerged to be the biggest loser of the stock market crisis. Government's strategy - "Privatization for People" - has got the biggest dent. Most of the public offerings of state enterprises were oversubscribed, with KAPCO creating a record, which may not be broken in the foreseeable future. As against this the response to public offering of United Bank was disappointing - subscription was received to the tune of 42 percent only.

The government is also trying hard to attract portfolio investment from the foreign fund managers. If the overseas investors get the impression that Pakistani market is not transparent and manipulation is there, they would never consider Pakistan a preferred destination for their investment. The country cannot afford to carry this impression. Let us all join the force to weed out irregularities from the regulatory system and build a transparent market free from manipulation.

Another task force should be constituted with wider membership and broader terms of reference. This task force should not confine itself to empirical data but actually listen to the complaints and grievances of people. It should also solicit comments from all the stakeholders. However, extreme care should be exercised in the selection of members of the task force.