Jun 05 - Jun 11, 2000

The players, regulators and investors must realize the ground realities and start working in a prudent manner

There are many lessons, both for the regulators and the investors, in the recent fiasco at Karachi and Lahore stock exchanges. It is heartening to note that KSE emerged stronger than LSE mainly because of its better self regulatory mechanism. However, there is a dire need to redefine members' exposure limit and to monitor this more stringently. At the same time Securities and Exchange Commission of Pakistan (SECP) and State Bank of Pakistan should be more vigilant. They must be capable of reading a storm in making rather than letting the tornado devastate and then collecting the debris.

Two factors were responsible for the recent fiasco in the equities market — greed and fear. It was the greed which made many brokers to increase their exposure and once the market stumbled, fear gripped all causing unprecedented selling pressure. However, one should be very clear that there was no change in economic fundamentals.

It is true that the bubble has finally burst. Therefore, it is necessary to investigate who were responsible for the building of this bubble. For a long time equities analysts were pinpointing that KSE-100 upwards movement was not supported by substantial change in economic fundamentals and the market was pushed up with the help of borrowed funds.

For some time it has been said, "money is being used to destabilize the country". The recent fiasco indicates the people who have used money to obliterate the process of consolidation of equities market. It may not be difficult to establish 'who are the front boys and who is the syndicate chief'.

The first pick of these speculators was HUBCO. When the market was able to understand their modus operandi, the speculators spread/widen their selection of equities — added other volume leaders and blue chips. These included Adamjee Insurance Company, PTCL, Fauji Fertilizer, ICI Pakistan, Sui Southern and even KESC.

Though a large number of speculators belong to Lahore they initially chose KSE as the centre of their activities. However, with the listing of HUBCO at LSE and KSE members becoming more choosy, Lahore became the centre of their activity. Involvement of some unscrupulous elements gradually become too naked in HUBCO trading. Therefore, they moved away from HUBCO. This is also evident from the recent large scale settlement where HUBCO was conspicuous by its absence.

While one KSE member was able to salvage his card another member lost his seat after temporary suspension. At present six (6) members from LSE face suspension. Trading at LSE has remained suspended on two days but members have virtually got four days to settle. Since the defaulted amount was very huge, it was imperative to first call for settlement of transactions before allowing trading.

Some of the members from LSE are blatantly saying that KSE is not cooperating in resolving the issue. They tend to forget that both the stock exchanges are independent and autonomous bodies and each has to resolve its own problems. It must also be kept in mind that it was a KSE member who had lost the card whereas LSE members face temporary suspension only. It is on record that KSE has played an active role in the formation of the consortium to buy the shares of suspended LSE members to avoid the adverse impact of the inability to settle their liability. Even in the case of Hanif Moosa, who had lost his card, KSE was more than generous in trying to bail him out. It is unfortunate that instead of accepting the generosity of KSE he chose to relinquish his card.

Though, the sea looks calm, the storm is still not over. The following weeks may witness some turmoil. It depends a lot on the attitude and availability of funds at the disposal of the consortium and extent of cooperation of suspended members. It may not be wrong to assume that commercial banks will also redefine their strategy towards margin financing.

It is true that people have short memory, stockbrokers with the help of stock exchanges should come up with strategy to ward off such crisis in future. They should only entertain retail investors enjoying credibility and sound financial position. Moreover, they should avoid huge exposure in any single scrip.

It is true that equities market operate on speculation supported by fundamentals but it is also true that very soon greed overpower sanity. When share prices go up, even without any plausible reason, many who have no knowledge of equities market jump into it. They are mostly seduced by the brokers — the dream merchants.

Although, the KSE directors have done an excellent job in averting the crisis, there is a need to redefine members' exposure limit and follow it more stringently. Both KSE and SECP must follow qualitative criteria for scrips to be accepted as security requirement. Since SECP has declared Badla investment having no legal coverage, all the stock exchanges must try to stop this activity as early as possible.