Regulators must look into the current muddle and take corrective measures immediately to protect the interest of investors

Oct 06 - 12, 2003

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 story.

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 Badla system.

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.