Often measures are ill timed and efforts are half hearted

SHABBIR H. KAZMI, Special Correspondent
Dec 25 - 31, 2006

The year 2006 will be remembered in the history of Pakistan's capital market for a number of reasons. The KSE-100 touched record high in March and then there was a nosedive, leading to a crisis. Various steps were taken to strengthen the risk management system but bad timing further plunged the index.

Two reports were prepared to identify the causes of 2005 and 2006 stock market crises and pinpoint the culprits. Neither the Taskforce nor the Forensic report could identify the culprits because the motive was to create further confusion rather than focusing the facts which led to the crisis and people who were either responsible for it or made a fortune. This belief is also substantiated by the forensic report on which thousands of dollars were spent.

Having said this it is pertinent to note that despite all odds the market has sustained 10,000 levels, mainly because investors did not miss any profit making opportunity. They indulged in buying whenever prices became attractive and also did not miss profit-making opportunity.

During 2006 at least six public offerings were made, some receiving good response and one not receiving the minimum number of applications. Interestingly all the offerings were for equities and no debt instrument were floated. Perhaps the possible rationalization could be that borrowers expected decline in interest rates and therefore, they were not keen in locking funds at higher interest rates.

Issue of GDRs by MCB Bank and OGDC deserve specific mention. MCB mobilized US$ 150 million through sale of its GDRs, listed at London Stock Exchange. The issue was oversubscribed by five times. According to Aftab Manzoor, President MCB Bank, "The objective of floating GDRs was to test the response of international market and introduction of Pakistan as well as the MCB Bank. It has proved a good omen for the country as well as for the bank."

Contrary to MCB issue, offer of GRDs by Oil & Gas Development Company (OGDC) has raised many eyebrows. The general expectation was that price of OGDC share would touch Rs 200 before closure of book building. However, the GDR could not fetch more than Rs 115 per share equivalent. It was big market dampeners. Massive selling pressure was evident in the local market. As a spillover impact prices of shares across the board registered substantial decline. According to an expert, "Advisor to the issue failed in marketing the scrip". Another expert said, "It seems that global investors were told not to quote above Rs 115 so that they could make good profit subsequently." Yet another expert was of the view, "Introduction of risk management measures and hype about forensic report dampened market sentiments. The intensity of bearish sentiments could be gauged that the KSE-100 index breached 10,000 barrier on Thursday.

There is general feeling that whenever the KSE-100 index is on winning streak regulators often come up with some directive, which creates panic-like situation and leads to freefall of index. Though, forensic report failed in identifying the reasons for 2005 crisis regulators were prompt in issuing notices to brokers.

It is also felt that members are gradually loosing their control on the board of directors of stock exchanges. First, the concept of non-member directors was introduced. This year it was also decided to elect non-member director as Chairman of the Board. While one may not have any objection on the induction of non-member director or election of non-member as chairman, it would be fair to review the contribution made by non-member directors. Some of the insiders confess that non-member directors have not been able to justify their nomination. Rather some of them became regular players on the local stock exchanges.

Khalid Mirza, when he was Chairman SECP, came up with the idea of demutualization of stock exchanges. With his exit the concept was swept under the carpet. It is evident because all the subsequent chairmen were not able to convince the members to go ahead. The biggest resistance has been put forward by the members of Karachi Stock Exchange. Mainly because of the cost of ticket at the KSE.

As such the introduction of web-based trading has opened a new chapter. Bulk of the daily trading volume and financing is still channeled through less than half a dozen big brokers. By virtue of their size they would continue to benefit whether SECP goes forward with demutualization or abandon the idea. However, it seems that demutualization can become a reality due to non-member directors and chairman.

Though, it is often said that foreign fund managers are operating in Pakistan and the benchmark used is SCRAs. However, it is on record that foreign portfolio investment is highly volatile. The entry of foreign funds skyrocket the prices and their exit plunges the market to lowest levels. It is mainly due to limited number of quality scrips and very small free float.

In the recent past government had offered shares of state owned enterprises to general public under "Privatization for People" program. It is estimated that government still owns a very substantial percentage of the shares of these entities. Divestment can increase market float, which in turn reduced market volatility.