Demutualization to increase market activity: Zafar Moti

Nov 26 - Dec 02, 2007

Brokerage houses work as an intermediary between buyers and sellers of securities in capital markets. Among three stock exchanges of Pakistan, KSE holds the largest share of capital and market capitalization. Investors-be it institution or individual-are not allowed to involve in conventional stocks trading without taking assistance of brokers. Presently, there are two hundred brokerage houses operating in KSE. Very few of them are in this business since long. The root of Zafar Moti Capital Securities (Pvt.) Ltd, dated back to 1953, when grand father of Zafar Moti had bought membership in KSE from Behram's Avari's father. Its CEO, Zafar Moti told in an interview with PAGE that it had been honoured as a longest running brokerage house of KSE which manages portfolios of institutional buyers as well as individual investors. Known as a third generation member of the Karachi Stock Exchange, Zafar Moti, has an erudite views about agents of growth of capital markets especially KSE, known for its highest dividend pay outs and capital gains world over. Capital markets of Pakistan have enormous potentials to grow further in an open market environs. Having studied ups and downs of nation's economy be it a 60's era of industrialization boom or sagging economy during martial law or privatization regime giving way to an open economy, he favours inflow of money from parallel economy into the capital market. That basically moves to generate funds for realization in primary, secondary, and tertiary sectors of the economy.

Being also a member of Lahore Stock Exchange, Zafar Moti has been director of LSE and various time of KSE. He also has the laurels of being founder member of national commodity exchange and founder director of CDC. He was a graduate of Institute of Business Administration.

Zafar said retail clientele in share market has tremendous potential to grow provided due facilities and benefits to small investors. Retail investment can be extended if investors' facilitation services improve. They should be motivated so that they could evince savings in capital market at par with parallel economy. In his opinion, individual investment should be encouraged more than corporate. Individual investors should get benefits in exposure, margin financing, capital value tax, and delivery so on and so forth; so that they get attracted towards shares holding. Easy regulations could expand retail clients' base. Currently, the rules and criteria are some of the de-motivating factors. Even, the documents required for trading from them create trouble and dissuade them to come forward to bourse.

When asked of his opinion regarding removal of cap over CFS, he replied, situation is quiet satisfactory ever since limit extended to Rs.55 billion. Equity financing through stock exchange is called continuous financing system. Cap on it is a barrier, however, he said. Unless the cap of Rs. 55 billion removes retail price facilities could not be availed during bullish market trends. As seventy percent of investors are dependent on this facility to leverage; they can gain only by leverages. Otherwise, they don't have funds to pull out full deliveries. Small investors get alternative funding facilities from future markets and other avenues all over the world. Zafar advocates free market operation.

In reply to scribe's question, "May cap removal increase over indulgence?" he prompted, over indulgence can be thwarted from available caps of margins and exposures. Retail client does not have capacity to shock the market. So, his over indulgence does not make any difference. In contrast, institutional and high targeted clients could misuse financing system. Their over indulgence must be stopped. This can be restrained through giving corporate clients benefits for holding long term investment and pump-up margins that means high margins. All in all companies, corporate clients, and institutions should be monitored and checked. The approach should be top-down instead of bottom-up, he added.

Zafar also lamented over the role of regulatory authorities which, he said, has not been supportive to medium-sized brokerage houses. Member complaint cell should be set up like investor complaint cell.

When asked of brokers maintaining their portfolios along with of clients, he said this practice, if wrong, should be un-allowed to both corporate and small brokers. It would not be justified to show biasness in this regard. Noteworthy, brokers may not be allowed to buy shares for themselves while dealing on behalf of their clients. They may be restricted to trading rights for other brokers or investors.

However, he said, demutualization would be in the greater advantage of small and large brokers and individual investors. It will give a boost to market activity.

Stock market is the place where funds are raised for the primary, secondary, and tertiary sectors of the economy. But, in reality nothing is happening. Announcement of IPOs every week could improve the situation. Profitable companies should be motivated to get listed with stock exchange. Rather, wearily companies stared delisting in the past that effected in sagging of pharmaceutical sector of Pakistan, which once showed robust performance ten years back. Because of, major scrip had de-listed.

Whether through credit regime or any other ways, facilitation should be provided to investors. Mutual funding is a way but it robs investors of decision making power. Zafar said fundamentals and benchmarks of economy are indicating better realization of funds.

In a question about short selling and speculation, he said, it is not illegal to predict future according to evaluation of market trends. Speculation exists in every capital market of the world. Malaysia banned short selling in 1997. Later, it had to allow because of international pressure. So is the case with Pakistan. If investors wish to borrow and then sell shares in an anticipation of buying them back at low value, it is up to their calculated risks. Internationally, it is permissible. Making it prohibited in Pakistan implies outflow of foreign investments as well, he said.

Regarding capital gain tax, he said, waiver of capital gain tax should persist on. If government levies capital gain tax then capital loss should also be compensated. There is already a capital value tax, which is rather huge to shatter investors' confidence. He termed CVT an anti-trading tax.