Feb 09 - 15, 2009

During the recent stock market crisis, which still haunts investors, people who have invested in mutual funds also have to bear the brunt. Not only that NAV of most of the funds nosedived but sale and redemption of units of open end funds remained suspended for a long time.

It may be true that the recent equities market crisis can be termed 'most horrendous' because the aftershocks are still jolts. Investors overwhelmingly believe that the crisis was not because economic fundamental had gone uncanny but it was the outcome of a weak risk management system being followed brokers, stock exchanges and the apex regulator, SECP. Pocking of nose by all and sundry further complicated the issue and the wounds are still bleeding.

To begin with some of the sector experts are all critical of the business model being followed by the asset management companies. They say, 'Mutual funds having exposure in equities market instead of following a long-term investment policy also became 'day traders'. Initially the obsession was not keen, but the lust to make fortune through capital gains created the bubble, which has to burst one day. The additional fuel was provided by the Badla providers, under the umbrella of income fund. These funds mostly deployed the receipts in Badla financing. Since the returns were high more and more investors preferred to invest in income funds.

It is also being said that failure in installing a bailout or opportunity fund dampened market sentiments. But very few critics admit that taking 'leveraged positions' created the worst mess. Some of the critics also attribute the crisis to CFS Mark-II system being managed by National Clearing Company of Pakistan (NCCP). However, no one can offer a plausible reason for investors' assuming risk beyond their capacities.

Though, some of the brokers still do not admit that they are solely responsible for most of the equities market crises, they tell only half the truth. Lately, media pinpointed that brokers pledged shares kept in investor accounts. Instead of admitting their breach of confidence, it was blatantly said that they had investors' blanket permission. One of the brokers went to the extent of saying, "There is a clause in account opening form which allows the broker to pledge the shares and if investors have not read this, it is their mistake because ignorance is no excuse."

Coming back to the point that investors of mutual fund could not remain immune to the crisis, some experts say that one of the reasons is a very small free float which gives power to a few to set direction of the market or abuse it. According to one of the cynics this market has always been driven by the brokers, who have also emerged to be the biggest investors in the market. He also includes brokerage houses, asset management companies, banks and insurance companies possessing the largest percentage of shares and also term not available for sale. He believes that free float is not even more than 5% of the total listed capital.

Recent stock market crisis also has also created heartburn among the investors of mutual funds. They hardly thought that mutual funds would refuse to redeem their investment. According to a unit holder, "I was under the impression that investing in open end fund was like maintaining an account with a commercial bank. I could buy/sell any time I like but this time I have lost the confidence. I just refuse to accept any reason for suspending sale/redemption. I was also disappointed because elsewhere in the world in case of crisis the government extends a helping hand but in this part of the world, virtually no effort was made. The explanation given was that since the government itself is facing financial crisis I could not extend a helping hand. I am amazed because most probably Pakistan has the largest number of ministers at federal and provincial levels, MNAs and MPAs are paid huge remuneration. However, to support this extravaganza PSDP budget is curtailed and the central bank is also forced to meet budget deficit rather than extending money to the private sector for the creation of new manufacturing facilities.

As regards enhancing free float, the government is also responsible for the prevailing precarious situation. Though, in office for nearly a year, it has not come up with policies capable of ushering in a new phase of investment. It may be true that the country faces external and internal threats but the government has not been able to restore confidence of investors. The result, hardly any new company is being listed at the local exchanges. For nearly 18 months privatization program is at standstill.

For revival of interest of investors in equities market the government must announce the following at the earliest: 1) exempting dividend income from tax, reducing tax rates on listed companies, making listing mandatory if shareholders' equity of a private limited company exceeds a specified limit, listing of all the state owned enterprises on local stock exchanges and offering of at least 10% shares of these companies to the general public.

However, prior to offering of shares state owned enterprises, the SECP and the stock exchanges should be asked to clean the prevailing mess. However, while making any decision interest of all the stakeholders, particularly the small investors be given prime consideration.

If the government is really serious in boosting GDP of the country, making equities market vibrant is a must. Since there are no DFIs operating in the country, stock market should be used for mobilizing capital either through public offering by the listed companies or issue of debt instruments.

Proliferation of the mutual funds sector and its profitability is directly dependent on robust economy. No investment can b expected unless people have confidence in government policies, working environment is friendly and security of investment is guaranteed. Investors' confidence cannot be restored by politically motivated statements but only by acts.