KSE rebounds with curbs on short selling
EDITORIAL (June 25 2008): The Securities and Exchange Commission of Pakistan and the Karachi Stock Exchange, on Monday, took some emergency measures to avert the systemic risk in the wake of persistent fall in the market. Plus-minus five percent circuit breakers were changed to one and 10 percent for lower and upper single day movement in a share.
Short selling in deliverable futures has been banned. And, bank guarantees from 'A' rated banks have been allowed as margin in place of cash and securities. The SECP Chairman said these temporary measures are aimed to stabilise the market while protecting the existing risk management system of the exchange.
The acceptance of bank guarantees as margins, fulfils a long pending demand from the market players. It not only reduces the cost of doing business, but also enhances the liquidity (which is tight at the moment) and potential of participants to undertake more business.
Deliverable Futures Contract is a derivative product. It is a tool for arbitrageurs, hedgers and speculators. Prohibiting short selling in futures contract takes away a basic feature of the product. Therefore, this ban at best can operate only for a few days.
The cash as well as index futures systems are yet to take off. Is this due to supply side shortage on account of a ban on institutional participation? Or is it due to the opportunity for earning easy money through CFS, by institutions, the real reason for their failure? SECP and the Mutual Funds Association need to address this issue.
The SECP has restricted guarantees issuance to 'A' and higher rated banks. This may be in consonance with the eligibility of banks for participation in CFS Mark II system (beginning next month). The scope needs to be enlarged to include all scheduled banks.
After all, since the State Bank of Pakistan stands behind these institutions as the lender of last resort. Removal of this restriction would provide market participants greater opportunity and also escape monopoly of big brokerage houses and big banks.
Market players used to complain that the lock mechanism was not providing them an opportunity to exit. Well, they had an opportunity to do so on Tuesday. Where did all the sellers vanish? Why was every one a buyer yesterday? How come, no one availed of the exit opportunity? Something, indeed is not right!
Big brokers and KSE Directors had promised that the KSE Index would go back to the 15,000 level if the present capital gains tax free regime is extended for two more years. The PPP co-chairman, Asif Ali Zardari, despite opposition from both Finance Minister Syed Naveed Qamar and the Economic Advisory Council led by Shaukat Tarin, obliged the directors. But then the index after recovering for a day or two continued to drop.
Obviously, the ongoing political turmoil, the tightening of monetary policy, the persistent macro-economic imbalances and governance issues to check an economic down-slide weighed on the market. The fall of regional markets due to the food and oil (upward) price pressures showed KSE's fall was not exceptional.
But lately the value of a number of blue chip stocks on KSE dipped to low levels. There was no apparent logical reason for institutional investors, mutual funds or overseas fund managers to remain on the sidelines and not buy on such attractive prices.
Tuesday's market behaviour only reinforces the belief that these savvy investors were apprehending manipulation to push the market down. Who was doing it and for whose benefit needs to be probed. The decision to allow bank guarantees as margin will help in generating liquidity for the market.
Let us hope that this additional liquidity stays in the country and does not flow out for more real estate investment in UAE. Political stability and growing economic opportunities will bring the money back. If it happened after 9/11, it can happen again. But conditions to absorb this inflow must be there.
The SECP needs to lower the financial limit for Real Estate Investment Trust (REIT). The affection, respect and love the rich Pakistanis receive within the country are not available anywhere else, not even across the Gulf.
The opportunity provided in the budget to bring assets from grey to the tax economy by paying 2 percent tax is not a sufficient inducement. The return earned on investment in agriculture, industry and infrastructure projects needs to be more than the existing return potential provided in the tax evaded sector.
Business Recorder [Pakistan's First Financial Daily]
