ORDER: 1. The Competition Commission of Pakistan (hereinafter the "Commission") took suo moto notice of Circulars/Notices issued by Karachi Stock Exchange (hereinafter "KSE"), Lahore Stock Exchange (hereinafter "LSE") and Islamabad Stock Exchange (hereinafter "ISE") for placing/fixing a price floor for securities.
KSE notice KSE/N-501, dated 27th August 2008, addressed to all of its members, conveyed the decision of KSE board to place a floor on the trading price of the securities based on the closing price of securities as on 27th August 2008 and was to take effect from 28th August 2008.
Subsequently, LSE and ISE both followed the price floor decision taken by KSE vide their Circulars/Notices No 2042 and ISE/CIR/08/101, respectively issued on 28th August 2008. At issue in this case is whether the placing of floor (or fixing of minimum price) on the trading price of listed securities by KSE, LSE, and ISE during trading sessions amounts to "fixing the purchase and selling price . . . of any goods or the provision of any service" thereby violating Section 4 of the Competition Ordinance, 2007 (hereinafter the "Ordinance"). I affirm.
I. Background
A. Undertakings
2. Karachi Stock Exchange (Guarantee) Limited was incorporated under the Indian Companies Act VII of 1913 (as applicable to Pakistan) on 10th of March, 1949 as a company limited by guarantee, and is a registered stock exchange under the Securities and Exchange Commission Ordinance, 1969 (hereinafter "KSE").
KSE was established "to conduct, regulate and control the trade or business of buying, selling and dealings in shares, scrips, Participation Term Certificates, Modarba certificates, Stocks, Bonds, Debentures, Debenture stock, Government papers, Loans, and any other instruments and securities of like nature including but not limited to Special National Fund Bonds, Bearer National Fund Bonds, Foreign Exchange Bearer Certificates and documents of similar nature issued by the Government of Pakistan or any agency authorised by the Government of Pakistan." (KSE, Memorandum of Association, Part. IV (1).) KSE is an Undertaking as defined in clause (p) of Section 2(1) of the Ordinance.
3. Lahore Stock Exchange (Guarantee) Limited was incorporated under the Companies Ordinance, 1984 (XLVII of 1984) in October 1970, and is also registered under the Securities and Exchange Ordinance, 1969. LSE is an Undertaking as defined in clause (p) of Section 2(1) of the Ordinance.
4. Islamabad Stock Exchange was incorporated under the Companies Ordinance, 1984 (XLVII of 1984) on October 25, 1989 and it became operational on August 10, 1992 (Object Clause III(1) of Memorandum of Association of Islamabad Stock Exchange). ISE is an Undertaking as defined in clause (p) of Section 2(1) of the Ordinance.
5. Generally, all the three undertakings, to wit, KSE, LSE and ISE are responsible for conducting, regulating and controlling the trade or business of buying, selling and dealing in shares, scrips, stocks, bonds, debentures, and any other instruments issued by the Government of Pakistan or any institution authorised by them.
THEY PROVIDE FOLLOWING MARKETS FOR THE PURPOSE OF TRADING IN EQUITIES AND DERIVATIVES:
i. Regular Market
ii. Odd Lot Market
iii. IPO Market
iv. Future Market (Deliverable and Cash Settled Futures)
The Undertakings are self-regulatory bodies and have adopted regulations for listing of companies and also for the admission, conduct, expulsion and suspension of members and the mode and conditions under which the business by their members is carried out (Object Clause III of Memorandum of Association of KSE and LSE, and Object Clause III(4) of LSE).
6. A stock exchange provides trading facilities for stock brokers to trade stocks and other securities. Trading facility is traditionally a physical facility, but now with the advances in technology it could also be an electronic facility in which multiple participants have the ability to execute or trade agreements, contracts or transactions by accepting bids and offers made by other participants in the facility or system (http://www.traderslog.com/Trading-Facility.htm). In addition, a stock exchange provides facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends.
7. Under the Securities and Exchange Ordinance 1969, a transaction on a stock exchange must be made between two members of the exchange (Section 8(1), Securities and Exchange Ordinance, 1969; 8. Restriction on dealing in securities: (1) No person shall transact any business in securities on any Stock Exchange unless he is a member thereof).
Such a transaction must be done through as a stock broker, which is a regulated profession (Section 5(A), Id.) (5A. Brokers or agents not to engage in business without registration: No person shall act as broker or agent to deal in the business of effecting transactions in securities unless he is registered with the [Securities and Exchange] Commission in such manner, on payment of such fees and charges and on such conditions as may be prescribed.) (See also, Brokers and Agents Registration Rules, 2001; Notification No SRO 299(1)/2001, dated 10th May, 2001).
No person is allowed to act as a dealer in a security which is listed on a stock exchange outside of such stock exchange (See Section 8(3) of the Securities and Exchange Ordinance, 1969; 8. (3) No person shall act as a dealer in a security listed on a Stock Exchange outside such Stock Exchange. For securities which are not listed on any stock exchange, there is an "over-the-counter market," which is a decentralised market where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor. There is no central exchange or meeting place for this market.
B FACTS
8. Feeling the repercussions of the global financial crisis, the securities market in Pakistan witnessed a downward trend starting from 28th March 2008, when KSE-100 index was at 15,268 points (Letter by Mr Adnan Afridi, Managing Director, KSE, dated 27 August 2008, addressed to the Chairman, SECP, submitted by KSE along with its reply to Show Cause. [hereinafter "KSE Letter"]). From April to June 2008, the KSE-100 index fell by 4500 points.
On 23rd June 2008, the Securities and Exchange Commission of Pakistan (hereinafter the "SECP"), in consultation with brokers changed the circuit breakers from their -5 to +5 per cent range to a -1 to +10 per cent range, creating an asymmetric system of breakers: prices could go down only 1% but they could go up 10%.
According to one financial analyst, soon after the circuit breakers were revised "investors started realising that a market could not artificially be given a direction and if trades had to occur, a 1% lower breaker would only delay the fall in prices. All too often, the circuit breaker was hit and trading stopped because buyers and sellers refused to transact at the price permitted on the screen. Circuit breakers converted price risk into liquidity risk.
Average daily volumes fell to a 10-year low to around 20 million shares a day, from last years [2007] daily average of 240 million shares. Brokers started feeling the consequences of the SECP decision as their volume driven income depleted." (Junaid Khalid, Karachis Experiments with Circuit Breakers in 2008, available at http://ajayshahblog.blogspot.com/2008/12/karachis-experiments-with-circuit.htrnl). On 11th July 2008, the range of circuit breakers were restored to their original range, ie, -5 to +5 per cent.
9. The market kept plunging, the KSE 100-Index came down to around 9000 points on 26th August, 2008, and the KSE Board held a meeting with various stakeholder the same evening. Next morning, that is, on 27th August 2008, the KSE Board held two meeting with its members, which were attended by 35 and 103 members of the KSE respectively.
"The members showed disappointment at the failure of public institutions in supporting the Equity Market Opportunity Fund. They also indicated being not in a position to further sustain the losses and handle the margin calls made by the Exchange as well as their lending bankers. The 100 out of 103 members, urged the Board for flooring the price level of securities based on the closing price of the market as of August 27, 2008." (KSE Letter, supra note 8.) (Emphasis added).
10. On 27th August 2007, KSE issued a notice, bearing reference number KSE/N-501, to all members conveying the decision of the KSE Board to place a floor on the trading price of the securities based on the closing price of securities as on 27th August 2008. The Notice is reproduced here below in toto.
Member of the Exchange are hereby informed that the Board of Directors of the Karachi Stock Exchange, after holding extensive consultations with stakeholders (including its members, fund managers, other exchanges, etc) held an emergency meeting today. The Board observed that the continuous sharp decline in share prices can have implications for the wider financial system.
In view of the above, the Board, in terms of the powers described in the Regulations of the Exchange, decided to place a floor based on the closing prices of securities of Wednesday, August 27, 2008, both in the Ready and Futures Market, whereby the individual security prices will remain free to trade within the normal circuit breaker limits, but not below the floor-price level of August 27, 2008.
It was decided to introduce the above mechanism effective from August 28, 2008 till further notice. The Board will engage SECP, State Bank of Pakistan and the Ministry of Finance to develop medium term measures for achieving stability in the capital market. (Emphasis supplied).
11. On 27th August 2008, at 07:21 pm, (after business hours and presumably after the release of Notice No KSE/N-501 by KSE) Ms Musarat Jabeen, Director - Stock Exchanges Policy and Regulations Wing of SECP, sent an email, addressed to Mian Shakeel Aslam, Managing Director, LSE, and to Mr Aftab Ahmad Chaudree, Managing Director, ISE. The said email was placed on record by the LSE, and its contents are reproduced here below:
SUB: PREVALENT STOCK MARKET SITUATION
Dear Sirs, In view of the present continuous declining trend of the stock markets and the consequent possibility of systematic risk resulting in disruption of timely and smooth settlement of trades, the Karachi Stock Market has proposed the following:
1. Freezing/flooring of market at 9,144.93 (KSE 100 Index level);
2. Market closure for a definite/indefinite time period and/or
3. Market continuation
You are requested to furnish your views on the above KSE proposal in light of the existing stock market situation. Additionally, please confirm us your respective stock exchange position vis-à-vis risk management ie, margin collection from members, protection of clearinghouse, etc.
Yours truly,
Musarat Jabeen
12. On 27th August 2008 at 9:10 pm, Mian Shakeel Aslam, of LSE replied to the email of Ms Musarat Jabeen. The contents of Mian Aslams email are reproduced here below:
Dear Musarat
As discussed I have discussed the matter with board directors/ members. Our general view on this is that interfering directly with the market mechanism can have negative repercussion for the market and the confidence of investors, especially foreign investors.
We are of the view that certain other measures should be taken to help support the current volatile situation. Such measures should include amongst other things the following:
1 Stabilisation/support fund to inject funding into the market
2 Abolishing/reducing CVT
3 Making a requirement for listed companies to distribute a minimum of 40% of its profits as dividend (we believe that a similar measure was taken back in 2002 or so?)
We feel that the above measures will help support the market in the longer term as opposed to short term measures that may have longer term consequences.
Further we would like to point out that at this point the clearing house of the LSE is fully under control through the adoption of the required risk management procedures/rules and as a result the required margins are intact.
However this said, if the KSE does decide to freeze or close the market then the LSE will follow the same in order to avoid technical/procedural problems and avoid any distortion of the market and hence maintain uniformity.
Further, we are of the view that of the two proposed options, if these are to be adopted, then it would be better to freeze the market than close it and also freezing the market should not be for a day or two, but for more of a sustained period of time.
Should you require further information on this then please let me know?
Regards
Shakeel
13. Interestingly, Mian Aslam had a discussion with the LSE Board Directors and Members, and formed an important decision of placing the floor "for more of a sustained period of time" in less than two hours time, and communicated it back to the director of the SECP. Before the competition commission of Pakistan in the matter of Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange (File No 1/Dir(Inv) KSE/CCP/08).
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Date of hearing: 14th January 2009
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Present: Dr Joseph Wilson Member
Present for Karachi Mr Kamal Azfar, Advocate
Stock Exchange: Mr Haider Waheed, Advocate
Mr Rafique Umer, Company Secretary
Present for Lahore Mr Salman Raja, Advocate
Stock Exchange: Mr Waqqas Ahmad Mir, Advocate
Present for Islamabad Mr Aftab Chudhry, Managing Director
Stock Exchange: Mr Waris Niazi, Deputy Secretary
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(To be continued)
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