'KSE imposed floor to protect its members': SECP body endorses viewpoint of CCP Appellate Bench

The committee constituted by the Securities and Exchange Commission of Pakistan (SECP) to investigate stock exchange crises of 2008 endorsed the viewpoint of Appellate Bench of the Competition Commission of Pakistan (CCP) that the primary reason for the imposition of the floor by Karachi Stock Exchange (KSE) was to protect its members.
The report, called 'stock market crises 2008' issued by the SECP here on Tuesday disclosed that as stated by the Appellate Bench of the CCP, the primary reason for the imposition of the floor by the KSE was to protect its members and it may not be correct to say that it was in public interest.
Giving credit to the CCP, the committee's report said that the Committee has also benefited from the two comprehensive rulings of the Competition Commission of Pakistan (CCP) - by single bench comprising Dr Joseph Wilson dated March 18, 2009 and by Appellate Bench comprising Khalid A Mirza as Chairman CCP and Ms Rahat Kaunain Hassan, member CCP dated November 26, 2009. The CCP while taking a notice of the decision to impose floor on the prices as violation of Section 4 of the Competition Ordinance, 2007 (which later became the Competition Act, 2010), also provide insight into the process of imposition of the floor.
According to the committee headed by Shamim Ahmed Khan, the decision to impose the floor on prices of securities announced by the three stock exchanges separately on August 28, 2008 was noticed by the CCP for inquiry under section 37 of the Competition Ordinance 2007 which later became Competition Act of 2010. After detailed examination of the issue and hearing of the three stock exchanges, the CCP held the separate decisions of the KSE, LSE and ISE to impose a floor or fix the minimum sale price of securities to be anti-competitive and collusive action as these fell within the purview of section 4(1) of the CCP Ordinance. The order was passed on the grounds that it had the effect of preventing, restricting and reducing competition in the market. The orders also pointed out that by imposing artificial minimum price, it created a barrier to entry and by allowing the off-market, it created a private market which disadvantaged the buyers and sellers as they could not procure competitive prices. The orders also observed that the decision virtually entrapped investors and prevented them to sell securities at a price lower than the price fixed by floor.
The report said that the CCP which had also taken the notice of the imposition of the 'floor' as a possibly anticompetitive measure has also discussed the negative role of off-market. It has been pointed out that "it (off-market) moved buyers and sellers away from a direct contact available in an exchange setting and forced them to trade privately thereby increased the risks necessarily incident to a private market. The decision thus created asymmetric information for buyers and sellers.
It may be pointed out that the Appellate Bench of the CCP obtained a report from the KSE regarding loss of liquidity in the market. The report, which was prepared and submitted during the course of hearing by the KSE, indicated that "although we agree that liquidity declined, the report in no way establishes that there was an excessive loss of liquidity as envisaged by the regulations.
In its response before the CCP, the ISE took the stance that both ISE and LSE had decided to impose price floor reluctantly after the KSE had already implemented this decision. It also explained that both ISE and LSE being a unified trading platform (UTS) decided to follow the KSE. The role of the LSE and ISE before and during the crisis of 2008 establishes the fact that the two stock exchanges are not able to function independently of the KSE. This may rebut the argument that their existence generates competition among the three stock exchanges. This experience may justify integration of the three stock exchanges. Alternatively, the Lahore and Islamabad Stock Exchange should consider creating exclusive niches for themselves like platforms for trading of Small and Medium Enterprises (SMEs) and debt securities, the committee report added.
The force majeure provision in the RM Regulations does not appear to have been followed by the three stock exchanges either in letter or in spirit. In this regard, the Appellate Bench of the CCP in its order dated November 26, 2009 has made some pertinent points. Firstly, while determining a force majeure event KSE did not follow the established principles of law which required it to prove that force majeure circumstances existed notwithstanding its own efforts. The justification of loss of liquidity for the imposition of the floor became questionable in the light of the report submitted by the KSE to the Appellate Bench. The Committee is also of the view that while exercising powers under force majeure of the RM Regulations, the KSE board should have applied its mind to determine that an emergency or exceptional market condition existed in the market and after making reasonable determination should have consulted the NCCPL and CDC. It appears and as argued by the KSE in the CCP case, the KSE board imposed floor under clause (e) which empowered the KSE to take or omit to take all such other actions as the KSE Board deems to be reasonably appropriate in the circumstances having regard to the positions of the Exchange, Clearing Company, the Members and other customers." The Committee is of the considered view that clause (e) does not give a blanket approval to the KSE to impose floor on prices and the said clause must be interpreted in line with the other clauses and reasonability of the decision must be ensured, it added.