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A consortium of banks has arranged a financing line to the tune of Rs 19 billion for the stock brokers and investors to overcome the crisis created as they failed to meet the settlement of March Futures contracts. In a midnight session held on Saturday/Sunday at the Karachi office of Securities & Exchange Commission of Pakistan, SECP Chairman Dr Tariq Hasan and Commissioner Shahid Ghaffar and COT (Badla) financiers agreed upon steps to arrange the funding for settlement of outstanding amount of Rs 23 billion and roll over the March future contracts in an extra-ordinary session held on Sunday between noon and 9pm.
The steps included transfer of KSE funds amounting to Rs 35 billion (in the ready market) as well as Rs 11 billion in the future market plus Rs 2.75 billion of undistributed profit to the six banks having branches at KSE (Allied, Al-Falah, PICIC Commercial, MCB, Metropolitan and KASB). These banks will offer margin financing to KSE members to rollover/settle the March Futures transaction.
A committee was formed under the chairmanship of Jahangir Siddiqui to negotiate with banks to lend a helping hand. Siddiqui pledged to inject Rs 6 billion he had withdrawn for Badla finance.
Chairman, State Life Insurance Corporation of Pakistan, Kamal Afsar pledged to provide Rs 2 billion from Slic in the March future settlement. On their part, Aqeel Karim Dedhi and Arif Habib committed that they do not need any help to roll over the March future contracts as they had arranged adequate funding for their clients.
Interestingly, only the Managing Director of KSE, Moin Fudda, participated in the crisis session. None of the other KSE directors including Chairman Yasin Lakhani were called to the meeting. Lakhani was scheduled to leave for Istanbul on Sunday to attend a seminar.
According to a leading member of Karachi Stock Exchange, a six-member committee was formed on Saturday night, which held a marathon meeting till midnight. The committee comprised top members of Karachi Stock Exchange, representatives of financial institutions, and the SECP.
It was decided in the meeting that a consortium of banks and financial institutions should provide funds to the stockbrokers and investors to help them overcome the crisis. It is estimated that nearly Rs 26 billion is outstanding in the March futures contracts, of which nearly 30 percent is with the settlement house of Karachi Stock Exchange. The investors or stockbrokers conducting business through future contracts have to deposit as much as 30 percent at the Settlement House of KSE, which means the settlement of the said contracts was in deficit of around Rs 12 billion.
"We have received a financing line of as much as Rs 19 billion, which is not going to utilise fully as the stockbrokers have also the funding within their houses, but the arrangement from the banks is a ray of light at the end of the dark tunnel". There is a possibility that investors would utilise nearly seven to eight billion rupees, a leading member said.
The same member said that major contribution came from Muslim Commercial Bank, Allied Bank, Bank Alfalah, Metropolitan Bank and Bank Al-Habib. The shares of these banks would be around Rs 5 billion, Rs 3 billion, Rs 2.5 billion, Rs 2 billion and Rs 2 billion, respectively. He added that the net financing of Rs 19 billion would smoothly cover the March contract as well as pending COT deals of ready market.
The financing support is likely to enhance as several institutions have lent support to investors till filing of this report.
The problem of over-leveraging continues to haunt the local bourses, and yet another crash has been witnessed due to this problem. Even though the mode of over-leveraging is different, ie futures instead of badla, it still continues to be at the forefront of all local stock market crises.
The Securities & Exchange Commission of Pakistan held a meeting with the leading market participants/financiers and the KSE management, on March 26 to review the present market situation and to ensure the smooth settlement of the March Futures Contracts on Wednesday.
It was decided at the meeting that the preferred method of financing would be Margin Finance for which banks should be approached. The management and representatives of market participants had a meeting today with various banks whereby they have been able to raise sufficient commitments to meet the financing need through Margin Finance supplemented by Badla Finance.
The decision of the meeting was based on three principles, ie honouring of contracts, maintaining the integrity of the system and protection of the small investors by ensuring provision of financing to market participants.
A leading trader said that the move of State Bank of Pakistan to lift restrictions on banks and financial institutions on carry over transactions failed to attract desired funds as lenders are hesitant, fearing further decline in share prices, thus increasing the quantum of losses.
Karachi Stock Exchange, in consultation with Securities and Exchange Commission of Pakistan (SECP), allowed investors to conduct carry over transactions, commonly known as badla, on Saturday and Sunday. This was allowed to help investors to overcome the losses suffered in the March Futures contracts.
"The over-stretching and euphoria created by some players that the market would touch 12,000 points level forced them to build positions on daily basis. But as the settlement of the March Futures contract got nearer, the storm struck the bourses and the share prices, on daily basis, moved down and a new history was created at KSE in the world equity market. This was the largest decline in the world market on daily basis," an analyst said.
The stock market touched its peak at 10,304 points on March 15, and since then the index came crashing down, wiping around 2360 points--23 percent--in seven sessions.
On Saturday, the KSE allowed badla in the outstanding shares which helped the investors to switch from March Futures contracts in two hours -- from 11 am to 1 pm. During this period not a single share hit the circuit. The management decided to extend the badla period to 4 pm. According to a dealer, at 3.30 pm, the State Bank of Pakistan came with the circular removing restrictions from banks and other financial institutions to conduct COT. But lenders were not willing to release funds, as they feared more losses. The KSE also had given incentive the other day, increasing the badla cap to move up to 24 percent from 18 percent. But lenders were afraid to provide, as they anticipated more losses which could create another crisis in the badla market.
The amount was not sufficient and hang over of the Futures contracts was still outstanding. To overcome this debacle, an emergency meeting was called on Saturday night. All officials belonging to SECP and KSE were present, along with representatives of banks and other financial institutions, with cream of top members of KSE who, according to a dealer, were the main participants of the futures contracts. They conducted a brain storming session and several proposals were discussed including holding of one more badla sessions on Sunday, loans for the deprived members and proposal to meet banks to help finance the outstanding amount.
There was a confidence that as the big financiers have agreed to once again provide funds and take over the scrips at much lower than high price by other retail investors the crisis will be settled.
It is a repeat of a familiar scene at KSE - fourth time in five years - when the market is at an abnormally high level or when the financiers are not allowed to change Badla rate at will - they withdraw the funds, a settlement crisis erupts and then a bailout package is worked out to purchase scrips at distress level. Take your time to sell them back over a period, gradually upping their values, drive the values down resulting in funding crisis and buy them back at lower values and take the profit home.

Copyright Business Recorder, 2005

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