The Securities and Exchange Commission of Pakistan (SECP) has issued show cause notices to brokerage firms under investigation in connection with March 2005 crisis for failure to deposit shares or provide documentary evidence to the Karachi Stock Exchange when their net sales position in the Futures Contract exceeded the prescribed limit of Rs 50 million.
In a particular scrip, after allowing the prescribed adjustment permitted under Regulation 3(B) governing the futures contract. The show cause notice under Section 22 of the SECP Ordinance 1959 is said to be a consequence of the submission of the forensic report by Diligence USA LLC on the KSE events of March 2005 after detailed examination of the information received from the brokerage firms.
Regulation 3(B) stipulates that a member of the exchange may have a sales position in a particular scrip of more than Rs 50 million, after allowing the prescribed adjustment(s) unless the actual shares sold over this limit are deposited with the Exchange or the broker provides documentary evidence that the shares are lying in the Central Depository Company of Pakistan (CDC) or with a bank or a Development Finance Institution (DFI).
In practice, however, say sources in KSE as well as the brokerage firms, the surveillance department of KSE issued a letter to the members whenever it feared that short-sell above the prescribed limit might have occurred and the member was provided three days to provided information that the shares were either held by CDC or a bank or the deals were undertaken on behalf of a financial institution.
In case the reply was found unsatisfactory appropriate action was taken, including reporting to SECP that a member had not complied with the regulations and the issue must be taken into account when the renewal of the member's licence was under consideration.
The interpretation of Regulation 3(B) by the front-line regulator, ie KSE, as well as the members was erroneous, not being stipulated in the wording of the regulation. "We were never issued show cause notices by KSE. Only information along with evidence was sought by the KSE," the brokerage firms involved maintain.
Further, they said the show cause notice received on Wednesday was signed by the Executive Director (SECP) Securities Market Division, South. The same gentleman was Director Operations, KSE, during 15 February/March 2005 period and his present assistant (now Director SECP), Imran Panjani, was the in-charge of Surveillance at KSE in the same period. "How come, they implemented Regulation 3(B) in one was in KSE and have a different interpretation of the same in SECP," the brokers added.
Under Section 22(1) of the ordinance, failure to comply with the provisions of any regulation made under the ordinance is liable to a maximum fine of Rs 100,000 and in the event of a continued default a further fine of Rs 2000/- per day.
The show cause receiving firms have been provided 14 days, ie until February 9th to respond in writing or appear in person to defend themselves from the imposition of penalty.
ACCORDING TO LEGAL EXPERTS, THE ISSUE IS: Does the interpretation of the regulation over a practise in vogue for over four years at KSE prevail or not?
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