The Securities and Exchange Commission of Pakistan (SECP) has decided to initiate an independent study into the reasons and causes of Karachi Stock Exchange crash in 2008. Addressing a press conference at the SECP Headquarters here on Friday, SECP Spokesman Imran Ghaznavi announced that the decision has been made to devise strategies and plug loopholes that led to the market crash, which many think has led to huge flight of capital from the stock market, causing irreparable loss to investors.
"The 2008 crises had a long-term negative impact on the market and the study is expected to help the Commission formulate policies to ensure adequate level of transparency and general development of the capital market in Pakistan," he said. The commission has hired the services of Shamim Ahmed Khan, former commissioner SECP from April 1997 to March 2000 to conduct the study and it is scheduled to be finalised and made public by April 30, 2013. The study will also evaluate the rational behind placing a floor on the share prices of listed securities, which was imposed on August 27, 2008 and continued till December 15, 2008. "All the crises are dealt with best of options but it is generally not a tradition to conduct post event studies to learn from the past shortcomings," SECP spokesman said.
The study to be conducted by Shamim will also present the review of imposition of the Floor on the share price in the market and the relevant stake holders. "Shamim will also examine whether the Central Depository Company (CDC) played the role of a frontline regulatory body of the depository system," he added.
As per Terms of Reference, the report to be prepared on the background, impact and recommendations to avoid future recurrence of the 2008 stock market crisis in Pakistan should aim to identify factors leading to issues observed in the Pakistani securities market in 2008, and review/ analyse the correlation of market movement with the trends in the global markets; impact of major financing positions in the CFS Mk-II and Deliverable Future Market and their relation with the movement in prices of shares and impact on the market upon decline. The report would evaluate the rationale for placing a floor on the share prices of listed securities wef August 27, 2008 (the Floor).
It would analyse the role of the KSE, LSE and ISE as well as the Securities and Exchange Commission of Pakistan (SECP) in the decision to impose the Floor and the subsequently remove the Floor on December 15, 2008. The report would review the impact of the imposition of the Floor on the share prices in the market and on the market participants and stakeholders and determine the extent to which any market participant/ stakeholder benefited or was disadvantaged by the imposition of the Floor as the case may be and examine the events which took place during the imposition of the Floor and how the market and the market participants related during this period.
It would also examine the role of the SECP, KSE, LSE and ISE in lifting the floor and the subsequent measures taken to bring regulatory and operational reforms for enhancing transparency and investor protection and analyse the role of various market participants/stakeholders including, but not limited to the role of investors, brokers and as participants of CDC and National Clearing Company (NCCPL) in the entire situation.
The report would examine whether the Central Depository Company (CDC) played the role of a frontline regulator of the depository system, or was merely a service provider, and how its role affected the market during the relevant period, with specific reference to the misuse of clients'' securities and identify weaknesses in the system, policies, processes and the relevant regulatory framework.
It would also review the impact of reforms introduced by the frontline and apex regulators post 2008 market crisis; and suggest further regulatory and operational reforms/ steps needed for enhancing investor protection, promoting market stability and avoiding the occurrence of such a situation in future. Such suggestions should be made with respect to both legal amendments and improvement of existing systems in place to implement the legal framework effectively, SECP added.
Securities and Exchange Commission of Pakistan said that the in-depth investigation into stock market crisis of 2000, 2002, 2005 and 2006 was resorted to except the stock market crash of 2008. SECP Spokesman Imran Ghaznavi shared the details of the past investigations of different stock market crashes. He said the new study on the stock market crisis of 2008 would enable the SECP to take corrective measures for restoring investor''s confidence by keeping vigilant check on any type of malpractice in market transactions.
According to the SECP, the Pakistani stock exchanges have experienced various market crises, specifically during the years 2000, 2002, 2005, 2006, and then in 2008. In order to assess the precise nature of each crisis, understand the reasons for their occurrence and to identify the measures that could have helped avoid such situations, comprehensive investigations were undertaken in respect of the aforesaid market crisis, except that of 2008.
These investigations had focused primarily on ascertaining the possibility of any market manipulative practices which resulted in the crises. Enforcement actions including penal proceedings were also initiated against those found guilty of malpractices and the findings of these investigations also helped in the formulation and introduction of various reform measures mainly aimed at strengthening risk management for the future. However, it needs to be noted that the 2008 crisis differed from the earlier situations since they were triggered chiefly by indigenous factors, whereas the 2008 crisis occurred during the overall global economic slowdown, the SECP said. The great crash of 2008 swept over trillion rupees from the market and no participant including stock brokers could escape the damage. Eight brokers were expelled and two directors on the 2008 KSE board were declared as defaulters, SECP added.
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