The Federal Government is said to be quietly nudging the big banks to rescue the Karachi Stock Exchange from the settlement crisis it is facing to the tune of Rs 60 billion, it is reliably learnt. Hectic behind the scenes activity was seen on Wednesday, a national holiday, Federal Ministry of Finance bosses, high officials from the Securities and Exchange Commission, and leading brokers tried to persuade bankers to lend a helping hand for a smooth settlement of March Future Contracts.
While the brokers sought Rs 200 million, for each of the 200 KSE members now under pressure to take delivery on Friday; the officialdom wanted the banks to strategize and come up with a package to avoid a downward spiral which could adversely impact the offloading of UBL and SLIC shares, scheduled for June 2005, under the privatisation process.
Informed sources said the bankers were willing to step on to the plate as the required amount is well within their exposure limit fixed by the State Bank for equity investment. However, they would like to treat it as a business proposition ie seeking deep discounts in the valuation of the shares pledged to them.
The KSE on screen shows Rs 30 billion as outstanding in March Futures. Since the trade is two-way ie sale and purchase, the amount doubles to Rs 60 billion and the bourse holds only Rs 18 billion in exposure from its members.
Since the market closed around 8700 on Tuesday, traders fear that it could roll down to 8300 level on Thursday, that is, lose five percent more by the time the triggering mechanism locks it for halting the trading on most sought after scrips for the day.
In this kind of scenario it is very difficult to roll over the March settlement into April. It is said that institutions, despite being major holders in the Futures counter, are unable to settle with each other in individual deals.
Therefore, the KSE Board has been asked to consider approach to the SECP to permit manual switching from March to April contract as was done in the days prior to automation of settlement mechanism.
This would ease the settlement problem to a great extent, say leading experts on the bourses. Written contracts can be registered by the bourses for deals on both ready and Futures contracts under the old ''Parchi'' system in block deals between brokerage houses and institutions.
According to informed sources, leading KSE members have already asked the SECP to extend the deadline for abolishing group accounts in a brokerage house by three months. They said that the government, in the case of Kapco withdrew the condition of bank accounts for subscribers to the public offering in order to made the issue a success.
Since 80 to 85 percent retail investors are ''Benami'' and would be forced to flee the market in case of a crash, SECP should take a sympathetic view as it did in the case government offloading in Kapco ie relaxing the condition for subscribers to have compulsory bank accounts and allowing brokers to file application under a group account.
An analysis of the Tuesday market closure shows that nearly all active scrips other than NBP, OGDC, PPL and PSO are now valued below the 7000 Index. Experts feel that savvy players, including the Mutual Funds which had cashed out of the bourses when the index was between 6000 and 6500 are now scouting for shares in banking, cement, automobile and even textiles sectors.
Secondly, OGDC accounts for 65 percent of the float in COT and Futures counter and it is heavily leveraged above the 7000 level. Over trading has taken place due to heavy entry of retail investors above the 8000 mark, who have very little understanding of stock valuations. It is these investors who are now panicking and are not in a position to take delivery of the purchases.
It is said OGDC at the present price is overvalued by Rs 30 and 13 million shares on Futures counter would require settlement on Friday. Therefore, around Rs 3.9 billion are needed to pay the difference on margin calls in case of its further slide.
It is also pointed out that the falling index is not an issue at this point. It is the settlement problem which needs to be smoothed out. The market will eventually find its level. In fact a downward correction in OGDC and PTCL to proper levels will help in the sale of management stakes by the government as it will bring the valuation in line with expected offers from buyers interested in these huge conglomerates.
And, lastly experts say, SECP needs to understand that the Futures counter is very damaging for the market. They should have never allowed listing of government managed entities to be listed on Futures counter.
There is only one day left ie Thursday for some solution to be found to avoid a settlement crisis on Friday. Banks are interested in playing a role but they want to give funds to only strong brokers against selective shares and at price levels when the KSE-Index was around 6500 and then too would keep 40 percent margin.
This is the fourth crisis the stock exchange has faced within the last five years. In the Cres Investment Bank bail-out in 2002 the Big Five made a lot of money in huge capital gains. They may be looking for a similar bargain. But this time the bail-out package could exceed Rs 10 billion.