As expected, the government is trying, albeit informally, to rescue the Karachi Stock Exchange (KSE) from its current settlement crisis. A Recorder Report reveals that officials from the Finance Ministry and Securities and Exchange Commission (SEC) as well as prominent brokers have been asking the banks to help KSE settle its outstanding March Futures deals that stand at Rs 60 billion.
The bourse holds only Rs 18 billion in exposure from its members. For their part, the banks are said to be willing to come up with the necessary bail-out package, as the required amount is well within the exposure limit fixed by the State Bank for equity investment. But they have naturally decided to deal with the issue like any other business proposition, and are demanding major discounts in the valuation of the shares that are to be pledged to them.
The crisis owes itself to the pump and dump tactics adopted by major players in the bourses as well as a lax regulatory mechanism.
These players, which include brokers and speculators, have been pumping up the share values of major entities with a view to attracting a large number of retail investors - mostly professionals and housewives for whom buying and selling of shares is not a vocation but a side activity they understand only a little.
These players collude to trade amongst themselves to artificially raise prices in order to attract naïve positive-feedback traders. Once prices have risen, the former exit leaving the latter to suffer the inevitable price fall.
This mechanism may be stylised no doubt, yet there is compelling evidence when it is in operation. On the days when a stock price is relatively low, the big players that include the principal brokers, figure prominently in the trades and conversely when on the days its price is high, most trading is done by outside investors.
The overvalued share prices had to tumble down at some point, as they have this March. Matters did not rest there, most of the dominant players exited when the index hovered about 6500 to 7500 but continued to provide COT finance to their clients till the market reversed drastically. Now it is basically these clients who are faced with disaster.
Unsurprisingly, retail investors now face settlement delays and are in a state of panic. Even after the present crisis is overcome, it should take a while for many of them to recover their confidence to go back and take part in the shares market again. In fact, it is not only the retail investors who stand to suffer from the consequences of the market fall.
As the SEC had allowed the public sector entities such as OGDC, PSO and PTCL that are slated for privatisation, to be listed on the Forward Counter, the over-valuation fever also caught these entities on the Futures Counter which is surely not helpful in terms of their sale prospects.
Matters have reached the hazardous point that they have mainly because the government has tended to look the other way while irregularities were committed and massive amounts of tax evaded funds were employed in market manipulation through benami transactions. What was important from government perspective was to quote the rising stock exchange index to claim that its economic policies were working wonders and generating a lot of economic activity.
But when any economic bubble bursts, like it has now and on three previous occasions within the last five years, such claims, even when valid, become suspect in the public eye. It is time the government learnt from this unsavoury episode and ensured that the concerned regulatory authorities start differentiating between speculative and genuine activity in the stock market.
A lot of speculative activity has been going on not only in the stock market but also in the real estate business, making it ever so difficult for poor/middle income families to own a house. In its second quarterly report that came out only a few days ago, the State Bank too has expressed serious concern over what it terms an abnormal rise in real estate prices and the share levels of government owned entities on the stock exchange.
When Prime Minister Shaukat Aziz was the Finance Minister in the previous government he had chalked out an ambitious plan to invigorate the housing sector with a view to generating economic activity in this and a number of related sectors, and creating the much-needed new employment opportunities. But that plan remains bogged down mainly because of the mess in our land records and the problems created by powerful people who are engaged in speculative land buying and selling.
The biggest incentive for speculative buying in the stock market as well as real estate business is the fact that neither field is subject to capital gains tax. People can make immense amounts of money, and pocket it all. If these people knew that higher gains would lead to a corresponding level of taxes that would put a brake on the games they play in the stock market.
Realising the need, in the last budget that he presented as the Finance Minister, Shaukat Aziz had announced a capital value tax of 0.1 percent, but then during the short period between the announcement of the budget and its passage influential actors from the stock market succeeded in getting this tax reduced to a mere .01 percent.
The events of the last few days have shown that this was an unwise concession. The government must review its decision, and include in the upcoming budget a capital gains tax both for the players in the stock market and real estate, with a holding period to qualify for exemption so as to restrain the speculative activities in these areas.
We firmly believe that wealth can only be created by the private sector and capital formation is essential for economic development, but at the same time the exchequer too is entitled to a share of the gains made by trade in any field.