The time bound plan for phasing out of 29 scrips of the COT market has been followed by the Karachi Stock Exchange and 22 scrips have already been phased out so far. However, phasing out of the remaining 7 mega scrips will come in the following weeks and with the recent changes in the futures contracts and more particularly due to current market conditions, it is apprehended that it might create serious liquidity crunch. This will cause not only major disequilibrium but would also create hurdles in the smooth exit strategy in both futures and ready markets.
We need to appreciate that margin financing which had to replace COT is unfortunately not in place partly, which is the ground reality. This is due to the lack of concerted efforts and mainly due to non-availability of the system and required infrastructures at the banking level.
This needs to be more focused and intensified to evolve a workable system for smooth and successful introduction of the margin financing in the capital market of the country. This will also need a well thought-out strategy to implement the margin financing which can successfully carryover the float of COT without any adverse impact on the market.
Moreover, this will also require an intensive awareness programme not only for the investors but also for the relevant staff of the banks and financial institutions who will be involved in these operations.
Therefore, the entire exercise will require all out efforts by the KSE, SECP, SBP and the bankers. This would naturally require some more time before the COT system is completely eliminated and replaced by the margin financing.
There is a need to follow the under-mentioned strategy for an early and expeditious introduction of the margin financing system:
-- A committee comprising of the representatives of the SECP, SBP and KSE members be constituted which can supervise and co-ordinate with all concerned for the successful implementation of the system.
-- It is necessary to get a commitment of a Special Fund towards margin financing by allocating equivalent to 5 percent of the equity of the banks and financial institutions.
-- Preparation of the documentation required for the financing by the banks and other institutions.
-- Besides commitment of the banks to provide specials funds they should also become Associate Members of the Karachi Stock Exchange for their comfort and settlement of the transactions through NCCPL.
-- As a first step towards the implementation of this system, all those banks whose branches are located within the KSE premises should create Special Counter for providing margin financing facility.
-- The modalities for implementation of the system may be designed in a way that margin financing accounts are opened by the brokerage houses on behalf of their clients which will give a comfort to the Banks and financial institutions. This will also ensure a commitment of the brokerage houses towards promoting and implementing the margin financing.
-- The Karachi Stock Exchange along with the SECP and SBP would facilitate co-ordination with the Banks and financial institutions to expedite implementation of the project so that margin financing is introduced successfully.
-- All the members of the KSE be pursued to open margin financing accounts immediately with their respective bankers.
There is a need to revisit and review the phasing out COT programme. SECP must, therefore, reconsider switchover of the shares, from COT to margin financing for a period of at least three months so that by that time the margin financing system is in place and COT float is successfully and without affecting normal activity of the market is absorbed by the margin financing system which was the underlined objective when the decision on the subject was taken. However, the selection criteria of COT scrips shall remain the same which is being followed presently.