Whew! What a week! The KSE loses 1081 points in three sessions and then bounces back. What earth shaking event had happened to cause the fall? And, what made it turn around? Can anyone provide sensible explanation for this yo-yo movement. A downward trend did commence before the budget.
Government efforts towards revenue generation from the activity in the bourses was a definite negative. Subsidising cement import did add to the adverse reaction. The downward correction was expected, in any event, and did happen. How did the downward movement suddenly turn into an avalanche?
There is no logical explanation, other than the fact that overleveraging is rampant. When the market falls, margin calls are widespread and defaults start happening on a wide scale, then the bubble burst. And, as the financiers start selling their own holdings and selectively press the pedal in stocks which the borrowers hold, the small bush fire sets the whole wood aflame.
What needs to be looked into is the lack of secrecy about individual players' open positions. Individual financiers (badla lenders) in the past have exploited this circumstance to their advantage. Now with banks in the private sector, bank owners are also active on the bourses and have made very large investments in stocks both through other companies and directly.
They can and do take advantage when leveraged investors are caught on the wrong foot. Owning various financial institutions, they can also pledge sponsors' shares and have the muscle which the others shareholders cannot withstand. They re-purchase the same shares when the market bottoms out.
When the State Bank of Pakistan, a couple of years back, detected lending against a bank sponsors' shares, it issued regulation, debarring the same and lodging of the sponsors' shares itself.
SECP should do the same with non-bank financial institutions and brokerage firms. In fact, pledging of sponsor shares under company law should only be permitted for expansion of the company or merger and acquisitions.
Good corporate governance requires firewalls between the managements and the boards. Secrecy in banking is a sine a qua non. Details of clients' credit lines, margins, pledges, collaterals should be known only to the banker serving him. The two premier financial regulators need to create a system to closely monitor lendings by bank and non-bank and protect the borrowers competing with bank owners in other businesses.
We have been stressing time and again that the SECP Ordinance as well as the Income Tax law should be amended to permit and encourage formation of holding companies. The present system forces the sponsors to take circuitous routes and indulge in inter-company lending besides resuscitating their loss making entities to the detriment of minority shareholders.
Remember Dr Mahbub-ul-Haq's thesis of 22 families controlling the commanding heights of the economy. These so-called 22 families factually had less than 5 percent stake in GDP. But the slogan gained a momentum as the perception of misuse of the banking system and the unholy alliance of industrial barons led to nationalisation.
Coming back to the bourses, the lock system (stopping trades in a scrip moving up or down by five percent in a trading session) does not make sense in computerised age. KSE instead of shutting down trading in the scrip can easily shut down the screen of the broker whose margin has fallen short of the requirement.
The present exit mechanism creates difficulties and compounds the problem, as buyers on the next day open their bids at the lower lock level. The system must allow freedom to the seller and the buyer to strike a deal at a price acceptable to both.
While SECP is probing short and blank sellings, it should also, along with SBP, look into the role played by banks and NBFIs to trigger the decline. KSE needs to introduce option and index trading.
The government instead of using the long handle to force institutions under its management to bail out speculators again and again should give depth to the market by off-loading its gas and oil shares. That would give the market the depth it sorely needs.