An agreement has been reached on all modalities and the proposed Equity Market Opportunity Fund (EMOF) will be launched on Friday (today) at the local bourses under the management of National Investment Trust (NIT). In this regard, a meeting was held at the SECP Karachi Office here on Thursday.
The meeting was attended by representatives of SECP, the Karachi Stock Exchange (KSE), and the financial institutions with the objective of finalising the mechanics and obtaining firm commitments for the proposed 'Market Opportunity Fund' from participating institutions.
The paper circulated by NIT to the participants said that the Fund is established with the objective of providing stability and liquidity to the market in time of stress. This paper was circulated among all the participants and the paper was approved with the consensus of all participants.
The purchase of shares will be started from Friday and the settlement will be on Monday. The institutions will be invited to join this Fund and firm commitments will be obtained. NIT will manage these funds and no brokerage will be charged when NIT will use such funds to invest in stocks markets.
NIT will declare net asset values of these units on daily basis. NIT, if the circumstance so demand, may distribute dividends amongst the participants. The paper said the total list of eligible stocks would not exceed 50 and primary selection criteria would be that no scrip could be selected unless its is part of KSE-100 index.
No stock would be eligible which registered a low volume, based on three months average. Based on the above criteria a selection of 50 scrips would be made and this list of eligible stocks would be placed on the website of the Fund and conveyed to all the participants and the KSE for circulation. This list would be reviewed each quarter and on the first day of each quarter a new list would be generated and circulated.
Regarding the time of investment, the paper said the management of the Fund would continue to monitor the movement of KSE-100 index and the Fund would be required to enter the market, when the market decline is 15 percent in 50 days time.
The above measurement of index would be from the peak from the beginning of such 50 days. Actual decision for purchases in terms of which scrip in what quantity shall be based on liquidity and discount to fair market value at the time of purchase for which details would approved by the supervisory board.
NIT, as a separate open-ended Fund would manage the Fund, and it would have an oversight of a Supervisory Board separate from the NIT Board. The supervisory board of the Fund shall meet at least once in six months.
About the Fund, the paper said that it should be established and operated as an open ended-fund for the special purpose of market stabilisation. The participants shall give firm commitments and no participant shall refuse the call when made by the Fund management.
Against the commitments so available with the Fund, the Fund management shall make calls on funds pro-rata to the commitments. Each time units would be issued against such money received.
In order to facilitate the treasury management of the participants, the Fund management would be required to complete the exit by the way of sale of shares in the market and realise the invested money and go for the forced redemption of the units issued.
The above strategy would ensure that the funds of the participants are not stuck up, is efficiently used, the short-term profits from the operation are included in their income statements which would have a consequential effect on the market.
The Fund shall be of perpetual nature. In case any of the participants wants to opt out of the commitment, the participant shall have to serve a three months notice and shall only be allowed to exit with the approval of the supervisory board. After the successful operation of the Fund for the initial period of six months, it shall be made widely available to public.
The SECP or the ministries/authorities concerned would allow all the mutual funds and other such major institutions desirous of participation in the Fund, where special dispensations are required.
About the interim arrangement, the paper said that NIT would be required to prepare all the necessary legal documents to launch the Fund in accordance with the legal framework. As interim arrangement, so that the Fund could actually be launched on July 25, 2008.
NIT would use its management company for collection of money and making investments in the market as discretionary portfolio. It would be required to keep all the resources put at its disposal along with the investments quite separately.
This operation would be subject to audit by auditors selected from the State Bank of Pakistan panel to be appointed by the supervisory board. NIT would be required to get the necessary legal approvals on the fast track basis and as and when such approvals are in place, NIT would be required to transfer all assets and liabilities to the Fund, which had since been 'parked' in NIT, forthwith.
Subsequent to the above action, NIT would manage the funds as a separate and distinct Fund. Even in the interim arrangement NIT would be required to announce the NAV on daily basis. The paper said that investment in equity markets is not guaranteed to earn positive returns. Market risks are present and a long-term investment horizon needs to be maintained. Historical performances of country's equity markets suggest a potential for positive returns over the long-term.