Body to give final shape to mode of stocks financing

Posted on 07.28.05 by StockPK Team @ 1:00 pm    

The ‘Shaukat Tarin Committee’ will hold a meeting with all stakeholders of stock market on Thursday evening to give a final shape to a new mode of financing, in order to bring back investors to the lack-lustre stock market and improve liquidity.

According to sources, the Committee has improvised the recommendations to be placed with government officials expected to meet in Karachi on Friday, headed by Dr Salman Shah, Advisor to Prime Minister on Economic Affairs, and Omar Ayub Khan, State Minister for Finance.

Sources said that the main worry for investors is that they would have to take deliveries of the stock so far held on badla financing when the ongoing phasing out process is completed. Since 80 percent of the trade is badla-driven and speculative in nature, concerns regarding the drying up of the well send shivers down their spines.

The SECP, supported by a multitude of banks, has been trying to introduce margin financing to replace the legacy of badla.

Sources were of the opinion that two issues needed to be addressed through technical approach and market orientation, without hurting the interests of general investors. These are ‘conflict of interest’ and ‘lender of last resort’.

“The measure to be handled quickly is the mechanism of bringing liquidity in the market to arrest the declining trend, and eliminate the range-bound trading.” The banks and other financial institutions were biggest lenders in the badla market, in association with big guns. They are still major players, and some of the jobbers are still acquiring funds through unofficial counters at 24 percent, following freeze of the cap at Rs 12 billion and in seven companies.

The liquidity figures ranged from Rs 30 billion to Rs 100 billion, depending on the requirement of the market players and following the inclusion of new IPOs. Some suggestions have been made to put forward new mechanism–running finance limits, repo and reverse repo, futures deliverable, futures non-deliverable and COT.

A leading analyst said that after a number of badla engendered stock market scams and crashes, the Securities and Exchange Board of India (SEBI) had finally put the clamp on badla financing in July 2001. It was replaced by rolling settlement and derivatives. The initial sentiment of the stock market was very similar to what has been experienced in Pakistan.

According to M S Sahoo, chief general manager of SEBI, the turnover velocity of the Indian stock exchanges plunged from 448 percent in FY01 to 121 percent in FY02. But the removal of badla opened the doors for equity based derivatives (futures and options) to make their move. By FY04, the annual cumulative trade had surpassed the FY01 figures by 54 percent. The derivatives had made their niche. The biggest mileage gained by India out of the whole fiasco was that it managed to align itself with international standards and could attract considerable foreign portfolio investment (in excess of $8 billion for FY04).

Maybe there is a lesson for Pakistan somewhere shrouded in the Indian experience.

What instruments should be used to phase out the badla process? This question has been the biggest bone of contention between the stockbrokers and the SECP. The regulating body is firm about the use of margin financing, which the broker community believes would never bear fruit.

The primary argument on the part of the brokers is that it is extremely expensive and poses hurdles, owing to the due diligence requirement on the part of banks and other financial institutions involved.

Source:Business Recorder