SECP takes U-turn on its commitments
Posted on 09.13.06 by StockPK Team @ 10:43 am
This time too, the toothless watchdog - Securities and Exchange Commission of Pakistan (SECP) - accepted the backdoor recommendations made by the managements of three bourses at a meeting held here on September 11, 2006.
In other words, the commission declined its own proposal it made on August 30, 2006 to modify Continuous Funding System (CFS).
Surprisingly, SECP has raised the number of Continuous Funding System (CFS) eligible scrips approximately to 40-45 with effect from October 02, 2006 (The final number of scrips under this system depends on the eligibility criteria SECP put forth).
Prior to SECP-KSE meeting, SECP had proposed that it would reduce the number of CFS eligible scrips from 30 to 14 to improve the risk management system and curbing speculation.
But why has the regulatory body approved higher number of the scrips in CFS regime against its own proposal? Only the meeting attendants know.
Analysts were of the view that SECP went against its own independent findings and accepted to increase the number of CFS eligible companies as desired by the bourses’ management perhaps to give concession in replacement of putting ban on in house financing (badla).
Under the system of in house financing, a few of leading brokerage houses were providing financing to almost all the companies listed at KSE, while other brokerage houses were providing funding to half of the scrisp being traded at the Karachi bourse, The News learnt.
However, ban on in house financing might convince investors to remain out of the shares trading business at the local bourses, as the undocumented profits of the brokerage houses would be wiped out.
While others opined that there were no measures to check in house financing and the system would continue despite of the ban.
Analysts welcomed the enhanced cap of CFS for Karachi Stock Market to Rs55 billion from Rs24.5 billion, as the decision would address the liquidity crunch issue at the exchange. But again, the commission fell behind its proposal to limit the CFS cap to Rs40 billion proposed earlier in meeting held on August 30, 2006.
The regulatory authority approved Rs15 billion more from its proposed limit of Rs40 billion CFS. Analysts viewed this increase against its proposal, again to give concession in place of putting ban on in house financing.
Unofficially, there was available around Rs40 billion funding under the in house financing system at KSE that together with Rs24.5 billion CFS facility stood at Rs64.5 billion.
According to the Tareen Committee on CFS findings, the Karachi stock market requires around Rs82 billion financing under one system or the others. On the contrary, increase in CFS cap raises risk at shares’ trading business, believed an analyst.
In view of some punters, SECP played zero sum game, on one hand it banned in house financing that is viewed as non-transparent, more risky and prone to market manipulation and on the other hand, it unduly increased the number of CFS eligible scrips from expected 14 to unexpected numbers that would be between 40 to 45 accordingly.
Although SECP had initially decided to introduce Margin Financing to deal with the liquidity issue at the local bourses it introduced CFS and then kept making rapid amendments in this system.
The apex regulator remains silent on its commitment of phasing out CFS - that is the moderate form of that old Carry Over Transaction (COT) or Badla financing - and introducing Margin Financing.
Raising the investment cap under the present financing mechanism of Continuous Financing System (CFS) at the local bourses was a healthy sign for capital adequacy. But at the same time, raising CFS cap to pour in more liquidity would also maximize the risk factor of battering the market capitalisation. Moreover, badla, CFS, CFS MKI or CFS MKII were not in line with international practices.
Therefore, CFS should be replaced with Margin Financing System as soon as possible or a financing system capable of curbing risk dynamism as Margin Financing does.
Analysts have expressed fears that enhanced cap on CFS might play havoc in the rollover weeks and could create panic like mid of March 2005 and May & June 2006 situation at the bourses anytime or most of the times.
Source: The News
Tags: Badla, CFS, Karachi, KSE, News, SECP