Launch: Under emblem of PSX, there lays some bitterness

Number of Karachi-based brokers resentful of SECP for new rules on investors’ protection fund

KARACHI:

Trading on the newly formed Pakistan Stock Exchange (PSX) commences today after what appears to be a seamless integration of Karachi, Lahore and Islamabad stock exchanges.

But the brokerage community is finally showing signs of bitterness beneath the seemingly jubilant mood. A number of Karachi-based brokers are resentful of the Securities and Exchange Commission of Pakistan (SECP) for the new rules pertaining to the funds that they have generated for the protection of their stock investors.



Dubbed as the investors’ protection fund, brokers of each of the three stock exchanges generated money to protect investors in case one of them defaulted or ran away with clients’ assets. Maintained so far under trusts, these separate funds have ensured a semblance of stability in the stock market and “recourse in times of distress.”

In the case of the Karachi Stock Exchange (KSE) at least, more than a billion rupees drawn from the investors’ protection fund has helped compensate the victims of many defaulting brokers in recent years.

But a lot of it is going to change with Lahore- and Islamabad-based brokers becoming trading right entitlement certificate (TREC) holders of the PSX January 11 onwards.

“Outstanding claims against the brokers of Lahore and Islamabad dwarf the size of their respective investors’ protection funds. There is an imbalance. They should have settled their claims before integration,” said the owner of a medium-size brokerage who also served as a trustee for the investors’ protection fund raised by the erstwhile KSE brokers.



Requesting anonymity fearing a backlash from the regulator, he said that using the fund raised by Karachi brokers for the settlement of outstanding claims against their Lahore and Islamabad counterparts post-integration is highly unfair.



In an email to The Express Tribune, PSX Managing Director Nadeem Naqvi said the current size of the PSX investor protection fund, which was originally raised by the brokers of KSE, is Rs700 million. The respective fund size of Lahore and Islamabad stock brokers amounted to Rs290 million and Rs13 million, respectively.

As many as 3,455 outstanding investor claims were pending against 14 defaulted brokers of the erstwhile Lahore Stock Exchange as on November 27. These claims amount to Rs2.18 billion, which is more than 7.5 times of the Lahore brokers’ fund size.



Similarly, 2,024 outstanding investor claims were pending against 17 defaulted brokers of the erstwhile Islamabad Stock Exchange as on November 27. Outstanding claims amount to Rs458.6 million, over 35 times of the Islamabad brokers’ fund size.

As per the integration scheme, all pre-existing outstanding claims on brokers will now be handled by a Funds Committee constituted by the SECP – a measure that is tantamount to “overstepping the mark,” according to some Karachi brokers.

AKD Securities Chairman Aqeel Karim Dhedhi says the SECP should not issue directives with regard to the use of the investors’ protection fund. “I believe the new entity (PSX) should raise its own fund, although it should initially be allowed to borrow from the original fund generated by KSE brokers,” he added.

Despite repeated attempts for over one month, the SECP did not offer any comment on the issue.

The writer is a staff correspondent

Published in The Express Tribune, January 11^th, 2016.

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