Get your house in order…the Chinese are coming

Regulatory action against brokerage houses, in-house financing is all to be ready as PSX becomes bigger and better

Salman Siddiqui February 27, 2017
The regulators have tasked themselves to conduct a clean-up operation ahead of the handover. PHOTO: FILE

KARACHI: The Pakistan Stock Exchange (PSX) has been talk of the town for both good and bad reasons. In a nutshell, it had been booming, before news of fraud, scams and negative investor sentiment cast a shadow on the bullish run.

The PSX was upgraded to the MSCI Emerging Market Index after being in the Frontier Markets one for a while. The actual reclassification will take place this year.

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Developments on macro and microeconomic levels are also supporting the upward trajectory. To top it off, it was declared the top performing Asian market in 2016.

Simultaneously, regulatory authorities concerned have come into action, as they have detected default of brokerage firms, unearthed scams of misuse of investors’ funds by owners, caught an official on the charges of being an inside informer, suspended an official of PSX on charges of having failed to timely detect default of a brokerage firm.

Complaints about the prohibited in-house financing (badla) at some of the brokerage houses have also surfaced and regulators have also noted existence of single-member brokerage firms.

Questions arise as to why a couple of brokerage firms have defaulted if the market is booming. The Joint Action Committee, which has detected the defaults, has existed since 2015. Then why has it suddenly started detecting the defaults in 2017?

Why did it not detect any default in 2015 when the market performed comparatively at a slower pace (the benchmark KSE 100-Index increased only 5% in 2015 as compared to around 40% in 2016)?

In-house financing has been prohibited since the 2008 crash. Then how did the brokerage houses continue using the prohibited product?

The answer to these questions is transformation of the PSX from a local market to a regional player. A strategic Chinese consortium won 40% stake in the PSX and is expected to take over control of the management anytime.

The regulators have tasked themselves to conduct a clean-up operation ahead the handover. Also, they have conveyed that lethargic attitude in this regard will not be tolerated. The suspension of PSX official is an example.

Secondly, the level of defaults and change in regulations are not as big as they are being projected.

To be noted, the defaults have taken place at the brokerage firm in Lahore and Islamabad, which earlier were not being monitored as closely as brokerage firms in Karachi were.

PSX-Chairman Munir Kamal said the other day that fundamentals of the market remain strong and intact and fraud committed by a handful of brokers should not be construed as a sign of weakness in the market.

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Shahzad Chamdia, chairman of the stock market’s divestment committee, said the winning Chinese consortium is a good synergy between PSX and Chinese stock and future markets, which are part of the consortium.

The strategic partners are aimed at introducing new value products (including CPEC-bonds and derivatives/options), upgrading technology, facilitate cross-border listing and attract many more foreign investors from across the world, including China.

“The PSX would become a prominent regional market in the next two-three years. We, in partnership with the consortium, are aiming to increase the size of market capitalisation which stands at around $100 billion at present,” he said.

The size of the market capitalisation in India stands at $1.5 trillion and this is around $3-3.5 trillion in China. “This is the size of market cap, which makes it big or small,” he said.

The PSX has made necessary amendments to welcome four nominee directors of the Chinese consortium on the board. And they would have right to make nominees for the posts of chief executive, chief financial officer and chief regulatory officer at PSX, he said.

Another broker recalled that such defaults, detection of wrongdoing and massive amendments in regulations were last made at the PSX (formerly known as Karachi Stock Exchange) in 2008-2009 after the crash.

“This time regulators have not made massive changes in regulations. But their efforts are more in the way of getting the existing regulations implemented,” he said.

The writer is a staff correspondent

Published in The Express Tribune, February 27th, 2017.

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Lumdheeng | 7 years ago | Reply China was stopped by Germany entering into their market, trying to take over some of their defense industries, already they have taken the biggest super market of Germany.
Lumdheeng | 7 years ago | Reply China has been accused of "Yuan manipulator"keeping it low,so that exports continued to flow. Their stock market nowadays are in red markings,as already flooded the world with Japanese, South Korean,US products with "made in China"tag.
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