The Karachi Stock Exchange presents a bleak picture. The member room which used to be jam-packed with investors prior to the crash in 2008 is now home to few stragglers who sit silently, trading stocks whose volumes keep falling. “We are just silent observers of the market trying to monitor its direction,” said a member, who had been investing for the last 25 years, while requesting anonymity.
A visit to the stock market’s trading room revealed that three out of five people were only day traders. Day traders are those investors who buy and sell a stock within a single trading day “Desperate men with only Rs25,000 to invest cannot afford the big stocks – they only play the day trading game in second and third tier stocks with an aim of making a few thousand rupees,” said another member who empathised with the plight of the small players.
He added that most of these investors did not return after a few days. “Most of these people usually end up losing the small sums of money they came to the market with. This is something that happens almost every time, even if they do manage to make some money initially,” said Karachi Stock Exchange (KSE) member Yaqoob Habib.
“Small shareholders were always few in number,” said Habib, explaining that around 20 members generally carried out 80 per cent of the trading. “But the small shareholders would usually be more interested in long-term investment. It is not that day traders have increased – it is the small investors who have left,” he added. Talking about a drop in investment after the stock market crash of 2008, he informed that it was only the mutual funds, banks, modarabas, and large clients who were still investing in long-term.
A senior ex-member, still an active investor, blamed the capital gain tax (CGT) for market’s problems. He said the crashes had obviously hurt and driven investors away, but blamed CGT for preventing their return. He explained that the involved paperwork also contributed. “The income tax department has too much power; it scrutinises the amount being invested, and can also access your bank account details through your Unique Identity Number.”
Of the total 214 offices in the exchange, 42 have shut down. Two members of the KSE predicted that plenty more brokerage houses would shut down by July. “We do not see any hope for the future; there are 200 member seats in the trading hall and only 26 of them are presently occupied,” said one of the members.
Delisting of 150 companies
For the first time in 2010, plenty of companies were unable to declare dividends due to a cash crunch. “Companies expecting unfavourable cash flows are reluctant to give away their cash deposits,” said KSE Director Zafar Moti.
He said that small shareholders were suffering because of the lack of dividends. ”We are going to delist 150 companies, which are not abiding by the rules of the Karachi Stock Exchange and the Securities and Exchange Commission of Pakistan,” said Moti.
He added that these offenders were not paying dividends or the exchange membership fees, in addition to not holding annual general meetings. He did, however, inform that these companies constituted only two per cent of the market capitalisation.
SECP has also supported the delisting proposal. Moti said that delisting would not affect too many people, but another director was of the opinion that these companies should be forced to buy back their shares so shareholders receive what they are owed. “Assets of these companies should also be assessed independently, so it is not just the banks who receive what they are owed.”
However, Moti believes the future is not completely bleak, saying, “Companies which were unable to declare dividends this year will probably get back on track and make up for this soon.” Steps have been taken to protect investors, as entry and exit from the market has been made difficult by increasing the deposit requirement.
However, it is unlikely that just market rules and regulations will improve performance. Invest and Finance Securities Research Director Khalid Iqbal Siddiqui explained that no matter what measures or schemes, such as the Margin Trading System, were taken to protect investors, the situation in the market would not change. “The fundamental state of the economy and the profitability of the companies need to be increased. Artificial measures alone can never buoy up the system on their own,” said Siddiqui.
Published in The Express Tribune, April 8th, 2011.