‘Conflict of interest at the heart of KSE board’
Many say the downward trend can be attributed to uncertainties over discussions with the IMF.
KARACHI:
The consecutive decline witnessed at the Karachi stock market last week has become a controversial subject. Many say the downward trend can be attributed to uncertainties over discussions with the IMF while others link the fall to the impact of the floods on the economy and postponement of talks between the Federal Bureau of Revenue and the Karachi Stock Exchange (KSE).
Others, though, argue that the plunge was a direct result of in-fighting on the KSE board.
Despite the floods and other domestic factors, the Pakistani market was really not out of sync with the region as five of the seven major Asian markets ended the week in the negative.
So what was the impact of the so-called in-fighting at the KSE board? Insiders claim that there was dissent from two directors, including the chairman of the board, over the margin trading system while the majority of the board approved it.
Sources say that the commotion created about dissent on the product could be because the Securities and Exchange Commission (SECP) has asked the Board and management of KSE to address the chairman’s concerns.
However, it is more likely that the buzz has been created by KSE members who do not like anything getting in their way.
One argument that has surfaced is that the board is dominated by brokers who outnumber non-broker directors, including the chairman. It should be kept in mind that the KSE is not only an exchange but also a regulator. Therefore, in essence brokers dominate the board that is supposed regulate them.
The situation can be better understood with the help of an analogy. It is like the State Bank of Pakistan being controlled by commercial banks, explained a market observer. Think about what this could do to the country’s banking system.
When products are proposed which have caused problems before, perhaps even resulted in crashes, someone needs to safeguard interests of investors who have poured their life savings into the purchase of shares.
However, sources privy to board meetings suggest that this is unlikely to be the brokers. Isn’t it more rational to expect independent decisions to come from the non-broker directors whose incomes do not depend on trading in stocks?
Perhaps debates and disagreements on the KSE board may not be a bad thing. In fact, according to one suggestion, a better idea would be to have no one with a conflict of interest on the board. That is: no brokers. In that case the brokers would not be regulated by other brokers but by outsiders who could be chosen from a pre screened list of eligible directors such as that kept by the State Bank.
It has been learnt that when brokers were challenged by SECP directors, they responded by claiming that the latter add no value and are unaware of the technical aspects of the business. Reportedly, they also asserted that the chairman, of course, should be from the brokerage community.
Even though this is ideal for making quick decisions it completely disregards the issue of conflict of interest, say others and thus of ensuring that investor’s interests were protected.
Published in The Express Tribune, September 1st, 2010.
The consecutive decline witnessed at the Karachi stock market last week has become a controversial subject. Many say the downward trend can be attributed to uncertainties over discussions with the IMF while others link the fall to the impact of the floods on the economy and postponement of talks between the Federal Bureau of Revenue and the Karachi Stock Exchange (KSE).
Others, though, argue that the plunge was a direct result of in-fighting on the KSE board.
Despite the floods and other domestic factors, the Pakistani market was really not out of sync with the region as five of the seven major Asian markets ended the week in the negative.
So what was the impact of the so-called in-fighting at the KSE board? Insiders claim that there was dissent from two directors, including the chairman of the board, over the margin trading system while the majority of the board approved it.
Sources say that the commotion created about dissent on the product could be because the Securities and Exchange Commission (SECP) has asked the Board and management of KSE to address the chairman’s concerns.
However, it is more likely that the buzz has been created by KSE members who do not like anything getting in their way.
One argument that has surfaced is that the board is dominated by brokers who outnumber non-broker directors, including the chairman. It should be kept in mind that the KSE is not only an exchange but also a regulator. Therefore, in essence brokers dominate the board that is supposed regulate them.
The situation can be better understood with the help of an analogy. It is like the State Bank of Pakistan being controlled by commercial banks, explained a market observer. Think about what this could do to the country’s banking system.
When products are proposed which have caused problems before, perhaps even resulted in crashes, someone needs to safeguard interests of investors who have poured their life savings into the purchase of shares.
However, sources privy to board meetings suggest that this is unlikely to be the brokers. Isn’t it more rational to expect independent decisions to come from the non-broker directors whose incomes do not depend on trading in stocks?
Perhaps debates and disagreements on the KSE board may not be a bad thing. In fact, according to one suggestion, a better idea would be to have no one with a conflict of interest on the board. That is: no brokers. In that case the brokers would not be regulated by other brokers but by outsiders who could be chosen from a pre screened list of eligible directors such as that kept by the State Bank.
It has been learnt that when brokers were challenged by SECP directors, they responded by claiming that the latter add no value and are unaware of the technical aspects of the business. Reportedly, they also asserted that the chairman, of course, should be from the brokerage community.
Even though this is ideal for making quick decisions it completely disregards the issue of conflict of interest, say others and thus of ensuring that investor’s interests were protected.
Published in The Express Tribune, September 1st, 2010.