Skeletons in the closet: SECP finally orders investigation into 2008 stock market crash

Former chairman of SECP will examine causes, factors and outcomes of crisis.

ISLAMABAD: After a gap of over four years, the equity market regulator has decided to investigate the causes of the 2008 Karachi Stock Exchange crash, which wiped over one trillion rupees from the market and affected nearly all stakeholders.

The Securities and Exchange Commission of Pakistan (SECP) has hired SECP former chairman Shamim Ahmad to conduct a study that will determine the factors that led to the crisis and the role played by different stakeholders at that time, said the regulator’s spokesman Imran Ghaznavi here on Friday.

Ahmad, who served as SECP chairman from 1997 to 2000, has been tasked to complete his findings by the end of April 2013, said Ghaznavi. The study will also investigate the role of the SECP, banks, brokers and the other market players in and during the crisis.

Ahmed will prepare a report on the background and the impact of the crisis, and give recommendations to help avoid a recurrence of the 2008 mayhem in Pakistan. He will identify factors leading to issues observed in the Pakistani securities market in 2008, and analyse any correlation between the market’s movements and global trends.

The study will also evaluate the rationale behind the floor placed on share prices of listed securities with effect from August 27, 2008 in terms of Force Majeure Regulations of the Regulations Governing Risk Management for the Karachi Stock Exchange, the Lahore Stock Exchange (LSE) and the Islamabad Stock Exchange (ISE) respectively.

Ghaznavi said the causes of the 2008 crisis had not been ascertained earlier, as people believed it to be an outcome of the global economic crisis, domestic economic instability and the oil price shock. He said that since the crash, brokers have blamed bankers for blocking cash flows, which they claim had caused panic in the market, while bankers point the finger at brokers. “Action will be taken [against] whosoever [is] found responsible, and the report will be published,” he stated.

The SECP had expelled eight brokers after the market crashed in 2008, while two directors who had then served on the Karachi Stock Exchange Board were also declared defaulters.

The spokesman said the study will also analyse the role of SECP in the imposition of the floor on stock prices, and the subsequent decision to remove it on December 15, 2008.

Ahmad will review the impact of the imposition of the floor on share prices and on market participants and shareholders, and determine the extent to which any market participant benefitted or was disadvantaged by the imposition of floor, as the case may be.

He will investigate the events which took place during the imposition of the floor and subsequent measures taken to bring regulatory and operational reforms for enhancing transparency and investor protection. He will also examine whether the Central Depository Company (CDC) played its role as a frontline regulator of the depository system.

Published in The Express Tribune, November 3^rd, 2012.