Archive for the ‘Market support fund’ Tag

KSE – Karachi Stopped Exchange

From one of the best performing markets[1], Karachi Stock Exchange (KSE) had turned into a dead market and that too for more than three months mainly due to the implementation of Floor-Price-Level limit on 27th August 2008. Since then the trading volumes have touched the record low figure of around 3700 shares[2] and the KSE-100 index has mostly hovered around its Floor-Price-Level which is 9144.93 points. The decision to implement the floor was a combined effort on the part of KSE board and SECP and the first of its kind in the history of KSE. The initial reason cited for such a step was to prevent a possible flight of capital from the market. But according to some unofficial sources, a number of brokers were on the verge of default and they had a high influence behind this decision. The KSE board was also anticipating a bailout from the Government and as per the initial plans the floor was to be lifted in a week or two upon the announcement of the support fund. But constant delays and now a complete back out by the Government from its promise of a “market support fund” of Rs 20 billion and another “put option” of the value of Rs 30 billion,[3] mainly due to the pressure of IMF, left the market in a stale state for such a long period of time. It was not until MSCI Barra (NYSE: MXB) announced on 10th Decenber 2008 that it will remove the MSCI Pakistan Index from the MSCI Emerging Markets Index as of the close of 31st December 2008, that SECP issued a directive to remove the floor from Monday 15th December 2008. Here is the excerpt of MSCI press release

MSCI Barra to Remove the MSCI Pakistan Index from the MSCI Emerging Markets Index

Geneva – December 10, 2008 – MSCI Barra (NYSE: MXB), a leading provider of investment decision support tools worldwide, including indices and portfolio risk and performance analytics, announced today that it will remove the MSCI Pakistan Index from the MSCI Emerging Markets Index as of the close of December 31, 2008. MSCI Barra will maintain the MSCI Pakistan Index as a stand-alone index after its removal from the MSCI Emerging Markets Index. As a reminder, the MSCI international equity indices are constructed and managed with an objective of being fully investable from the perspective of international institutional investors. The deterioration of investability conditions in the Pakistani equity market since the imposition of the “floor rule” at the end of August 2008, which has resulted in the practical shutdown of the Pakistani equity market, and the continued lack of visibility regarding a potential re-opening of the market and its impact on investability have made the continued inclusion of the MSCI Pakistan Index in the MSCI Emerging Markets Index untenable.

The stock market, being one of the most liquid markets, is a strong component in an economic system especially in Pakistani economy where it has a number of stakeholders like mutual funds, brokerage houses, banks, investment firms, listed companies, traders and above all the investors. Evidence from the previous stock market crashes suggests that no one has ever considered the interests of the investors and things were not different this time round too. This enforcement of the floor was merely to protect the interest of the brokers and not the investors. But as more and more time elapsed the stakeholders pressed harder for the removal of floor and the resumption of trading since the more it was delayed the more troublesome it got. Following are just few of the problems that occurred over the past quarter:

  • An ever growing number of investors looking to pull out of the market.
  • Increasing chances and numbers of the defaulters – both brokers and investors.
  • Businesses associated with stock market recording zero revenues and therefore decreasing profitability.
  • Higher unemployment – due to the default of brokers, mutual funds, etc.

With the resumption of trading analysts are assuming that over the next few days the market could go down by more than 30%[4] and would stabilize only when the share prices in off market transactions equals the share prices in the stock market. With economy already on a downturn and people running out of cash, most of the investors would be entering the reopened market with an outlook of looking for a good price and an exit at the earliest. But for some of them out there it would be the best time to invest – when would you get such an opportunity to buy high dividend-yielding shares of OGDCL, NBP, PSO, etc at such a cheap price.