Stock market trading volumes: Major factors behind sharp decline identified

Securities & Exchange Commission of Pakistan (SECP) Policy Board has identified major factors responsible for sharp decline in stock market values and trading volumes during the past few weeks including Pakistan Stock Exchange (PSX) sudden intervention (at the behest of SECP) banning the market's 17 years old established practice involving blank sales in futures market.
The Securities and Exchange Policy Board met here at the SECP Headquarters under the Chairmanship of Prof Khalid Mirza and discussed reasons behind the sharp decline in stock market values and trading volumes over the previous few weeks.
When contacted, Khalid Mirza said, "Policy Board noted that the main reason for market crash (after April 30) was the fact that 17 years old operating usage of the stock exchange involving blank sales in futures market against subsequent purchases in the ready market were stopped by the stock exchange at the behest of the SECP. The Commission demonstrated remarkable insensitivity towards established market practice. After 17 years, a dormant rule was suddenly agitated at the cost of trading volumes with no beneficial results", Khalid Mirza added.
The Policy Board, at the outset, deliberated on the sharp decline in stock market values and trading volumes over the previous few weeks, in particular during the current month. SECP's Securities Market Division briefed the Board in the matter.
The Board was, however, not convinced by the reasons for this decline provided by SECP, namely: uncertainty regarding IMF, devaluation, interest rate increase expectations, expected low and DP growth rate, and inflationary trends.
While the Board recognised that these were all contributory factors, the fundamental reason underlying the market's bearish behavior was the cyclical change in market sentiment and outlook that accentuated the negatives and discounted any positives. Further, the Board noted with considerable concern that the situation was greatly aggravated by PSX's sudden intervention (at the behest of SECP) banning the market's 17 years old established practice whereby blank sales in the deliverable futures market against possible pre-existing interest could be subsequently rectified. The chairman expressed the view that this precipitous action by PSX which displayed insensitivity to time-honored usage of trade did not reflect well on either PSX or the apex regulator. When advised that PSX had later withdrawn this measure served to mollify the Board to some extent: In addition, the Board noted that the market surveillance capability of both PSX and SECP was fairly primitive and directed that as a priority measure modern surveillance software be installed in SECP as well as PSX (with robust interface possibility).
The Board reviewed the implementation of all previous directions that were given to the Commission. It was noted with grave concern that the directions pertaining to the withdrawal of all cases from law enforcement agencies (LEAs) had not been carried out. It had been decided in the previous meeting of the Board, on April 21st, the cases that came within the mischief of the Companies Act, the Securities Act, the SECP Act, and all other laws administered by SECP, should be investigated by SECP and not LEAs. Similarly, in the meeting of April 21st, the Board had also directed the Commission to recall all SECP officers seconded to LEAs. Much to the Board's heightened concern; this too had not been carried out. The Commission was once again unequivocally directed to secure the immediate repatriation of all SECP officials seconded to LEAs and that appropriate letters be addressed to the LEAs concerned in this connection. If then it transpires that there is an unassailable reason for an officer to remain deputed with an LEA, it would be essential that the approval of both the Commission and the Policy Board be obtained and also that SECP be fully compensated for all tangible and intangible costs in connection with this secondment.
The Listed Companies (Buy Back of Shares) Regulations, were presented to the Board after incorporating comments received from the public. These were approved with directions to further simplify in several respects, including inter alia removal of the requirement for a consultant to the issue, raising the limit on buy back from 15 percent to 20 percent of the paid-up capital. The Commission was asked to expedite the promulgation of these rules in a facilitative form so that companies are encouraged to utilize their cash reserves for buying back their own shares, thereby helping minority shareholders recover the value of their eroded investments. The Policy Board emphasised that several decisions previously taken with the goal of deepening the market need to be immediately implemented. These include: firstly, the fee levied by SECP on mutual fund AUMS should be reduced from the unconscionable level of 8bps to 2 bps, charging of sales load be allowed on all VPS subscriptions, the costs charged to mutual funds be capped at 4.5 percent (With no sub-caps for individual cost items), and governmental charges/levies be charged separately to mutual funds (and not included in the overall costs ratio) which was always the practice in the past; secondly, minimum brokerage commissions be prescribed as was the case in the past; and thirdly, in order to promote new listings and depth in the capital market, listings and capital issues by loss-making companies be allowed as is the practice in most progressive jurisdictions.
The Board also gave its consent to draft Panel of Provisional Mangers and Official Liquidators Regulations, as well approval for several amendments in the various rules and regulations including the Insurance Rules, PSX Rules, Securities & Exchange (Licensing and Operations) Regulations, and 7th Schedule of the Companies Act, 2017.
The Board also considered and approved in principle various proposals of the PSX Stockbrokers' Association:
First, SECP should encourage dispute resolution by the stock exchange in the first instance, and thereafter, as necessary, SECP can deal with the case. Also, all matters that fall within the jurisdiction of the Commission must be addressed by the Commission and not referred to an LEA or a criminal court.
Second, the current anomalous situation whereby pre-IPO holdings of shares are not deemed to be "Securities" with adverse tax implications and non-acceptability as collateral would be a significant negative for new listings on the stock market. This needs to be rectified in the upcoming Finance Act.
Third, instead of classifying all brokers, big and small, as Public Interest Companies, the usual criteria applicable to private companies may be used to determine whether or not a broker is a PIC.
Fourth, instead of SECP's concurrent regulatory jurisdiction alongside that of PSX, it would be best to have clarity in the matter with a defined domain for PSX. The Commission was asked to implement these proposals, as appropriate, at the earliest.