The facts regarding the Danka Controversy

The article by Khalil Ahmed under the caption Lessons from 'Danka Controversy' printed on July 1, 2006 is not based on proper research to ascertain the true facts and gives a totally wrong impression about the regulators of stock market ie is Securities and Exchange Commission of Pakistan (SECP) and Karachi Stock Exchange (KSE).
1. THE FACTUAL POSITION IS AS FOLLOWS:
The investigation reports of the Enquiry Committee of (SECP) are neither classified nor confidential documents. The reports are available with SECP and copies can be taken as per law and procedure. The orders passed by the Commissioner Enforcement and Appellate Bench of SECP are public documents and are available on its website. Had it been a secret, the issue would not have been discussed openly on the TV.
The author should have read the relevant reports and orders before making statement about the losses suffered by Iftikhar Shafi (IS) and thereby implicitly accusing the regulators.
2. Perusal of the Enquiry Report dated August 31, 2000 reveals that (I.S.) Group was responsible for creating crisis of May-June 2000 by manipulation of prices and cornering of shares of Adamjee Insurance Company Ltd (AICL) and Bank of Punjab (BoP). On the basis of findings of the said report the accused was issued show cause notice and an order was passed by the Commissioner Enforcement SECP on April 09, 2001. The accused filed an appeal before the Appellate Bench of SECP, which upheld the decision of the commissioner vide it order dated October 23, 2002.
The relevant extract from the Appellate order is reproduced below:
PARAGRAPH (49) OF THE SECOND ORDER READS AS UNDER:
-- It has been repeatedly argued by the Appellant IS that the real cause of securities market crisis in 2000 was due to the change in exposure regulations by the KSE. In this respect, IS contended that not only was such a change made with the intention of crippling IS exclusively, but also is tantamount to manipulation of the market by the management of KSE. :...., the inquiry committee has observed on page-23 that "no major market player, particularly Nisar Elahi, Iftikhar Shafi or their brokers namely First Capital ABN Securities, Hanif Moosa and Hanif Dharwarwalla were affected as they had no or little loss from April 10 to 28, 2000".
-- The inquiry committee on page-34 was also of the "opinion that the management and board of LSE operated the exchange with less prudent exposure regulations and held a favourable bias towards the group of investors known as Iftikhar Shafi and Mian Nisar Elahi and their stock brokers". In view of the above findings the Appellant IS has not adduced any evidence to rebut the aforesaid position and failed to prove that he has suffered any loss or that such loss was due to such change in regulation. It may also be relevant to add as argued by LSE there was no change in exposure regulations of LSE and also that manipulation by parties in any case also related to the time prior to change in KSE Exposure Regulations.
-- We would also like to point out that IS was not a member of KSE the changed exposure demands were only affected against brokers. In such a situation that group's broker would either have to obtain the required shares to satisfy their effective exposure demand from the group or alternatively from their own resources the omission to do which would have constituted acts of default by the brokers and not the Group Entity as per the Exposure Regulations of KSE.
-- The extract from page 58, 59 of the SECP Enquiry Committee Report reads as under.
-- "The investor played to the tune of Badla financiers and quietly kept on filtering money emanating out of rising prices in COT in either cash or securities and in the end let the short seller and Badla providers hold on to high priced positions which were squared off at huge losses at low prices when Iftikhar Shafi and Associate refused to pick-up delivery as result their stock brokers defaulted on payments in clearing to the exchanges.
-- On page 18 of the First Committee stated as under: "On April 3, 2000, the Management issued a Notice No KSE/N - 1217 effective from April 6, 2000 ...requiring margin in the Bank of Punjab (BoP) shares @ 50% instead of earlier margin requirement of 20%. This increase in margin was well within the competence of the Management and is attributed to substantial rise in the BoP share price over a few weeks with large quantity being placed against exposure.
3. It is amply proved that the change of exposure rules was within the powers of KSE, it was made in accordance with the proper procedure to protect the larger interest of investors. (I.S.) Group did not suffer any loss due to this change instead the loss of clearing house of KSE was considerably reduced.
4. A glance on the Articles of Association of KSE clearly reveals that the Board headed by the Chairman is responsible for policy, whereas the management of KSE, headed by the Managing Director, looks after day-to-day affairs. The system as operative at relevant time did not provide the detailed information regarding investment by different investors and the devices of manipulation of prices of shares could not be readily detected. However persistent rise in share price of Adamjee Insurance Company Ltd (AILC) and Bank of Punjab (BoP) was detected soon and appropriate corrective measures were taken by KSE promptly when the cornering of shares by (I.S Group) came to its notice.
5. It is unfortunate to note that the author has alleged (without ascertaining the true facts about the date of establishment of the Mutual Funds) that Badla was being provided by Mutual Funds of ex-chairman. The Mutual Funds of the ex-chairman came into existence in the year 2002 much after the crisis.
6. The relevant data of the trend in KSE 100 Index reveals that market was at the lowest ebb at 766 points after nuclear test in 1998; it stabilised at 1100 - 1200 and increased to 1456 after change of government in 1999. It was artificially raised by massive purchase of AICL and BOP shares by the (I.S.) Group in the year 2000 through Badla/COT. The prices of these shares reached their highest level in April 2000 when the group sold its shares at peak prices, siphoned off profits and did not take deliveries leaving the brokers with losses.
7. The broker of (I.S.) Group Hanif Moosa defaulted, others suffered huge losses and LSE market came to a financial collapse. We wonder why the author did not mention the statement of Aqeel Karim Dhedhi, who highlighted through video contact that he had to suffer huge losses as the (I.S.) Group did not settle the Badla/COT transactions and failed to take deliveries.
8. Although clarifications do not quite nullify the damage done, in order to rectify the matter to whatever extent it is possible now, this article seeks to bring the true facts for the right thinking people. However, it would have been best if Khalil Ahmed had in the first place acted with the responsibility and diligence called for when writing in the national Press.
(The writer is Advisor to the Arif Habib Group.)