The Karachi Stock Exchange (KSE), in a letter to Securities and Exchange Commission of Pakistan (SECP), has said that one percent limit per member on trading would stifle normal market activity and would create liquidity problems following the decision to enhance cash margin ceiling. The KSE has proposed March 16, 2005, as the benchmark for futures counter, whereby the prices of nearly all scrips eligible for futures market were trading at their peak level, with volume amounting to 586 million, which also the highest.
On that date, the free-float of these companies averaged around 9.3 percent. The free float on March 16 on trading basis on that particular session for Hubco was nearly 10 million shares, whereas if calculated at one percent it would be 6.763 million shares, and at 5 percent it would be around 33.819 million shares.
Market men were of the view that out of the free float of nearly 4 billion shares, nearly 9.3 percent were called on the ready board at peak levels, and the stock market regulator should consider setting new benchmark for the free float system under the futures market mechanism.
The data of the KSE revealed an interesting feature. The table showed that PPL had around 68.583 million shares as free float, but according to the knowledgeable sources, as per the data available with the CDC, the total number of outstanding or free float was 123 million shares. Taking this account as average shares turnover, the free float would enhance further, experts said.
An analysis of the free float against the open position would reveal that even at the peak level on March 16, 2005, less than 20 percent of the free float was attracted in open positions in most of the scrips, thereby negating fears of over-speculation or cornering. Therefore, one percent of free float would virtually choke the normal market activity.
The KSE letter sent to SECP said that its board had examined and strongly felt that each limit/restriction should be market activity focused and provide a level playing field to both buyers and sellers.
The KSE felt that earlier there was no restriction prior to determination of overall limit of free float. The following additional restrictions have been imposed.
One percent restriction on trading in each scrip in futures by each member, based on free float. This was suggested in the meeting of April 1, 2005 in Islamabad, without the availability of free float figures. The KSE''s view was one percent or 5 million shares, whichever is higher. However, it was decided that at any point in time in a single scrip in a future contract shall not exceed 1 percent of free float of each scrip or the number of contracts determined under a slab system, whichever is higher. Subsequently, in the meeting of April 21 in Karachi, 1 percent without reference to slab system was insisted upon by SECP.
"Restricting each member to take exposure up to 10 times of net capital balance.
"Increase in exposure demanded in highest slab from 20 percent to 30 percent and collection of mark to market losses twice a day.
"Reduction of profit distribution from 30 percent to 20 percent.
"Disallowing of netting from ready to future for the purpose of capital adequacy.
"The KSE said that one percent limit on trading would stifle normal market activity and hence it was proposed that initially 5 percent of the free float be fixed.
Secondly, it was pointed out that the cost of funds is increasing daily, raising of slabs from 20 percent to 30 percent, by 50 percent and calling for cash margins will put severe liquidity crunch on the members, thereby affecting their ability to carry on business. It is therefore recommended that the requirement of 100 percent cash margin be reduced to 50 percent cash margin and 50 percent approved securities. It was further recommended that in lieu of 50 percent cash margin, submission of letter of credit from approved bank should be allowed.
The KSE urged the SECP that this condition seems to be very harsh and an over-reaction to the perceived over-exposure in the futures market. The stock market regulator should consider relaxation at a time when COT is being phased out and would drastically retard normal market activity in the futures counter.
The KSE pointed out that delay would cause unnecessary anxiety and affect market sentiment. It further said that for developing rules for cash settlement in futures market with effect from July 2005, the exchange management has been asked to make a presentation based on international practices to the board. The KSE is studying several modules practice in developed markets and would soon come out with a mechanism suitable for market conditions and intrinsic behaviour of all stakeholders, experts said.
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STATEMENT SHOWING FREE FLOAT AND RELATED PERCENTAGE
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%age of
S.No. Company Free Float 1% of Free 5% of Free Outstanding Outstanding
Shares Float Float As on 16/3/05 Float As on
16/3/05
01. Hub Power Company Ltd 676,384,097 6,763,840 33,819,200 10,092,500 1.49
02. Pakistan Telecommunication Co Ltd. 575,619,727 5,756,197 28,780,985 85,999,500 14.94
03. Sui Northern Gas Pipeline Limited 250,883,318 2,508,833 12,544,165 15,555,000 6.20
04. Fauji Fertiliser Bin Qasim Limited 194,017,858 1,940,178 9,700,890 21,893,000 11.28
05. Oil & Gas Development Co. Limited 193,850,791 1,938,507 9,692,535 39,004,000 20.12
06. Muslim Commercial Bank Limited 184,122,868 1,841,228 9,206,140 54,685,500 2.97
07. Telecard Limited 183,316,117 1,833,161 9,165,805 8,224,500 4.48
08. Fauji Fertiliser Company Limited 155,582,193 1,555,821 7,779,105 4,884,500 3.13
09. Sui Southern Gas Company Limited 154,724,307 1,547,243 7,736,215 12,404,500 8.01
10. Dewan Salman Fibre Limited 127,518,163 1,275,181 6,375,905 14,808,000 11.61
11. Pakistan Industrial Credit & lnv. Corp. 123,852,255 1,238,522 6,192,610 2,225,000 1.79
12. Maple Leaf Cement Limited 119,970,498 1,199,704 5,998,520 2,480,500 2.06
13. DG Khan Cement Limited 110,636,130 1,106,361 5,531,805 7,927,000 7.16
14. National Bank of Pakistan Limited 109,421,261 1,094,212 5,471,060 15,578,500 14.23
15. Faysal Bank Limited 97,812,558 978,125 4,890,625 6,382,500 6.52
16. WorldCall Communication Limited 83,220,336 832,203 4,161,015 266,000 0.31
17. Southern Electric Power Co. Limited 82,947,831 829,478 4,147,390 364,500 0.43
18. Nishat Mills Limited 79,892,859 798,928 3,994,640 8,100,000 10.13
19. Lucky Cement Limited 77,190,527 771,905 3,859,525 7,309,500 9.46
20. Engro Chemical Pakistan Limited 70,628,489 706,284 3,531,420 4,072,000 5.76
21. Pakistan Petroleum Limited 68,583,764 685,837 3,429,185 27,850,000 40.60
22. Pakistan State Oil Company Ltd. 65,024,677 650,246 3,251,230 10,728,000 16.49
23. The Bank of Punjab Limited 60,712,900 607,129 3,035,645 6,932,500 11.41
24. Union Bank Limited 60,663,514 606,635 3,033,175 2,316,500 3.81
25. Askari Commercial Bank Limited 59,554,005 595,540 2,977,700 2,291,500 3.84
26. Pakistan Oil Field Limited 58,785,285 587,852 2,939,260 7,254,500 12.34
27. PICIC Commercial Bank Limited 54,142,713 541,427 2,707,135 -- --
TOTAL: 4,079,059,041 379,629,500 9.30
REPORTING DATE: March 16, 2005
INDEX: 10,077
READY VOLUME: 666,736,060
FUTURE VOLUME: 586,184,000
May 7, 2005
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