It is not Carry Over Transaction versus margin financing afflicting the capital market, instead it is a total funding availability issue. This has to be tackled on a comprehensive basis and in a systematic fashion, said the Advisor on Finance, Dr Salman Shah to Business Recorder in Karachi.
He was confident that the thirteen-member committee constituted under the President of Pakistan Banks Association, Shaukat Tarin, would wrap up the matter in the next two weeks.
The committee will start work on Tuesday; meet on daily basis and give its recommendation by Saturday, July 23rd, 2005. He said that preliminary assessment of the market needs is said to be around Rs 100 billion. This, however, needs to be validated.
A thirteen-member committee has been constituted to assess the overall quantum of funding needed for the capital market: What are the various modes of financing available, and, the associated risk management system for each financial product?
Decision to this effect was taken at a meeting chaired by the Advisor on Finance, Dr Salman Shah, at the State Bank of Pakistan Head Office on Saturday, in a meeting with bank heads and leading brokers to ascertain the demand from the Karachi Stock Exchange that the SECP imposed cap of Rs 12 billion on COT (Badla) financing was stifling the daily trading volume.
While the Minister of State for Finance, Omar Ayub, was present at the meeting, the SECP Chairman Dr Tariq Hasan's absence was conspicuous. SECP was, however, represented by its Commissioner (Securities) Shahid Ghaffar.
"It was a pathetic display by the brokers who had come to the meeting without any homework," said a source. All they wanted was relaxation/restoration of the COT as they were having a difficult time in getting replaceable funding from the banks, added to the problem of weekly reduction in COT. They felt that margin financing was not only more expensive but also involved cumbersome paperwork and time consuming approval procedures.
It was also clear to the brokers that most of the time the Badla lenders were not taking adequate margins, based on market-to-market valuation, and they also did not want to be regulated by the exchange management.
"That is not so," said a COT financier. We feel that COT should be allowed to continue at present valuation of seven scrips, estimated at Rs 15 to 16 billion instead of Rs 12 billion.
Further, it was emphasised that despite frequent crises on the bourses there has never been a major default due to adequate safeguards in the T+3 system backed by the COT funding system. However, the bankers were quick to remind the brokers that on the last three occasions it was the banks that rescued the market otherwise without their help, the market would have crashed.
Since there were conflicting claims about the volume of daily carry-over, and cost estimates ranged from Rs 24 to Rs 100 billion, it was decided the Tarin committee must validate the amount needed. It should also come up with a plan giving overall quantum of funding needed going forward (in the next 12 to 24 months) in all forms and shapes; ie working capital, running finance, REPO, share financing, margin financing and COT. And, after giving a universal dimension to funding needs, the committee will then examine the various modes of financing and their risk management parameters.
Dr Salman Shah called for 'thinking out of the box' and did not rule out COT as a mode of financing with proper risk management in the future.
The thirteen-member committee will consist of: five leading bankers, five brokers, including the three Chairmen of the bourses; and the Managing Directors of CDC, NACS and NIT.
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