The government broke its silence on the fate of the stock market on Friday as the finance adviser to the prime minister sprang into action an hour after the close of the market, which had witnessed bloodbath that day.

Dr Abdul Hafeez Shaikh met a delegation of stockbrokers, led by PSX Chairman Sulaiman Mehdi, and gave a patient hearing to their woes. From the peak of 53,124 points on May 25, 2017, the KSE-100 index tanked 20,029 points or 38 per cent to the three-year low of 33,166 points on Friday. Individual stocks from both blue-chip and second-tier categories lost 50-80pc of their value. Since the 1994-96 slump, the market has not fallen for three years in a row.

The music to the investors’ ears was the Finance Minister’s consent on Friday to consider the recommendation of creating a market support fund (to bail out) the market. Mr. Sulaiman Mehdi confirmed to this writer that “no amount regarding the size of support fund had been decided and rumours specifying it, were baseless”.

In all the twisting of rules, small investors with the capacity to trade in the ready market only are clearly at a loss

He went on to say: “We forwarded a proposal for a market support fund and told the Finance Minister that a success story already existed of a support fund and he agreed”. The last market support fund was set up during the market meltdown of 2008 to arrest the free fall in stock prices, which had plunged by almost 55 per cent in four months.

A government-guaranteed Stock Market Support Fund of Rs20 billion was set up under the management of NIT on Jan 13, 2008. It invested in the shares of eight government-owned enterprises listed on the stock market: OGDC, PSO, PPL, Sui Southern, Sui Northern, PTCL, National Bank and Kapco. The move, which at the time was presided over by the then chairman NIT Tariq Iqbal Khan, provided the sinking market with stability. National Bank had contributed Rs7bn, EOBI Rs5bn and State Life Rs2.5bn.

After the conclusion of the meeting, Finance Minister along with the brokers delegation also met Governor State Bank of Pakistan Dr. Reza Baqir, ostensibly to discuss the modalities of the support fund.

Although it would take a while to persuade all the participants of the fund to extend their cooperation, the news may give new lease on life to the market. Professor Khalid Mirza, chairman of the Policy Board of the Securities and Exchange Commission of Pakistan told this writer on Friday evening that he was in favour of a fund that is created to curb excessive volatility in the market.

Mr Mirza, however, emphasised that he had little sympathy for people who acted irrationally and traded beyond limits and now wanted to be bailed out. “It is the responsibility of the market to protect both the longs as well as the shorts”, he said.

The developments on Friday eclipsed the ‘’F8’’ window issue, designated in the trading system for Blank Sale. Several knowledgeable persons affirmed that the “PSX Regulations relating to execution of Sale/Blank Sale in Deliverable Futures Contract (DFC) Market” was at the centre of a major controversy. A senior market participant had pointed out to the PSX, a while ago, that many big market players, including high net-worth individuals (HNWI); brokers; institutions and mutual funds, sure of a market decline due to host of bad news on the economy together with uncertainty over — IMF package, MSCI, FATF, devaluation, Monetary policy and Budget 2020 — resort to blank and short selling in the Futures market early in the morning, collect the difference at the close and continue to make fortunes at the cost of pushing the ready market deeper in the dumps.

Consequently, voices were raised at the PSX for putting a ban on ‘’blank & short selling” to arrest the market fall. The Exchange released a notice on April 30, stating: “PSX has observed that F8 window is being used for executing sale transactions in DFC Market despite owning securities or having Pre-Existing interest and such mistakes, if inadvertent, are not being modified through sale modification interface provided in the trading system, which is a violation of PSX Regulations 13.5.2”.

The PSX notice was interpreted by some quarters as a prelude to the placing ban on blank and short selling. But those in the knowledge of rules said that the PSX notice did not refer to any change in the rules. Regulation 10.9 relating to “Temporary Prohibition on Short Sales” clearly states: “The Board may temporarily prohibit Short Selling completely for a specified period with any extension thereof”. But the rule comes with a qualification that such prohibition could be made by the Board “with the prior approval of the Commission and after notice to the Brokers”. Since no notice to the brokers has been served or approval of the Commission obtained, the unsavoury game in high finance continues.

In all the twisting and turning of rules, small investors with small means with capacity to trade only in the ready market are clearly at a loss. Among the already tiny number of 238,763 total investors in Pakistan equity market, the largest component is made up of small voiceless investors who have taken the brunt of the blow. The volumes in the ready market are anaemic, which previous Friday hit seven-year low at 39m shares. On the other hand, the daily volumes in the future contracts have risen exponentially.

Published in Dawn, The Business and Finance Weekly, May 20th, 2019