Tarin comes naked on richs' side, orders public financial institutions to bear risks

[Naveed Yaseen]

NIT ordered to intervene in bourse activity from Monday
RECORDER REPORT
KARACHI (December 25 2008): The Advisor on Finance to the Prime Minister Shaukat Tarin has asked both the finances and financiers to resolve the Rs 9.8 billion of transactions conducted under the Continuous Funding System (CFS) or 'Badla' in an amicable manner and ordered the National Investment Trust (NIT) to intervene in the bourse activity from Monday December 29, 2008.

At a meeting held at his residence in Karachi, the Advisor asked the Financiers (lenders) to accept to partly adjust and carry forward the transactions to avoid sale of shares held in CFS so that market does not come under more pressure on Friday. He formed a committee under the Chairmanship of Mutual Funds Association of Pakistan Najam Ali.

The finances agreed to meet later in the night and come up with a formula acceptable to the Finances (borrowers) ie the brokers giving relief from additional margins to leverage investors. According to reliable sources, the formula under discussion was to give a waiver of 30 percent to borrowers of up to Rs 50 million; 20 percent for borrowing up to Rs 100 million; 10 percent and five percent for borrowing limit of Rs 250 million and Rs 500 million and above respectively.

The Advisor on Finance had to intervene after the Securities and Exchange Commission of Pakistan (SECP) could not resolve the issue of CFS funding. While the borrowers were in favour of another forced roll over directive and SECP did propose two options based on this premise - the lenders rejected the proposal feeling it was too one-sided.

Even in yesterday's meeting the Chairman SECP Razi-ur-Rahman Khan and the President of Abamco, Najam Ali exchanged hot words and blamed each other for the fiasco at the KSE and in the Sindh High Court.

The Advisor had to intervene due to the looming systemic risk since the removal of floor on December 15th, 2008 the whole universe of equity based investment is in suspended animation and there is still no price discovery at the stock market.

The major eight public sector scrips have declined by nearly 25 percent on the ready board and by 40 percent in off-market transactions. Even in illiquid stocks (called side items) there has been some side activity, however, in all major liquid stocks values have declined without any buying or on buying 100 shares per scrip.

CFS settlement has further aggravated the problem. Around 140 brokers were being affected. 54 brokers were issued notices by NCCPL upon removal of the stay order by the SHC. Now around 14 brokers are in suspension against claim of Rs 4 billion. Only two brokerage firms (having common ownership) reportedly account for Rs 1.4 billion in CFS borrowing.

The banking sector lending against shares is four times the outstanding CFS amount. Due to decline in market values banks are also inclined to sell in the market to meet margin requirements. The banks are forced to sell as borrowers are short of money or liquidity.

Second, the properties held by banks as collateral cannot be sold as there are no buyers in the property market. Since there are reports of rising non-performing loans eroding the profitability of banks - banking scrips which along with oil are market leaders and revenue spinners - and inventory losses of OMCs is adding to selling pressure.

Various sectors including automobile and cement are also adding to the selling pressure. Since corporate sector profits are declining and liquidity is still short in satisfying the appetite of trade and industry, the banks are not allowing borrowing against approved limits thereby creating a risk for the financial sector.

The Advisor on Finance Shaukat Tarin after proper evaluation reportedly asked National Bank, EOBI, State Life and a consortium of banks to provide a fund of Rs 20 billion - against a guarantee of the Government to purchase eight eligible PSE stocks from both CFS system held by banks towards financing against shares. These scrips bought at cut-throat values will be sold to overseas Pakistanis as a package to hold on for 24 months and earn both dividend and capital gains.

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