Competition Commission of Pakistan frowns on KSE fixed floor move

[Naveed Yaseen]

* Feels placing price floor prevents free interplay of market dynamics * KSE director says move does not violate rules

By Sajid Chaudhry and Tanveer Ahmed
KARACHI: The apprehensions over setting the floor on August 27, 2008 stock valuations by the Karachi Stock Exchange (KSE) substantiated on Tuesday when the Competition Commission of Pakistan (CCP) took notice of the latest events at the stock market.

Even before the notice of the CCP, market players and analysts were questioning the move of the KSE to set the floor suggesting that it was aimed at saving the skin of big brokers, who were trapped in a falling market, but leaving the foreign investors vulnerable because the zero lower lock left them with no exit available.

“The CCP notes with concern the decision of the Karachi Stock Exchange to place price floor, across the board, based on the closing prices of securities on 27 August 2008,” a CCP announcement said. The commission feels that placing this price floor prevents the free interplay of market dynamics, and forecloses free choice, entry and exit by traders. It also discriminates against investors who are “short” and favours those who are “long”, apart from the moral hazard implications.

The commission asked the KSE to provide certain clarifications with regard to the price floor to determine whether their action has violated any provision of the competition Ordinance, 2007, the CCP said. “Under risk management system, KSE has the authority to take such measures to support the market and there is nothing that is in contravention of rules and regulations,” responded Shahzad Chamdia, a director of KSE when asked about the CCP notice.

He pointed out that under discretionary powers, the board of directors of the KSE could even suspend trading, if need arises in a particular situation and added that the steps like revision in upper and lower circuit breakers in the past is a clear example of supporting the market in a difficult situation.

He said that such interventions are practiced worldwide to back the market and cited the examples of Nigeria and Vietnam, which also passed through this trauma, resulting in placing of floor.

“No doubt, it is a hurdle in free market movement, however this is a temporary phenomenon and might remain for a particular time period,” Chamdia replied when pointed out that CCP termed it against the free market dynamics.

Chamdia’s argument has however been contested by stock market analysts, who called it a devastating step for the development of the capital market. “If our authorities keep on intervening in the market, then there is no such thing like free market, which has been propagated for long,” analyst Faisal Shaji believed.

“It is also absurd to compare the market with those of Nigeria and Zimbabwe where floor was set in the past,” Shaji felt.

He was not hopeful of any positive outcome for the market following the notice of CCP on floor-setting, as he believed that the CCP has failed in the past in dealing with such situations.

It may be noted that the board of directors of the KSE are due to meet on Wednesday (today) to decide about the future of floor-setting in the market.

http://www.dailytimes.com.pk/default.asp...2008_pg5_1