Downswing in stock market is not speculative.
Economic Review: Do you think that 8-point proposal submitted by stock exchanges would be materialised and the liquidity crunch would be overcome?
Arif Habib: Yes, I am quite optimistic because Prime Minister Mohtarama Benazir Bhutto has agreed to our proposals, despite some objections raised by the Finance Advisors. People belonging to CBR were of the view that these proposals should be accommodated in Finance Bill instead of introducing them during midterm. So far the problem regarding Pension Fund rules, the CLA has issued a notification in this regard. However, Prime Minister has constituted a committee headed by Chairman, Corporate Law Authority to explore ways and means to implement these proposals. This proposal package when materialised would solve the liquidity problem.
ER: The public subscription against new floatations are highly disappointing. Do you think that stock market would be able to take up the floatation of the giants like HBL, PTC and UBL.
AH: Public subscription was disappointing mainly because of the bearish market conditions. There have always been cycles in stock market business. It may rightly be recalled here that our supply of securities in 1994 was reasonably substantial. Its volume was equal to the total volume of shares issued from 1947 up to 1993. When supply load in 1994 went to that extent it generated much pressure on the market. People instead of opting for new issues whose profitability was yet to be determined started concentrating and consolidating on the listed companies whose shares which were available on attractive rates. It resulted into lack of public interest in new floatations.
So far the UBL, HBL and PTC's absorption is concerned, the privatisation under plan is to transfer the management of these organisations. Those who invest will certainly be interested to acquire management. This is not for the secondary market. Public subscription then will be invited at an appropriate time. For instance MCB first took over the management and public subscription was invited later on. Allied Bank's management has been handed over but it has not announced public offering. In case of PTC public offering has been done and the issue left is the management transfer. Certainly there will be a lot of interest to acquire PTC's management. However, our main concern should be a good management transfer because its benefits would be reflected through efficiency and better public services. No doubt the size of HBL is big but the experience of UBL's privatisation would provide guidelines to it. Transfer of management will certainly enhance interest in new floatations, otherwise it would have a little public response in the existing scenario.
ER: Recent downswing in stock market is speculative. Your comment!
AH: It is incorrect to describe it speculative. Since the downswing has many reasons. The major factor is the deteriorating law and order situation of Karachi. Another contributing factor is the supplies of 1994 when they were brought in the secondary market for transaction it produced a lot of pressure. In the end of 1993 the listed capital was Rs. 60 billion and now it stood at Rs. 131 billion, depicting a rise of Rs. 71 billion. Meanwhile, the downturn in the international markets has also influenced the local market. The rapidly incoming foreign investment too was stopped. In the first-half the issue of balance of payment because of declining exports and increasing imports, coupled with deteriorating foreign reserves also left negative impact on the market.
So the downswing in stock market carries economic and technical reasons as well. No doubt there is an element of speculation in the market and the job of CLA is to discourage this factor, but it can't be eliminated altogether. Speculation has a role to play. It provides liquidity in the market. Moreover, I don't subscribe to the view that the slump in the market has a political undertone. The size of the market went to the extent of Rs. 325 billion and it is not easy for anybody to influence or manipulate such a big market because it involves a lot of money. However, the adverse publicity certainly shakes the confidence of foreign and local investors.
ER: Do you feel that the new rules and regulations approved by CLA would protect the genuine investors?
AH: CLA has proposed various steps to safeguard the interest of public investors. These rules provide many checks. The new rules will ensure protection of investors particularly in the area of premium on right issue foreign placement. But proper monitoring by CLA and stock exchanges is necessary for the implementation of these rules for achieving the desire results and benefits.
ER: It was earlier proposed to constitute stock watch committee to review the trends of economy. Do you think that it will improve the working of the stock exchanges.
AH: There is no such stock Watch Committee. Basically such committee exists in international stock exchanges to keep an eye on wide fluctuations. Some wide fluctuations are against the public interest. It is its prime function to examine whether the fluctuations are genuine or manipulated. In light of the observation the committee adopts corrective measures. Recently we have introduced computerized training system and started a pilot project which would be expanded within a year. Then we would be able to introduce the Stock Watch System.
ER. What is the procedure of delisting. What plans do you have for virtually dead companies.
AH: In stock rules there are four provisions which deal with the delisting procedure. A company is delisted when it fails to hold AGM for three consecutive years, does not pay dividend for five years, if market value of share remains less than half than its face value for a year and fails to clear outstanding dues of stock exchange. A company is usually delisted when it violates all the four provisions.
In the existing procedure a delisted company becomes scot-free, since there is no punishment for management. Its assets are neither liquidated nor it is accountable to anybody. So long it is listed it has certain obligations. In my last term in 1993 I had arrived at an understanding with CLA that under Companies Ordinance Section 305 G, liquidation procedures against the defaulter should be initiated. CLA had assured that liquidation procedure would be initiated against companies which were delisted by stock exchange, so that assets should go of their hands too. In our view the liquidation procedure as admissible under companies ordinance should be taken up against the companies delisted by KSE.
ER: Whether present environment is conducive for investment?
AH: Investment climate is quite conducive and in my opinion it is an appropriate time to invest. Market has a lot of attraction. Moreover, government policies are also encouraging. However, the hampering factor is the Karachi situation which leaves a negative impact on the market. If law and order situation improves I am confident that it would attract local as well as foreign investors.
ER: How do you foresee the future of stock market?
AH: Future of stock market is bright. Lowering of interest rates in the western market and growing recovery in the emerging markets would be some of the contributing factors. Moreover, the economic scenario of the country appears bright. It is also believed that government would be able to meet GDP growth and revenue collection targets. The production of crops like wheat, rice and cotton is also encouraging. These factors are likely to provide a boost to the stock market.
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|Title Annotation:||interview with Arif Habib, president of Karachi Stock Exchange Ltd.|
|Date:||Jan 1, 1996|
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