ISLAMABAD (July 11 2006): While terming former Securities & Exchange Commission of Pakistan (SECP) chairman Dr Tariq Hasan's accusations against the finance ministry baseless and incorrect, adviser to prime minister on finance Dr Salman Shah said on Monday SECP's flawed planning to replace COT with margin financing caused the Karachi Stock Exchange (KSE) crash in March 2005.

The adviser was addressing a press conference along with state minister for finance Omer Ayub Khan here.

Salman said the SECP made a number of changes in bourses rules and regulations at a very critical point in time in 2005, which played a significant role in KSE crash. He mentioned some of these changes, in particular, phasing out of COT and putting in place margin financing system and activation of the futures market that had been dormant since its introduction in 2001.

He added the SECP's strategy for phasing out COT was flawed as it had failed to put in place a financing limit for transitional period and concentrating its financing in much larger amounts on remaining scripts, particularly those noted by the task force. He said the SECP also failed to check unprecedented build-up in the futures markets that contributed to the KSE crisis.

He said forensic investigations into the KSE crash were underway and its final report will fix responsibility on those responsible for it. The adviser added the government will take action against culprits irrespective of their official position or social status and Dr Tariq Hasan, if involved, will be no exception.

The adviser recalled 2005 events that were related to the KSE crash. He said on March 15, 2005 KSE-100 index was at all-time high at 10,300 points and after only few weeks it dipped down to a level of around 6,500 points, wiping out market capitalisation to the tune of Rs 800 billion ($13.3 billion).

He said this was a major setback to stock markets and its aftermath lingered on for several months with a range-bound index, low transaction volumes and loss to investors.

The adviser added the KSE crash had full potential of derailing the economy. According to him, one of the setbacks of the crisis was that it took the entire society into its grip with apprehension over the future of financial markets in Pakistan.

The adviser reiterated the government's commitment for reforms programme. He said the government will continue to strengthen transparency, efficiency and working of the capital markets to enhance their capitalisation for the benefit of investors. He said for this purpose, Securities and Exchange Ordinance for demutualisation and corporatisation of stock exchanges, future contracts and establishment of commodity exchange have been included in the finance bill, 2006. He said modern financial markets were critical to the development of the country and the government's economic strategy hinges on fully harnessing savings of the people and channelling their investments through innovative, efficient and deep financial markets.

Salman recalled in April 2005, the SBP governor had constituted a committee, headed by Shaukat Tareen, to recommend methodology to make available requirements of margin financing and this was followed by setting up of an independent task force by the government on April 8, headed by former Justice Saleem Akhtar and comprised of Dr Zubair Khan, Shahid Kardar and Allana as members to investigate the stock market crash and determine its causes, fix responsibility and suggest changes for the future.

He said the task force completed its report in June 2005, and released it on July 2, 2005. The report was subsequently made public and posted on the SECP website. The report thoroughly discussed the SECP's role as regulator, the Karachi Stock Exchange management and brokers in the crisis and held each player responsible for a series of omissions and commissions that led to the build-up and subsequent crash in March 2005.

He said the task force also noted it was incumbent on the SECP to have acted more forcefully via directives to a recalcitrant exchange to ensure recommendations of previous inquiries into market crisis were implemented in a more timely fashion. This clearly puts responsibility on the SECP to have more proactive in monitoring the market and prevent market abuse.

The task force report points out in para 46 that on March 27, 2005 (Saturday), the SECP chairman and commissioner security markets (SM) held an informal meeting at the SECP Karachi office, which was attended by KSE managing-director, DGM (Ops) and major brokers.

The adviser claimed none of the participants had a bailout plan in view of the large settlement quantum of March futures contract and minutes of the meeting were also not recorded. The task force pointed out an ingenious arrangement in violation of normal trading rules were agreed upon during the meeting and this arrangement was designed to benefit some large arbitrage players.

He said the task force had advised final phase-out of COT financing should be handled in a manageable and timely manner so as to ensure that investors have alternate financing mechanisms such as margin financing. It could be made readily available and freely accessible to support investment and trading activities, besides further developing the futures market. But none of them was done in a proper manner and this carelessness on the part of the SECP served as a catalyst to build up crisis on the KSE in 2005.

He defended the finance ministry and categorically said the government never intervened into the SECP affairs and it will strictly follow the same policy of non-interference.

He told a questioner, Dr Tariq Hasan was not forced to resign by anybody; rather he had resigned in August last year against COT replacement. The adviser added his letter addressed to the Prime Minister on August 15, 2005 made no mention of the finance ministry or the Prime Minister's interference in the SECP working and the same was his position before the standing committee of the National Assembly on finance and revenue.

He claimed Dr Tariq Hasan made allegations against government functionaries in January 2006, when his resignation was accepted by the Prime Minister.

Copyright Business Recorder, 2006