The regulators have partially banned share trading under the Negotiated Deal Market (NDM) transactions on the country’s bourses where the stock brokers are found to have been misusing the securities of their clients for personal gains.
However, the Securities and Exchange Commission of Pakistan (SECP) is focusing more on protecting the investors’ shares. Sources in the Karachi Stocks Exchange (KSE) claim that the NDM transactions were taking a heavier toll on investors, especially smaller ones, in terms of a huge difference in the share prices that are set by the two parties under such off-market deals.
The SECP, in a letter issued on April 3 to the managing directors of the three stock exchanges in Karachi, Lahore and Islamabad, said the stock brokers were using NDM transactions to transfer securities from the sub-accounts of their clients to their own house accounts or some other sub-account they control.
This practice, the regulators said, had “become a vehicle to misappropriate the securities owned by the clients and to bypass the restrictions on unauthorized movement of securities in the CDS”.
The commission already has restricted the movement of shares in the Central Depositary System (CDS) to protect the investors’ assets.
Urging the need for implementing a suitable mechanism to prevent the anomaly, the SECP instructed the front regulators at all three bourses to disallow all transactions in the NDM between a broker’s proprietary account and a client of such broker.
Also, the regulator directed that the NDM transactions be prohibited between the clients of the same broker.
Having taken from April 14, the ban has also been communicated to the National Clearing Company of Pakistan Limited (NCCPL) and Central Depositary Company (CDC) the later being the one to have pinpointed the irregularity in its proposals to the stocks exchanges in September last year.
Having highlighted the misuse of clients’ securities through NDM, CDC, however, gave a cold shoulder to the SECP’s repeated reminders that the company should swiftly finalize its consultation process with the bourses and submit its proposals to the Commission for further action.
“Despite the lapse of considerable time and reminders, CDC failed to finalize and implement the subject proposal,” the apex regulator said in a letter it issued to CDC on April 3.
The ban, however, did not set well with the brokers who raised different queries regarding the restriction. This made the SECP clarifying, on April 10, that the ban on NDM transactions only was applicable in cases where such transactions would result in intra broker transfers of securities namely from house account to sub-account or from sub-account to house account or between sucb-0acocunts under the control of the same broker.
Increasing pressure exerted by, what the sources said, the “big fish” of stocks market has compelled the apex regulator to be flexible a little further. The SECP Friday has asked by April 30 the stocks exchanges for their comprehensive proposals to decide the final fate of the restriction on all such off-market thus unregulated negotiated deals.
The sources, however, claim that the anomaly also was causing financial losses to the investors, especially the retailers.
Citing t deals through NDM transactions in the stakes of KAPCO and HUBCO as recent illustrations, the sources said there was a huge difference between the market price and underline price for the two off-market negotiated deals.
The foreign shareholders of KAPCO, the sources recalled, had offloaded some 10-11 percent of its stakes in the scrip at an underline negotiated price of Rs 48 against the market price of Rs 64 per share. “The price difference is above 30 percent as against the regulatory cap of 5 percent,” they added.
Similarly, the price difference under NDM transaction for HUBCO ranged between Rs 7 and Rs 8 per share, the sources said.
The off-market share trading under NDM also is believed to be more secretive. “They share no detail with the investors. The negotiated share price is totally different from what appears on the trading screen,” claimed Yaqub Habib, a small investor at KSE.
The retailer recalled how he had offloaded some 5000 of his KAPCO stakes when he had seen the screen showing the scrip priced at Rs 64 at time when its international shareholder was selling his holding. “The price never came down from Rs 58, however,” he lamented.
All kinds of on- or off-market trading on the local bourses, he claimed, must be shown on the screen so transparency could be ensured. He said investors must be kept aware of all trading activities in the listed stocks.
To this effect, the front and apex regulators are mulling over the recommendations of Market Development and New Product committees to introduce sending SMS alerts against each NDM transaction to the respective clients.