The Karachi Stock Exchange (KSE), the country’s largest bourse and once most liquid equity market of the region, bears little or no attraction for unrepresented small investors apparently due to the profit-eroding taxes like Capital Gains Tax (CGT). The volume-starved KSE, however, still holds charm for big, and therefore, influential share traders who are drawing handsome capital gains through malpractices such as insider trading.
Insider trading is the buying or selling of a security by a trader, usually a large one, who has access to material, nonpublic information about that particular security. The official and unofficial sources affiliated with the local equity market confirmed to Pakistan Today that the menace of insider trading has always been rampant at the ill-regulated Karachi bourse. “Everybody who has connections does insider trading,” a senior broker at KSE told Pakistan Today. “And those who don’t do this are called stupid,” the broker added, bitterly.
Official sources in Securities and Exchange Commission of Pakistan (SECP) revealed that during the past seven years, a number of cases of insider trading at the KSE have been unearthed by the regulator. An SECP summary on insider trading, available with Pakistan Today, reveals that between October 28, 2004 and June 16, 2011, the Commission had convicted at least 10 individual and institutional investors, involving some big names on the stock market, for their involvement in the malpractice.
The regulator, the summary shows, during the period had slapped corrupt individuals and institutions with a penalty of over Rs7.693 million. Other censors the SECP imposed on the convicted investors include the payment of over Rs195.20 million as compensation for losses incurred by the affected firm or investor. The 10 cases of insider trading uncovered by the Commission include three institutional investors and seven high-profile individuals in executive, managerial and directorial ranks.
The institutions revealed in the SECP summary, are Pak Kuwait Investment Company Limited, Corporate Business Management Private Limited and Bawany Management Private Limited. While the individual perpetrators of insider trading include Alfalah GHP Investment Management Fund Manager Salman Ali Hussain; Shehzad Textile Mills CEO Imran Aslam; Shehzad Textile Mills Beneficial Owner Irfan Aslam; Pattoki Sugar Mills Director Muhammad Sarwar; Bawany Air Products CEO Hanif Bawany and Treet Corporation Limited Treasury Manager Jawwad Ahmed.
The ‘greedy’ investors, as termed by the SECP, perpetrated insider trading and were nabbed in different times, indicative of the fact that the malpractice remained persistent throughout last seven years. Cases of insider trading detected by the regulator, respectively, date back to October 28, 2004, September 10, 2009, December 9, 2009, July 23, 2010, December 23, 2010, December 29, 2010, December 29, 2010, May 19, 2011 and June 16, 2011. According to the SECP summary, the disgraced investors exploited undue financial gains through insider trading through using various ways and means that include a directorial ‘tip’ regarding negative or positive financial announcement of the related firm, having deliberated-provided access to information on the trading or acquisition intentions of a certain company and so on.
“Insider trading is carried out through a nexus of four persons, the chief executive, the chief financial officer, the auditor and the broker,” a senior stock broker at KSE confided to Pakistan Today. The broker claimed that to some extent, the SECP was also conniving with the culprits by not containing the menace through creating an effective deterrence. “The SECP remains in a deep slumber in this time,” he claimed. The stock broker stressed the insider trading has spared no equity market in the world including in the developed world such as in the case of the US. “This can only be curbed through hard regulatory deterrence.”
However, an SECP official insisted that the regulator was taking all necessary steps to ensure transparency at the country’s stock exchanges. “We have been trying our level best to curb insider trading through toughening the (relevant) laws and increasing penalties,” SECP Securities Market Division Director Imran Inayat Butt said. The SECP official said the general human ‘greed’ incited investors to try to exploit opportunities in any form in the stock markets world over. “You can minimise but not end it,” Butt opined.
The SECP director said the regulator through imposing heavy penalties on the convicted investors was sending a strong message to the market participants that “whoever commits malpractices will face the music.”