KARACHI – The regulator and management of the domestic equity market seem to have failed to preserve the integrity and credibility of the country’s capital market, where the fate of hundreds of aggrieved investors faced with substantial losses is hanging in balance. The Securities and Exchange Commission of Pakistan (SECP) has long received complaints from the investors, particularly small ones, regarding the non-transference of shares and funds by various brokerage houses at the country’s largest bourse, Karachi Stock Exchange (KSE).
Brokerage houses like Eastern Capital Limited (ECL) have been found to be involved in malpractices like unauthorised pledges and movements of shares, violation of the Code of Conduct, non-collection of margin from the clients, non-segregation of the funds, shares of clients, criminal misappropriation of property, criminal breach of trust, forged documentation, possession of document with foreknowledge that it is forged and intending to pass it off as genuine.
However, despite reports of rampant regulatory abuse; the performance of the SECP as a regulator and KSE as a manager and guarantor has, apparently, not been up to the mark.
“The KSE has failed to protect the interests of investors as many of the more than 5000 claimants against seven defaulting brokerage houses were paid percentage-wise, while hundreds are still awaiting payments,” an investor told Pakistan Today at KSE.
Given the lack of alternative resources, the KSE has found it difficult to clear claims running into millions of rupees of the investors against defaulting brokerage houses like Eastern Capital Limited (ECL), Capital One Equities Limited (COEL), Cliktrade Limited (CtL), Shahid Darvesh Securities, Prudential Securities and others, they noted. Taking the example of the ECL, sources claimed that while assets of the defaulting broker amounted to Rs 60 million only; the claims submitted by over 1,600 investors were calculated by the KSE on October 30 2009, at over Rs 421.63 million.
They stated that even the Members Default Account of the KSE could not help the managers of the country’s largest bourse to clear outstanding amount of the investors. This was despite the fact that the KSE had recently revised payments to the losses-hit investors from the Default Account to Rs 250 million from the previous figure of Rs 10 million, sources insisted.
As for the SECP, sources claimed that the regulator had failed to address the investors’ problems in a prompt manner, with the apex regulator taking years to take stern and effective action against the ECL for its alleged involvement in the non-transfer of shares and non-payment of funds to the investors. “The SECP has not been able to ensure transparency at the equity market where brokers and companies are exploiting the small investors at will,” a small trader complained.
On Wednesday, an upset occurred with the SECP filing a criminal complaint (No 314/2010) in the court of Session Judge Karachi South against the ECL, its director and all others involved in the non-transfer of shares/funds and unauthorised pledges of client’s shares.
“It emerged that the shares of the clients which were in control of Eastern Capital Limited for trading purposes only were moved, pledged and transferred to other accounts, without any authorization,” the SECP said. It added, “This is the third criminal complaint against the brokerage houses involved in illegal pledging of shares. The earlier two were filed against COEL and CtL.”
According to the SECP, shares were pledged with the banks to obtain financing which were mostly used to liquidate liabilities of the brokerage house resulting in a total loss to investors.
Arrest warrants have been issued against the accused who are to be tried under Section 24(2) of the Central Depositories Act 1997 and other relevant provisions of Pakistan Penal Code.
The regulator has also initiated inquiries against the ECL among five brokers who, as the SECP statement reveals, never bothered to take, what the sources said, directives of a ‘weak’ regulator seriously. The commission has formed enquiry committees comprising officials from the SECP, KSE and Central Depositary Company to look into the scams.
The SECP has also moved a reference under Section 18(b)(i) of the NAB Ordinance, 1999 with a request to investigate the affairs of COEL and CtL “to punish the culprits who have cheated innocent investors and to recover the investors’ savings which have been misappropriated/transferred for the personal benefits of the sponsors, directors and their associated concerns.”
As a future remedial measure, the SECP has recently approved a project called “Automation of Securities Settlement” jointly being implemented by the NCCPL and CDC to facilitate the market participants to automate the mechanism for settlement of book-entry securities by eliminating the need for any manual intervention. “The new system not only improves efficiency but also help in preventing mishandling of book entry securities of clients,” the regulator said.
