ISLAMABAD: A group of small investors have approached the finance ministry and the capital markets regulator against the introduction of leverage product in stock markets on the ground that it could lead to another crash of the market engineered by some influential brokers.
A group of individuals identifying themselves as ‘small investors’ have written a letter to the minister and secretary finance, secretary law and the chairman SECP, which said that the introduction of any leverage product without punishing the brokers responsible for 2005 and 2008 stock market crashes, would lead to the third market crash.
Leverage is an arrangement under which the investors borrow money to fund the share purchase in the stock market.
A copy of the letter obtained from the finance ministry said that certain brokers misused ‘badla’ financing and had withdrawn liquidity from the market to manipulate the crash in 2005.
“Without punishing anybody the Continuous Funding System (CSF) was introduced after the crash,” the letter said, and added that the CSF led to the 2008 crash.
It said that the SECP again approved another leverage product ‘Margin Trading System’ (MTS) on Sept 16, without taking action against those responsible for earlier market crashes.
The small investors group also criticised the SECP for taking a sympathetic role towards the brokers and to the disadvantage of the investors. It has not yet identified the brokers, who manipulated the share prices by withdrawing liquidity from the market.
They further said that under the Central Depositories Act (CDC), 1997 the regulator has to identify and prosecute the brokers, who pledged the clients’ shares without their knowledge.
The group identified some investors’ protection mechanisms in the stock markets so that the leverage products do not prove to be counter productive.
The small investors suggested that section 32-E of Securities and Exchange Ordinance 1969, required the SECP to have completed the demutualisation of stocks exchanges by Dec 31, 2006, which has not been done as yet.
This rule was meant to protect the investors from the monopoly of brokers but the SECP made the demutualisation rules in 2008, which were later reshaped into the Demutualisation Act.
The group said that the SECP initiated an ‘uncalled for’ act of getting a new legislation over demutualisation, which helped to prolong the brokers’ monopoly.
They maintained that the SECP Act has the proviso of Investors Protection Fund at the national level in line with international practices for adequate and proper compensation to the defrauded investors.
“The fund needed to be replaced with the current fund being controlled by the brokers,” they said
The group further said that the SECP Act also required the regulators to establish an independent tribunal to adjudicate stock market offences and thus provide the investors relief against the malpractices of the brokers.
The small investors asked the finance ministry to intervene in the matter, saying that the SECP recently denied the establishment of such tribunal. The move has been made to protect the stock market offenders, the small investors said.
It said that under the scenario when the market mechanism is heavily in favour of the brokers the introduction of any leverage product would cause a serious harm to the investors.