Equity market fund to support capital market

KARACHI - A meeting between Security and Exchange Commission of Pakistan (SECP) and Karachi Stock Exchange (KSE) has discussed the setting up of equity market opportunity fund (EMOF) of not less than Rs 50 billion to reduce volatility in the market and increase liquidity. According to a concept paper prepared by SECP, EMOF is considered to be the most institutionalized way for market intervention by regulators/governments in a formalized fund structure having approved preset rules of operation. National Investment Trust Ltd (NITL) will manage EMOF and for this purpose open a CDC account for each participant to deposit allocated shares in this account. NITL will allocate shares purchased on any day to each participant on the basis of that participant's percentage financial commitment to the fund. SECP said that the objective of fund is to reduce volatility by acting as shock absorber and not as means to prop up the market or any scrip price. EMOF will be providing stability and liquidity to the market in times of stress, giving exit opportunity to small investors and reduce the systemic risk in the market. The EMOF will not be a fund, but a club of like-minded institutions, willing to step up to provide relief to the market by investing at attractive fundamental valuations. Participants of EMOF will be financial institutions (banks and DFIs, state-owned institutions and semi government companies having substantially large pension and gratuity funds such as SBP, SLIC, EOBI, PRC, NIC, PIC, CAA, CDA, KPT, PSMC, PSO, SNGP, WAPDA, retirement funds of OGDC, PPL, SSGC, EOBI, PSO, PIA, NILC, Pak Railways, banks and DFIs etc. The institutions will be invited to join this fund, and firm commitments will be obtained. A separate UIN shall be allotted to EMOF which will commence operations within 3 working days of financial closure. SECP said that the credit crunches due to global inflation and rising interest rates, commodity prices have impacted Global Capital and equity markets. Among global constraints, the Pakistan equity market also suffers due to imperfect and incomplete information flow, currency weakness and media speculations about chaotic political situation and deteriorating law and order which lead to negative sentiments among investors about the economic fundamentals. However, the economics fundamental of Pakistan listed securities, with respect to current profitability and medium term growth remain bright. Many securities are trading at low P/E ratios due to "margin selling" as opposed to their intrinsic values. This dislocation of real and perceived values creates an opportunity for a long term institutional investor. Pakistan is not the first developing nation to witness such circumstances; India, Taiwan, Honk Kong, Thailand, and Korea are amongst developing nations which have witnessed such a steep decline in the past. EMOF will invest in KSE-30 Index scrips that are eligible for CFS and CFS MK - II.  Fund allocation will be according to the weight of each eligible scrip as a percentage of total CFS value as of July 08, 2008. The EMOF shall provide support to the market for five trading days in phase one. According to mechanism, on day 1, the fund will invest in eligible scrips at the closing values in the ready market provided that these values are below 20% of their 6-month weighted average prices. From day 2 onwards, the EMOF will invest in scrips at the closing values of the ready market provided that: These values are below 20% of their 6-month weighted average prices; and the scrip closed at the lower circuit breaker on that day. The EMOF shall be utilized in the following manner: 30% of funds will be made available on Day 1; 30% of funds will be made available on Day 2; 30% of funds will be made available on Day 3; 10% of funds will be made available on Day 4 and any unutilized funds shall continue to be made available till the 5th trading day. After Phase one, if funds are still available, the EMOF will review its investment strategy and may re-enter the market. Future purchases will also be accommodated through this process; however settlement shall take place on the expiry of the respective contracts. "No" brokerage/ commission shall be levied on buy trades of EMOF, besides "no" SECP levies or exchange laga shall be applicable on EMOF. Investor will be allowed to enter its bid only through any one broker. Offers entered through more than one broker shall be disregarded by the Exchange. Similarly, institutions (banks, insurance companies, NBFIs, state-owned enterprises and mutual funds) will not be eligible to sell their holdings to EMOF. Brokerage houses (their proprietary accounts), their directors, employees and their immediate family members/related parties shall not be eligible to sell their holdings to EMOF. Those institutions participating in the Fund cannot sell the shares eligible for the Fund in the futures or ready market till the Fund operations are complete.

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