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In March 2003, the KSE-100 Index had stood at around 3,000. Within 2 years, it had become a leader in the world and Asian stock exchanges and its index had jumped in leaps and bounds and gone up to as high as 10,700. 

Mr. Moin Fudda, the dynamic MD of KSE, has proudly given presentations at conferences, seminars, talk shows, etc., showing figures and impressive charts, giving comparative figures of leading stock exchanges and the successful performance of KSE.

With the KSE index climbing the way it was, every wanted to get a piece of the pie and jumped in blindly, especially when only 25% front money was needed to start trading in the badla shares. So small investors, with no experience or knowledge about shares, got greedy and jumped into the arena to make a quick buck and though many did make a lot of money, late entrants in to the ring but were burnt badly.

Mr. Fudda had always pointed out the risk factor in over trading in his presentation and the potential dangers of speculation and the need for margins. But as some analysts have stated, that when share markets gain more than 70 per cent in value in a short time, then alarm bells should have sounded to warn the investors and appropriate steps should have been taken to protect them, but this was not done. 

And so, the crash came as no surprise to the experienced traders and the circuit breakers, which had been installed to the KSE management to stem and control the rise and fall of shares, came into effect and investors were forced to sit on stocks they could not afford to hold and yet could not sell, due to the lower locks being enforced within 5 minutes of the opening of the KSE.

According to the figures available in the newspapers, in four days, between 21st and 25th of March, the KSE-100 index lost 25% in value and brokerage houses were flooded with orders to sell, but with no buyers in sight. OGDC shares crashed from Rs198 to Rs134 and still investors could not sell their shares because of the locks. 

This is when the small investors and brokers, who saw their life savings being washed away, lost their patience and the violence began. It started in the parking lot of the exchange and then spread to the management's offices, as angry investors blamed them for the crisis, demanding an explanation and a way out of a no win situation.

This display of anger against the KSE and its management was flashed on television screens across the world, eroding the confidence in the KSE that Mr. Fudda and the government had been building up in the International market.

It seems that the problem arose when those financing the “badla system”, decided that the market had reached a point of no return and refused to provide any more finance. Now for those who are not familiar with the badla system, which frankly neither am I, but let me try and explain.

When you buy shares through a brokerage house, you have to make the payment for those shares by the end of the week. If you do not have the funds for the payments, then the badla brokers arranges finance for you at a premium (borrowing at an interest), which varies from week to week. During the crisis, the badla rate had gone as high as 18% to 24% for two weeks.

When the badla financers realized that the situation was spinning out of control, they pulled the rug out from under the investors, by refusing to provide funds for the badla transactions, triggering the crash. As the crisis continued, the index started to fall and is still falling, with major stocks locked at their lower circuit breaker levels to avert a total collapse of the Exchange.

The questions being raised by analysts are, where were the regulators when the spread between the ready and futures markets had widened to over 70 per cent? When OGDC, which accounts for one third of the index, was climbing without any justification, why did KSE regulators failed to investigate this mass buying? Decisive and timely action may have prevented the confusion and the panic that followed. 

According to reports, there was some disagreement between MD of the KSE and its board members in settlement of the payments, as they felt that a delay would violate the sanctity of the contract and would cast serious doubts on the credibility of the KSE in the eyes of investors. 

Board members tried to appease the investors by appearing on television and stating that there was no panic, ignoring the fact that panic had already started and the market had started to tumble, because settlement problems create greater panic than just a falling market.

 Experts feel that without the circuit breakers, the market would go into a free fall, which could cause some brokers to default due to failed settlements. Another view is that the market would have gone into free fall anyway, but at a certain level, somewhere below 8,000 points, genuine buyers would have returned and we would have a realistic market, instead of speculators and would have found its natural level without artificial support. 

Another point raised by experts, is where was the Securities & Exchange Commission throughout this unholy mess? Why was the KSE allowed to violate the sanctity of contracts without resolving the settlement problem and why was the decision allowed to be revoked without any explanation? What steps has SECP taken to protect the interests of the small investors? 

The general opinion is that the regulating measures introduced in the KSE, protect the interests of the brokerage houses and the stock exchange and not the investors, who have lost their shirts and will now not even be able to buy a shirt in the Lunda Bazaar. 

H. Maker. (email: trust@super.net.pk).