Protect small investors to create bigger markets

Investor participation is generally based on perceived sentiments about the market. After every stock market crash, regulators and Stock Exchange CEO’s find themselves at the forefront of a decades old battle; how to lure investors back to the markets. Stock markets are based primarily on the psychological perception of millions of people with a technical and fundamentals overlay. If majority of the people start to think that “bad times” are imminent, they would want to exit the markets with whatever they could get for their investments and salvage their funds. Exact opposite is true in “good times”…Psychological comfort for investors is the most vital factor anywhere in the world when it comes to Capital Markets. It prevents them from making a hasty decision to DUMP their stocks, if they feel that the BIG BOYS will not take them for a ride. And as a matter of fact, the bigger the boys, the bigger their rides are. J.P. Morgan and other similar large investment banks on Wall Street were recently penalised with a staggering amount of more than 20 billion dollars for their wrong doings. Investor participation in the markets will only increase if regulators go out of their way to protect the retail investors because retail investors are the backbone of every financial market.

Retail investors cannot be protected after a crash in the markets. For that laws have to be implemented and strategies have to be developed during the good times, so no institution or cartel of institutions can profit at the expense of small investors while creating panic amongst the general public. Big Boys benefit by creating huge Short Positions on the upper end of the markets and wait for the markets to tank. In individual stocks they fill institutional orders through propriety or house accounts by selling the shares through a “Naked Short” and cover it with a few dollars or rupees lower. This happens million times a day around the world. No exceptions.

Now let’s talk about Pakistani Markets. What reforms or modifications in regulations need to be made in order to protect small investors, thus increasing their Psychological Comfort, and enhancing investor participation? Here are few suggestions.

SHORT SELLING I believe that allowing short selling in regular/ready market will not only generate higher volumes for the stock exchanges but it will discourage one-sided manipulation of stocks as well. Futures market in Pakistan does allow short selling but in a very limited number of securities. I feel it is an investors right to short sell a stock if he or she believes that the company stock is overvalued just the same way he or she buys a stock when they think it’s undervalued.

MARKET-MAKERS To provide liquidity for investors, investment banks that have taken the company public must be committed to the stock of the company because it is them who brought the shares to the market for everybody to buy. It is them who have done the valuation of the company. It is them who picked the company. It is them who make the money before anyone else in the form of fees for taking that company public. If all of the above and much more is true then they should be held obligated to commit their firm’s capital towards providing liquidity in those stocks. A certain amount of their net capital should be earmarked for market making purposes, so it provides some relief to the small investors

SHAREHOLDERS ASSOCIATIONS/GROUPS There is an absolute need for shareholders to get together and form an association with a legal cover in order to have their voices heard. A powerful lobbying body, whose voice reaches the corridors of Islamabad where Ministry of Finance can take notice of overall shareholders’ concerns and grievances. Instead of having ad hoc smaller associations spread around the country, there should be one shareholders association where it becomes mandatory for everyone to be automatically registered if they enter capital markets.

YOUTH PARTICIPATION To date no education programme has been developed in Pakistan to teach our young students the basics of investments which are the future investors of our country. The savvier they become at an earlier age, the better it is for the future development of our capital markets. In that vein, schools, colleges, universities should include a mandatory course on the basics of capital markets. Students should be encouraged to invest in the market even with as small an amount as 5K to 10K Rupees. Hundreds of thousands of students, times that amount in a few years can become a force to be reckoned with.

BANK ACCOUNTS LINKED TO BROKERAGE ACCOUNTS All commercial bank accounts should be linked to a brokerage account simultaneously at the time of opening of an account. Iran, despite all its sanctions and economic pressures, enjoys over 3.6 million stock market investors simply because of this practice. Linking a brokerage account with a bank account will not force a person to invest in the stock market rather it will make it easier if they choose to invest without going through the hassle of waiting. Since not all commercial banks have a brokerage division a uniform system could be developed, whereby commercial banks can form affiliations with top notch brokerage houses in the country. It’s a difficult task given the Pakistan Financial Industry’s environment but YES it could be done.

MANDATORY IAP SPENDING It should be made mandatory for all financial institutions that benefit from the Capital Markets along with KSE, LSE and ISE to spend part of their income on Investor Awareness Programmes. We are not talking about Marketing Campaigns; rather the money should be spent wholly on the basis of CSR to educate potential and existent investors.

EDUCATING CEOS OF PRIVATE COMPANIES In a country boasting 200 million people and a stock market established since decades… A question always hangs on the back of my mind… How come we don’t have New Company Listings coming up in droves every quarter? And the answer I could come up with after talking to numerous private company CEOs is that they simply do not understand the benefits of taking their companies public. There are other factors involved as well, such as dynastic hold over businesses with authority issues among others, but what we can do is to encourage through equity education the pros of taking a company public. This will bring novel and innovative ideas to the markets along with new investors. This will not only boost our market capitalisation but investor participation as well. It will also shed the commercial banks’ burden of lending money to these institutions, thus freeing up their cash to inject it into newer enterprises. Public companies can pick from the equity or debt markets to raise funds for their expanding operations.

So much more could be written and even more could be implemented but the cornerstone of all these ideas is the will to implement. We have a vibrant capital market with a country of 200 million people; there is no stopping us in becoming a regional force. We should prioritise to wean our dependency off the Foreign Institutional Investors who only seek profit and which they remit back to their countries. It’s about time we had moved towards indigenous development of our capital markets so what we make is beneficial for us, the Pakistanis.

(The writer is an investment banker, entrepreneur & capital markets advisor)