“REAL REASONS OF MARCH 2005 STOCK MARKET CRISIS, INVESTIGATION AND COVER-UP: LESSONS FOR SMALL INVESTORS”

Abstract

The KSE Index rose from 6,218 on December 31, 2004 to 10,303 on March 15, 2005. This was an increase of 65 percent in only two and a half months. Not only did the index rise during this period, but the value traded also increased from Rs.20 billion to somewhere between Rs.50-100 billion. The most marked increases were recorded in shares of oil and gas, telecom and cement companies. Many possible reasons can be attributed to the rise in the index like higher corporate earnings announcements, privatization of some state-owned enterprises through the stock market, and the euphoria created in the market about the possibilities of a rise in the Index through the media. On 12th April, 2005, Dr. Tariq Hassan, Chairman of SECP, formed a taskforce so as to find out the reasons for the fluctuation in the stock market, especially between 1st January and 31st March, and suggest measures to further strengthen the regulatory framework for stock exchanges. Some of the key reasons identified by the taskforce for the sharp rise in the index were increased liquidity due to higher remittances, low interest rates, better corporate performance, higher oil prices, relatively liberal availability of badla financing, and IPOs of public sector enterprises. SECP requested Diligence USA, LLC to perform a forensic investigation of some alleged manipulative activities regarding the stock market crisis of March 2005, as transacted on the KSE. Diligence investigated accusations related to the removal of regulated badla financing and in-house Badla, wash trades, and breaching the regulations governing Futures Contracts (exceeding the Rs.50 million reporting threshold). Diligence issued its report on November 21, 2006.