Daily Times

Stock markets are considered as an integral part of the economy. There is an impression that if the stock market is booming then the economy must be growing and vice versa. In other words, the stock market index is an essential barometer of the economy. Here the question arises, “Why do we need stock markets?”

Companies are usually out of funds due to which they are unable to perform their operations efficiently. They obtain funds sometimes from bank loans, but companies are more reluctant in loan agreements due to strict conditions which are often impossible to fulfil. So, the companies opt for stock market where they float their shares at a prescribed rate. Stock exchange provides a platform to buyers and sellers for the transaction of these shares and securities.

The stock exchange is highly regulated market. In Pakistan, there are four regulatory bodies which govern and secure the interests of investors of the stock exchange. It includes Pakistan Stock Exchange (which is front line regulator), National Clearing Company of Pakistan (NCCPL) which provides clearing and settlement services. The Central Depository Company (CDC) is the third regulatory body in Pakistan’s local capital market which acts as a depository of investors’ shares and lastly Securities and Exchange Commission of Pakistan which governs all the financial transactions through SECP Ordinance 1969.

Mostly, it is claimed that stock market brings more risk to the unsophisticated investors and brokers are usually suspected for this due to their fraudulent attitude. Section 17 and 18 of SECP Ordinance 1969 prohibits the fraudulent acts and statements of stockbrokers. This case is based on the fraudulent act of broker came before Securities and Exchange Commission of Pakistan. In a case against the Lahore Stock Exchange, section 17 and 18 of SECP Ordinance 1969 was invoked by against members of Lahore Stock Exchange which were found involved in fraudulent acts and false statements with the investors. These acts are prohibited under section 17 of SECP Ordinance 1969, according to which “No person shall employ any device, scheme or artifice, or engage in any act, practice or course of business, which operates or is intended or calculated to operate as a fraud or deceit upon any person”.

An inquiry was conducted under section 21 of SECP Ordinance 1969 and the department was directed to grant relief to appellants (investors) who suffered because of the false pretenses of the agent. It is important to mention that cases which involve disputes between brokers and investors like cited above, Pakistan Stock Exchange provides arbitration services for dispute resolution.

SECP issued the Broker and Agent Registration Rule 2001 which contains regulations about brokers and agents. According to section 12 of this statute, brokers have to abide by the code of conduct. However, investors always seem to complain about the deceptive attitudes of the brokers.

A Blank sale is a common deceptive tool which is employed by brokers. It is carried out by a party which actually doesn’t own shares. In a Blank sale, the name of the buyer and transferee is not recorder and hence in case of fraud, the investor has no proof of sale transactions.The investor’s protection is on the stake in a Blank sale as his funds are being used without his knowledge and consent.

There is a need to guide and aware investors about the malpractices in the stock markets their remedies and respective forums where they can lodge their complaints.

In a case against Director Market Supervision and Capital Development, the broker’s company had engaged in setting up his position in different scripts. It was also found involved in a Blank sale which is prohibited in Broker and Agent Regulation 2001as it affects the smooth running and functioning of the stock exchange.The case was presented before Securities and Exchange Commission of Pakistan which imposed a fine of one lac rupees on Blank sale with investors’ funds.

Insider trading has a more adverse impact on stock investors. It implies to the access to non-public information about the security. Usually, employees and executives of a company have access to strategic information of the company. They are aimed at getting benefit from the stock information which is not publically available. Insider trading is strictly prohibited in section 15 A of SECP Ordinance 1969.

In a case of Pakistan Petroleum Provident Fund Trust Company (PVT) Limited and its Directors, the board of trustees by virtue of their executive position had prior information about the financial position of the fund. Relying on inside information disseminated by its directors, the board of trustees bought shares before the announcement of financial results. The matter was brought before Securities and Exchange Commission of Pakistan (SECP) which held directors involved in insider trading under section S. 15-A and also imposed heavy fines as per Section 15-E of SECP Ordinance 1969. SECP has drafted strict regulations on insider trading as it is more exploiting to the investors. Under Section 159 of Securities Act, 2015 insider trading is an offence with three years’ imprisonment and a fine of up to two hundred million rupees.

It is evident from the discussion of above cited cases that business in Stock market is not as simple and easy. It has more implications towards investors. Stockbrokers involved in fraudulent activities with investors are posing serious threats to their funds. However, it is satisfying to state that SECP has taken a serious account of investor’s protection and made laws which are stricter than ever before. Investors are protected through the Securities Act 2015, SECP Ordinance 1969 and SECP Act 1997. All these statutes have a wider domain for the protection of unsophisticated investors. However, there is a need to guide and aware investors about the malpractices in the stock markets their remedies and respective forums where they can lodge their complaints.

The writer is Senior year Law student at LUMS

Published in Daily Times, May 26^th 2018.