Reviving the bourses

In the aftermath of the stock market collapse last year the government stopped short of carrying out the widespread reform it called for. But this time the 21-point stock market rejuvenation package it has come up with is aimed at bringing about stronger participation of major players in the market and floating a fund to bail out the hapless small investors. The package unveiled by the Securities and Exchange Commission (SEC) has taken a number of initiatives that should in the short run help rebound the stock markets. As news of such a bailout package has been circulating for more than a week, the markets rebounded this week with significant gains to take the all price index beyond the 5,000 mark. Such optimism comes against the backdrop of the government's declaration of a special fund that will help small investors recuperate some of their losses. While the intention is grand, it remains to be seen how the mechanism will actually work out in the coming days. The plan will come into play in three phases: short, mid and long-term. Short and mid-term interventions are expected to be put into action within the next three to six months' time. Good news for banks in the short term as limits to their capital market exposure have been withdrawn. Added to this, the decision to make mandatory the owning of 30 per cent stake by sponsors-directors led to heavy buying of shares from the secondary market and the positive impact of this on the market is being witnessed. The markets should also see fresh infusion of funds with the government's decision to extend the deadline for single borrowers' exposure limit to two years. Looking beyond the three-month mark, SEC has made it known that a corporate governance guideline is going to be prepared in an effort to ensure transparency and accountability of listed companies. On a more practical level, efforts will be undertaken to increase the capital of merchant banks and other subsidiary firms. Again, these are laudable measures. If one recounts recent history, similar commitments at market reform were made after the last share market scam which unfortunately, for whatever reason did not materialise. One may only hope that serious regulatory reforms are undertaken this time round to prevent another disaster in the future. In the long term, the decision to make more stringent rules to tackle 'insider trading' will undoubtedly mitigate volatility of the market. Putting into place more elaborate market surveillance mechanisms and the formulation of a Financial Reporting Act (FRA) to enhance disclosure by listed companies will help investors, particularly small investors, make informed decisions on the purchase of stocks and bonds. News of such changes has generally been welcomed by investors. The real challenge for the government will be to put the FRA and reframed 'insider trading' rules into action. However, for achieving long-term stability of the market, there is a need for increasing the supply of shares in the market. The focus of the SEC should be to better manage the market once the immediate crisis has been tackled. As the market watchdog, it falls on SEC's shoulders to take action before the bubble bursts.