That scarcity of funds is one of the key reasons for the current moribund state of the country's stock market is an undisputed reality.
But, with confidence of investors, individual and institutional, remaining at a very low level, no solution to the problem of fund-constraint is in sight right at this moment.
Piecemeal steps taken from time to time by different stakeholders to buoy up the market have failed to produce anything tangible until now. An apparent intervention by the government on one or more occasions infused short-lived vibrancy into the market. This kind of phenomenon was also noticed very recently following a few directives coming from the highest authority of the government. The market recorded some gains for two to three days and then lost the steam, as usual.
In a situation where both institutional and individual investors are reluctant to put their money even in quality stocks, the relevant authorities should think about drawing liquidity for the market from some other potential sources.
The World Bank (WB) recently has mentioned about one such source that, if tapped properly and meticulously, could help solve the fund problem for the stock market, to some extent.
The Bank in a note to the government on a capital market development project has suggested creating an independent regulatory body to oversee the activities and operations of the provident funds belonging to various private sector entities.
According to the WB estimate, there are as many as 600 active provident funds in the private sector and these funds are managing resources worth over US$2.0 billion.
The Bank, quite rightly, has laid emphasis on ensuring regulatory control over the operations of these funds and then taking steps for channelling a portion of the resources available with those to the stock market.
It is true that there are no defined rules for registration of the provident funds and their operations. Some funds get enlisted with the National Board of Revenue (NBR) for the purpose of enjoying tax exemptions.
A large portion of the proceeds of the provident funds are usually kept with the banks as time deposits. Because of uncertain nature of return on investment, the people who manage provident funds avoid investment in stock market. Here, some thinking on the part of the government is necessary to attract a portion of these funds to the capital market.
The number of 600 active provident funds appears to be small given the existence of thousands of private firms that are registered with the Registrar of Joint Stock Companies and Firms. The country's labour law makes the offering of the contributory provident fund facility to workers and employees mandatory for production units and firms having certain manpower strength. If the provision is applied faithfully, the number of provident funds would be in their thousands.
However, channelling resources from these funds to the capital market would not be easy. The fund managers are found eager to make investment only in instruments that offer safe and attractive rates of return. In this case, bonds with higher yields might work well.
The government as well as the private entities needing substantial volume of funds should float bonds in the capital market to mop up resources held by pension and provident funds. However, the first and foremost condition for getting these funds in place will be ensuring a vibrant secondary bond market. Currently, the country's bond market is almost non-existent and necessitates a lot of groundwork to make it strong and vibrant.
Because of serious erosion in confidence, funds and individual investors would demand some form of guarantee while investing in bonds and debentures floated by private parties. If the banks provide the guarantee, there should not be any problem.
If harnessed properly, the provident and pension funds have all the potential to become a stable source of liquidity for investment by the private sector. In that case, private firms would not have to take long-term loans from banks. Banks are not comfortable with long-term lending because they take funds from the depositors for short-term. This mismatch of funds gives rise to lots of problems for the banks. Defaults do make the situation even worse.
Instead of lending for the long-term, it would be much more convenient for banks to work as guarantors for private parties floating bonds against certain amount of commission earning. However, the banks will have to exercise caution while becoming guarantors for private parties. Indifference might cost them a lot as it is happening in the case of imprudent lending.
So, the government will have to do a lot of ground work if it is really interested in wooing resources belonging to provident and pension funds to the capital market. It should convene a meeting of officials of the relevant regulatory bodies, banks, bourses and experts to help it chalk out a plan that would ensure the creation of more provident funds in the private sector and the use of their resources for investment in the capital market.
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