Did the JSCL Rights Share Issue Cause the Stock Market Crash of 2008

Dr. Asim Hussain has been guilty of several things in the past and it seems that there is a new addition to this list. According to a report by the National Accountability Bureau, he is also involved in a rights issue scam that caused the Karachi Stock Exchange to crash.

According to this report, Dr. Asim request Syed Naveed Qamar to approve a right issue for Jahangir Siddiqui & Company Limited (JSCL), the flagship company owned by stockbroker Jahangir Siddiqui. The issue in question was worth $170 million.

The report highlighted Dr Asim as being very close to former president and PPP co-chairman Asif Ali Zardari, and mentioned that Dr Asim was responsible for arranging meetings between Mr Qamar and Mr Siddiqui in order to get the chief regulator to approve the right shares offer.

JSCL had announced an issue of right shares in April 2008, and even claimed that they had done a great job. According to the company’s annual report, the value of the equity inflow totaled roughly Rs. 15.5 billion, the largest ever in Pakistan, comprising both foreign investors and minority shareholders.

One could still investigate the claim that Dr. Asim had been involved in influencing the SECP in order to approve the rights issue for JSCL, but it is preposterous to claim that this rights share issue was responsible for the KSE crash of 2008.

Before we get into why there is no connection between the crash and the issue, it is important to understand what exactly is a right issue. Basically, it is a way for a company to raise additional finance in order to fund its various operational expenses, by offering more shares to its shareholders. The current shareholders would be offered company shares at a discounted price, the exact number of shares being proportional to the number of shares they currently own. The shareholders have the option of either taking up the offer or declining. If they decline, the shares are then offered to the general public. This is the normal course of doing business, and there is no conceivable reason why it should affect the stock market in this manner.

Now let’s look at the stock market crash of 2008, for which it is necessary to put it in context. This crash occurred in the midst of the global recession of 2008-09 when investor confidence was at all-time low. It is only natural for the stock market to plummet the way it did. That the rights share issue happened around the same time is mere coincidence and nothing more.