Regulatory failure

WHEN a regulator fails to do its job, the consequences are felt by everyone, even if in ways too subtle to notice directly. The Securities and Exchange Commission of Pakistan (SECP) is the apex regulator for all financial markets and incorporated companies in the country. Next to it is the front-line regulator, the Pakistan Stock Exchange (PSX), whose job is to regulate listed companies and trading activity on the stock market floor. And the State Bank of Pakistan (SBP) is the main regulator for all banks. It is the job of these three entities to ensure that companies under their watch are not breaking the law, or taking risks that threaten systemic stability, or concealing material information from their shareholders (in the case of listed companies), or engaging in insider trading. The job is not easy and requires constant vigilance. It also requires moral courage. What reportedly happened at Unity Foods, a listed company operating in edible oil and rice, now in the crosshairs of the FIA, was a stark example of regulatory failure. The company is accused of having discrepancies totalling more than Rs44 billion between its published accounts and internal record. The SECP reportedly smelled trouble in the company as far back as 2019, but ran into legal hurdles in its efforts to try and investigate. By the time the investigation finally concluded and enough material was gathered to merit accusations of alleged criminal liability, almost six years had passed. The big problem here is the sanctity of accounts of listed companies that are publicly owned and traded. In the case of Unity Foods, the biggest shareholder happened to be a Singapore-based company called Wilmar International, which announced earlier this year that they have taken a loss of $150 million on their books due to their investment in Pakistan. Their statement said the audited statements they were shown by company management all along appeared to show profitability and healthy material assets. Then, in 2025, the company began having difficulty servicing its bank debts, leading to questions from the Board, and the eventual departure of its CEO and founder in December 2025, followed by its CFO in January. Since then, Wilmar said it discovered a string of inconsistencies on the company’s books in financial and working capital items, leading ultimately to an FIR a few days ago. If regulators can’t detect malpractices until a company’s solvency is in doubt, then why would investors feel safe putting their money in the country? The bigger story here is the hit that Pakistan’s corporate governance framework takes with this episode. If this could happen in a listed company, overseen by two highly staffed regulators (the PSX and SECP), and auditors could sign off on the company’s health one year, only for criminal charges to be filed against massive discrepancies between its published and internal data to be discovered a year later, then what does it say for the quality of our regulators and auditors? This episode shows why investment, whether foreign or domestic, is so difficult to arrange in Pakistan. If two regulators and an auditing firm can fail to detect these kinds of malpractices for so long, until the company has reached a point where its solvency is in doubt, then how is an investor supposed to feel confident about putting money down in Pakistan with long repayment horizons? And this is only the most extreme example of regulatory failure. Consider another problem that is brewing in our banking industry but has not yet detonated into a crisis. Everyone knows that one bank is so overextended in the amounts it has borrowed short term from the State Bank that it is today the single most concentrated source of systemic risk that the financial system has seen. The bank’s borrowing from the short-term window known as Open Market Operations (OMO) is now larger than its total deposit base, meaning it owes more to the SBP than it does to its own depositors. I cannot recall a similar situation in our financial history, at least not over the last quarter of a century. In the last three years, its borrowing from the OMO window went from six per cent of the total to more than 50pc today. From around the summer of 2023, the SBP’s OMO book grew by Rs5. 5 trillion, and the bank took on more than 100pc of this. Read that again. Not only did the SBP grow its entire OMO book by a staggering amount, injecting all that money into the monetary system, but it also allowed one bank to soak up all of it, as well as whatever was rolling off the books of other banks. More than 97pc of this borrowing from the OMO window was set to mature between one to seven days in the bank’s last annual report. Nobody knows whether this maturity structure has changed much in the last eight or nine months. This is disturbing. The bank is refinancing its entire SBP position almost every week. The amount that is at stake is more than 10 times its total equity. Clearly, this situation is untenable. Yes, the build-up is secured against government paper and does not present default risk in the narrow sense. But if the SBP has to stop rolling this mess over, or if there is an external shock that forces a rate hike for example, it could force a fire sale of this same government paper into a market that cannot absorb them, at a bank whose equity is a tiny fraction of the total position. The central bank has lent itself into a corner, and nobody there seems to be asking any questions about this. Its OMO book is how the SBP manages market liquidity, and today almost half of it is held by one bank, that cannot repay without liquidating itself. This is also regulatory failure. The writer is a business and economy journalist. khurram. husain@gmail. com X: @khurramhusain Published in Dawn, September 3rd, 2026

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