INTERVIEW WITH AQEEL KARIM DHEDHI CHAIRMAN AKD GROUP OF COMPANIES

KHALIL AHMED
(feedback@pgeconomist.com)

May 7 - 20, 20
12

Starting his business in 1947 with interests in real estate, followed by stock-broking, father of Aqeel Karim Dhedhi, late Haji Abdul Karim Dhedhi, laid the foundation of what today is the AKD Group, one of the premier business enterprises in Pakistan. Being the chairman his vision for the group is to evolve it into a vibrant set of business enterprises operating in the key sectors of Pakistan's economy including financial services, telecom, infrastructure, manufacturing and natural resources. Aqeel Karim Dhedhi strongly believes in the 'first mover advantage'. AKD Securities was the first to launch a state-of-the-art Online Stock Trading service in Pakistan and remains the leader in this arena today. The first institutionalized technology venture capital fund in the country was launched by AKD in the year 2000.

The AKD Group is a major force in Pakistan's real estate market with extensive interests in numerous residential and commercial real estate projects all across the country. The Group has a beneficial ownership in Karim Centre, situated in Saddar, Karachi. Among other projects, AKD Group has also ventured into the development and construction of Creek View & Creek Terraces (The Arkadians) opposite Golf Club Karachi.

AKD Capital was one of the 1st two companies to have been awarded Real Estate Investment Trust (REITs) license.

AKD Group also has interests in various sectors including oil and gas, telecommunication and technology, equity brokerage, asset management etc. In addition, AKD Group is a partner with Port of Singapore Authority (PSA) to set up a Free Trade Zone (FTZ) in Gwadar.

PAGE: IT IS BEING SAID THAT YIELDING TO PRESSURE FROM BROKERS THE GOVERNMENT HAS DECIDED TO ALLOW THROUGH A PRESIDENTIAL ORDER INVESTMENT OF BLACK MONEY IN THE CAPITAL MARKET, GIVING THEM AN OPPORTUNITY TO WHITEN MILLIONS OF DOLLARS IN UNDECLARED EARNINGS. YOUR VIEWS.

AKD: In my view, the government's actions will in fact help documentation in the economy since tax returns and wealth statements will still need to be filed. To say that there is no track record or traceability is incorrect and misleading especially when every account opened by an investor requires an account opening form carrying necessary background details and bank verifications with payments made through cheques which provide a complete transaction trail. In this case, the national clearing company of Pakistan limited (NCCPL) will compute every gain or loss on every transaction that can be identified through each investors' Unique Identification Number (UIN) ensuring that there is no escape from the tax net. The UIN is a transparent and traceable feature, which is not available even in the more developed markets within the region. This allows the federal board of revenue (FBR) to trace and track the flow of funds on each trade by each investor, should they so wish, thereby allowing increasing transparency and improving documentation going forward.

The recent ordinance is a means to smoothen and facilitate tax collection. Moreover, undeclared income does not necessarily have to be illegal as over the years many investors have benefitted with the stock market outperforming all other asset classes and tracing these returns (which have been ploughed back into the market) to prior years is a tedious task. This also applies to the government of Pakistan (GoP), which is at present the biggest shareholder and beneficiary of positive stock market performance through increasing valuations of government entity stakes.

The GoP will now be better placed to raise necessary supportive finances from the equity markets or fetch attractive price when they offer shares at stock exchanges. Additionally, the capital markets serve as a platform to raise risk capital that has enabled the emergence of globally recognized conglomerates in Pakistan, which would not have existed if the avenue to raise long-term finances through capital markets were unavailable.

By way of background, the Pakistan's equity market is an equal opportunity marketplace that allows any investor to make fair returns. In fact, this is one of the few investment opportunities in Pakistan that can allow investors to protect their purchasing power on an inflation-adjusted basis. Over the last 10 years, the average return of the KSE-100 Index has been close to 30 per cent, much higher than alternative investment schemes e.g. the weighted average cost of deposits for banks at 5.74 per cent in Mar'12 is still very low compared to double-digit inflation.

PAGE: THE SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN (SECP), THE REGULATOR OF STOCK MARKET AND A SUPPORTER OF THE SCHEME, HAS SOUGHT SUSPENSION OF SECTION 111 OF THE INCOME TAX ORDINANCE TILL JUNE 2014. THE SECTION ALLOWS OFFICIALS TO TAX INCOME, ASSETS, AND INVESTMENT OF A PERSON WHOSE NATURE AND SOURCE ARE UNEXPLAINED. YOUR COMMENTS.

AKD: Prior to the introduction of capital gains tax in 2011, the GoP collected between PkR3bn-PkR4bn a year from 2006 to 2008 through transactional taxes while after the introduction of CGT GoP tax collection from the exchange dropped steeply to PkR320mn for fiscal year 2011. This is within the backdrop of perceptions and instances of harassment by taxmen leading to a collapse of market trading volumes and an outflow of liquidity. Additionally, the market also provides additional tax collection revenues e.g. through 10 per cent withholding tax on dividends, which has been in place for some time. As you can see, the market has always been supportive in tax enhancing measures to help the GoP's efforts to raise revenue.

In this regard, the proposed holding period of 45 days and 120 days also exposes investors to market risk, further vindicating that the intention is not to provide any unnecessary leeway but to improve the means for tax collection. As such, the Ordinance does not exempt taxation. It simply facilitates and smoothens the collection process while ensuring that investors are not harassed. Now, the change in tax collection mechanism will serve to shore up the GoP's tax collection from the capital market.

Moreover, the process of price discovery had stalled over the last few years with the capital gains tax and a cumbersome returns filing process reducing the average daily volume to 130mn shares across FY08-FY11 vs. an average daily volume of 258mn shares over FY05-FY08.

Now, while the capital gains tax will remain in place, elimination of cumbersome interaction between the tax authorities and investors (NCCPL will conduct at-source deduction although tax returns will still have to be filed) should lead to higher share trading volumes, which would lead to both improved price discovery for investors by improving liquidity as well as allowing for higher foreign participation and higher tax collection for the government (through CVT).

Banks have been levying withholding tax at 10 per cent on profits on bank deposits on behalf of deposit holders for the last several years without complaints from either side i.e. depositors and the FBR. The NCCPL was already suited for such purpose in view of the extensive database and role of clearing agent that it already has. The Ordinance has just replicated and provided a similar structure to what is prevalent for bank deposits.

PAGE: SOME ANALYSTS HAVE RULED OUT SPECULATIONS THAT CAPITAL FLOWS WOULD CAUSE BUBBLE IN THE MARKET BECAUSE THE PRICE-EARNING RATIO IN PAKISTAN WAS LESS AS COMPARED TO OTHER ASIAN MARKETS. WHAT IS YOUR TAKE ON IT?

AKD: The Pakistani market trades at a forward P/E multiple of 7.2x which is at a 39 per cent discount to the regional markets vs. a historical average discount of 35 per cent. So yes, the recent rally appears sustainable particularly as corporate sector performance has been very strong. Moreover, at 7.7 per cent, the Pakistani market gives the highest dividend yield in the region and it is interesting to note that many corporates have now started to give quarterly dividends. Compared to the historical differential to T-bill yields too, the market's earnings yield presents substantial upside. Breaking the all-time high Index level appears a realistic possibility this year.

PAGE: YOUR COMMENTS ON CEMENT, BANKS, AND ENERGY STOCKS.

AKD: Cement stocks have done very well recently as margins have expanded following sustained high cement prices. At the same time, domestic offtake continues to improve and outlook remains strong particularly if public development expenditure picks up ahead of general elections.

After a strong CY11, banks' profits have continued to increase. Although spreads are slightly lower due to lower interest rates, there has been a steep decline in loan provisions, which has pushed growth. Although banking stocks have rallied significantly, lower provisions in particular can still unlock further upside if this trend sustains.

Higher production flows, contained exploration expenditures, and continuing high oil prices should support positive stock price performance going forward. We remain positive on oil companies particularly in view of continuing high oil prices combined with considerable production additions from new discoveries and ongoing development.

PAGE: HOW WOULD YOU COMMENT ON DEMUTUALIZATION BILL 2009?

AKD: The three stock exchanges presently operational in Pakistan are operating as a mutualized structure. In a mutualized structure, the members have the ownership as well as the trading rights. Demutualization is the process of converting a mutually owned company to a company owned by shareholders. While a mutualized structure potentially creates a conflict of interest and potential lack of transparency, it may also be the case that separating ownership and management leads to loss of owners losing interest in the workings of the exchange. As such, while the demutualization bill has been approved, implementation needs to be in a way that keeps owners engaged and onboard while there should not be any radical changes in the functioning of the exchanges.