INTERVIEW WITH HAROON ASKARI, DEPUTY MANAGING DIRECTOR KSE

KHALIL AHMED
(feedback@pgeconomist.com)

May 28 - June 3, 20
12

Haroon Askari has been associated with the Karachi stock exchange (KSE) since 1993 first as a broker member of the exchange until 1999 and from 2005 in the management of the exchange as head of operations. Now, he is working as deputy managing director.

KSE is premier, biggest and the most popular stock market of the country, as such it is used as the representative of capital market of Pakistan. The KSE was incorporated on March 10, 1949. It started with five companies with a paid up capital of Rs35.71 million. It has played a key role in the economic development of Pakistan including its privatization program. It achieved a major milestone by KSE-100 index touching the level of 15,737.32 on 20 April, 2008. It was declared the "Best Performing Stock Market of the World for the year 2002". There are 600 companies listed at the exchange today. KSE-100 index is now at 14,142.08 with market capitalization at Rs3,611.52 billion.

PAGE: PAKISTAN'S STOCK EXCHANGES ARE AT PRESENT OPERATING AS NON-PROFIT COMPANIES WITH MUTUALIZED STRUCTURE WHEREIN MEMBERS HAVE OWNERSHIP AS WELL AS TRADING RIGHTS. YOUR COMMENTS.

ASKARI: Demutualization is the process by which a brokers-owned stock exchange converts itself from a company limited by members' guarantee to a publically owned joint stock company, limited by shares. Unlike the mutual stock exchange, the demutualized exchange is for profit organization. It can redistribute company's profits to its shareholders/members. Demutualization is a part of the overall reform that government of Pakistan with active participation of the securities exchange commission of Pakistan (SECP) has put in place to help reposition Pakistan's capital markets for the challenges ahead.

Traditionally, stock exchanges across the world have had mutual structures, with access to trading floors restricted to members only. This way the share trading business was protected with these barriers creating a monopoly. The mutual structure was therefore the type of organization that assured the protection of monopoly power of the stock exchange run and managed by the brokers.

In the demutualize exchange, the brokers-owners of stock exchanges lose power and influence in exchange decision making. As demutualized exchange keeps the ownership, management, and trading part in separate hands, there is no conflict of interest and all components of the capital market interplay with each other on a level playing field. It represents a wholesale corporate cultural transformation that will affect every dimension of an exchange. The change is seen as an opportunity to further improve the trading platforms of the exchange for operating a fair and efficient stock market with a duty to protect the public interest.

The modern day technology and fast connectivity has eliminated geographical barriers thereby making the markets global resulting in the decrease of the role and functions of intermediaries i.e. brokers. The advent of technology provided the regulators an opportunity to increase the outreach of the market to masses across the country forcing the stock exchanges to restructure for this purpose.

The demutualization will help in restructuring of stock exchanges. It will open the participation of new entities that will focus stock exchange attention more towards clients/ investors, as the independent owners/non-broker shareholders of the exchange can freely pursue business opportunities without being restricted to the vested interests of members.

The demutualized exchange enjoy economic freedom to raise money for itself. They can go public to raise new finance to make acquisitions.

As part of the demutualization process, the members of a mutually owned stock exchange receive shares of the successor company.

PAGE: APART FROM DEMUTUALIZATION OF STOCK EXCHANGES, GOVERNMENT IS ALSO REVAMPING CAPITAL GAINS TAX REGIME WHEREBY CALCULATION AND DEDUCTION IS BEING CENTRALIZED AND AUTOMATED. COULD YOU GIVE YOUR INPUT ABOUT IT?

ASKARI: The government decided to levy capital gains tax (CGT) with effect from July 1, 2010 on the sale and purchase of shares in the following manner:

1. In order to promote savings and capital formation, the CGT would not be charged where the holding period is over 12 months.

2. For shares held for more than six months but less than one year, the CGT rate is eight per cent of the value of such shares sold.

3. For shares held for less than six months, the CGT would be calculated at 10 per cent of the value of such shares sold.

Since the imposition of the CGT, the trading volumes at the exchange declined significantly. The investors objected not about the tax itself but they expressed very strong dislike about the way the proposed tax was to be collected. Individual investors felt very uneasy to come in contact with the taxman and as such they wanted some kind of centralized tax collection method where the due tax is calculated and collected by an automatic electronic system rather than each individual submitting on his own his account of sale and purchase of securities.

In view of these apprehension expressed by majority of individual clients, the government decided to change the collection mode to a centralized system of calculating and collection and payment system of CGT. President Asif Ali Zardari promulgated the ordinance mandating that the CGT on disposal of shares of listed companies shall be calculated and collected by the national clearing company of Pakistan Limited (NCCPL) on behalf of the federal board of revenue (FBR).

For the purpose, the NCCPL has developed an automated system. The collected tax amount shall be deposited in a separate bank account with the National Bank of Pakistan by the NCCPL and the said amount shall be paid to the FBR along with interest accrued on a yearly basis by July 31 next following the financial year in which the amount was collected. Moreover, NCCPL shall furnish to the FBR within 30 days of the end of each quarter a statement of capital gains and tax computed thereon in that quarter.

The Central Depository Company of Pakistan Limited shall furnish information as required by the NCCPL for discharging obligations under this schedule. The NCCPL shall issue an annual certificate to the taxpayer on the prescribed form in respect of capital gains subject to tax under this schedule for a financial year.

Market welcomed the announcement enthusiastically and since the announcement of the above stated scheme, the market volumes have increased 400 per cent and the values jumped up by nearly 35 per cent in last four months.

This measure provided reassurance and comfort to investors that they could now fulfill their tax obligation in a very transparent, fair, and hassle-free manner.

PAGE: YOUR VIEWS ON FOREIGN INVESTORS IN KSE.

ASKARI: Share of foreign portfolio investment is approximately six per cent of KSE total capitalization and 21 per cent of its free float capitalization. There is no restriction on investment by foreigner in the stock market. 100 per cent foreign equity is allowed, and capital, profits, dividends etc. can be repatriated fully.

The market gains since the low of 2008 crisis where KSE 100 index plunged to 4500 points, were mainly driven by significant foreign buying and even after the floods in Pakistan, the foreigners invested more than $522 million in the year.

Despite the devastating floods and other economic headwinds that the country had to face, the underlying corporate profits of the listed companies remained very strong that provided the reason to all investors including foreign investors to continuously add fresh purchases to their portfolios.

After the recent gains of about 30 per cent in 2012, the KSE-100 shares still trade at PE ratio of about 8 to 10, significantly discounted relative to KSE's historic price-earnings multiple of 12, and other regional markets.

The problem with the foreign institutional investment (FII) is that it can be very destabilizing for an emerging economy. It is often described as hot money, and it can leave as quickly as it comes in.

In Pakistan's case, however, the amount of FII has so far been very small relative to its market capitalization and the size of the country's GDP. If foreign portfolio investment dollars continue to come in at the same or even a bit higher rate in 2011 as they did last year, it will likely result in a healthy situation in providing necessary liquidity and help push the market up again this year.

PAGE: HOW WOULD YOU COMMENT ON THE IMPACT OF POLITICS ON CAPITAL MARKET?

ASKARI: Stock market, more than any other market, is sensitive to and its growth and prosperity depend upon good law and order situation and stable political and economic system.

Pakistan is facing some very serious challenges right now. It is going through a very rough patch in relation to establishing clear boundaries of various pillars of governance.

The tussle between the apex court and the executive arm of the government is not conducive for an investment climate. Investors are waiting for some clarity in this regard and an amicable resolution to the current dispute.

On the international political front, Pakistan is not sure about its relations with its allies in the so called war against terrorism. America being the biggest trading partner and biggest donor plays an extremely important role in the sustainability of the economy of Pakistan. Good and friendly relationship with USA is critical for our economy. Investors are looking for resolution of this issue as soon as possible.

Pakistan's relations with its neighbors are also extremely important for better investment climate. Relations with India are on the mend. We hope the recent initiative taken by the government in this regard will bear fruit and the effort to normalize and improve our relations with India will be further enhanced.

Pakistan finds itself in a very difficult situation when it comes to relation with Iran. On one hand, USA is pressurizing us not to enter in to a deal with Iran in relation to gas pipeline and Saudi Arab being the friendly nation and a donor country is also against Iran on the other. I suggest that Pakistan together with Turkey should make an all-out effort to increase its trade relations with Iran and complete Iran-Pakistan gas project while keeping its good relations with all other countries.

Pakistani capital markets and investors want to see the country prosperous, strong, and peaceful with open market, liberal, easy to understand, and easy to follow business laws.