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A formidable financial obligation on Pakistan's economy

June 03 - 09, 2002

The Securities and Exchange Commission of Pakistan (SECP) the vigilant watchdog of the corporate sector, has taken 3 major decisions during the month of May which will have far reaching consequences for the capital market in Pakistan. The decisions which are aimed at expanding the activities of the capital market will also ensure safety and protection of investor's interest. Besides, the SECP has also suggested 66 amendments in the income tax ordinance 2001 for improving the investment climate in the country and encouraging incorporatization of small business.

The decisions are:

1. Approval for registration of commodity exchange the National Commodity Exchange Limited (NCEL) almost a new concept in the history of capital market in Pakistan providing facilities of dealings in future contracts for commodities.

2. A decision to bring the real estate developers, colony developers and automobile supplier firms under its authority to save investors from cheaters and swindlers.

3. Approval for over-the-counter (OTC) trading in the Karachi Stock Exchange where shares of big companies would be traded separately and those of small companies would be traded over the counter for quantitative dispensation of the market.

Addressing a press conference in Islamabad, the SECP Chairman Khalid A. Mirza said that NCEL, sponsored by KSE would serve as a stock exchange of futures contracts. The commodities will include gold, cotton, rice etc. the exchange is expected to start operation by September provided various actions taken by the sponsors by then. According to the SECP Chairman the rules and regulations, capitalization of market, registration of brokers, scrutiny of people who apply for trading etc. are yet to be undertaken.

A press release of the SECP said that NCEL has applied for grant of registration as an exchange providing for facilities for dealings in futures contract for commodities. A hearing in this regard was held by full commission including the chairman. The hearing was attended by representatives of NCEL, stock exchanges, Karachi Cotton Association, ADBP and several trade associations and institutions.

The Commission after giving due consideration to the view points expressed in the hearing and after being satisfied with the financial soundness of sponsors and the availability of infrastructure and risk management framework, decided to grant approval for registration of NECL as an exchange in commodity futures contracts subject to certain terms and conditions. In granting this registration, the commission clarified that the exchange will not become operationalized till it has fulfilled the terms and conditions indicated in the approval letter.

It is noteworthy that each type of commodity futures contract to be traded on the exchange would require specific approval of the commission. It is the intention of the commission to consult all relevant parties and stakeholders before approving futures contract in respect of any commodity for the exchange. The emergence of trading in futures contracts in commodities would provide the investors/stakeholders with the basic instruments, enable economic players to lock in costs and would also help stimulate the investment climate in the country.

(2) The SECP has proposed amendments in the Companies Ordinance, 1984 to bring the real estate developers, colony developers and automobile suppliers under its purview to protect small investors.

An SECP announcement said the move has been initiated on persistent demand of the public who have allegedly been cheated and deprived of their life-long savings by such companies who received advance payments on the promise of providing developed plots, constructed houses or motor vehicles but disappear in certain period of time.

To achieve this objective the Companies (Invitation and Acceptance of Deposits) Rules, 1987, which were prescribed under section 88 of the Companies Ordinance, 1984 to regulate the deposits collected by companies, are being amended. The existing rules do not apply to loans, finance security deposits, earnest money, advances of every kind, including advances against supply of goods or property. Now, amendment has been proposed to bring within the ambit of the said rules, the amount collected through a scheme advertised on the media as an advance by the companies engaged in the business of real estate development and colonies organization, and also by automobile companies or other persons against the promise to supply the property or commodity at some future date.

The amendments in the rules have been considered necessary after several complaints received from the aggrieved general public who have allegedly lost their money and could not get the developed plots, constructed house and motor vehicles in accordance with the commitments of the companies which had succeeded in collecting the huge amounts of money through attractive advertisements. It is hoped that after having the power to regulate such deposits, the Commission would be able to safeguard the interest of general public adequately.

(3) The SECP had, in principle, agreed to the concept of the Over-the-Counter (OTC) market submitted by a committee comprising Chairman KSE, Managing Director KSE, Managing Director LSE and the Vice-Chairman ISE. Mr. Salim Chamdia, Chairman KSE, headed the Committee. The Committee was formed at the last Co-ordination Committee meeting of the SEC and the three stock exchanges, held in March 2002. The Committee then submitted its report to the SEC in April 22nd 2002. After a careful review of the report, the Commission has forwarded certain comments on the report and has asked the Committee to prepare Draft Regulations for the OTC market.

The OTC market will provide investors with a convenient, efficient and transparent mode of investment and will help enterprising promoters set up new projects or expand their activities by providing them with the opportunity to raise finance in a cost-effective manner, in a listing regime where requirements are less stringent.

Some of the important recommendations/proposals sent by SEC to CBR through Ministry of Finance for incorporation in Finance Ordinance 2002 are:


1. By way of encouragement to invest, it is considered necessary to increase the ceiling for investment allowance for investment in new issues to 30% of taxable income.


1. The maximum tax rate for individual and Association of Persons (AOP) is 35% and average tax rate from them is 20%. Corporate tax rate, however, ranges from 45% for private company and 35% for public company not withstanding additional burden of taxation which the corporates have to take up to remain competitive with non-corporate competitors. Businessmen's reluctance to use corporate status militates with the government's desire to document the economy. It has, therefore, been suggested that corporate tax rate should be brought, at least, in line with maximum tax for individual/AOP.


1. Exemption available to TFC income of individuals and AOP is intended to provide a fillip to utilization of this resource base in the economy. This is being discontinued from the date of enforcement of the new tax law (July 2002), which will defeat the very purpose of this exemption at the initial stage. This exemption is recommended to be continued till TFC market has attained its potential.


1. When an issue of bonus shares is announced by an company, the market value of the already issued shares of the company is reduced; it is only the number of shares which increase with lower value. The Income Tax Ordinance, 1979 had exempted bonus issue from any tax iiability. Further, there is need to encourage corporates to retain their income within the company for growth and expansion. Such capitalization of earning is a book entry within the shareholders equity portion of the balance sheet (nothing of any value for the shareholder). Thus, there is need to continue the existing exemption.

2. Dividends are paid out of after tax profit of a company; it is therefore, in fact, an indirect tax on shareholders. There is no justification for taxing dividend in the hands of shareholders as it amounts to taxing an income which has already been taxed.


1. Level playing field should be available to private sector and public sector mutual funds. Anomalies in this regard are proposed to be removed.

2. Capital gains from listed securities are exempted from tax if investment is made directly by an investor. However, if he invests through mutual fund, the capital gain and income get taxed. The anomaly needs to be removed.


1. The objective of tax allowance for annuity payments is to encourage individuals to save for after retirement age. The existing allowance does not provide enough incentive to individuals to buy an annuity. It is recommended that the limit of 5% or Rs.50,000 may be raised to 10% or Rs. 100,000 respectively and eventual annuity income be made exempted from tax.

2. Investment allowance may be allowed for insurance premium paid in a year.


1. Exemption on bonus shares should be continued to encourage companies which cannot pay cash dividend to pay stock dividends.