A formidable financial
obligation on Pakistan's economy
From SHAMIM AHMED
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:
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.
decision to bring the real estate developers, colony developers and
automobile supplier firms under its authority to save investors from
cheaters and swindlers.
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
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.
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
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.
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:
ENCOURAGEMENT FOR NEW PUBLIC ISSUES
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.
TAX RATES APPLICABLE TO COMPANIES
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.
TAX ON TERM FINANCE CERTIFICATES
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.
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.
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.
Level playing field should be available to private sector and public
sector mutual funds. Anomalies in this regard are proposed to be
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
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
Investment allowance may be allowed for insurance premium paid in a
Exemption on bonus shares should be continued to encourage companies
which cannot pay cash dividend to pay stock dividends.