PRIVATIZATION AND CAPITAL MARKETS
Shares of Habib Bank Limited, United Bank Limited and National Bank of Pakistan are to be offered for sale
From SHAMIM AHMED RIZVI, Islamabad
Jul 03 - 09, 2000
While a committee is probing into the recent crisis in the stock market specially of Karachi and Lahore, the 3 bourses are preparing for handling a much higher volume of business in the coming months as a result of government decision to proceed with its massive privatization campaign through the 3 stock exchanges in the country. Shares of Habib Bank Limited, United Bank Limited and National Bank of Pakistan are to be offered for sale to the general public through stock market. Those related to the capital market are expecting roaring business in the stock markets in the coming months both because of government policy of privatization and the incentive offered in the coming budget to the investors in the capital markets.
The Finance Minister has announced that the government has decided as a policy of carryout its privatization programme in future through stock markets. A number of companies, banks, DFIs and other state enterprises will be listed with stock exchanges and about ten per cent shares offered to general public through investment in stock markets.
The Board of Directors of the Islamabad Stock Exchange believes that the privatization process would lead to a speedy growth in the volume and market capitalisation while 10 per cent tax credit for fresh investment would help accelerate the economy. The board appreciated that the major proposals forwarded by the bourses had been incorporated in the budget. Major incentives relating to capital gains and distribution of minimum dividend under Section 12 (a) of the Income Tax Ordinance 1979 remain in place, and additionally bonus shares have been exempted from tax for a further period of one year.
A statement issued said this budget was the corner-stone of the economic policy of the government for the next three years. It can be expected that the investment incentives pertaining to equity investment would be continued through this period. However, an announcement to this effect needs to be made soon to encourage long-term investment decisions.
The board appreciated the decision to extend the tax exemption on the conversion of memberships into corporate entities. This would encourage the professionalisation of the brokerage houses.
The board felt confident that though the support for the enhancement of the infrastructure of the stock exchanges did not find place in the budget, these issues would be soon resolved through discussions. The board welcomed the decision to abolish wealth tax. This measure would lead to capital formation and encourage disclosure of assets which can be used for productive purposes. However, the board was of tie view that the wealth tax act should be repealed so as to give confidence that it would not be revived. The lowering of interest rates, on the National Saving Schemes would help reduce the lending rates also cut the cost of the capital for productive activities and make equity investment more competitive and rewarding, which would lead to a revival of the primary market restoring to the stock exchanges their capability to mobilise resources for economic growth and development. Now that the government has set a time frame for the privatization of the major state-owned enterprises in the energy and financial sectors, the capital market would see a speedy growth in volume and market capitalisation.
In the meanwhile, the government has constituted a four-member independent committee to proble into the recent stock market crisis and fix responsibility on persons who led the market to that stage. The step has been taken to stop reccurrence of such occasional upheavals which shake the investors confidence specially scaring away the new investors.
Commissioner Securities and Exchange Commission of Pakistan (SECP) Tariq Iqbal Khan announced that four drastic measures would also be introduced in six months to streamline the system, ensure responsible trading activities and avoid such crisis in future.
The committee comprises of Itrat Rizvi of National Development Leasing Corporation and former SECP nominee in Karachi Stock Exchange (KSE) board Javed Kalia, incumbent SECP nominee at the KSE, Waqar Malik General Manager of ICI Pakistan Lahore and Javed Panni SECP Director Securities Market. They would submit the report within 21 days.
The committee would conduct inquiry in both Lahore and Karachi stock exchanges. On some important steps to avoid such future risks, Tariq said four measures which are to be introduced sometime in 2001 have been advanced significantly. These include.
All the stock exchanges have been asked to amend their softwares and come to the T+3 cycle of the National Clearing and Settlement System (NCSS) within three months. Minimum capital requirement has been increased from existing Rs.2.5 lacs to Rs 25 lacs and this would have to be complied within three to six months so that there are no weak brokers in the market.
Capital adequacy ratio for members has been increased by 25 times. This would also be complied within three to six months. Free exposure to stock market members and brokers has been stopped forthwith and now they will have no free exposure. The member will have to deposit 5 per cent of his exposure in the market.
Terms of the reference of the inquiry committee include.
Identify the reasons for the recent stock exchange crisis.
What were the risk management measures in place before and during the crisis and how effective were these measures. If the same were not effective, what were the reasons for their ineffectiveness.
Whether the exposure limit monitoring was in place and consistently applied before and during the crisis.
Whether the software for exposure calculation and enforcement contained all necessary features to cater to the approved regulatory framework.
Whether the security prescribed was adequate and provided by the players involved.
Identify the persons who were responsible for infringement of any provision of the ordinance/Act, rules, regulations, procedures, identifying the provision infringed.
Suggest remedial measures to be taken by the stock exchange and the SECP.
Any other matter having a bearing or relevant to the crisis.