PERFORMANCE OF EQUITIES MARKET IN 2011

THE GENERAL PERCEPTION IS THAT VOLUMES ARE LIKELY TO IMPROVE IN 2012.

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

Dec 26, 2011 - Jan 1, 20
12

Performance of Pakistan's equities market during year 2011 was worst than that in 2008.

The number of initial public offerings (IPOs) was four with many failing to attract attention of the investors.

There is a long list of factors dampening investors' confidence. These include rift between brokers' fraternity and regulators, imposition of capital gains tax (CGT), poor law and order conditions, political volatility and delayed response of apex regulators to the long outstanding issues facing small investors.

It was expected that with the appointment of new chairman of securities and exchange commission of Pakistan (SECP), things would improve. However, it seems that the SECP is following its own agenda rather than responding to the needs of the market. While no one can deny the hard work of the chairman and his limited team, most of the issues continue to shatter the market confidence, the major being capital gain tax (CGT).

It has proved beyond any doubt that the tax imposed in current financial year has failed in yielding the desirable results. In fact, the overall collection from the equities market has remained pathetically low.

If turnover remains lean, no one should expect any substantial increase in revenue collection.

Brokers' fraternity has been demanding reverting to the previous system. However, it seems that withdrawal of tax had become an 'ego issue' and whiz kids at the ministry of finance as well at federal bureau are not ready to accept the failure of the system. One of the worst apprehensions of investors is that the complicated system enables the tax collectors to exercise their discretionary powers only to extort money but also fails in increasing revenue collection.

It is true that SECP has little role to play in the withdrawal of CGT but it has to act as mediators between the tax collectors and the taxpayers.

As long as daily trading volumes remain pathetically low, the probability of collecting any significant amount of tax will remain a distant dream.

The other heartburning points for brokers' fraternity included election of chairman, term of directors, and minimum paid up capital of brokerage houses.

In October, Lahore stock exchange sponsored SAFE IPO Summit that proved a non-event. It was aimed at increasing number of public offering. The factors dampening investors' confidence are known to the regulators, management of the stock exchanges and brokers.

No entrepreneur would be keen in establishing new productive facilities in a country that is suffering from acute shortage of energy and where industries are closed nearly for half of a week.

Lately, a Pakistani delegation went to India but the visit was termed chasing the shadows. There is almost a consensus that the governments of both the countries, especially Pakistan will never allow cross border listing. No one can deny that working conditions in India are far better as compared to Pakistan. It is a huge market and the Indian government provides more incentives to the investors.

Exchange rate is stable and foreign investors from all around the world are keen in forming joint ventures with the Indian entrepreneurs. Above all, India has been more successful in securing 'outsourcing' business.

The attempts to develop cordial business relationship with India received the first jolt when hawks expressed extreme dislike over granting most favored nation (MFN) status to India. While the business community also fears that opening up trade with India may prove disadvantageous for Pakistan, the hawks are openly saying that trade between the two countries should not be allowed till the resolution of longstanding Kashmir issue.

One wonders if informal trade between the two countries is thriving why should there be any resistance in encouraging formal trade between the two countries.

While the dream of cross border listing may not be realized because the government of Pakistan fears flight of capital, there is certainly a need to find out reasons for disappointing number of initial public offering (IPOs) and poor response of investors.

Experts are of the view that there is hardly any incentive for going public. Around the world, corporate tax rate for public limited companies is substantially lower as compared to private limited companies but it is not so in Pakistan, rather there is a prohibitive law of taxing dividend income. Unless rate of tax on public limited companies is reduced and dividend income declared tax free, small investors may not be keen in investing in the shares of listed companies.

For a long time, experts have been suggesting that the stock exchanges should offload the extra baggage by reducing the number of listed companies. They say that nearly one-third of the listed companies are of no consequence. Most of these companies have been placed on defaulters' counter because of noncompliance of listing regulations, carry huge accumulated losses and there is hardly any trading in the shares of these companies.

The experts even go to the extent of saying that removal of up to 200 companies would at the most reduce the listed capital by five per cent.

The biggest advantage is that stock exchanges will be able to monitor the remaining companies more efficiently and investors will start receiving dividend on their investment.

One of the suggestions is that the SECP should work more closely with the stock exchanges and focus on bringing the day traders back to the market.

Some of the critics say that day traders often create hype but forget that this quick change of hands creates volume, commission for the brokers and above all revenue for the government.

Karachi stock exchange has recorded trade of over one billion shares as against this the average daily trading volume recorded in 2011 has been very disappointing.

Though, the general perception is that volumes are likely to improve in 2012 but experts say in view of electioneering the government continues to remain indifferent to core economic issues and instead focuses on popular decisions to gain political mileage.