3.2.2 Regulatory Actions
1. Registration of New Modaraba Company
During the year under review, a new modaraba company was registered under the Modaraba Ordinance. The company intends to float a specific purpose manufacturing modaraba with a paid-up fund of Rs. 800 million, which is the largest in the sector so far.

2. Mergers and Consolidation
In the modaraba sector, mergers are being encouraged as they are expected to enhance the performance through improved economies of scale and operational synergies. During the period under review, the High Courts approved two cases of mergers in the modaraba sector. The Commission has also given its clearance for another merger that would occur upon completion of the prescribed judicial process.

3. Annual Review Meetings of Modarabas
Prudential Regulations for modarabas that were prescribed and issued by the Commission in April 2000 provide for the holding of annual review meetings in which modaraba certificate holders can express and share their views with the modaraba management companies regarding the affairs of the modaraba. During the financial year 2001, such annual review meetings were held by all modarabas, thus providing, for the first time, a forum for the certificate holders to voice their views about the performance of the modarabas and their respective management companies.

4. Issuance of Circulars
During the year under review, the Modaraba Wing prescribed policy guidelines for modarabas issuing bonus and right certificates and guidelines for the holding of annual review meetings by modarabas in terms of Prudential Regulations. The circulars prescribing these guidelines have also been placed on the Commission's website.

3.2.3 Monitoring and Enforcement
1. Penal Actions Against Delinquent Modarabas
Monitoring and surveillance activities were enhanced during the year. The Modaraba Wing maintained effective off-site monitoring of the sector by reviewing periodic returns/ information submitted by each modaraba. On-site monitoring was conducted through appointment of Special Auditors in the case of six modarabas. Show Cause notices were issued to two modarabas on account of non-submission of half-yearly accounts for the six months ended December 31, 2000. An investigation into the affairs of a modaraba was ordered under Section 21 of the Modaraba Ordinance. Also, based on the results of inquiries ordered previously, penalties were imposed on directors of three modarabas under Section 32 of the Modaraba Ordinance.

During the year under review, two cases against sponsors/directors of modarabas on account of mismanagement and embezzlement of funds were filed in the Modaraba Tribunal. The Commission also granted permission for voluntary change of management of two modarabas.

2. Prescription of New Periodic Statements and Returns
The formats of periodic statements and returns to be filed by modarabas under the Prudential Regulations were prescribed through a circular. As a result of revision and consolidation, these returns were reduced from 32 to seven. At the same time, the returns became more informative and useful as a basis for taking proactive measures. This, in turn, has served to increase the operational efficiency of the Modaraba Wing.

Prudential Regulations for modarabas issued by the Commission prescribed a mandatory reserves requirement of up to 10 percent of profits. This limit was increased to 20 percent vide circular dated June 14, 2001, with a view to increasing the equity of the certificate holders and to encourage the growth of modarabas.

3.3 Mutual Funds Wing
3.3.1 Overview
Mutual funds serve as an effective vehicle for mobilizing and channeling savings towards productive sectors. Realizing the importance of this industry, the Government set up the National Investment Trust Limited (NIT) in 1962 to manage an open-end mutual fund. NIT has since been investing in stocks of different companies and, at present, it is the single largest investment institution with a net worth of more than Rs. 16 billion. In 1966, the Government set up another institution - Investment Corporation of Pakistan (ICP) - to float and manage closed-end funds. ICP has launched 26 closed-end mutual funds and the listed capital of ICP mutual funds stands at Rs. 3.1 billion as on June 30, 2001. Around 10-15 percent of the available floating stock has always been held by ICP which also offered certain other services for growth of the corporate sector that included bridge financing, underwriting of issues and facilities for investors to open and operate discretionary and non-discretionary investment accounts.

In 1971, the Government cleared the way for entry of private entrepreneurs in the closed-end segment of the industry by notifying the Investment Companies and Investment Advisors Rules (IC & IA Rules), 1971. However, it was during the period 1991 to 1996 that the industry attracted the attention of investors. So far, the private sector has established a total of 13 funds under the IC & IA Rules, of which 12 were floated during 1991 to 1996. In view of the receptivity to mutual funds, the Government notified another set of rules, namely, Asset Management Companies Rules, 1995 to provide the necessary legal framework for launching and managing open-end funds by the private sector. One such fund has already been established and applications from four private corporate houses are under consideration of the Commission.

The mutual funds industry with a total size of Rs. 24 billion represents around 7 percent of the total market capitalization of the stock market. However, until now the industry has not developed to its full potential owing to poor management as well as adverse stock market conditions. Mutual funds in Pakistan are around 2.5 percent of bank deposits, which is quite low compared to other countries in the region and insignificant compared to the size of mutual funds in developed countries, like the USA, where mutual funds amount to approximately 112 percent of bank deposits. Keeping in view the size of our economy and bank deposits, the mutual funds industry should grow to over Rs. 100 billion in a favorable investment environment. Recent reduction announced by the Government in the rates of return applicable to various National Savings Schemes and Government debt instruments is expected to generate interest in mutual fund investments.

Key statistics of the public sector closed-end mutual funds as on June 30, 2001, based on audited accounts, are given in Table 8.

Key statistics of the private sector closed-end mutual funds as on June 30, 2001, based on audited accounts, are given as follows: